Microeconomics Flashcards
Wants
Desires for goods and services
Resources
Factors used to produce goods and services
The economic problem
Unlimited wants exceeding finite resources
Scarcity
A situation
Economic good
a product which requires resources to produce it and therefore has an opportunity cost
Free good
a product that does not require any resources to make it and so does not have an opportunity cost.
Factors of production
the economic resources of land, labour, capital and enterprise
Land
gifts of nature available for production
Labour
the human effort used in producing goods and services.
Capital/capital goods
human-made goods used in production
Consumer goods
goods and services purchased by households for their own satisfaction
Enterprise
risk-bearing and key decision making in business
Occupationally mobile
capable of changing use
Geographically immobile
incapable of moving from one location to another location
Mobility of labour
the ability of labour to change where it works or in which occupation.
Mobility of capital
the ability to change where capital is used or in which occupation
Mobility of enterprise
the ability to change where enterprise is used or in which occupation.
Entrepreneur
a person who bears the risks and makes the key decisions in a business.
Labour force
people in work and those actively seeking work.
Productivity
the output per factor of production in an hour
Labour productivity
output per worker hour.
Output
goods and services produced by the factors of production
Investment
spending on capital goods
Gross investment
total spending on capital goods
Depreciation (capital consumption)
the value of capital goods that have worn out or become obsolete
Net investment
gross investment minus depreciation.
Negative net investment
a reduction in the number of capital goods caused by some obsolete and worn out capital goods not being replaced.
Opportunity cost
the best alternative forgone.
Production possibility curve
a curve that shows the maximum output of two types of products and combination of those products that can be produced with existing resources and technology.
Microeconomics
the study of the behaviour and decisions of households and firms, and the performance of individual markets
Macroeconomics
the study of the whole economy
Market
an arrangement which brings buyers into contact with sellers
Economic agents
those who undertake economic activities and make economic decisions
Private sector
firms owned by shareholders and individuals
Economic System
the institutions, organisations and mechanisms that influence economic behaviour and determine how resources are allocated
planned economic system
an economic system where the government makes the crucial decisions, land and capital are state-owned and resources are allocated by directives
directives
state instructions given to state-owned enterprises
mixed economic system
an economy in which both the private and public sectors play an important role
market economic system
an economic system where consumers determine what is produced, resources are allocated by the price mechanisms and land and capital are privately owned
price mechanism
the way the decisions made by households and firms interact to decide the allocation of resources
capital-intensive
the use of a high proportion of capital relative to labour
labour-intensive
the use of a high proportion of labour relative to capital
Demand
the willingness and ability to buy a product
Supply
the willingness and ability to sell a product
Market Equilibrium
a situation where demand and supply are equal at the current price
Market Disequilibrium
a situation where demand and supply are not equal at the current price
Market Demand
total demand for a product
Aggregation
the addition of individual components to the arrive at a total amount
Extension in demand
a rise in the quantity demanded caused by a fall in the price of the product itself
contraction in demand
a fall in the quantity demanded caused by a rise in the price of the product itself
changes in demand
shifts in the demand curve
increase in demand
a rise in demand at any given price, causing the demand curve to shift to the right
decrease in demand
a fall in demand at any given price, causing the demand curve to shift to the left
normal goods
a product whose demand increases when income increases and decreases when income falls (good quality products)
inferior goods
a product whose demand decreases when income increases and increases when income falls (poor quality products)
substitute
a product that can be used in place of another
complement
a product that is used together with another product
ageing population
an increase in the average age of the population
birth rate
the number of live births per thousand of the population in a year
market supply
total supply of a product
extension in supply
a rise in the quantity supplied caused by a rise in the price of the product itself
contraction in supply
a fall in the quantity supplied caused by a fall in the price of the product
change in supply
changes in supply conditions causing shifts in the supply curve
increase in supply
a rise in supply at any given price, causing the supply curve to shift to the right
decrease in supply
a fall in supply at any given price, causing the supply curve to shift to the left
unit cost
the average cost of production. It is found by dividing total cost by output
improvements in technology
advances in the quality of capital goods and methods of products
direct taxes
taxes on the income and wealth of individuals and firms
indirect taxes
taxes on goods and services
tax
a payment to the government
subsidy
a payment by a government to encourage the production or consumption of a product
equilibrium price
the price where demand and supply are equal
excess supply
the amount by which supply is greater than demandd
disequilibirum
a situation where demand and supply are not equal
excess demand
the amount by which demand is greater than supply
price elasticity of demand (PED)
a measure of the responsiveness of the quantity demanded to a change in price
elastic demand
when the quantity demanded changes by a greater percentage than the change in price
inelastic demand
when the quantity demanded changes by a smaller percentage than the change in price
perfectly elastic demand
when a change in price causes a complete change in the quantity demanded
perfectly inelastic demand
when a change in price has no effect on the quantity demanded
unit elasticity of demand
when a change in price causes an equal change in the quantity demanded, leaving total revenue unchanged
price elasticity of supply
a measure of the responsiveness of the quantity supplied to a change in price
elastic supply
when the quantity supplied changes by a greater percentage than the change in price
inelastic supply
when the quantity supplied changes by a smaller percentage than the change in price
perfectly inelastic supply
when a change in price has no effect on the quantity supplied
perfectly elastic supply
when a change in price causes a complete change in quantity supplied
unit PES
when a change in price causes an equal percentage change in the quantity supplied
public sector
the part of the economy controlled by the government
state-owned enterprises(SOEs)
organisations owned by the government which sells products
privatisation
the sale of public sector assets to the private sector
price mechansim
the system by which the market forces of demand and supply determine prices
market failure
market forces resulting in an inefficient allocation of resources
free rider
someone who consumes a good or service without paying for it
allocative efficiency
when resources are allocated to produce the right products in the right quantities
productively efficient
when products are produced at the lowest possible cost and making full use of resources
dynamic efficiency
efficiency occurring over time as a result of investment and innovation
third parties
those not directly involved in producing or consuming a product
social benefits
the total benefits to a society of an economic activity
social costs
the total costs to a society of an economic activity
private benefits
benefits received by those directly consuming or producing a product
private costs
costs borne by those directly consuming or producing a product
external costs
costs imposed on those who are not involved in the consumption and production activities of others directly
external benefits
benefits enjoyed by those who are not involved in the consumption and production activities of others directly
socially optimum output
the level of output where social cost equals social benefit and society’s welfare is maximised
merit goods
products which the government considers consumers do not fully appreciate how beneficial they are and so which will be under-consumed if left to market forces. Such goods generate positive externalities
demerit goods
products which the government considers consumers do not fully appreciate how harmful they are and so which will be over-consumed if left to market forces. Such goods generate negative externalities.
