Microeconomics Definitions Flashcards
Paper 1 (253 cards)
1
Q
Market
A
The ‘place’ in which goods are bought and sold
2
Q
Normative statement
A
a statement that includes a value judgement and cannot be refuted just by looking at the evidence
3
Q
Positive statement
A
A statement of fact that can be scientifically tested to see if it is correct or incorrect
4
Q
Value judgement
A
an opinion about whether something is desirable or not
5
Q
need
A
something that is necessary for survival e.g. food, shelter
6
Q
want
A
something that is desirable, but is not necessary for human survival e.g. fashionable clothing
7
Q
economic welfare
A
the economic well-being of an individual, a group within a society, or an economy
8
Q
economic system
A
the set of instructions within which a community decides what, how and for whom to produce
9
Q
market economy
A
an economy in which goods and services are purchased through the price mechanism in a system of markets
10
Q
command economy
A
(also known as a planned economy) an economy in which government officials or planners allocate economic resources to firms and other productive enterprises
11
Q
mixed economy
A
an economy that contains both a large market sector and a large non-market sector in which the planning mechanism operates
12
Q
production
A
a process, or set of processes, that converts inputs into output of goods
13
Q
capital good
A
a good which is used in the production of other goods and services (producer good)
14
Q
consumer good
A
A good which is consumed by individuals or households to satisfy their needs or wants
15
Q
factors of production
A
inputs into the production process, such as land, labour, capital and enterprise
16
Q
finite resource
A
a resource, such as oil, which is scarce and runs out as it is used. also known as a non-renewable resource
17
Q
renewable resource
A
a resource, such as timber, that with careful management can be renewed as it is used
18
Q
economic good
A
has an opportunity cost
19
Q
free good
A
has no opportunity cost
20
Q
fundamental economic good
A
how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare
21
Q
Scarcity
A
results from the fact that people have unlimited wants but resources to meet these wants are limited. In essence, people would like to consume more goods and services than the economy is able to produce with its limited resources
22
Q
opportunity cost
A
the cost of giving up the next best alternative
23
Q
economic growth
A
The increase in the potential level of real output the economy can produce over a period of time
24
Q
technical progress
A
new and better ways of making goods and new techniques for producing more output from scarce resources
25
full employment
When all who are able and willing to work are employed
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Unemployment
When not all of those who are able and willing to work are employed
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choice
Choosing between alternatives when making a decision on how to use scarce resources
28
resource allocation
The process through which the available factors of production are assigned to produce different goods and services
29
productive efficiency
For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised.
30
allocative efficiency
occurs when the available economic resources are used to produce the combination of goods and services that best matches people's tastes and preferences (producing the things people most want)// occurs when it is impossible to improve overall economic welfare by reallocating resources between markets. In the whole economy, price must equal marginal cost (P=MC) in every market
31
competitive market
A market in which the large number of buyers and sellers possess good market information and can easily enter or leave the market
32
equilibrium market
the price at which planned demand for a good or service exactly equals planned supply
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supply
the quantity of a good or service that businesses are willing and able to sell at given prices in a given period of time
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demand
the quantity of a good or service that consumers are willing and able to buy at given prices in a given period of time. For economists, demand is always effective demand
35
effective demand
the desire for a good or service backed by an ability to pay
36
market demand
the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices
37
condition of demand
a determinant of demand, other than the good's own price, that fixes the position of the demand curve
38
increase in demand
a rightward shift of the demand curve
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decrease in demand
leftward shift of the demand curve
40
normal good
a good for which demand increases as income increases and demand decreases as income falls
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inferior good
a good for which demand decreases as income increases and demand increases as income falls
42
elasticity
the proportionate responsiveness of a second variable to an initial change in the first variable
43
price elasticity of demand
measures the extent to which the demand for a good changes in response to a change in the price of that good
44
income elasticity of demand
measures the extent to which the demand for a good changes in response to a change in income; it is calculated by dividing the percentage change in quantity demanded by the percentage change in income
45
market supply
the quantity of a good or service that all firms plan to sell at given prices in a given period of time
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cross- elasticity of demand
measures the extent to which the demand for a good changes in response to a change in the price of another good; it is calculated by dividing the percentage change in quantity demanded of one good by the percentage change in the price of the other good
47
Profit
the difference between total sales revenue and total costs of production
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total revenue
the money a firm receives from selling its output, calculated by multiplying the price by the quantity sold
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conditions of supply
determinants of supply, other than the good's own price, that fix the position of the supply curve
50
increase in supply
a rightward shift of the supply curve
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decrease in supply
a leftward shift of the supply curve
52
price elasticity of supply
measures the extent of which the supply of a good changes in response to a change in the price of that good
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equilibrium
a state of rest or balance between opposing forces
54
disequilibrium
a situation in a market when there is excess supply or excess demand
55
market equilibrium
a market is in equilibrium when planned demand equals planned supply and the demand curve crosses the supply curve. In this situation there is no excess demand or excess supply in the market. Unless some event disturbs the equilibrium, there is no reason for the price to change.
