Microeconomics definitions Flashcards
Economics
the study of how society organises scarce productive resources in order to satisfy people’s unlimited wants.
Economic agents
any person/group of people who has an influence on the economy by producing, buying, or selling
Ceteris paribus
an assumption made in economics that all other things remain equal when analysing the relationship between two variables
Positive economic statements
objective statements that can be proved or disproved= what was or will be and these statements can be verified as being true or false by reference to the data or scientific approach=value-free statements.
Normative economic statements
Value judgements are subjective. They relate to what should or ought to
Economic problem
all economies face the problem of scarce resources and infinite wants.
Scarcity
gap or limitation between the resources available and the human wants or needs for them
Needs
goods that are necessary for survival, such as water, food, clothing, shelter. Needs are limited.
Wants
goods that are not essential for survival but make our lives more comfortable, such as larger car, new TV. Wants are infinite.
Factors of production
resources that are used to make goods and services. They include land, labour, capital and enterprise
Land
all natural resources including non-renewables such as oil and copper and renewable resources such as water and forests
Labour
people within working age within an economy, however not all will be economically active e.g. the early retired. The productivity, i.e. the efficiency, of labour is heavily influenced by education and training
Capital
all man-made goods used repeatedly to produce consumer goods e.g. machinery, tools and equipment.
Entrepreneur
the person who manages all the other factors of production and often risk their own money to set up a new venture.
Renewable resources
those that can be replenished, so the stock level of the resources can be maintained over a period of time
Non-renewable resources
those that cannot be renewed. For example, things produced from fossil fuels such as coal, oil and natural gas
Opportunity cost
the next best alternative foregone for the option that is chosen.
Economic goods
goods which are scarce are known as economic goods e.g. oil, gold. All such goods carry a price that reflects their scarcity.
Free goods
have a zero price, examples include air and rain water, consuming these goods involves no opportunity cost
Production possibility frontier
represent the maximum output of any combination of two types of products that an economy can produce with its current resources and technology.
Trade-off
sacrifice of the production of one good when making a decision to make more of another good.
Capital goods
used to produce other goods or services e.g. factory, machinery, robotics and tools. It is wanted not for its own sake but for the consumer goods and services it can provide
Consumer good
directly provide utility to consumers. E.g. smartphones, clothes, fast food and cars. A consumer good is wanted for the satisfaction it gives.
Specialisation
where an individual, firm, region or country concentrates on the production of a limited range of goods and services.
Division of labour
dividing the production process into a number of tasks and assigning each worker a specific task
Bartering
system of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money
Double coincidence of wants
in order to make an exchange in a barter system a consumer would have to find someone who wants what they have and someone who has what they want.
Medium of exchange
one of the functions of money that fulfils the role of being acceptable to both buyers and sellers, removing the need for bartering and allowing people to specialise.
Store of value
money can be saved as wealth so it can spent later.
Measure of value
money provides a unit of account by pricing of goods/services e.g. in £s. This allows comparison between the relative value of products.
Means of deferred payment
enables borrowing and lending. Someone can borrow money in order to buy a product now and pay for it later.
Free market economy
an economy where all resources are privately owned and allocated via the price mechanism. There is minimal government intervention.
Mixed economy
economy where some resources are owned and allocated by the private sector and some by the public sector.
Command economy
economy where there is public ownership of resources and these are allocated by the government.
Market
where consumers and producers come into contact with one another to exchange goods and services.
Rational decision making
consumers allocate their income to maximise their utility from the goods and services they purchase. Firms use their resources to maximise profits from the goods and services they produce.
Utility
the amount of satisfaction obtained from consuming a good or service.
Demand
the amount of a good or service demanded at each price over a given period of time.
Total utility
the amount of satisfaction a person derives from the total amount of a product consumed.
Marginal utility
the satisfaction obtained from consuming one extra unit of a good or service.
Diminishing marginal utility
as successive units of a good or service are consumed, the utility gained from each extra unit will fall.
Price elasticity of demand
measures the responsiveness of quantity demanded to a change in price.
