Microeconomics Key Words Year 2 Flashcards
Abnormal Profit.
Profit over and above normal profit. Also known as supernormal profit and-above normal profit.
Absolute Poverty.
A condition characterised by severe deprivation of basic human needs. Not only dependent on income but also on access to services.
Adverse Selection.
A situation in which people who buy insurance often have a better idea of the risks they face than the insurer. People who know they face large risks are more likely to buy insurance than people who face small risks.
Allocative Efficiency.
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.
Altruism.
Concern for the welfare of others.
Anchoring.
A cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered.
Artificial Barriers.
Barriers erected by the firms themselves, such as high levels of advertising expenditure or predatory pricing.
Asymmetric Information.
When one party to a market transaction possesses less information relevant to the exchange than the other.
Automation.
Automatic control where machines operate other machines.
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.
Average Cost of Labour.
Total wage costs divided by the number of employees.
Average Fixed Cost.
The total cost of the fixed factors of production divided by the number of units produced. (AFC=TFC/Q)
Average Returns of Labour.
Total output divided by the total number of workers employed.
Average Revenue.
Total revenue divided by output.
Average Total Cost.
Total cost of producing a particular level of output, divided by the size of output; often called average cost:ATC=AFC+AVC
Average Variable Cost.
The total cost of the variable factors of production divided by the number of units produced. (AFC=TvC/Q)
Behavioural Economics.
A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.
Bounded Rationality.
When making decisions, an individual’s 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.
Bounded Self-Control.
Limited self-control in which individuals lack the self-control to act in what they see as their self-interest.
Cartel.
A collusive agreement by firms, usually to fix prices. But sometimes to restrict output and deter the entry of new firms.
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.
Cognitive Bias.
A mistake in reasoning or in some other mental thought process occurring as a result of, for example, using rules-of-thumb or holding onto one’s preferences and beliefs, regardless of contrary information.
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.
Competition and Markets Authority.
Government agency responsible for advising on and implementing UK competition policy.
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.
Complete Market Failure.
A market fails to function at all and a ‘missing market’ results.
Concentration Ratio.
Measures the market share (percentage of the total market) of the biggest firms in the market. For example, a five-firm concentration measures the aggregate market share of the largest five firms.
Condition Of Demand.
A determinant of demand, other than the good’s own price, that fixes the position of the demand curve. A change in one or more of the conditions of demand leads to a shift of demand.
Constant Returns To Scale.
When the scale of all the factors of production employed increases, output increases at the same rate.
Consumer Surplus.
A measure of the economic welfare enjoyed by consumers: surplus utility received over and above the price paid for a good.
Consumption Externality.
When consumption of a good or a service imposes external costs or benefits on third parties outside of the market without these being reflected in market prices..
Contestable MArket.
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.
Contraction Of Demand.
An adjustment or movement up a demand curve following an increase in the good’s price.
Contractualistaion.
Services which were previously provided by the public sector, such as road cleaning or refuse collection, are put to private sector tender and then provided by private sector firms.
Creative Destruction.
Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations.
Deadweight Loss.
The name given to the loss of economic welfare when the maximum attainable level of total welfare is not achieved.
Decrease In Demand.
A leftward shift of the demand curve.
Decreasing Returns To Scale.
When the scale of all the factors of production employed increases, output increases at a slower rate.
Default Choice.
An option that is selected automatically unless an alternative is specified.
Demerit Good.
A good for which the private benefits of consumption are greater than the social benefits and for which the long-term private benefits are less than the short-term benefits.
Deregulation.
The removal of previously imposed regulations.
Derived Demand.
Demand for a good or factor of production, not wanted for its own sake, which is a consequence of the demand for something else.
Diseconomy Of Scale.
As output increases, long-run average cost rises.
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.
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.
Divorce Of Ownership From Control.
The owners and those who manage the firm are different groups with different objectives.
Duopoly.
Two firms only in a market.
Dynamic Efficiency.
Occurs in the long run, leading to the development of new products and more efficient processes that improve productive efficiency.
Economic Sanctions.
Restrictions imposed by regulations and/or laws that restrict an individual’s freedom to behave in certain ways. Breaking a sanction can lead to punishment.
Economy Of Scale.
As output increases, long-run average cost falls.
Elasticity Of Demand For Labour.
Proportionate change in demand for labour following a change in the wage rate.
Elasticity Of Supply Of Labour.
Proportionate change in the supply of labour following a change in the wage rate.
Entry Barriers.
Obstacles that make it difficult for a new firm to enter the market.
Equality.
Means that everyone is treated exactly the same. A completely equal distribution of income means that everybody has the same income.
Equity.
Means that everybody is treated fairly.
Exit Barriers.
Obstacles that make it difficult for an established firm to leave the market.
Extension Of Demand.
An adjustment or movement down a demand curve following a fall in the good’s price.
External Diseconomy Of Scale.
An increase in the long-run average costs of production resulting from the growth of the market or industry of which the firm is a part.
External Economy Of Scale.
A fall in the long-run average costs of production resulting from the growth of the market or industry of which the firm is a part.
Externality.
