Microeconomics Flashcards
free market economy
private ownership of FOP;
market forces allocate resource
planned economy
state ownership of FOP;
gov allocates resource
factors of production
resources used to produce g/s → land, labour, capital, enterprise
land
natural resource
primary sector
anything derived from land (FOP)
eg. agricultural products, metals, minerals
labor
human resource (physical+mental)
→ return is wage
human capital
the education, training, skills, experience of a country’s labor force
physical capital
man-made machinery, tools, infrastructure…
infrastructure
physical capital financed by gov that is essential for economic activity (eg. roads, telecommunications) → generate PE
entrepreneurship
the ability of individuals to organize the other FOP (land, labour, capital) + willingness to take risks
→ return is profit
market
a place for buyers and sellers to interact and carry out economic transaction
resource allocation
apportioning available FOP for particular production purposes
scarcity
limited economic resources relative to society’s unlimited needs and wants
utility
satisfaction derived from consuming a g/s
wealth
the total value of assets owned by a person, firm, community, or country minus what is owed to banks or other financial institutions
firm
productive units that uses FOP to produce and sell g/s and earn profits
PPC
a model showing the MAX COMBINATION OF TWO g/s that can be produced by an economy in a given time period when all FOP are used EFFICIENTLY and tech is fixed
productive capacity
max possible output of an economy
opportunity cost
the next best alternative foregone when an economic choice is made
rational consumer choice
- perfect information
- weigh up all pros/cons
- utility maximization
- consistent taste
rules of thumb
mental shortcuts to make a quick, satisfactory, but not perfect decisions
anchoring
consumer make decisions based on anchor values that are pre-set in their minds
framing / choice architecture
choices are presented in a way designed to affect decision-making
consumer nudges
designs that include positive reinforcement and indirect suggestions to influence consumer behavior
demand
the quantity of a g/s that consumers are WILLING＋ABLE to buy at DIFFERENT PRICES over a time period
quantity demanded
the quantity of a g/s that consumers are WILLING+ABLE to buy at a SPECIFIC PRICE over a time period
law of demand
as P falls, QD will increase over a certain period of time, ceteris paribus
marginal utility
the additional satisfaction gained from consuming one more unit of a g/s
complements
goods that are jointly consumed
eg. bread and butter
substitutes
goods that can be used IN PLACE OF EACH OTHER as they SATISFY THE SAME NEED
eg. Coke and Pepsi
supply
the quantity of a g/s that producers are WILLING＋ABLE to sell at DIFFERENT PRICES over a time period
joint supply
goods that are produced together
eg. designer bag and leather accessories
competitive supply
goods that use the same resources to produce → compete with each other for the use of the resources
market equilibrium
QS=QD, no shortage or surplus
price mechanism
the forces of D and S determine the prices of g/s
consumer/producer surplus
the DIFFERENCE between the price that consumers/producers are
WILLING+ABLE to pay/sell and the MARKET PRICE
→ the BENEFIT they receive from buying/selling at Pe
social surplus
PS+CS
*SS is maximized at Me where MSB=MSC and Ae is achieved
allocative efficiency
the SOCIALLY OPTIMUM OUTPUT where MSB = MSC
(p＋c of the right amount such that the scarce resource is allocated in the best way for society)
productive efficiency
COMPETITION forces firms to produce at MIN AC; Inefficient firms are forced out of the market cuz they can’t sell their output at Pe
efficiency
making the best use of scarce resources
welfare loss
loss of social surplus when there is market failure (where MSB≠MSC)
PED
responsiveness of QD to a change in P
PED = %△ in QD / %△ in P
(price) elastic demand
PED>1
∆P leads to more than proportionate ∆QD
primary commodities
raw materials produced in the primary sector
manufactured products
goods produced by workers with capital
YED
responsiveness of D to a change in INCOME
normal good
essentials; D increases as income increase
luxury good
price elastic (PED>1)
income elastic (YED>1)
inferior good
low quality goods; D decrease as income increase
PES
responsiveness of QS to a change in PRICE
direct tax
tax on income/profit/wealth; paid directly to gov
indirect tax
tax on expenditure; levied on producers and passed to consumers in the form of higher price of products
subsidy
money per unit of output paid by gov to firms; to encourage production and lower price to consumers.