56
market disequilibruim
exists at any other price other than the equilibrium price. When the market is in disequilibrium, either excess demand or excess supply exists in the market. Excess demand causes the price to rise until a new equilibrium is established. Conversely, excess supply causes the market price to fall until equilibrium is achieved.
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excess supply
when firms wish to sell more than consumers wish to buy, with the price above the equilibrium price
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excess demand
when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price
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joint supply
when one good is produced, another good is also produced from the same raw materials
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competing supply
when raw materials are used to produce one good they cannot be used to produce another good
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complementary good
a good in joint demand, or a good which is demanded at the same time as the other good
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substitute good
a good in competing demand, namely a good which can be used in place of the other good
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composite demand
demand for a good which has more than one use
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derived demand
demand for a good which is an input into the production of another good// demand for a good or factor of production, wanted not for its own sake, but as a consequence of the demand for something else
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merit good
a good which when consumed leads to benefits which other people enjoy, or a good for which the long-term benefit of consumption exceeds the short-term benefit enjoyed by the person consuming the merit good. Whether a good should be regarded as a merit good, depends on the value judgements being made.
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short-run production
occurs when a firm adds variable factors of production to fixed factors of production
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long-run production
occurs when a firm changes the scale of all the factors of production
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productivity
output per unit of input
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labour productivity
output per worker
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Capital productivity
Output per unit of capital
71
Productivity growth
the difference between labour productivity in the UK and in other developed economies
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specialisation
a worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services.
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division of labour
this concept goes hand in hand with specialisation. different workers perform different tasks in the course of producing a good or service
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trade
the buying and selling of goods and services
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exchange
to give something in return for something else received. money is a medium of exchange
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short run
the time period in which at least one factor of production is fixed and cannot be varied
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long run
the time period in which no factors of production are fixed and in which all the factors of production can be varied
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fixed cost
cost of production which, in the short run, does not change with output
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variable cost
cost of production which changes with the amount that is produced, even in the short run
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total cost
the whole cost (fixed cost plus variable cost) of producing a particular level of output
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average cost
total cost of production divided by output
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long-run average cost
long-run total cost divided by output
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economy of scale
as output increases, long-run average cost falls
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diseconomy of scale
as output increases, long-run average cost rises
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technical economy of scale
a cost saving generated through changes to the 'productive process' as the scale of production and level of output increase
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internal economy of scale
cost saving resulting from the growth of the firm itself
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external economy of scale
cost saving resulting from the growth of the industry or market of which the firm is a part
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total revenue
all the money received by a firm from selling its total output
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average revenue
total revenue divided by output; in a single-product firm, average revenue equals the price of the product
90
profit
the difference between total sales revenue and total cost of production
91
market structure
the organisation of a market in terms of the number of firms in the market and the ways in which they behave
92
price taker
a firm which passively accepts the ruling market price set by market conditions outside its control