Occurs when production or consumption of goods or services imposes external costs or benefits on third parties outside of the market without these being reflected in market prices. When an externality is generated, there is a divergence between private and social costs and benefits.
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.
Firm.
A productive organisation which sells its output of goods or services commercially.
Framing.
How something is presented (the ‘frame’) influences the choices people make.
Free-Rider Problem.
Occurs when non-excludability leads to a situation in which not enough customers choose to pay for a good, preferring instead to free ride, with the result that the incentive to provide the good through the market disappears and a missing market may result. (A free rider is someone who benefits without paying).
Geographical Immobility Of Labour.
When workers are unwilling or unable to move from one area to another in search of work.
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.
Government Failure.
Occurs when government intervention in the economy makes the allocation of resources worse. The intervention may be ineffective, wasteful and/or damaging.
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.
Hypothesis Of Diminishing Marginal Utility.
For a single consumer the marginal utility derived from a good or service diminishes for each additional unit consumed.
Income.
Personal or household income is the flow of money a person or household receives in a particular time period.
Income Effect.
An increase in the hourly wage rate means higher real income, and if leisure is a normal good, the quantity of leisure demanded goes up which means a reduction in the quantity of labour supplied.
Increase In Demand.
A rightward shift of the demand curve.
Increasing Returns To Scale.
When the scale of all the factors of production employed increases, output increases at a faster rate.
Individual Demand Curve.
Shows how much of a good or service the consumer plans to demand at different possible prices.
Innovation.
Improves on or makes a significant contribution to something that has already been invented, thereby turning the results of invention into a product.
Internal Economies And Diseconomies Of Scale.
Changes in the long-run average costs of production resulting from changes in the size or scale of a firm or plant.
Invention.
Making something entirely new; something that did not exist before at all.
Labour Productivity.
Output per worker.
Law Of Demand
As a good’s price falls, more is demanded.
Law Of Diminishing Returns.
A short-term law which states that as a variable factor of production is added to a fixed factor of production, eventually both the marginal and average returns to the variable factor will begin to fall. It is also known as the law of diminishing marginal (and average) productivity.
Limit Prices.
Prices set low enough to make it unprofitable for other firms to enter the market.
Long-Run Average Cost.
Cost per unit of output incurred when all factors of production or inputs can be varied.
Long-Run Marginal Costs.
Addition to total cost resulting from producing one additional unit of output when all the factors of production are variable.
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.
Mandated Choice.
People are required by law to make a decision.
Marginal Cost.
Addition to total cost resulting from producing one additional unit of output.
Marginal Cost Of Labour.
The addition to a firm’s total cost of production resulting from employing one more worker.
Marginal Physical Product Of Labour.
The addition to a firm’s total output brought about by employing one more worker.
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.
Marginal Revenue.
Addition to total revenue resulting from the sale of one more unit of the product.
Marginal Revenue Product Of Labour.
The money value of the addition to a firm’s total output brought about by employing one more worker.
Marginal Tax Rates.
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 a person or business pays.
Marginal Utility.
The additional welfare, satisfaction or pleasure gained from consuming one extra unit of a good.
Market Conduct.
The price and other market 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.
Market Failure.
Occurs when the price mechanism fails to allocate scarce resources in a productively efficient way and when the operation of market forces leads to an allocatively inefficient outcome.
Market Structure.
The organisational and other characteristics of a market.
Marketisation.
The provision of goods and service is shifted from the non-market sector into the market sector of the economy. Also known as commercialisation.
Means-Tested Benefits.
The ability to claim these benefits depends on a person’s income or ‘means’.
Mechanisation.
Process of moving from a labour-intensive to a more capital-intensive method of production, employing more machines and fewer workers.
Merit Good.
A good for which the social benefits of consumption exceed the private benefits and for which the long-term private benefits of consumption are greater than the short-term private benefits.
Minimum Efficient Scale.
The lowest output at which the firm is able to produce at the minimum achievable LRAC.
Missing Market.
The absence of a market for a good or service, most commonly in the case of public goods and externalities.
Monopolistic Competition.
A market structure in which firms have many competitors, but each one sells a slightly different product.
Monopoly.
One firm only in a market.
Monopoly Power.
Firms in market structures other than pure monopoly usually possess significant monopoly power, defined as power over price setting and other aspects of the market such as product differentiation.
Monopsony.
There is only one buyer in a market.
Monopsony Power.
The market power exercised in a market by the buyer of a good or the services of a factor of production such as labour, even though the firm is not a pure monopsonist.
Moral Hazard.
The tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely.
National Living Wage.
An adult wage rate, set by the UK government, which all employers must pay from 2016 onward, and which has replaced the adult national minimum wage rate.
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.
Natural Barriers.
Barriers that result from features of the industry, such as economies of scale or high research and development costs; not barriers that have been erected artificially.
Negative Externality.
A cost that is suffered by a third party as a result of an economic transaction. In the transaction, the producer and consumer are the first and second parties, and third parties include any other people or firms that are affected by the transaction. Pollution is a negative externality when unwillingly consumed by third parties.
Net Advantage.