Income elasticity of demand
measures the responsiveness of quantity demanded to a change in income
Perfectly inelastic demand
demand remains unchanged in response to the other variable (e.g. price change).
Inelastic demand
demand changes by a smaller percentage than the change in the other variable.
Unitary elasticity
demand changes by the same percentage as the change in the other variable.
Elastic demand
demand changes by a greater percentage than the change in the other variable.
Normal good
where demand increases as income increases e.g. books. Luxury goods are normal goods but demand increases by a greater percentage as income rises e.g. designer bags.
Substitute goods
good that is in competition with another good and may see demand increase if the price of a rival good increases. XED is positive for substitute goods. E.g. Sky and Virgin Media
Complementary goods
good that is bought alongside another good and may see demand increase if the price of the complementary good decreases. XED is negative for complementary goods. E.g. consoles and computer games.
Indirect taxation
tax imposed on expenditure that increases businesses costs and reduces supply (supply shifts left).
Subsidies
payment from the government to a producer, often given per unit produced. This reduces businesses costs and increases supply (supply shifts right).
Total revenue
the total amount of money a firm gains through sale of their goods. TR = Price x Quantity.
Supply
the amount of a good or service supplied at each price over a certain period of time.
Elasticity of supply
measures the responsiveness of quantity supplied to a change in price.
Short run
period of time when at least one factor of production is fixed, therefore supply is likely to be inelastic.
Long run
period of time when all factors of production are variable, therefore supply is likely to be more elastic.
Equilibrium
determined by the interaction of the supply and demand curves. The equilibrium price and quantity will not change unless there is a change in the conditions of demand/and or supply
Excess supply
quantity supplied is greater than quantity demanded at the existing price.
Excess demand
quantity demanded is greater than quantity supplied at the existing price.
Rationing
market forces of demand and supply ensure that the amount demanded is exactly the same as the amount supplied
Incentive
higher price motivates firms to supply more of a good to gain more profit
Signalling
change in price provides a message to consumers and producers to change their behaviour
Consumer surplus
the difference between how much consumers are willing to pay and what they actually pay for a product.
Producer surplus
the difference between the cost of supply and the price received by the producer for the product.
Indirect taxes
taxes imposed on expenditure which has the effect of increasing costs and shifting supply left.
Ad valorem taxation
taxes imposed as a percentage of the price of the product or service.
Specific taxes
taxes imposed as a set amount per unit of the product/service.
Incidence of tax
relates to how the burden of a tax is distributed between different groups i.e. producers and consumers.
Subsidy
grant from the government which has the effect of reducing costs of production and shifting supply right.
Behavioural economics
method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making.
Habitual behaviour
frequency of past behaviour influences consumers’ current behaviour.
Inertia
consumers may not make an active effort to change their behaviour for many reasons e.g. too much choice/complex information.
Weakness at computation
consumers, when thinking about a decision, show weakness as they may be more influenced by recent events, unable to calculate probability and may be influenced when buying (e.g. by marketing of firms)
Market failure
occurs when the market forces of supply and demand don’t result in an efficient allocation of resources. The price mechanism doesn’t consider all the costs/ benefits in the production & consumption of the product or service.
Externalities
costs or benefits to third parties who are not directly part of a transaction between producers & consumers
Positive externality
occurs when the consumption or production of a good causes a benefit to a third party. (Social benefits > private benefit)
Negative externality
occurs when the consumption or production of a good causes a harmful effect to a third party. (Social cost > private cost)
Merit goods
goods and services that the government feels that people will under-consume- ought to be subsidised or provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service
De-merit goods
good which can have a negative impact on the consumer – but these damaging effects may be unknown or ignored by the consumer. Demerit goods also usually have negative externalities – where consumption causes a harmful effect on a third party.
Private costs
the costs to the first party who’s either the producer or consumer of the good or service
External costs
the costs to the third party who is neither the producer nor seller. It is the cost in excess private costs. They are negative spillover effects from the production or consumption which the market fails to consider.
