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Economics and Business > 'Summary of definitions' > Flashcards

'Summary of definitions' Flashcards

1
Q

Economics

A

studies how scarce (time, money, space) resources are or should be distributed

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2
Q

Positive dimension

A

actual behavior

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3
Q

Normative dimension

A

desired behavior

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4
Q

Models

A

simplified representation of reality

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5
Q

Comparative advantage

A

the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals

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6
Q

Absolute advantage

A

the ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost at which any other entity produces that good or service

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7
Q

Market

A

consumer/producer decide about demand/supply on basis of prices. Prices adjust to make decisions compatible

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8
Q

Willingness to pay (WTP)

A

money the consumer is willing to give up for a certain good

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9
Q

Marginal utility

A

WTP for one extra unit of a certain good

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10
Q

Price taker

A

views price as independent of own consumption (e.g. prices of milk in the supermarket)

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11
Q

Market demand curve

A

relates price to the quantity demanded by all consumers of the economy

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12
Q

Perfect competition (5 criteria) or sometimes called ‘Pure competition’

A
  1. Firms sell an identical product.
  2. Firms are price takers. They cannot control the market price of their product.
  3. All firms have a relatively small market share.
  4. Buyers have complete information about the product being sold and the prices charged by each firm.
  5. Freedom of entry and exit.
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13
Q

Marginal cost

A

the cost that comes from making or producing one additional item.

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14
Q

Purpose of analysing marginal cost

A

to determine at what point an organisation can achieve economies of scale. calculation is mostly used to isolate optimum production level.

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15
Q

Market supply curve

A

relates price to the quantity supplied by all firms in the economy

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16
Q

Avoidable costs

A

an expense that will not be incurred if a particular activity is not performed. variable costs that can be avoided

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17
Q

Average cost curve

A

initially will decline as fixed costs are spread over a larger number of units, but will go up as marginal costs increase due to the law of diminishing returns

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18
Q

competitive equilibrium

A

interaction of profit-maximizing producers and utility-maximizing consumers in competitive markets with freely determined prices will give rise to the equilibrium price. at this price, the quantity supplied is equal to the quantity demanded.

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19
Q

Inverse demand/supply function

A

a function that maps the quantity of output demanded/supplied to the market price (dependent variable) for that output

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20
Q

Pareto efficiency

A

an economic state where resources are allocated in the moste efficient manner. pareto efficiency is obtained when a distribution strategy exists where one party’s situation cannot be improved without making another party’s situation worse. Pareto efficiency does not imply equality or fairness.

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21
Q

Pareto dominated

A

an allocation that makes everyone weakly and at least one person strictly better off.

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22
Q

First Welfare Theorem

A

shows how prices decentralise economic activity in an (Pareto-) efficient way.

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23
Q

Monopoly

A

a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. absence of competition.

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24
Q

Profit maximisation

A

an assumption in classical economics; firms seek to maximise profit.
Profit = total revenue - costs
profit is maximised when it produces an output where
Marginal revenue = Marginal cost

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25
Q

Deadweight loss

A

the costs to society created by market inefficiency. when supply and demand are not in equilibrium.

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26
Q

Marginal revenue

A

the increase of revenue that results from the sale of one additional unit of output.

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27
Q

Price floor

A

the lowest acceptable limit as restricted by controlling parties. Floors can be established for a number of reasons, including prices, wages, interest rates, underwriting standards and bonds.

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28
Q

Price ceiling

A

the maximum price a seller is allowed to charge for a product or service. price ceilings are usually set by law and limit the seller pricing system to ensure fair and reasonable business practices

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29
Q

Consumer surplus

A

an economic measure of consumer satisfaction.

what consumers are willing to pay - market price.

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30
Q

Producer surplus

A

an economic measure of the difference between the amount that the producer of a good receives and the minimum amount that he or she would be willing to accept for the good.

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31
Q

Game theory

A

a formal framework to analyse strategic interaction

32
Q

Bi-matrix

A

a representation of a game with two players and few strategies, which describes the game in normal form

33
Q

Prisoners’ dilemma

A

a paradox in decision analysis in which two individuals acting in their own best interest pursue a course of action that does not result in the ideal outcome.

34
Q

Strictly dominant strategy

A

regardless of what any other player does, the strategy earns a player a strictly higher payoff than any other strategy

35
Q

Weakly dominant strategy

A

regardless of what any other player does, the strategy earns a player a payoff at least as high as any other strategy, and the strategy earns a strictly higher payoff for some profile of other players’ strategies

36
Q

Second price auction

A

the bidder with the highest bid gets the item and pays the second highest bid

37
Q

Nash equilibrium

A

a concept of game theory where the optimal outcome of a game is one where no player has an incentive to deviate from his or her chosen strategy after considering an opponent’s choice.