The sum of monetary and non-monetary benefits of working.
Non-Excludability.
A property of a public good which means that if it is provided for one person it is provided for all.
Non-Rejectability.
A property of a public goof which means that if the good is provided, it is impossible for a person to ‘opt out’ and not gain its benefits.
Non-Rivalry.
A property of a public good which means that when a good is consumed by one person, it does not reduce the amount available for others.
Normal Profit.
The minimum profit a firm must make to stay in business, which is, however, insufficient to attract new firms into the market.
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.
Occupational Immobility Of Labour.
When workers are unwilling or unable to move from one type of job to another, e.g. because different skills are needed.
Optimum Firm Size.
The size of firm capable of producing at the lowest average cost and thus being productively efficient.
Partial Market Failure.
A market does function, but it delivers the ‘wrong’ quantity of a good or service, which results in resource misallocation.
Plant.
An establishment, such as a factory, a workshop or a retail outlet, owned and operated by a firm.
Positive Externality.
A benefit that is enjoyed by a third party as a result of an economic transaction, e.g. a beautiful garden, visible to third parties.
Poverty.
The state of being extreme;y poor and not having enough money or income to meet basic needs.
Predatory Prices.
Prices set below average cost (or very cheaply) with the aim of forcing rival firms out of business.
Price Agreement.
An agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service.
Price Discrimination.
Charging different prices to different customers for the same product or service, with the prices based on different willingness to pay.
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. In barometric price leadership, one firm acts as a ‘barometer’ or a benchmark, whose prices other firms follow.
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.
Price-Taker.
A firm which is so small that it has to accept the ruling market price. If the firm raises its price, it loses all its sales; if it cuts its price, it gains no advantage.
Price War.
Occurs when rival firms continuously lower prices to undercut each other.
Private Costs And Benefits.
Private costs are costs incurred solely by an individual or firm as a result of their own activities; private benefits are benefits enjoyed solely by an individual or firm as a result of their own activities.
Private Finance Initiative.
The government seeks tenders from the private sector for designing, building, financing and running infrastructure projects.
Private Good.
A good which exhibits the characteristics of excludability and rivalry.
Privatisation.
The transfer of assets from the public sector to the private sector.
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.
Product Differentiation.
The marketing of generally similar products with minor variations or the marketing of a range of different products.
Production Externality.
When production of a good or service imposes external costs or benefits on third parties outside of the market without those being reflected in market prices.
Productive Efficiency.
The level of output at which average costs of production are minimised.
Productivity.
Output per unit of input.
Profit.
The difference between total sales revenue and total cost of production.
Profit Maximisation.
Occurs at the level of output at which total profit is greatest.
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 taxation in general.
Property Rights.
The exclusive authority to determine how a resource is used. In the case of a private property right, the owner of private property such as a bar of chocolate in a sweet shop has the right to prevent other people from consuming the bar unless they are prepared to pay a price to the owner.
Public Good.
A good which exhibits the characteristics of non-excludability and non-rivalry.
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.
Public-Private Partnership.
Partnership between the private and public sectors to provide public services.
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.
Quasi-Public Good.
A good which has characteristics of both a public and private good, e.g. it might be non-excludable but rival, or excludable but non-rival.
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.
Regulation.
The imposition of rules and other constraints which restrict freedom of economic action.
Regulatory Capture.
Occurs when the regulatory agencies act in the interest of regulated firms rather than on behalf of the consumers they are supposed to protect.
Relative Poverty.
Occurs when income is below a specified proportion of average income, e.g. below 60% of median income.
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.
Returns To Scale.
The rate by which output changes if the scale of all the factors of production is changed.
Rule-Of-Thumb.
A rough and practical method or procedure that can be easily applied when making decisions.
Satisficing.
Achieving a satisfactory outcome rather than the best possible outcome.
Shift Of A Demand Curve.
The movement of a demand curve to a new position.
Social Costs And Benefits.
Social costs are costs which fall on the whole of society: social cost = private cost + external cost; social benefits are benefits enjoyed by the whole of society: social benefit = private benefit + external benefit.
Social Norms.
Forms or patterns of behaviour considered acceptable by a society or group within that society.
Static Efficiency.
Efficiency (e.g. productive and allocative efficiency) at a particular point in time.
Substitution Effect.
A higher hourly wage rate makes work more attractive than leisure, so workers substitute labour for leisure.
Sunk Costs.
Costs that have already been incurred and cannot be recovered.
Technological Change.
A term that is used to describe the overall effect of invention, innovation and the diffusion or spread of technology in the economy.
Total Returns Of Labour.
Total output produced by all the workers employed by a firm.
Total Revenue.
All the money received by a firm from selling its total output, TR = P x Q.
Trade Union.
A group of workers who join together to maintain and improve their conditions of employment, including their pay.
Universal Benefits.
Benefits claimable of right and not dependent on a person’s income.
Utility.
The satisfaction or economic welfare an individual gains from consuming a good or service.
Wage Discrimination.
Paying different workers different wage rates for doing the same job.
Wealth.
Personal wealth is the stock of everything which has value that a person or household owns at a particular point in time.
