Microeconomics Year 1 Key terms Flashcards
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.
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.
Artificial barrier to entry
A barrier to market entry which is man made.
Average cost
Total cost of production divided by the output.
Average revenue
Total revenue divided by output; in a single-product firm, average revenue equals the price of the product.
Capital/producer good
A good which is used in the production of the goods or services.
Capital productivity
Output per unit of capital
Choice
Choosing between alternatives when making a decision on how to use scarce resources.
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.
Competing supply
When raw materials are used to produce one good they cannot be used to produce another good.
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. A competitive market is one which firms strive to outdo their rivals but it does not necessarily meet all the conditions of perfect competition.
Complementary good
A good in joint demand, or a good which is demanded at the same time as the other good.
Composite demand
Demand for a goos which has more than one use.
Concentrated market
A market containing very few firms, in the extreme only one firm.
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.
Condition of demand
A determinant of demand, other than the good’s own price, that fixes the position of the demand curve.
Conditions of supply
Determinants of supply, other than the good’s own price, that fix the position of the supply curve.
Consumer good
A good which is consumed by individuals or households to satisfy their needs or wants.
Consumer sovereignty
Through exercising their spending power, consumer collectively determine what is produced in a market. Consumer sovereignty is strongest in a perfectly competitive market.
Consumption externality
An externality (which may be positive or negative) generated in the course of consuming a good or service.
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’s calculated by dividing the percentage change in quantity demanded by the percentage change in the price of another good.
Decrease in demand
A leftward shift of the demand curve.
Decrease in supply
A leftward shift of the supply curve.
Demand
The quantity of a good or service that consumers are willing and able to buy at a given prices in a given period of time. For economists, demand is always effective demand.
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.
Derived demand
Demand for a good which is an input into the production of another good.
Derived demand
Demand for a good which is an input into the production of another good.
Diseconomy of scale
As output increases, long-run average cost rises.
Disequilibrium
A situaron in a market when there is excess supply or excess demand.
Distribution of income and wealth
The way in which income and wealth are divided among the population.
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.
Economic growth
The increase in the potential level of real output the economy can produce over a period of time.
Economic welfare
The economic well-being of an individual, a group within society, or an economy.
Economy of scale
As output increases, long-run average cost falls.
Effective demand
The desire for a good or service backed by an ability to pay.
Elasticity
The proportionate responsiveness of a second variable to an initial proportionate change in the first variable.
Entry barrier
Makes it difficult or impossible for new firms to enter a market.
Equilibrium
A state of rest or balance between opposing forces.
Equilibrium price
The price at which at which planned demand for a GOS exactly equals planned supply.
Equity
Fairness or justness.
Excess demand
When consumers wish to but more than firms wish to sell, with the price above the equilibrium price.
Excess supply
When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price.
Exchange
To give something in return for something else received. Money is a medium of exchange.
Exit barrier
Makes it difficult or impossible for firms to leave a market.
External economy of scale.
Cost saving resulting from the growth of the industry or market of which the firm is part.
Externality
A public good, in the case id an external benefit, or a public bad, in the case of an external cost, that is ‘dumped’ on third parties outside the market.
Factors of production
Inputs into the production process, such as land, labour, capital and enterprise.
Finite resource
A resource, such as oil which is scare and runs out as it’s used. A non-renewable resource.
Fixed cost
Cost of production which, in the short run, does not change with output.
Full employment
When all who are able and willing to work are employed-
Fundamental economic problem
How best to make decisions about the allocation of scare resources among competing uses so as to improve and maximise human happiness and welfare.
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 location where the jobs exist.
Government failure
Occurs when government intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome.
Immobility of labour
The inability to move from one job to another, either for occupational reasons (eg. the need for training) or for geographical reasons (eg. the cost of moving to another part of the country).
Imperfect competition
Any market. structure lying between the extremes of perfect competition and pure monopoly.
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.
Income elasticity of demand
Measures the extent to which the demand for a goos changes in response to a change in income; it’s calculated by dividing the percentage change in quantity demanded by the percentage change in income.
Increase in demand
A rightward shift of the demand curve.
Increase in supply
A rightward shift of the supply curve.
Inequity
Unfairness or unjustness.
Inferior-good
A good for which demand decreases as income rises and demand increases as income falls.
Information problem
Occurs when people make wrong decisions because they don’t posses or ignore relevant information. Very often are myopic about the future.
Informative advertising
Provides consumers and producers with useful information about goods or services.
Innovation
Converts the results of invention into marketable products or services.
Internal economy of scale
Cost saving resulting from the growth of the firm itself.
Invention
Creates new ideas fro products or processes.
Joint supply
When one good is produced, another good is also produced from the same raw materials.
Labour productivity
Output per worker.
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.
Long run
The time period in which no factors of production are fixed and in which all the factors of production can be varied.
Long-run average cost
Lon-run total cost divided by output.
Long-run production
Occurs when a firm changes the scale of all the factors of production.
Market demand
The quantity go a good or service that all the consumers in a market are willing and able to buy at different market prices.
Market disequilibrium
Exists at any price other. than equilibrium price. When the market is in disequilibrium, either excess demand or excess supply exists in the market.
Market equilibrium
When planned demand equals planned demand in the market.
Market failure
When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a good or service providing the wrong quantity.