public good
a product which is non-rival and non-excludable and hence needs to be financed by taxation
private good
a product which is both rival and excludable
monopoly
a single seller
price fixing
when two or more firms agree to sell a product at the same price
mixed economic system
an economy in which both the private and public sectors play an important role
rationing
a limit on the amount that can be consumed
lottery
the drawing of tickets to decide who will get the products
nationalisation
moving the ownership and control of an industry from the private sector to the government
public corporation
a business organisation owned by the government which is designed to act in the public interest
multinational companies
companies which produce in more than one country
money
an item which is generally acceptable as a means of payment
commercial banks
banks which aim to make a profit by providing a range of banking services to households and firms
liquidity
being able to turn an asset into cash quickly without a loss
central bank
a government-owned bank which provides banking services to the government and commercial banks and operates monetary policy
mortgage
a loan help to buy a house
disposable income
income after income tax has been deducted and state benefits received
consumption
expenditure by households on consumer goods and income
rate of interest
charge for borrowing money and a payment for lending money
Earnings
the total pay received by a worker
Wage rate
a payment which employer contracts to pay a worker. It is the basic wage a worker receives per unit of time or unit of output.
National minimum wage (NMW)
a minimum rate of wage for an hour’s work, fixed by the government for the whole economy
Wage differential
the difference in wages
Primary sector
covers agriculture, fishing, forestry, mining and other industries which extract natural resources.
Secondary sector
covers manufacturing and construction industries
Tertiary sector
covers industries which provide services
Elasticity of demand for labour
a measure of the responsiveness of demand for labour to a change in the wage rate
Elasticity of supply of labour
a measure of the responsiveness of the supply of labour to a change in the wage rate
Division of labour
workers specialising in particular tasks
Trade union
an association which represents the interests of a group of workers
Collective bargaining
representatives of workers negotiating with employers’ association
Real income
income adjusted for inflation
Industrial action
when workers disrupt production to put pressure on employers to agree to their demands
Strike
a group of workers stopping work to put pressure on an employer to agree to their demands
Industry
a group of firms producing the same product
The quaternary sector
covers service industries that are knowledge based
Internal growth
an increase in the size of a firm resulting from it enlarging existing plants or opening new ones
External growth
an increase in the size of a firm resulting from it merging or taking over another firm
Horizontal merger
the merger of firms producing the same product and at the same stage of production
Vertical merger
the merger of one firm with another firm that either provides an outlet for its products or supplies it with raw materials, components or the products it sells
Conglomerate merger
a merger between firms producing different products
Rationalisation
eliminating unnecessary equipment and plant to make a firm more efficient
Vertical merger backwards
a merger with a firm at an earlier stage of the supply chain
Vertical merger forwards
a merger with a firm at a later stage of the supply chain
Internal economies of scale
lower long run average costs resulting from a firm growing in size
External economies of scale
lower long run average costs resulting from an industry growing in size
Internal diseconomies of scale
higher long run average costs arising from a firm growing too large
External diseconomies of scale
higher long run average costs arising from an industry growing too large
Corporation tax
a tax on profits of a company
Total cost
the total amount that has to be spent on the factors of production used to produce a product
Average total cost
total cost divided by output
Fixed costs
costs which do not change with output in the short run
Average fixed cost
total fixed cost divided by output
Variable cost
costs that change with output
Average variable cost
total variable cost divided by output
Long run
the time period when all factors of production can be changed and all costs are variable
Price
the amount of money that has to be given to obtain a product
Total revenue
the total amount of money received from selling a product
Average revenue
the total revenue divided by the quantity sold
Profit satisficing
sacrificing some profit to achieve other goals
Profit maximisation
making as much profit as possible
Market structure
the conditions which exist in a market including the number of firms
Competitive market
a market with a number of firms that compete with each other
Normal profit
the minimum level of profit required to keep a firm in the industry in the long run
Supernormal profit
profit above that needed to keep a firm in the market in the long run
Monopoly
a market with a single supplier
Barrier to entry
anything that makes it difficult for a firm to start producing the product
Barrier to exit
anything that makes it difficult for a firm to stop making the product
Scale of production
the size of production units and the methods of production used.
Sunk costs
cost that cannot be recovered if the firm leaves the industry
