microeconomics definitions Flashcards
Allocative efficiency
: When economic resources are utilised to produce the combination of
goods and services that maximise economic welfare
Allocative price function
Prices allocate resources away from markets with excess supply
to markets with excess demand
Capital
Producer goods
Capital/producer goods
: Goods used in the production of other goods
Ceteris paribus
All other things being held constant
Choice
Selecting one of multiple alternatives when deciding how to allocate scarce
resources
Consumer good
Goods consumed by households & individuals, used to satisfy needs and
wants
Economic welfare
The economic satisfaction/wellbeing of individuals/households/groups in
an economy
Enterprise
The ability to utilise factors of production effectively
Factors of production
: Inputs of the production process, such as land, labour, capital and
enterprise
Finite resource
Non-renewable resource that becomes increasingly scarce.
Fundamental economic problem
: Deciding how to best allocate scarce resources to
maximise overall economic welfare
Imperfect information
When individuals lack the information to make the best decision
Incentive price function
Prices create incentives for people to adjust their economic transactions
Infrastructure
Facilities required for an economy to function
Labour
Workers with human capital
Land
Natural physical materials, as well as space for fixed capital
Need
Something necessary for human survival, e.g. food, shelter
Normative statement
Statements including value judgements, that cannot be easily
proved/disproved
Opportunity cost
Loss of other alternatives due to selecting one of a set of options.
Pareto efficiency
: State of resource allocation, where in order to make an economic agent
better off, another agent is made worse off
Positive statement
Statements including facts, that can easily be proved/disproved.
Production possibility frontier
A curve displaying the various possible combinations of two
products that can be produced with finite resources
Rationing price function
Prices rise to ration demand for goods
Renewable resource
Restorable resource that can be replenished
Scarcity
Resulting from the concept of infinite wants and needs, yet limited resources.
Signalling price function
Prices provide information to sellers and buyers, influencing
economic decisions
Trade
Buying and selling of goods and services
Value judgements
Statements that are subjective and based on opinion rather than factual
evidence
Want
Something desirable, yet not necessary for human survival
Bilateral monopoly
Market in which there is a single seller and a single buyer
Human capital
The economic value of an individual’s skills, experience, training, etc.
Labour exploitation
Employers benefiting from treating employees unfairly
Marginal physical product (MPP):
Additional output each unit of labour can produce.
Marginal productivity theory
Theory stating demand for labour is derived from MRP
Marginal revenue productivity (MRP):
Additional revenue derived per extra unit of labour.
Monopsony power
The ability to set prices based on bargaining power.
National minimum wage (NMW)
The legal minimum hourly wage set by the government.
This is age dependent.
Negative discrimination:
When employers undervalue the marginal revenue productivity of
a worker.
Positive discrimination
When employers overvalue the marginal revenue productivity of a
worker
Trade union
Organisation within or outside a firm campaigning for the rights of the workers.
Trade union wage gap
The difference in wages between those in a trade union and those
not in a trade union; an indicator of trade union power.
Wage differentials
: Differences in wages of different groups of workers, or workers in the
same occupation
Wage discrimination
Paying an employee lower wages because of their race, gender,
religion, disability, sexual orientation or some other ‘protected characteristic’
Anti-competitive behaviour
Business strategies employed to deliberately limit
contestability within markets
Artificial barrier to entry
Barriers to market entry that are man-made, i.e., non-natural.
Break even
The same as normal profit
Cartel
Formed by groups of producers when they illegally decide to collude and not
compete
Collective bargaining
When the members of a union act as a unit to increase bargaining
power when negotiating with employers
Collusion
Illegal cooperation between multiple firms, forming a cartel..
Concentrated market
: A market with very few (in its most extreme cases, 1) firms.
Concentration ratio
The total market share of the leading firms in an industry; these firms’
output as a percentage of total output.
Consumer surplus
Difference between the prices consumers are willing to pay and the
prices they actually pay
Contestability
Ease with which competitors can enter a market
Deadweight loss
Loss of social welfare derived from economic activity
Demerger
When a firm sells parts of its business to create separate smaller firms
Divorce of ownership and control
The process in which owners become increasingly
separated from those managing the business
Duopoly
Any market that is dominated by two organisations
Duopsony
Two major buyers of a good or service in a market
Dynamic efficiency
Improvements to efficiency in the long run, brought about by
investment into research and development
Entry barrier
Make it impossible/more difficult for firms to enter a market
Exit barrier:
Make it impossible/more difficult for firms to exit a market
Game theory
Where there are two or more interacting decision makers and different
(groups of) decisions lead to differing outcomes
Hit and run
Firms enter a market, make supernormal profits, then leave; possible due to
low barriers to entry and exit
Imperfect competition
Any market structure between the extremes of perfect competition
and a pure monopoly
Innovation
Improving upon an existing product or process
Interdependence
Where the actions of one firm influence the actions of other firms in the
market
Invention
Creation of a new product or process
Kinked demand curve
Assumes a business may face a dual demand curve for its product
based on the oligopoly market structure
Limit pricing
Lowering the price of a good or service to around average cost, creating an
artificial barrier to entry
Market share maximisation
When a firm maximises their percentage share of the market
in which it sells its product.