price ceiling
price set by gov BELOW market equilibrium price;
to make a g/s more affordable to low-income
price floor
price set by gov ABOVE market equilibrium price;
to protect producer from low-price competition and increase production + income for producer
market failure
when markets fail to achieve allocative efficiency → MSB≠MSC → DWL
externalities
external costs/benefits to 3rd parties as a result of the p/c of a g/s
MSB (marginal social benefit)
MSC (marginal social cost)
the additional benefit/cost to society of producing/consuming an additional unit of a g/s (private+external)
merit good
benefit both consumer + society, create PE
→ UNDER-p/c in a free market relative to social optimum as producers/consumers only consider PB and ignore EB
demerit good
harm both consumer + society, create NE
→ OVER-p/c in a free market relative to social optimum as producers/consumers only consider PC and ignore EC
public good
non excludable - available for all to use, can’t charge market price
non-rivalrous - one’s use doesn’t reduce its availability for others
free good
doesn’t use scarce resource → no oppo cost
common pool resource
non-excludable - available for anyone to use, can’t charge market price
rivalrous - one’s use depletes availability for others
tragedy of commons
CAR are rapidly depleted/degraded
by private individuals for their self-interest to
enjoy short-term PB and ignore EC
sustainability
preserving the environment so that it can meet the needs of present generation without sacrificing the the needs of future generations
pigouvian taxes
indirect tax to eliminate ECP/ECC
carbon tax
tax per unit of carbon emission/content
tradable permits
permits (max amount) to pollute issued by gov; can be traded in a market
collective self-governance
CAR users solve the problem of overuse by devising rules + monitor + penalty
asymmetric information
market failure where buyers and sellers have unequal access to information (one party in an economic transaction has more or better info than the other)
revenue
price x quantity sold
marginal revenue
revenue gained from selling one additional unit of output
average revenue
revenue per unit sold (AR = TR/Q = P)
loss
TC > TR
normal profit
minimum return for a firm to stay in business (when P=AR=AC)
profit maximization
MR = MC
short run
the period of time when at least one FOP is FIXED
long run
the period of time when all FOP are VARIABLE
EOS (economies of scale)
average cost falls as output increases
perfect competition
no entry barrier → large number of small firms producing homogeneous products → no market power, price taker
+ perfect information!
competitive market
many firms; no firm has the ability to control the price
homogeneous product
goods that are considered identical across firms in the eyes of consumers
eg. agricultural products like corn and wheat
price taker
a firm that is unable to influence the price → forced to accept the market price
Average Product
Marginal Product
AP: output produced by each unit of FOP
= TP/Q(FOP)
MP: output produced by each EXTRA unit of FOP
= ∆TP/∆Q(FOP)
monopoly
high entry barrier → 1firms producing unique product (no substitute) → significant market power, price maker
barriers to entry
anything that deters new firms entering a market
eg. patent, high start-up capital cost, EOS…
market power
the ability of a firm (or group of firms) to raise and fix the price above market price (P>MC)
abnormal profit
P ＞AC
abuse of market power
when a firm acts to eliminate competitors or prevent entry of new firms into the market
natural monopoly
extremely high fixed cost → can produce enough output to cover the needs of an entire market while still experiencing EOS → monopoly more efficient, low AC
monopolistic competition
low entry barrier → many firms producing slightly differentiated products → some market power, price maker
oligopoly
high entry barrier → a few large firms dominate the market → significant market power, price maker
collusive oligopoly
dominating firms agree to fix price and/or engage in other anti-competitive behavior
concentration ratio
the proportion of market sales accounted for by the largest firms → indicates market power
cartel
formal agreement among dominating firms agree to fix price
Actual Growth (PPC)
increase in efficiency; point shift from inside to on PPC curve
Potential Growth (PPC)
increase in potential output due to increase in quantity/quality of FOP; PPC curve shift outwards
