Microeconomics Flashcards
Abnormal profit
The profit over and above normal profit (i.e. the profit over and above the opportunity cost of the resources used in production by the firm)
Ad velorem tax
An indirect tax based on a percentage of the sales price of a good or service. The best known example in the UK is Value Added Tax
Allocative Effiency
Occurs when nobody can be made better off by transferring resources from one industry to another without making somebody worse off.
Average Cost
The average cost of production per unit. It is calculated by dividing the total cost by the quantity produced. It is equal to the total variable cost + the total fixed cost.
Black Market
An illegal market in which the normal market price is higher than a legally imposed price ceiling (or maximum price).
Average product
Total output divided by the total units of labour employed
Buffer stock schemes
Seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
Capital
One of the factors of production. It includes all buildings and machinery.
Cartels
A group of producers that attempt to increase the price of their good by limiting output or agreeing upon a price to sell their goods at.
Ceteris paribus
All other things remaining equal.
Choices
Economic choices have to be made regarding the use of scare economic resources
Command economy
An economic system where the government controls all of the factors of production.
Complementary goods
A good which is usually purchased with another (e.g., bread and butter). Two complements are said to be in joint demand.
Composite demand
A good that is demanded for two or more distinct choices (e.g., oil is used for petrol and the production of chemicals).
Consumer surplus
The difference between what consumer are prepared to pay for a good and what they actually have to pay for a good.
Cross price elasticity of demand
Measures the responsiveness of demand for good X following a change in the price of good Y.
Demand
The quantity purchased at any given price.
Demerit good
A good that is deemed to be socially unacceptable and is over provided by the market mechanism (e.g., cigarettes)
Derived demand
The demand for a product X might be strongly linked to the demand for a related product Y (e.g. the demand for steel will increase if the demand for cars increases).
Diseconomies of scale
When a business expands beyond a certain size, average costs per unit may start to increase.
Arise mainly through problems of management. As a firm grows, management finds it more difficult to organize production efficiently. It is much easier to lose control of costs in a large organization than in a small business.
Division of labour
Happens when specialisation takes place (e.g., on a production line).
Economic efficiency
The use of resources that leads to the highest possible value of output.
Economic goods
These goods are scare and they have an opportunity cost
Economic problem
Resources are scarce, however wants are infinite.
Economic resources
These are the inputs necessary for production to take place; land, labour, capital and enterprise
Economies of scale
The reduction in long-run average and marginal costs arising from an increase in size of an operating unit
Economics of scale can be internal to an organization (cost reduction due to technological and management factors) or external (cost reduction due to the effect of technology in an industry).
Effective demand
A want for a good or service that is backed up by the money to purchase it.
Elastic
A percentage change in a variable leads to a larger percentage change in the quantity demanded or supplied (an elastic band!).
Enterprise
One of the factors of production that is carried out by an entrepreneur.
Equilibrium
A situation of rest where there is no desire to move from the current position.
Equilibrium price and quantity
The price and quantity at which there is no tendency to change as demand is equal to supply
Externalities
Occur when the actions of a firm lead to a variety of effects that they do not charge for. They can be positive externalities (e.g., extra healthcare is better for the community as a whole) or negative externalities (e.g., pollution).
Factors of production
These are the inputs necessary for production to take place; land, labour, capital and enterprise
Financial economies of scale
Large firms are able to borrow money cheaper than small ones, as they are more likely to be able to repay the loan (less chance of bankruptcy).
Fixed capital
Is the capital that will not be converted into the final product (e.g. factories and machinery)
Fixed costs
These are costs that do not vary with the level of output (e.g., rent, advertising campaigns and utility standing charges).
Free goods
These are goods that are unlimited in supply and have no opportunity cost (e.g., air).
Immobility of labour
When workers are unable to move to a different area to take new jobs. This might be due to personal reasons or not being able to sell a property.
Imperfect competition
A market structure where there are several firms in the industry, each of which has some ability to control the price they set for their product.
Income elasticity of demand
Shows how the quantity demanded will change in response to fluctuations in income.
Indirect tax
An indirect tax is imposed on producers (suppliers) by the government. (e.g., VAT or cigarettes).
Inelastic
A percentage change in a variable leads to a smaller percentage change in the quantity demanded or supplied (an inelastic band!).
Inferior good
When income increases, demand decreased ( e.g. potatoes)
Joint Supply
Two or more goods are produced together, so a change in the quantity supplied of one good will lead to a change in the supply of another good (e.g. an increase in the supply of beef will lead to an increase in the supply of leather).
Marginal cost
This is the cost of producing one extra unit of output.
Market failure
Where resources are allocated inefficiently.
Merit goods
A good that is deemed to be socially acceptable and is under provided by the market mechanism (e.g., health and education)
Mixed economy
An economy where both the free market mechanism and the government planning process allocate resources (e.g. UK)
Mobility of labour
The ease to which labour is able to move regions or countries.
Monopolistic competition
A market structure where a large number of small firms produce a non-homogeneous product and there are no barriers to entry or exit.
Monopoly
A market structure where one firm supplies all output in the industry without facing competition due to the high barriers to entry that exist.
Non-excludability
Once a good is provided, no person can be excluded from using it (e.g. street lighting and defence).
Non-rivalness
Consumption of a good by one person does not reduce the amount available for consumption by another person (e.g., street lighting and defence).
Normal good
Demand for these goods increase when income rises, i.e. it has a positive income elasticity
Occupational mobility
The ease by which a worker can change jobs.
Oligopoly
A market that is dominated by a few large suppliers.
Perfectly price elastic
Buyers are prepared to buy any amount at a given price, but demand falls to zero if the price rises.
Perfectly price inelastic
The quantity demanded does not change in response to price changes.
Price elasticity of demand
Shows how the quantity demanded will change in response to movement in price.
Price elasticity of supply
Shows how the quantity supplied will change in response to movement in price.
Private goods
Goods that can only be consumed by one person at a time. The principles of non-excludability and non-rivalry do not apply
Productive efficiency
Is achieved when production is at its lowest cost.
Public goods
A good where consumption by one person does not reduce the amount available for consumption by another person and where once provided, all individuals benefit or suffer whether they wish to or not (e.g., street lighting and defence).
Specialisation
Economic units (individuals, firms, nations etc.) concentrate on producing certain goods and services.
Substitute goods
A good that can replaced by another (e.g. a mars bar can be replaced by a snickers)
Total revenue
The total amount received from the sales of a product.
Working capital
Stocks of raw materials, semi-manufactured and finished goods.
Producer Surplus
An economic measure of the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good. The difference, or surplus amount, is the benefit that the producer receives for selling the good in the market.
Absolute poverty
Measures the number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services.
Externalities pt 2
Externalities occur in nearly every market and industry and can cause market failure if the price mechanism does not take into account the full social costs and benefits of production and consumption.
Free Rider
Public goods are non-excludable
Giffen Good
As prices increases, demand increases. It’s also an inferior good.
Maximum Price
The Government can set a legally imposed maximum price in a market that suppliers cannot exceed - in an attempt to prevent the market price from rising above a certain level (e.g. Rent control) Prevent the monopolistic exploitation of consumers
Minimum Price
Government imposes price floor below which the normal market price cannot fall.
To raise incomes for producers such a farmers and protect them from frequent fluctuations in the commodity market.
Quasi Public Goods
Quasi-public good is a near-public good.
1) Semi-non-rival
2) Semi-non-excludable