Market structure
The characteristics of a market.
Merger
Multiple firms uniting to form one larger firm
Monopoly
Market with only one supplier/ one dominant supplier
Monopoly power
The ability of a firm to be a price maker rather than a price taker; the
ability to set prices
Monopsony
Market with only one consumer/ one dominant consumer
Natural barrier to entry
Barriers to market entry that are not man-made.
Natural monopoly
When the ideal number of firms in an industry is 1
Oligopoly
Market dominated by a few firms.
Patent
Government legislation protecting a firm’s right to be the sole producer of a good
Predatory pricing
Temporarily lowering a good’s price below average cost, creating an
artificial barrier to entry
Price competition
Reducing the price of a product, thus stripping demand from
competitors
Price discrimination
When a firm charges different prices to different groups of consumers
for the same good
Price leadership
The dominant firm in the market sets the price and less dominant firms
alter their prices accordingly
Price maker
A firm with monopoly power; the ability to set prices.
Price taker
A firm that passively accepts the market price, set by forces beyond the firm’s
control
Price war
Where multiple firms cut prices, each firm trying to undercut its competitors and
gain market demand
Principal-agent problem
Where those in control of a firm (agents), act in their own best
interest, rather than that of the owners (principals)
Producer surplus
Difference between the prices producers are willing to accept and the
prices they actually accept
Product differentiation
Differences between multiple similar goods and services
Profit maximisation
Occurs where the positive difference between total revenue and total
costs is at its highest
Pure monopoly
Only one firm in a market
Sales maximisation
When sales revenue is at its highest
Satisficing
Due to conflicts of interests, managers often run films to make the minimum
level of acceptable profit (as specified by owners)
Shareholder
Economic agents concerned on the growth of the firm for monetary reasons
Stakeholder
Economic agents concerned on the growth of the firm for not necessarily
monetary reasons
Static efficiency
Efficiency in the short run
Takeover
When a firm buys another firm, with the latter becoming a part of the former
Ad valorem taxes
Taxes that are a percentage of price
Asymmetric information
When one party knows more or has better information than the
other party in a transaction e.g a patient and doctor
Competition and Markets Authority (CMA)
Government department in the UK that aims
to reduce anti-competitive strategies
Competition policy
Government intervention that reduces monopoly power and introduces
competition to reduce consumer exploitation
Complete market failure
Occurs when there is a missing market
Consumption externality
An externality (which may be positive or negative) generated
through consumption of a good or service
Demerit good
: Goods where the social costs in consumption exceed the private costs in
consumption
Department for Business, Innovation and Skills (BIS)
An organisation that aims to
enhance UK industry performance
Deregulate
To reduce the amount an industry is regulated
Economic welfare
: Quality of life of a population
EU directories
Set of checks that EU members must pass, ensuring all members have
similar or the same legislation
EU regulations
Set of laws all EU members must comply with
Externality
External effects imposed on society derived from the production or consumption
of a good or service
Free rider problem
Once a public good is produced, there is no way to control who
benefits from it
Geographical immobility of labour
Occurs where workers find it difficult to relocate to
places where jobs exist e.g housing costs
Government failure
Where government intervention leads to a lessening of economic
welfare and a misallocation of resources
Government intervention
When a government actively intervenes and affects market
operation
Immobility of factors of production
: When it is hard for factors of production to move
across different areas within the economy
Immobility of labour
The inability of labour to move from one occupation to another. There
are two main types, geographical and occupational
Imperfect information
When an economic agent does not hold all the necessary
information to make an informed decision about a product
Incentive
Something that motivates an agent in the economy
Income Inequality
Differences in size of earnings between households/individuals
Market distortions
Where interference in a market affects behaviour and prices/output
Market economy
Where output and prices are determined by the workings of supply and
demand
Market failure
Occurs when the market mechanism leads to a misallocation of resources.