Social costs
the sum of private costs and external costs: social costs= private costs +external costs
Private benefits
the benefits to the first party who is either the producer or consumer of the good or service
External benefits
the benefits to the third party. It is the benefit in excess of private costs. They are positive spillover effects from the production or consumption which the market fails to consider
Social benefits
social benefits are simply the sum of private benefits and external benefits
Information gaps
where consumers, producers or the government have insufficient knowledge to make rational economic decisions
Symmetric information
where both parties in a transaction (consumer and producer) have the same information
Asymmetric information
where one party in a transaction has more or superior information compared to another
Private goods
goods that have rivalry and excludability in their consumption
Private goods
goods that have rivalry and excludability in their consumption
Public goods
goods that have non- rivalry and non- excludability in their consumption- not easy to identify who’s benefitting from the good and so who should pay for it and how much they should pay
Quasi-public goods
Non rivalry- one person’s
Non- excludability
once the good is provided for one person its available to everyone as it is impossible to exclude anyone from using it
Free rider problem
once a product is provided it is impossible to prevent people from using it and therefore impossible to charge for it
Government intervention
any action carried out by the Government that affects the market with the objective of changing the free market equilibrium / outcome i.e. To correct market failure
Tax
a charge levied by the government to raise revenue
Indirect tax
a tax imposed on expenditure, producers (suppliers). It is a tax placed on a product and increases costs to firms
Ad valorem tax
an ad valorem tax is a percentage tax e.g. VAT is charged at 20% of the price
Specific tax
a flat rate tax e.g. 50p per item
Maximum price
a price set by the government which makes it illegal for firms to charge more than a certain amount for a given quantity
Minimum price
a price floor on a good or service set by the government, below which it cannot fall
Trade pollution permits
a pollution permit that can be bought and sold in the market. It allows the owner to pollute up to a certain limit
State provision
a government funded good or service that is provided by the public sector or contracted out to the private sector
Regulation
government laws and rules imposed on markets to influence the behaviour of consumers and producers
Property rights
an economic agent has exclusive authority to decide how to use a resource
Extension of property rights
allowing other stakeholders, often third parties, to have a say in how a resource is used
Government failure
occurs when government intervention leads to an inefficient allocation of resources and a net loss welfare
Distortion of price signals
the actions of government which distort the operation of the price mechanism and so misallocation or resources
Unintended consequences
the actions of government that have effects that are unanticipated and not predicted by the policymaker
Excessive administration costs
where costs that arise in the formation, monitoring and enforcing of governments measures are too high and above the benefits of the measure.
Government information gaps
where the government has insufficient information to make rational economic decisions
Agency problem
possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm
Divorce of ownership from control -
firms are owned by shareholders, who have little say in the day to day running of the business, and controlled by managers; this leads to the principal-agent problem
Barriers to entry
ways to prevent profitable entry of competitors- may relate to differences in costs between existing and new firms
Barriers to exit
the costs associated with a decision to leave a market/ industry e.g. lost goodwill with customers
Private sector
all privately owned businesses and organisations. These businesses usually aim to return a profit to the owners
Public sector
Company owned by local or central government
Profit organisation
most private sector organisations aim to make a profit to maximise financial benefits
Not- for profit organisation
any profit they do make is used to support their aim of maximising social welfare and helping individuals and groups, charities
Internal growth
growth as a result of a firms increasing the levels of factors of production it uses
Organic growth
internal growth without resort to takeovers and mergers, achieved through expanding a product range, selling into new countries
Inorganic growth
external growth as a result of takeovers and mergers
Vertical integration
integration of firms in the same industry but at different stages in the production process
Backward vertical integration
acquiring a business operating earlier in the supply chain e.g. retailer buys a wholesaler
Forward vertical integration
acquiring a business further up the supply chain e.g. a vehicle manufacturer buys a car parts distributor
Horizontal integration
when companies from the same industry amalgamate to form a larger company- firms at the same stage of the production process
Conglomerate integration
combining firms which operate in completely different markets
Merger
two or more firms join under common ownership
Takeover
when one firm buys another.
Hostile takeover
a takeover that’s not supported by the management of the company being acquired
Synergy takeover
when the whole is greater than the sum of individual parts
De-merger
a business strategy in which a single business is broken into two or more components, either to operate on their own, be sold or dissolved
Diseconomies of scale
a business may expand in the long run may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising LRAC.
