'Summary of definitions' Flashcards
Economics
studies how scarce (time, money, space) resources are or should be distributed
Positive dimension
actual behavior
Normative dimension
desired behavior
Models
simplified representation of reality
Comparative advantage
the ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals
Absolute advantage
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
Market
consumer/producer decide about demand/supply on basis of prices. Prices adjust to make decisions compatible
Willingness to pay (WTP)
money the consumer is willing to give up for a certain good
Marginal utility
WTP for one extra unit of a certain good
Price taker
views price as independent of own consumption (e.g. prices of milk in the supermarket)
Market demand curve
relates price to the quantity demanded by all consumers of the economy
Perfect competition (5 criteria) or sometimes called ‘Pure competition’
- Firms sell an identical product.
- Firms are price takers. They cannot control the market price of their product.
- All firms have a relatively small market share.
- Buyers have complete information about the product being sold and the prices charged by each firm.
- Freedom of entry and exit.
Marginal cost
the cost that comes from making or producing one additional item.
Purpose of analysing marginal cost
to determine at what point an organisation can achieve economies of scale. calculation is mostly used to isolate optimum production level.
Market supply curve
relates price to the quantity supplied by all firms in the economy
Avoidable costs
an expense that will not be incurred if a particular activity is not performed. variable costs that can be avoided
Average cost curve
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
competitive equilibrium
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.
Inverse demand/supply function
a function that maps the quantity of output demanded/supplied to the market price (dependent variable) for that output
Pareto efficiency
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.
Pareto dominated
an allocation that makes everyone weakly and at least one person strictly better off.
First Welfare Theorem
shows how prices decentralise economic activity in an (Pareto-) efficient way.
Monopoly
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.
Profit maximisation
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
Deadweight loss
the costs to society created by market inefficiency. when supply and demand are not in equilibrium.
Marginal revenue
the increase of revenue that results from the sale of one additional unit of output.
Price floor
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.
Price ceiling
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
Consumer surplus
an economic measure of consumer satisfaction.
what consumers are willing to pay - market price.
Producer surplus
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.
Game theory
a formal framework to analyse strategic interaction
Bi-matrix
a representation of a game with two players and few strategies, which describes the game in normal form
Prisoners’ dilemma
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.
Strictly dominant strategy
regardless of what any other player does, the strategy earns a player a strictly higher payoff than any other strategy
Weakly dominant strategy
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
Second price auction
the bidder with the highest bid gets the item and pays the second highest bid
Nash equilibrium
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.
Oligopoly
a situation in which a particular market is controlled by a small group of firms.
Cournot competition
two identical firms with cost function C(X)=cX set quantities
Bertrand competition
two identical firms with cost function C(X)=cX set prices
Gross Domestic Product (GDP)
total expenditure on goods/services produced in a country in a given period. Does not include used goods.
Accounting Identity
every transaction that is part of the GDP must fall into one of the four categories
Consumption
Investment
Government Purchases
Net exports
Real GDP
value of goods/services at constant prices
GDP deflator
measures how much of the change in nominal GDP is due to prices.
Consumer Price Index (CPI)
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.
Inflation
the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
Real interest rate
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
Output decision
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.
Marginal product of labor
the change in output that results from employing an added unit of labor.
Disposable income
the amount of money that households have available for spending and saving after income taxes have been accounted for
Consumption function
relates private consumption to disposable income
Money
an asset that can be used to make transactions. also used as a medium of exchange, store of value and unit of account.
Barter economy
trade requires double coincidence of wants
Commodity money
holds intrinsic value (e.g. gold) and is used to facilitate transactions
Fiat money
bank notes that can be used as a medium of exchange
Currency
all the EUR bills and coins in ciruclation
Deposits
what is stored in the bank
Money stock
currency + deposits
European central bank (ECB)
determines the supply of money in the Euro area through open market operations, overnight interest rates and reserve requirements.
Open market operations
ECB buys/sells assets from public to increase/decrease currency supply
Overnight rates
obtaining short term liquidity from ECBs marginal lending utility or using deposit liquidity at the ECBs deposit facility
Reserve requirements
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.
Velocity of money
the rate at which money circulates in the economy
Cold progression
distortions in the tax system. loss of purchasing power because of higher tax burden due to inflation
Hyperinflation
widely fluctuating inflation, making in very hard to predict price movements
Quantitative easing
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.
Open economy
economical transactions across national/continental borders.
Nominal exchange rate
the relative price of currencies in two countries
Real exchange rate
the relative price of goods in two countries
The law of one price (loop)
the same good cannot be sold at different prices at different places at the same time
Purchasing power parity (PPP)
a EUR should have the same purchasing power everywhere
International arbitrage
buy a good somewhere for a low price and sell it somewhere else for a higher price
Trade balance
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
Perfect capital mobility
all investors go for the best interest offered internationally
Economies of scale
the cost advantage that arises with increased output of a product.
Markup
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).
The 5 assumptions
- Marginal utility is decreasing.
- A is a price taker.
^^ together imply that A has to compare per unit price P and marginal utility to maximise net utility - B is a price taker.
- Marginal cost is increasing.
- No avoidable fixed costs.
^^^ together imply that B has to compare price P and marginal cost to maximise profit.