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price maker
a firm possessing the power to set the price within the market
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perfect competition
a market that displays the six conditions of: a large number of buyers and sellers; perfect market information; the ability to buy or sell as much as is desired at the ruling market price; the inability of an individual buyer or seller to influence the market price; a uniform or homogeneous product; and no barriers to entry or exit in the long run
95
competitive market
a market in which firms strive to outdo their rivals, but it does not necessarily meet all the conditions of perfect competition
96
concentrated market
a market containing very few firms, in the extreme only one firm
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pure monopoly
when there is only one firm in the market
98
monopoly power
the power of a firm to act as a price maker rather than as a price taker// the ability of a monopoly to raise and maintain price above the level that would prevail under perfect competition. Market power can also be exercised, usually to a lesser degree, by firms in oligopoly and monopolistic competition
99
imperfect competition
any market structure lying between the extremes of perfect competition and pure monopoly
100
profit maximisation
occurs when a firm's total sales revenue is furthest above total cost of production
101
sales maximisation
occurs when sales revenue is maximised
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market share maximisation
occurs when a firm maximises its percentage share of the market in which it sells its product
103
normal profit
minimum profit necessary for a firm to stay in an industry
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abnormal profit
The profit over and above normal profit
105
consumer sovereignty
Through exercising their spending power, consumers collectively determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market
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producer sovereignty
producers or firms in a market determine what is produced and what prices are charged
107
entry barrier
makes it difficult or impossible for new firms to enter a market
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exit barrier
makes it difficult or impossible for firms to leave a market
109
natural monopoly
the term has two meanings, first when a country or firm has complete control of a natural resource, and second when there is only room in a market for one firm benefiting from economies of scale to the full
110
patent
a strategic or man-made barrier to entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good, unless the firm grants royalties for other firms to produce the good
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natural barrier to entry
a barrier to market entry which is not man-made// barriers to market entry caused by geography. For example, if one firm has control of a resource essential for a certain industry, other firms are unable to compete in a industry
112
artificial barrier to entry
a barrier to market entry which is man-made
113
informative advertising
provides consumers and producers with useful information about goods or services
114
persuasive advertising
attempts to persuade potential customers that a good or service possesses desirable characteristics that make it worth buying
115
saturation advertising
through flooding the market with information and persuasion about a firm's product, this functions as a man-made barrier to market entry by making it difficult for smaller firms to compete.
116
product differentiation
making a product different from other products through product design, the method of producing the product, or through its functionality// the marketing of generally similar products with minor variations or the marketing of a range of different products
117
quantity setter
a firm chooses the quantity of a good to sell, rather than its price. In monopoly, the market demand curve then dictates the maximum price that can be charged if the firm is to successfully sell its chosen quantity.
118
concentration ratio
A ratio which indicates the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output
119
Oligopoly
A ratio which indicates the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output
120
Oligopoly
a market dominated by a few firms
121
resource misallocation
when resources are allocated in a way which does not maximise economic welfare
122
collusion
co-operation between firms, for example to fix prices. Some forms of collusion may be in the public interest, for example joint research and labour training schemes
123
invention
creates new ideas for products or processes // making something entirely new; something that did not exist before at all
124
innovation
converts the results of invention into marketable products or services// improves on or makes a significant contribution that has already been invented, thereby turning the results of invention into a product
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price competition
reducing the price of a good or service to gain sales by making it more attractive for consumers
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limit pricing
reducing the price of a good to just above average cost to deter the entry of new firms into the market. Prices are set at levels which are likely to make it unprofitable for potential entrants who might consider coming into the market
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predatory pricing
Temporarily reducing the price of a good to below average cost to drive smaller firms or new market entrants out of the market.