Revenue
income generated from the sale of output in goods and services markets
Revenue maximisation
when MR = zero (i.e. when price elasticity of demand = 1)
Total revenue
refers to the amount of money received by a firm from selling a given level of output and is found by multiplying price (P) by output i.e. number of units sold
Average revenue (AR) =
average price per unit sold
Marginal Revenue (MR)=
The change in revenue from selling one extra unit of output
Marginal revenue product
measures the change in total revenue for a firm from selling the output produced by additional workers employed
Sales maximisation
AR=AC
Profit maximisation
Profit maximisation occurs when marginal cost = marginal revenue (MC=MR)
Variable cost
business costs that vary directly with output since more variable inputs are required to increase output
Fixed costs
costs that don’t vary directly with level of output i.e. they are treated as exogenous or independent of production
Marginal cost
the change in total costs from increasing output by one extra unit
Satisficing behaviour
maximising behaviour may be replaced by satisficing which in essence involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit.
Allocative efficiency
value that consumers place on good or service = cost of resources used up in production. price = marginal cost.
Productive efficiency
a business in a given market or industry reaches the lowest point of its average cost curve. Output is being produced at minimum cost per unit - efficient use of scarce resources, high level of factor productivity
Dynamic efficiency
occurs over time- focuses on changes in the consumer choice available in a market together with the quality/performance of goods and services that we buy
Business ethics
concerned with the social responsibility of management towards the firms major stakeholder, environ and society
Competitive advantage
when a company has an advantage over another
Corporate governance
practices, principles and values that guide a firm and its activities
CSR
companies integrate social and environmental concerns into their businesses operation and in interaction with their stakeholders
Multinational
company with subsidiaries or manufacturing bases in several countries
Short termism-
when a business pursues the goal of maximising s/t profits due to fear of being taken over or having the stock market mark down the value
Average fixed cost
TFC/ Q
Marginal cost
the change in total costs from increasing output by one extra unit
Cost synergies
cost savings that a buyer aims to achieve as a result of taking over or merging with another business
Diminishing marginal productivity
As more of a variable factor (e.g. labour) is added to a fixed factor (e.g. Capital), a firm will reach a point where it has a disproportionate quantity of labour to capital and so marginal product of labour falls- raising marginal costs
Long run
a period of time when all FOP are variable and business can change the scale in production
Short run
a time period where at least one FOP is in fixed supply. Machinery= fixed
Sunk costs
cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contest
Dynamic efficiency
occurs over time- focuses on changes in the consumer choice available in a market together with the quality/performance of goods and services that we buy
Productive efficiency
a business in a given market or industry reaches the lowest point of its average cost curve. Output is being produced at minimum cost per unit - efficient use of scarce resources, high level of factor productivity
Allocative efficiency
value that consumers place on good or service = cost of resources used up in production. price = marginal cost.
Pareto efficiency
Where it is not possible for individuals, households, or firms to bargain or trade in such a way that everyone is at least as well off as they were before and at least one person is better off.
Static efficiency
measures how much output can be produced from given resources and whether producers charge a price that reflects fairly the cost of the factors used to produce a product
Static efficiency
measures how much output can be produced from given resources and whether producers charge a price that reflects fairly the cost of the factors used to produce a product
X-inefficiency
a lack of competition may give a monopolist less incentive to invest in ideas. The actual unit cost of production is higher than cost we may see in competitive market
R&D
spending by businesses towards the innovation, introduction and improvement of products and processes. greater dynamic efficiency
Perfect competition
where prices reflect complete mobility of resources and freedom of entry and exit, full access to information by all participants, homogenous products, and the fact that no one buyer and seller has an adv
Price taker
when a firm take the ruling market price as its demand curve
Monopolistic competition
competition between companies whose products are similar but differentiated to allow each to benefit from monopoly pricing- demand is not perfectly elastic
Non price competition-
competing not on the basis on price but quality, product, packaging, service
Price maker
a business with price setting power- imperfectly competitive markets
Product differentiation
a business seeks to distinguish what are essentially the same products by real/illusory means
Marginal profit
the increase in profit when one more unit is sold or difference between MR and MC
Monopoly profit
firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above equilibrium without losing profits to competitors
Normal profit
minimum amount of profit required to keep factors of production in their current use. AC not MC
Supernormal profit
profit is above that required to keep the resources in their present use in the l/r (AR>AC)
Shut down price
in the s/r firms will continue to produce as long as total revenue covers TVC P>AVC
Barriers to entry
situation where there’s a single or few buyer(s) and seller(s) of a given product in a market
Anti-competitive behaviour
strategies like predatory pricing, designed to limit the degree of competition in a market
Concentration ratio
measures the proportion of an industry’s output or employment by the largest firms. high = monopoly, duopoly, oligopoly.