Merit good
Goods where the social costs in consumption deceed the private costs in
consumption
Misallocation of resources
Resources are not distributed optimally
Nationalise
To convert from private ownership to public (government) ownership
Negative externality
Negative external effects imposed on society derived from the
production or consumption of a good or service
Non-excludable
A good or service where you are unable to prevent non-paying consumers
from benefiting or using the good
Non-rival
Where one person’s consumption of a good or service does not decrease the
amount available for consumption by another consumer
Occupational immobility of labour
Occurs where workers find it difficult to transfer
between different occupations due to a lack of transferable skills
Outsourcing
When a private sector firm bids to offer a public service
Partial market failure
Occurs when the market is producing a good or service, but at the
wrong quantity or price
Penalties
Fines or other forms of punishment that make producing output less profitable
Positive externality
Positive external effects imposed on society derived from the
production or consumption of a good or service
Price ceiling
A price above which trade is illegal
Price controls
Government controls on prices e.g maximum or minimum prices
Price floor
A price below which trade is illegal
Price mechanism
The way in which prices are determined through forces of supply and
demand
Private benefit
Benefits incurred to the individual through consumption or production
Private cost
Costs incurred to the individual through consumption or production
Private good
An excludable, rival good
Privatise
To convert from public (government) ownership to private ownership
Production externality
An externality (which may be positive or negative) generated
through production of a good or service
Productivity gap
Difference between productivity of UK labour and other countries’ labour
Productivity gap
Difference between productivity of UK labour and other countries’ labour
Property right
Legal ownership of a resource.
Public good
A non-excludable, non-rival good
Public sector
The part of the government financed by and controlled by the government
Quasi-public good
A good that is not fully non-rival and/or not fully non-excludable
Rationing
Limiting the amount or quantity of a good
Regulation
Imposing policies, rules, laws, constraints, etc.
Regulatory capture
Regulatory bodies become dominated by the industries in which they
were regulating, leading to a decrease in economic welfare
Resource misallocation
When resources are allocated in a way that doesn’t maximise
economic welfare
Signalling
Where a change in the price of goods or services that show that supply or
demand should be adjusted
Social benefits
The sum of private benefits and external benefits
Social cost
The sum of private costs and external costs
Specific taxes
Taxes that are a set price per unit
State provision
Where the government provides a good or service
Subsidy
Payment made by the government (or other authority) to incentivise production of
a good
Tax
Compulsory levy imposed by the government to de-incentivise production of a good
Unintended consequences
When the actions of people or a government have
consequences that were not anticipated
Vouchers
Allowances to utilise goods or services at a discount rate
Absolute poverty
When a person doesn’t have enough income to fulfil basic needs
Distribution of income and wealth
The way in which total income and wealth are divided
among the population of the economy
Earnings trap
Situations where the more an individual earns, the less they are entitled to,
making it hard to escape poverty
Equity
Fairness, justness. Involves value judgements
Fiscal drag
As wages rise, a higher proportion of income is paid in tax
Gini coefficient
Measures income or wealth inequality; maximum inequality is 1.
Horizontal equity
People in identical circumstances are treated equally
Hysteresis
Effects that persist even after the initial causes giving rise to the effects are
removed
Inequity
Unfairness, unjustness. Involves value judgements
Kuznets hypothesis
Theory that as an economy grows, inequality is initially increased,
then decreased
Lorenz curve
Can be used to illustrate and measure distributive inequalities
Means tested benefits
Entitlement to certain benefits depends on whether the income or
wealth of an individual is below a certain level
Poverty trap
Where a rise in income leads to a decrease in eligibility in benefits, forcing
individuals deeper into poverty.