128
signalling function of prices
prices provide information to buyers and sellers
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incentive function of prices
Prices create incentives for people to alter their economic behaviour; for example, a higher price creates an incentive for firms to supply more of a good or service.
130
rationing function of prices
rising prices ration demand for a product
131
Allocative function of prices
changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand
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market failure
when the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity
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missing market
a situation in which there is no market because the functions of prices have broken down
134
private good
a good that is excludable and rival
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public good
a good that is non-excludable and non-rival
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quasi-public good
a good which is not fully non-rival and/or where it is possible to exclude people from consuming the product
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externality
a public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is 'dumped' on third parties outside the market
138
positive externality
which is the same as an external benefit, occurs when the consumption or production of a good causes a benefit to a third party, where the social benefit is greater than the private benefit
139
negative externality
which is the same as an external cost, occurs when the consumption or production of a good causes costs to a third party, where the social cost is greater than the private cost.
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production externality
an externality (which may be positive or negative) generated in the course of producing a good or service
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consumption externality
An externality (which may be positive or negative) generated in the course of consuming a good or service
142
Social benefit
the total benefit of an activity, including the external benefit as well as the private benefit. Expressed as an equation: social benefit = private benefit + external benefit
143
subsidy
a payment made by the government or other authority, usually to producers, for each unit of the subsidised good they produce. Consumers can also be subsidised
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demerit good
a good, such as tobacco, for which the social costs of consumption exceed the private costs. Value judgements are involved in deciding that a good is a demerit good.
145
social cost
the total cost of an activity, including the external cost as well as the private cost. Expressed as an equation: social cost = private cost + external cost
146
information problem
Occurs when people make wrong decisions because they don't possess or they ignore relevant information. Very often they are myopic (short-sighted) about the future
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immobility of labour
the inability of labour to move from one job to another, either for occupational reasons or for geographical reasons
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geographical immobility of labour
occurs when workers find it difficult or impossible to move to jobs in other parts of the country or in other countries for reasons such as higher housing costs in locations where the jobs exist
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Occupational immobility of labour
occurs when workers find it difficult or impossible to move between jobs because they lack or cannot develop the skills required for new jobs
150
equity
fairness or justness// when everyone is treated fairly
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inequity
unfairness or unjustness
152
distribution of income and wealth
the way in which income and wealth are divided among the population
153
regulation
involves the imposition of rules, controls and constraints, which restrict freedom of economic action in the market place
154
tax
a compulsory levy imposed by the government to pay for its activities. Taxes can also be used to achieve other objectives, such as reduced consumption of demerit goods
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price ceiling
a price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets by creating excess demand
156
price floor
a price below which it is illegal to trade. Price floors, or minimum legal prices, can distort markets by creating excess supply
157
government failure
occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome
158
production possibility frontier
a curve depicting the various combinations of two products (or types of products) that can be produced when all the available resources are fully and efficiently employed
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rational behaviour
acting in pursuit of self-interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed
160
utility
the satisfaction or economic welfare an individual gains from consuming a good or service
161
marginal utility
the additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good or service
162
hypothesis of diminishing marginal utility
for a single consumer, the marginal utility derived from a good or service diminishes for each additional unit consumed
163
asymmetric information
when one party to a market transaction possesses less information relevant to the exchange than the other
164
Behavioural economics
a method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions
165
bounded rationality
when making decisions, individuals' rationality is limited by the information they have, the limitations of their minds and the finite amount of time available in which to make decisions