First mover advantage
business that creates a new product- first into the market- comp adv- learning by doing – more difficult and costly for new firms to achieve profitable entry
Oligopoly
a market dominated by a few producers
Cartel
association of businesses or countries that collude to influence production levels and the market price of product(s)
Collusion
when rival companies cooperate for their mutual benefit. 2 or more parties act together to influence production and or prices level- preventing fair comp. common in oligopoly/ duopoly
Overt collusion
formal and open agreements between firms to undertake actions likely to minimise competitive response
Tacit collusion
firms cooperate but not formally, secret, unspoken cooperation
Heterogenous products
products differentiated by design, packaging, functionality, performance
Interdependence
when actions of one firm has an effect on competitors (oligopoly)two or more things depend on another
Kinked demand curve
assumes business might face a dual demand curve based on likely reactions of other firms in the market to a change in its price or another variable
Late mover advantage
advantage a company gains by being one of the later entrants to sell a product or provide a service, when technology has improved and can be copied easily
Game theory
when there are 2 or more interacting decision takers and each decision or combination of decisions involves particular outcome (knows as payoff)
Nash equilibrium
the outcome of a game that occurs is when player A takes the best possible action given action of player B and player B takes the best possible action given action of player A
Prisoner dilemma
a problem in game theory that demonstrated why 2 people might not cooperate even if it’s in their best interest to do so. No matter what the other player does, one will gain a greater payoff by playing defect
Pay off matrix
used in game theory- table to simplify all possible outcomes of strategic decision
Price war
vigorous comp between businesses often in s/t battle for MS and inc cash flow
Monopoly
A market structure characterised by a single seller, selling a unique product in the market.
Competitive tendering
system introduced in UK to force publicly run organisations to request bids from a number of different firms for contracts to supply goods or services
Monopsony
As a firm grows in size it can purchase its factor inputs in bulk at negotiated discounted prices- particularly the case when a firm has monopsony (buying) power in the market
Natural monopoly
A natural monopoly occurs when the most efficient number of firms in the industry is one.
Sunk costs
cannot be recovered if a business decides to leave an industry
First degree price discrimination
when individuals ae charged the exact price they are willing and able to pay
Second degree price discrimination
involves businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously published/advertised price
Third degree price discrimination
when individuals are charged different prices for the same products/ services, with there being no difference in cost of production
Contestable market
threat of competition
Derived demand
demand for a factor of production such as labour as a result of demand for the final predict that that FOP can produce
Labour demand
number of workers employers are willing and able to employ at a given wage rate a given time period
Human capital
The amount of skill, knowledge talent, experience and ability of workers. Can be inc through education and training
Incentive scheme
motivational scheme for employees- to encourage inc productivity / efficiency / working to the company objectives. Examples = share schemes, bonuses, commission on sales, additional holiday, company car formal awards.
Income
the flow of earnings to a factor of production. Labour earns wages. Capital earns interest. Land earns rent. Enterprise earns profit.
Informal labour markets-
Also known as ‘grey* market, shadow economy, or black economy. This is the part of the economy that’S not taxed or regulated by GOV- doesn’t feature in GDP statistics for that country. People working in informal labour market = likely to be paid in cash, may undertake work such as domestic cleaning / gardening, babysitting, car- washing and is characterised by unstable employer-employee relationships. Informal work is often vitally important to the poor.