Vertical equity
People in different circumstances are treated unequally yet fairly
Automation
Automatic control; the process by which machines control other machines
Average cost
Total production cost divided by total output (cost per unit of output)
Average revenue
Total revenue divided by total output (revenue per unit of output)
Capital productivity
Output per unit of capital
Constant returns to scale
When output increases by an equal proportion the increase in
inputs
Decreasing returns to scale
When output increases by a smaller proportion than the
increase in inputs
Diseconomies of scale
When long-run average costs rise as output rises
Division of labour
Different workers performing different tasks in a good’s/services’
production, specialising to an extent
Economies of scope
When it is cheaper to make a range of products
Economy of scale
When long-run average costs fall as output rises
External economy of scale
Firms saving resulting from growth of the industry a firm is part
of
Fixed cost
Costs of production that do not vary with output, only in the short run
Increasing returns to scale
When output increases by a larger proportion than the
increase in inputs
Internal economy of scale
Firms saving resulting from growth of the firm itself
Labour productivity
Output per worker
Law of diminishing returns
sloped demand curve
Long run
Time period in which none of the factors of production are fixed, and all can be
varied
Long-run average cost
Long-run total cost per unit of output
Long-run production
When a firm changes the scale of all factors of production
Mechanisation
When a firm transfers from becoming more labour intensive to becoming
more capital intensive
Minimum efficient scale (MES)
The lowest level of output at which average costs are
minimised. Dependent on the market structure as well as barriers to entry
Normal profit
Total revenue equals total costs; the minimum profit required to keep a firm
operating in an industry
Operating costs
Same as variable costs
Overheads
Same as fixed costs
Production
A set of processes that converts inputs into outputs
Productive efficiency
Minimised average total cost
Productivity
Output per unit of input
Profit
Total revenue subtract total costs
Rate of return
Income received from an investment
Returns to scale
The scale by which a firm’s output changes as the scale of all inputs are
altered
Short run
Time period in which at least one of the factors of production are fixed and cannot
be varied
Specialisation
A worker only performing a specific task or a small range of tasks
Sunk cost
Non-recoverable costs of entering a market
Supernormal (abnormal) profit
Any level of profit over and above normal profit
Technical economy of scale
Cost saving through changing the production process
Total cost
Total fixed cost added to total variable cost
Total revenue
Price of each good, multiplied by quantity sold
Variable cost
Costs incurred when paying for the variable factors of production
X-inefficiency
When a firm lacks the incentive to control costs. This causes the average
cost of production to be higher than necessary
Competing supply
When resources can be used to produce one good OR another good,
not both
Competitive markets
A market with large numbers of buyers and sellers, with low barriers
to entry and exit
Complementary goods
Goods in joint demand; these goods are often bought together, e.g.
printers and ink cartridges
Composite demand
Demand for a multi-purpose good
Condition of demand
A determinant of demand other than the good’s price, that sets the
position of the good’s demand curve
Condition of supply
A determinant of supply other than the good’s price, that sets the
position of the good’s supply curve
Customer sovereignty
Consumers can collectively govern production in a market via
exercising spending power. Strongest in perfectly competitive markets
Cross elasticity of demand (XED)
Measures the responsiveness of a good’s demand to a
change in the price of a different good
Demand
The quantity of a good or service that a consumer is willing and able to buy at a
given price, at a given time
Derived demand
Demand for a good that is the input of another good
Disequilibrium
Excess supply or demand in a market
Effective demand
Desire for a good or service that is backed by the ability to pay for said
good or service
Elasticity
The proportionate responsiveness of a second variable to a change in a first
variable
Equilibrium
No excess supply or demand in a market; a state of balance between opposing forces.
Equilibrium price
The price where planned demand matches planned supply
Excess demand
When consumers want to buy more than producers are willing to sell;
occurs below equilibrium price
Excess supply
When producers want to sell more than consumers are willing to buy;
occurs above equilibrium price
Exchange
Trading objects of value, utilising media of exchange e.g. money.
Income elasticity of demand (YED)
Measures the responsiveness of a good’s demand to
a change in the incomes of consumers
Inferior good
A good for which demand rises as incomes fall
Joint supply
When one good is produced, another good is also produced from the same
raw materials
Normal good
A good for which demand rises as incomes rise
Normal good
A good for which demand rises as incomes rise
Price elasticity of supply
Measures the responsiveness of a good’s supply to a change in
price
Producer sovereignty
Producers determine what is produced and the prices charged.
Substitute good
A good in competing demand; a good that can be used in place of another
similar good
Supply
The quantity of a good or service that a producer is willing and able to sell at a given
price, at a given time
Altruism
The selfless and disinterested concern towards the wellbeing of others
Anchoring bias
Individuals tend to rely on the first piece of information they are given
Asymmetric information
When one party (buyers or sellers) has more information than the
other in an economic transaction
Availability bias
Individuals base the likeliness of future events occurring on past events
Behavioural economics
Branch of economics that incorporates psychological insights to
understand human economic decision making
Bounded rationality
Individuals’ inability to make rational economic decision making due to
imperfect information, time constraints and limited mental processing ability
Bounded self control
Individuals’ inability to make rational economic decision making due
to inability to control themselves
Choice architecture
A framework illustrating the effects of presenting choices in different
ways
Economic man (Homo economicus)
A hypothetical person who behaves in exact
accordance with their rational self-interest
Heuristics
Rules of thumb
Hyperbolic discounting
Individuals tend to base the value of rewards on the amount of
time taken to acquire the reward (longer waits, less valuable)
Perfect information
When both buyers and sellers have full knowledge of goods and
services in a market
Risk aversion
Individuals tend to value losses more than commensurate gains
Symmetric information
: Where consumers and producers have sufficient information to
make rational decisions
Utility
Benefit, wellbeing, welfare or satisfaction gained from consumption of a good or
service.
Utility maximisation
When consumers aim to make their personal welfare as high as
possible.
