Microeconomic key terms Flashcards
Basic economic problem
Unlimited wants v.s scarce resources
Opportunity cost
next best alternative forgone
Capital
equipment used to produce goods and services (factories, machines, tools)
Enterprise
the willingness to take a risk and make a profit
Land
All natural resources in and on land (oil, precious metals)
Labour
the work done by people
Non renewable resource
A natural resource which is not replenished at the rate at which it is consumed
Renewable resource
Replenished naturally over time
Ceteris Paribus
means “all other things being equal”
Need
something necessary for human survival
Want
something that is desireable but not necessary
Production
a process that converts inputs into (finished) outputs
Good job
Consumer good
consumed by individuals/households to satisfy their wants and needs
FOP
inputs into the production process(CELL)
Finite resource
is scarce and runs out as it is used
Basic/fundemental economic problem
how best to make decisions about the allocation of scarce resources among competing uses
Positive statement
A statement of fact that can be scientifically tested to see if it is correct or incorrect (using evidence)
Normative statement
a statement that includes a value judgement and cannot be refuted just by evidence
Production possibility frontiers
shows the maximum output combinations of two g/s in an economy when it’s resources are fully and efficiently employed
Specialisation
when a country/firm/region focuses on the production of one type of g/s
Division of labour(second type of specialisation)
workers specialise within the production process (focus on certain skills/work)
Production
value of goodsand services produced
Prodcutivity
Output per unit of input (output per worker)
Liquidity
the ease with which an asset can be converted into cash
economic system
a set of social indtitutions which deal with the production, distribution and consumption fo g/s
Price mechanism
when the forces of d/s determine how much is bought and sold and by whom
Demand
The quantity consumers are willing and able to buy at a given price in a given time period ceteris peribus
Derived demand
goods that are only demanded because they are required for the production of other goods
Law of diminishing marginal utility
the utility that individuals gain from the last product consumed (one more unit) falls as a greater number of products are consumed
Utility
the satisfaction obtained from consuming a good or service
Income effect
Supply
the willingness and ability for producers to supply a g/s at a given price in a given time period
Consumer surplus
Difference between what consumers are prepared to pay and what they actually pay
Producer surplus
Difference between the price producers are prepared to supply at and the market price they recieve
PED
the responsiveness of quantity demanded to a change in price
PES
responsiveness of supply of goods or services to a change in market price
YED
responsiveness of demand to a change in income
normal goods
as income rises, demand for this good increases
inferior goods
as income rises, demand for this good falls
Substitute
goods in competitive demand that act as a replacemnent for another good
Complements
goods which tend to be bought with each other(joint demand)
XED
measures the responsiveness of quantity demanded of good B to the price of good A
rational behaviour
a decision making process that is based on making choices that result in th eoptimal level of benefit or utility
rational decision making
choosing the option that results in the greatest level of satisfaction
utility
satisfaction an individual derives from the consumption of a g/s
Marginal utility
the change in satisfaction from consuming an extra unit
inertia
consumers tend to do nothing or remain unchanged
indirect taxes
taxes imposed on the consumption, sale or use of goods and services
tax burden
total amount of tax paid by a particular group of people
specific tax
imposes a flat rate of tax
ad valorem tax
%-based tax that is imposed depending on its value ie VAT and stamp duty
bounded rationality
people’s ability to make rational decisions is severely limited (opt to satisfice)
satisfice
accepting satisfactory outcome rather than optimum
externalities
costs or benefits to 3rd parties from a transaction that is not reflected in the market price
Market failure
in a free market, this is when the allocation of goods and services is not efficient and equitable(fair/impartial)
private cost
internal costs to the producer or consumer directly involved in the transaction
external cost
a negative effect on the wellbeing of a 3rd party not involved in the transaction
social cost> private cost
private benefit
the satisfaction or utility an economic agent derives from the production or consumption of a good
external benefit
positive effect of a market transaction on 3rd parties
Marginal private cost (MPC)
internal cost to a producer or consumer for supplying/consuming an additional unit
Marginal private benefit (MPB)
additional staisfaction or utility to a producer or consumer for supplying/consuming an additional unit
MEC (marginal external cost)
Cost to 3rd parties from the consumption/production of an additional unit
MSC
total cost to society for the production/consumption of an additional unit
negative externality
costs to third-parties from a transaction that is not reflect in market price (MSC> MPC)
positive externality
benefits to 3rd parties from a transaction that is not considered in the market price (MSB> MPB)
rivalrous
if one person consumes it, someone else cannot ie petrol
excludable
you can prevent someone from using a good/service ie if they dont pay (cinema ticket)
private good
excludable and rivalrous
public good
non excludable and non rivalrous
quasi-public
nto fully non-rival and/or non-excludable ie road pricing
price ceiling
a regulated max. price in the market (producers cannot legally offer a higher price)
price floors
a regulated min. price in the market
imperfect information
when people have inaccurate, incomplete or misunderstood data which causes them tomake the wrong decison that does not maximise their welfare
asymetric information
where buyers and sellers have different levels of information
government failure
where government intervention, intended to improve economic outcomes or correct market failures, actually leads to inefficiencies and a welfare loss