Discouraged workers
people out of work for a long time who may give up on job search and effectively leave the labour market= become economically inactive. See hidden unemployment.
Geographical mobility of labour
the ability of labour to move around an area, region or country in order to work. Geographical mobility is affected by things such as family ties, transport networks, transferable qualifications and common language.
Labour supply (to an industry / occupation
the labour supply is number of hours people are willing and able to supply at a given wage rate. The labour supply curve for any industry or occupation = upward sloping. As wages rise, other workers enter this industry attracted by the incentive of higher pay.
Compensating wage differentials-
Higher pay may be earned for relatively low skilled jobs if working conditions are unsociable, unpleasant or dangerous, whereas lower pay = earned for higher skill jobs if working conditions are nice, flexible and safe.
Demographic changes
Any change in population e.g. in terms of average age dependency ratio, life expectancy, family structures, birth rates etc.
Discrimination
the different treatment of people as a result of factors: age, gender, race, sexual orientation, ethnicity.
Earnings
earnings are made up of rages plus overtime pay, bonuses and commission.
Economic rent
any amount and by a FOP, such as labour, above minimum account they require to work in our current occupation.
Economically inactive
These who are of working age but on neither in work nor actively seeking unpaid work.
Effective marginal tax rate
tax rate on each extra £1 of income –considers impact of direct taxes (such as income tax) but also possible withdrawal of means tested welfare benefits if people take a paid job. High effective marginal tax rate = root cause of the U/E trap - disincentives to find work.
Efficiency wage
as theory suggests it may benefit from support workers a wage higher than the marginal one of your products. Paying a higher wage improves workers morale - can lead to a high quality of people applying for new jobs as they become available.
Elasticity of labour demand-
Elasticity of labour demand measures responsiveness of demand for labour (employment) when there is a change in the wage rate.
Flexible labour market
Labour market that adjust quickly to changes in the demand for and supply of labour. Characteristics include flexible employment contracts and flexible pay.
Full employment
when there are enough unfilled job vacancies for all the unemployed to take paid work.
Gender pay gap
difference between male and female earnings, usually expressed as a percentage of male earnings. In the UK, the gender pay gap is on 20%
Imperfectly competitive market
A Labour market in which workers or firms have the power to set and marginal revenue product theory. Imperfections in the labour market can include monopsony trade unions, discrimination, poor information and skills shortages which can transfer power to the workers (suppliers of labour) and allow them to demand higher wages in return for the labour.
Labour market failure
A labour market in which there isn’t an efficient allocation of resources. Reasons for labour market failure- Discrimination, Economic Inactivity, skills shortages, action of trade unions, action of monopsony employers, Labour Immobility (geographical and occupational
Labour market flexibility
speed and agility of a labour market to respond to a change in economy. Flexibility = essential for good supply side performance in economy. Flexibility = flexibility in terms of occupations, skills, location, number of hours work, pay arrangements et cetera
Living wage
wage that provides enough money for a working person to live decently and provide for their family the wage rate is estimated to be £9 per hour outside of London and £11 per hour in London in 2019
Maximum wage-
a wage set below equilibrium wage rate outcome would be excess demand for labour, labour shortage
Migration
movement of people especially workers between countries
Immigration
refers to people entering a country
Emigration
refers to people leaving a country
Net migration
refers to difference between number of people entering and leaving a country
Minimum wage-
wage set above equilibrium wage rate outcome is excess supply
Monopsony employer
a labour market structure in which the single powerful buyer of a particular type of labour e.g. main buyer of the nurses and doctors = NHS monopsony employer will tend to pay relatively lower wages unemployed your people than in highly competitive market
NEET
A young person (usually between 16 and 24) who is Not in Employment, Education or training. There are around 900 000 NEETs in UK
Nominal wages
also known as money wages: the actual hourly rate of pay - it is not adjusted for inflation.
Pension
payment made to people who have retired from work in UK.
Total physical product
total output of a given quantity of FOP
Marginal physical product-
extra physical output of an extra unit of variable factor of production
Marginal revenue product=
p * Marginal physical product