Market share maximisation
Occurs when a firm maximises its percentage share of the market in which it sells its product.
Market structure
The organisation of a market in terms of the number of firms in the market and the ways in which they behave.
Market supply
The quantity of a good or service that all firms plan to sell at given prices in a given period of time.
Merit good
A good, such as healthcare, which when consumed leads to benefit 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. Value judgements are involved in deciding that a goos is a merit good.
Missing market
A situation in which there is no market because the functions of prices have broken down.
Monopoly power
The power of a firm to act as a price maker rather than as a price taker.
Natural barrier to entry
A barrier to market entry which is not man-made.
Natural monopoly
1) When a country or firm has complete control of a natural resource.
2) When there is only room in a market for one firm benefiting from economies of scale to the full.
Need
Something that is necessary fro human survival, such as food, clothing, warmth or shelter.
Negative externality (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.
Normal good
A good for which demand increases as income rises and demand decreases as income falls.
Normative statement
A statement that includes a value judgement and cannot be refuted just by looking at the evidence.
Occupational immobility of labour
Occurs when workers find it difficult or impossible to move between jobs because they lack or cannot develop the skills requires for the new jobs.
Oligopoly
A market dominated by a few firms.
Opportunity cost
The cost of giving up the next best alternative.
Patent
A strategic or man-made barrier to market 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.
Perfect competition
A market which displays the six conditions of:
1) A large number of buyers and sellers
2) Perfect market information
3) The ability to buy or sell as much as is desired at the ruling market price.
4) The inability of an individual buyer or seller to influence the market price.
5) A uniform or homogeneous product.
6) No barriers. to entry or exit in the long run.
Persuasive advertising
Attempts to persuade potential customers that a good service possesses desirable characteristics that make it worth buying.
Positive externality (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.
Positive statement
A statement of fact that can be scientifically tested to see if it’s correct or incorrect.
Predatory pricing
Temporarily reducing the price of a good to below average cost to drive smaller firms to new market entrants out of the market.
Price ceiling
A price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets by creating excess demand.
Price competition
Reducing the price of a good or service to gain sales by. making it more attractive for consumers.
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.
Price elasticity of supply
Measures the extent to which the supply of a good changes in response to a change in the price of that good.
Price floor
A price below which it’s illegal to trade. Price floors, or minimum legal prices, can distort markets by creating excess supply.
Price maker
A firm possessing the power to set the price within the market.
Price taker
A firm which passively accepts the ruling market price set by market confirms outside its control.
Private good
A good, such as an orange, that is excludable and rival.
Producer sovereignty
Producers or firms in a market determine what is produced and what prices are charged.
Product differentiation
Making a product differ4ent from other products through product design, the method of producing the product, or through its functionality.
Production
A process, or set of processes, that converts inputs into output of goods.
Production externality
An externality (which may be positive or negative) generated in the course of producing a good or service.
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.
Productive efficiency
For the economy as a whole occurs when it’s impossible to produce more of one good without producing less of another. For a firm this occurs when the average total cost of production is minimised.
Productivity gap
The difference between labour productivity in the UK and in other developed economies.
Productivity
Output per unit of input.
Profit
The difference between total sales revenue and total cost of production.
Profit maximisation
Occurs when a firm’s total sales revenue is further above total cost of production.
Public good
A goos, such as a radio programme, that is non-excludable and non-rival.
Pure monopoly
When there is only one firm in the market.
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 charges if the firm is to successfully sell its chosen quantity.
Quasi-public good
A goos which is not fully non-rival and/or where it’s possible to exclude people from consuming the product.
Rationing function of prices
Rising prices ration demand for a product.
Regulation
Involves the imposition of rules controles and constraints, which restrict freedom of economic action in the market place.
Renewable resource
A resource, such as timber, that with careful management can be renewed as it’s used.
Resource allocation
The process through which the available factors of production are assigned to produce different goods and services, e.g. how many of the society’s economic resources are devoted to supplying different products such as food, cars, healthcare and defence.
Resource misallocation
When resources are allocated in a way which doesn’t maximise economic welfare.
Sales maximisation
Occurs when sales revenue is maximised.
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.
Scarcity
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.
Short run
The time period in which at least one factor of production is fixed and cannot be varied.
Short-run production
Occurs when a. firm adds variable factors of production to fixed factors of production.
Signalling function of prices
Prices provide information to buyers and sellers.
Social benefit
The total benefit of an activity, including the external benefit.
Expressed as an equation: social benefit= private benefit + external benefit
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
Specialisation
A worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services.
Subsidy
A payment made by government or another authority, usually to producers, for each unit of the subsidised goof that they produce. Consumers can also be subsidised: for example, bus passes given to children to enable them to travelog buses free or at reduced price.
Substitute good
A good in competing demand, namely a good which can be used in place of the other good.
Supply
The quantity of a good or service that firms are willing and able to sell at given prices and in a given period of time.
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.
Technical economy of scale
A cost saving generated through changes to the ‘productive process’ as the scale of production and the level of output increase.
Total revenue
The money a firm receives from selling its output, calculated by multiplying the price by the quantity sold.
Trade
The buying and selling of goods and services.
Unemployment
When not all of those who are willing and able to work are employed.
Variable cost
Cost of production which changes with the amount that is produced, even in the short run.
Want
Something that is desirable, such as fashionable clothing, but is not necessary for human survival.