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bounded self-control
limited self-control in which individuals lack the self-control to act in what they see as their self-interest
167
cognitive bias
is a systematic error in thinking that affects the decisions and judgements that people make
168
availability bias
Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events
169
anchoring
a cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered (the so-called 'anchor'). Individuals use an initial piece of information when making subsequent judgements
170
social norms
forms or patterns of behaviour considered acceptable by a society or group within that society
171
nudges
factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behaviour in ways which comply with desirable social norms
172
altruism
concern for the welfare of others
173
Fairness
the quality of being impartial, just, or free of favouritism. It can mean treating everyone the same. Fairness involves treating people equally, sharing with others, giving others respect and time, and not taking advantage of them
174
Choice architecture
a framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making
175
default choice
an option that is selected automatically unless an alternative is specified
176
framing
how something is presented (the 'frame') influences the choices people make
177
mandated choice
people are required, often by law, to make a decision
178
restricted choice
offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. If there are too many choices, people may make a poorly thought-out decision or not make any decision
179
effective demand
The desire for a good or service backed by an ability to pay
180
market demand
the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices
181
individual demand
the quantity of a good or service that a particular customer or individual is willing and able to buy at different market prices
182
condition of demand
a determinant of demand, other than the good's own price, that fixes the position of the demand curve
183
substitute goods
alternative goods that could be used for the same purpose
184
Complementary goods
when two goods are complements, they experience joint demand
185
productivity gap
the difference between labour productivity in the UK and in other developed economies
186
firm
a productive organisation which sells its output of goods and/or services commercially
187
marginal returns of labour
the change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed
188
law of diminishing marginal returns
a short-term law which states that as a variable factor of production is added to a fixed factor of production, both the marginal and eventually the average returns to the variable factor will begin to fall
189
total returns
the whole output produced by all the factors of production, including labour, employed by a firm
190
average returns of labour
Total output divided by the total number of workers employed
191
returns to scale
The rate by which output changes if the scale of all the factors of production is changed
192
plant
an establishment, such as a factory, a workshop or a retail outlet, owned and operated by a firm
193
increasing returns to scale
when the scale of all the factors of production employed increases, output increases at a faster rate
194
constant returns to scale
when the scale of all the factors of production employed increases, output increases at the same rate
195
decreasing returns to scale
when the scale of all the factors of production employed increases, output increases at a slower rate
196
marginal cost
addition to total cost resulting from producing one additional unit of output
197
marginal revenue
addition to total revenue resulting from the sale of one more unit of the product
198
price-maker
when a firm faces a downward-sloping demand curve for its product, it possesses the market power to set the price at which it sells the product
199
quantity- setter
when a firm faces a downward-sloping demand curve for its product, it possesses the market power to set the quantity of the good it wishes to sell
200
technological change
A term used to describe the overall effect of invention, innovation and diffusion or spread of technology in the economy
201
dynamic efficiency
measures improvements in productive efficiency that occur in the long run over time
202
monopolistic competition
a market structure in which firms have many competitors, but each one sells a slightly different product
203
creative destruction
capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations
204
entry barriers
obstacles that make it difficult for a new firm to enter a market
205
exit barriers
obstacles that make it difficult for an established firm to leave a market
206
divorce of ownership from control
the owners and those who control the firm (managers) are different groups with different objectives
207
satisficing
achieving a satisfactory outcome rather than the best possible outcome
208
allocative inefficiency
occurs when P>MC, in which case too little of a good is produced and consumed, and when P
209
sunk costs
costs that have already been incurred and cannot be recovered
210
market conduct
the pricing and marketing policies pursued by firms. This is also known as market behaviour, but is not to be confused with market performance, which refers to the end results of these policies
211
cartel
a collusive agreement by firms, usually to fix prices. Sometimes there is also an agreement to restrict output and to deter the entry of new firms
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price leadership
the setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market.