38
Q

Oligopoly

A

a situation in which a particular market is controlled by a small group of firms.

39
Q

Cournot competition

A

two identical firms with cost function C(X)=cX set quantities

40
Q

Bertrand competition

A

two identical firms with cost function C(X)=cX set prices

41
Q

Gross Domestic Product (GDP)

A

total expenditure on goods/services produced in a country in a given period. Does not include used goods.

42
Q

Accounting Identity

A

every transaction that is part of the GDP must fall into one of the four categories

Consumption
Investment
Government Purchases
Net exports

43
Q

Real GDP

A

value of goods/services at constant prices

44
Q

GDP deflator

A

measures how much of the change in nominal GDP is due to prices.

45
Q

Consumer Price Index (CPI)

A

tries to measure the cost of living with reference to a fixed base year and a typical consumption basket. can be biased by Substitution bias, introduction of new products and unmeasured quality changes.

46
Q

Inflation

A

the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.

47
Q

Real interest rate

A

An interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender.
Real interest rate = Nominal Interest Rate - Inflation

48
Q

Output decision

A

a rational, profit-maximising firm will choose to produce the quantity where marginal cost is equal to marginal revenue, or where the MC and MR curves intersect. this is true for both competitive firms and monopolies, although the implications are different.

49
Q

Marginal product of labor

A

the change in output that results from employing an added unit of labor.

50
Q

Disposable income

A

the amount of money that households have available for spending and saving after income taxes have been accounted for

51
Q

Consumption function

A

relates private consumption to disposable income

52
Q

Money

A

an asset that can be used to make transactions. also used as a medium of exchange, store of value and unit of account.

53
Q

Barter economy

A

trade requires double coincidence of wants

54
Q

Commodity money

A

holds intrinsic value (e.g. gold) and is used to facilitate transactions

55
Q

Fiat money

A

bank notes that can be used as a medium of exchange

56
Q

Currency

A

all the EUR bills and coins in ciruclation

57
Q

Deposits

A

what is stored in the bank

58
Q

Money stock

A

currency + deposits

59
Q

European central bank (ECB)

A

determines the supply of money in the Euro area through open market operations, overnight interest rates and reserve requirements.

60
Q

Open market operations

A

ECB buys/sells assets from public to increase/decrease currency supply

61
Q

Overnight rates

A

obtaining short term liquidity from ECBs marginal lending utility or using deposit liquidity at the ECBs deposit facility

62
Q

Reserve requirements

A

how much (%) a bank has to keep in reserve and how much they can lend out. The lower the reserve requirement, the higher the amount of money stock.

63
Q

Velocity of money

A

the rate at which money circulates in the economy

64
Q

Cold progression

A

distortions in the tax system. loss of purchasing power because of higher tax burden due to inflation

65
Q

Hyperinflation

A

widely fluctuating inflation, making in very hard to predict price movements

66
Q

Quantitative easing

A

an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply. floods financial institutions with capital in an effort to promote increased lending and liquidity. is considered when short term interest rates approach zero. does not involve printing new bank notes.

67
Q

Open economy

A

economical transactions across national/continental borders.

68
Q

Nominal exchange rate

A

the relative price of currencies in two countries

69
Q

Real exchange rate

A

the relative price of goods in two countries

70
Q

The law of one price (loop)

A

the same good cannot be sold at different prices at different places at the same time

71
Q

Purchasing power parity (PPP)

A

a EUR should have the same purchasing power everywhere

72
Q

International arbitrage

A

buy a good somewhere for a low price and sell it somewhere else for a higher price

73
Q

Trade balance

A

the difference between a country’s imports and its exports. a country has a trade deficit if it imports more than it exports. the opposite is trade surplus

74
Q

Perfect capital mobility

A

all investors go for the best interest offered internationally

75
Q

Economies of scale

A

the cost advantage that arises with increased output of a product.

76
Q

Markup

A

the difference between an investment’s lowest current offering price among dealers and the higher price a dealer charges a customer. Markups occur when dealers act as principals (buying and selling securities from their own accounts, at their own risk), as opposed to brokers (receiving a fee for facilitating transactions).

77
Q

The 5 assumptions

A
  1. Marginal utility is decreasing.
  2. A is a price taker.
    ^^ together imply that A has to compare per unit price P and marginal utility to maximise net utility
  3. B is a price taker.
  4. Marginal cost is increasing.
  5. No avoidable fixed costs.
    ^^^ together imply that B has to compare price P and marginal cost to maximise profit.

Economics and Business (1 decks)

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