microeconomics definitions Flashcards
Allocation of resources
How scarce resources are distributed among producers to determine what is made and who gets these items
Capital
machinery, equipment and buildings that can be used in the production process
Economic activity
any action that produces goods or services
Economic resources
inputs necessary for production i.e. the factors of production
economic welfare
well-being or satisfaction that is affected by a range of material and non-material factors such as income, quantity of goods, environment
enterprise
the initiative to undertake a project or business that involves risk
entrepreneur
the human organiser and initiator of a new business who takes risks in order to gain profit
factor incomes
rewards to the four factors of production e.g. rent is paid for land
factors of production
inputs or resources necessary for production
finite resources
a raw material that has limited supply and is expected to run out in time
free market economy
there is little government action involved in the production of goods and services
full capacity output
the maximum that can be produced by an economy
fundamental economic problem
there are infinite wants but finite resources so people cannot have everything they want. There is scarcity and prices will ration who gets the available supply and choke off excess demand
goods
physical, tangible items e.g. car
Human capital
the skills and training of workers. investment in training rises human capital and the productivity of workers
hypothesis
a proposed explanation made on the basis of little evidence as a starting point for further investigation
infinite wants
people have unlimited desires and never have all the goods and services they wish for
informal economy
any trade that breaks current laws e.g. selling drugs
interest
the payment for the use of capital
laissez-faire
the hypothesis that Governments should interfere as little as possible in the running of firms and the economy
land
raw materials and the earths surface both renewable and non-renewable
market
anywhere where buyers and sellers trade goods and services
need
a product that is necessary for human survival
normative statement
a deceleration that cannot be compared against facts but involves opinion or value judgement
opportunity cost
value of the next best alternative forgone
positive statement
a declaration that can be checked against facts to see whether it is true or false
production possibility frontier
shows the maximum possible combinations of two goods that can be produced by an economy using current available resources
productivity
output per unit of a factor of production in a given time. Most common measure is labour productivity, which can be measured by output per worker
Profit
difference between the revenue a firm earns from its trading activities and its total costs. It is a reward for risk and a return on capital invested
renewable resources
factors of production that can be replenished over time so never run out e.g. wind power
rent
the payment for the use of land or any raw material
revenue
money generated by sales of a product. Price x quantity
scarcity
A shortage of resources to satisfy all wants
services
providing intangible items for others e.g. banking
specialisation
concentration of expertise in a particular area
technical progress
advances in technology and scientific understanding which allows GDP to rise. it involves process and product innovation
Trade-off
one thing is achieved at the expense of another e.g. inflation is reduced in a way that increases unemployment
value judgement
statement that cannot be scientifically tested as true or false but depends on the view of the person who makes it
want
a product that is desirable but not necessary for human survival
alturism
behavioural economics - being more concerned for others than for oneself. It may be that some people do not seek to maximise their own personal welfare but are selfless.
Anchoring
A cognitive bias of relying to heavily on the first piece of information offered which can influence decision making
Availability bias
occurs when individuals place too much weight on the probability of an event happening because of how easy it is to bring to mind
behavioural economic theory
the use of physchological and sociological insights to explain how individuals make choices and decisions and may not end up with an ideal outcome
biases in decision making
occurs when economic agents make biased or sub optimal decisions due to preferences and personal experiences
bounded rationality
consumers are limited by limited brain power, time constraints, and imperfect information to maximise their welfare
choice architecture
describes the deliberate design of how choices are presented to individuals as choices are influenced by the layout/sequencing/ and range of choices that are available.
default choice
is the choice that is made if the consumer does not opt out or change anything. A website might have an expensive one day delivery ticked with other cheaper options available
economic incentives
monetary inducement to do something e.g. set up a business in order to maximise profit
framing
consumers choices are influenced by how the information is presented to them e.g. 10% fat free sells better then 90% fat
hypothesis of diminishing marginal utility
states that the extra benefit of consuming one more unit declines with every extra unit consumed
mandated choice
when people must by law make a decision e.g. some employers make employees choose whether to join pension scheme at point of employment scheme.
- choice is not decided for you but you are forced to make a decision
marginal utility
the additional satisfaction or welfare gained from consuming one extra unit of a good
nudges
policies that use subtle measures to influence behaviour in a less obvious way. They use behavioural and psychological insights to change behaviour to more beneficial actions
rational economic decision making
means acting in a sensible manner to attempt to maximise ones own welfare
rules of thumb
a rough, quick practical method to help make decisions with limited calculations
social norms
people make decisions based off what others think or do or what is culturally acceptable
restricted choice
when a limited number of choices are provided to make decision making process easier -> should lead to better outcome
e.g. energy company only allowing to show a few energy plans
traditional economic theory
assumes that individuals will aim to maximise their utility and also tend to achieve it
utility
satisfaction or economic welfare gained from consuming a product
utility maximisation
concept that individuals and firms seek to get the highest satisfaction from their economic decisions
ad valorem tax
a levy or tax charged as a proportion of the price e.g. VAT
By-product
a good not made as the prime objective of the production process
ceteris paribus
everything else remaining constant
commodity
any good. Sometimes it refers more specifically to raw materials e.g. copper
complement good
a good which is used in conjunction with another good
composite demand
demand for a product that has more than one use e.g. oil is used for fuel and plastic
contraction of demand
a fall in demand due to the price rising
expansion of demand
a rise in demand due to the price falling
contraction of supply
a fall in supply due to a fall in price
cross elasticity of demand
a measurement of the responsiveness of demand for one good in response to a change in price of another
what does a positive XED represent
They are substitutes
what does a negative XED represent
They are compliments
formula for XED
% change in quantity demanded for X ➗ % change in price of Y
demand
quantity of goods consumers are willing and able to buy at a given price
derived demand
demand for good or service that arises from the demand for another related good or service e.g. demand for cinema workers is derived from the demand for films at cinemas
direct tax
a levy on income or wealth e.g.income tax that goes directly from the taxpayer to the government
disequilibrium
a combination of price and quantity that is likely to change usually due to excess demand or supply
dividend
annual payment to shareholders and is a proportion of the profit earned by the firm
dynamic market
occurs when demand and supply change very quickly so prices fluctuate greatly