213
price agreement
an agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service
214
price war
occurs when rival firms continuously lower prices to undercut each other
215
price discrimination
charging different prices to different customers for the same product or service, with the prices based on different willingness to pay
216
contestable markets
a market in which the potential exists for new firms to enter the market. A perfectly contestable market has no entry or exit barriers and no sunk costs, and both incumbent firms and new entrants have access to the same level of technology
217
hit-and-run competition
occurs when a new entrant can 'hit' the market, make profits and then 'run', given that there are no or low barriers to exit
218
static efficiency
efficiency at a particular point in time
219
consumer surplus
a measure of the economic welfare enjoyed by consumers: surplus utility received over and above the price paid for a good
220
producer surplus
a measure of the economic welfare enjoyed by firms or producers: the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept
221
deadweight loss
the loss of economic welfare when the maximum attainable level of total welfare fails to be achieved
222
marginal physical product of labour
the addition to a firm's total output brought about by employing one more worker
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marginal revenue product of labour
the money value of the addition to a firm's total output brought about by employing one more worker
224
elasticity of demand for labour
proportionate change in demand for labour following a change in the wage rate. The elasticity can be calculated by using the following formula: proportionate change in quantity of labour demanded/ proportionate change in the wage rate
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elasticity of supply of labour
proportionate change in the supply of labour following a change in the wage rate. The elasticity can be calculated by using the following formula: proportionate change in quantity of labour supplied/ proportionate change in the wage rate
226
average cost of labour
total wage costs divided by the number of workers employed
227
marginal cost of labour
the addition to a firm's total cost of production resulting from employing one more worker
228
monopsony
there is only one buyer in a market
229
monopsony power
the market power exercised in a market by the buyer of a good or the services of a factor production such as labour, even though the firm is not a pure monopsonist
230
trade union
a group of workers who join together to maintain and improve their conditions of unemployment, including their pay
231
collective bargaining
a process by which wage rates and other conditions of work are negotiated and agreed upon by a union or unions with an employer or employers
232
national minimum wage
a minimum wage or wage rate that must by law be paid to employees, though in many labour markets the wage rate paid by employers is above the national minimum wage
233
wage discrimination
paying different workers different wage rates for doing the same job
234
distribution of income
how income is divided between rich and poor, or between different groups in society, e.g. on a regional, age or gender basis
235
distribution of wealth
how wealth is divided between rich and poor, or between different groups in society, e.g. on a regional, age or gender basis
236
income
personal or household income is the flow of money a person or household receives in a particular time period
237
wealth
personal wealth is the stock of everything that a person or household owns at a particular point in time which has value
238
equality
when everyone is treated exactly the same. A completely equal distribution of income means that everybody has the same income
239
Lorenz curve
a graph on which the cumulative percentage of total national income or wealth is plotted against the cumulative percentage of population (ranked in increasing size of share). The extent to which the curve dips below a straight diagonal line indicates the degree of inequality of distribution
240
Gini coefficient
measures the extent to which the distribution of income or wealth among individuals or households within an economy deviates from a perfectly equal distribution
241
progressive taxation
a tax is progressive when, as income rises, a greater proportion of income is paid in taxation. The term can be applied to a particular tax such as income tax or to taxation in general
242
poverty
the state of being extremely poor and not having enough money or income to meet basic needs
243
absolute poverty
a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services.
244
relative poverty
occurs when income is below a specified proportion of average income, e.g. below 60% of median income
245
marginal tax rate
the tax rate levied on the last pound of income received. The term can be applied solely to income taxes or to all the taxes that a person or business pays
246
free-rider problem
a free rider is someone who benefits without paying as a result of non-excludability. Customers may choose not to pay for a good, preferring instead to free ride, with the result that the incentive to provide the good through the market disappears.
247
moral hazard
The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely.
248
competition policy
the part of the government's microeconomic policy and industrial policy which aims to make goods markets more competitive. It comprises policy toward monopoly, mergers and restrictive trading practices.
249
competition and markets authority
government agency responsible for advising on and implementing UK competition policy
250
public ownership
ownership of industries, firms and other assets such as social housing by central government or local government. The state's acquisition of such assets is called nationalisation.
251
privatisation
The transfer of assets from the public sector to the private sector
252
deregulation
the removal of previously imposed regulations
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regulatory capture
occurs when regulatory agencies act in the interest of regulated firms rather on behalf of the consumers they are supposed to protect.
