The price system and the microeconomy (A level) Flashcards
Utility
the satisfaction received from consumption
Law of diminishing marginal utility
as consumption increases, the satisfaction from consumption decreases
Total utility
the total satisfaction received from consumption
Marginal utility
the utility derived from the consumption of one more unit of the good or service
Equi-marginal principle
consumers maximize their utility where their marginal valuation for each product consumed is the same
Indifference curve
this shows all the combinations of two goods that give a consumer equal satisfaction
Marginal rate of substitution
the rate at which a consumer is willing to substitute one good for another
Budget line
the combinations of two goods that can be purchased with given income and given prices
Substitution effect
where, following a price change, a consumer will substitute a cheaper good foe the one that is now relatively more expensive
Income effect
where following a price change of a good, a consumer has higher real income and will purchase more of this good
Giffen good
a type of inferior good where the quantity demanded falls as price falls and the quantity demanded increases as price increases
Economic efficiency
where scarce resources are used in the most efficient way to produce maximum output
Productive efficiency
when a firm is producing at the lowest possible cost
Allocative efficiency
where price is equal to marginal cost; firms are producing goods and services most wanted by consumers
Marginal cost
the addition to total cost when making one extra unit of output
Pareto optimality
where it is impossible to make someone better off without making someone else worse off
Dynamic efficiency
when resources are allocated efficiently over time
Externality
where the actions of a producer or consumer give rise to side effects on others not directly involved in the action
Third party
those not directly involved in the decision-making
Negative externality
where the side effects of an action have negative impacts that imposes costs on third parties
Positive externality
where the side effects of an action have positive impact that provides benefits to third parties
Private costs (PC)
those costs that are incurred by a consumer or by the firm that produces a good or service
Private benefits (PB)
those benefits that accrue to the consumer or to the firm that produces a good or service
External costs (EC)
those costs incurred and paid for by a third party not involved in the action
External benefits (EB)
those benefits that are received by a third party not involved in the action
Social costs (SC)
the total costs of a particular action
Social benefits (SB)
the total benefits of a particular action
Deadweight welfare loss
the loss in welfare arising from an inefficient allocation of resources
Asymmetric information
where one party has more or better information than another in a business transaction
Adverse selection
when sellers have information buyers do not have on product quality or when buyers have information that sellers do not have on product quality
Moral hazard
the temptation to take risks when some other party is covering these risks
Cost-benefit analysis
a method of decision-making that takes into account the costs and benefits involved
Shadow price
one that is applied where there is no established market price available
Benefit:cost ratio:
net benefits as a proportion of net costs
Economies of scale
the benefits gained from falling long-run average costs as the scale of output increases
Isoquant
a curve showing combinations of labour and capital to produce a given level of output
Total product
the same as total output
Production function
the maximum possible output from a given set of factor inputs
Marginal product
the change in output arising from the use of one more unit of a factor of production
Law of diminishing returns
where the output from an additional unit of input leads to a fall in marginal product; also known as the law of variable proportions
Average product
total product divided by the number of worker employed; a simple measure of productivity
Profit maximisation
the assumed objective of a firm; the difference between total revenue and total cost is at a maximum
Fixed costs (FC)
costs that are independent of output in the short run
Variable costs (VC)
costs that vary directly with output in the short run
Increasing returns to scale
where output increases at a proportionately faster rate than the increase in factor inputs
Decreasing returns to scale
where factor inputs increase at a proportionately faster rate than the increase in output
Isocosts
lines of constant relative costs for factors of production
Minimum efficient scale
lowest level of output at which costs are minimised
Diseconomies of scale
where long-run average costs increase as the scale of output increases
External economies of scale
cost savings accruing to all firms as the scale of the industry increases
Total revenue (TR)
a firm’s total sales or earning over a given period of time
Average revenue (AR)
revenue per unit of output
Marginal revenue (MR)
the additional or extra revenue gained from the sale of one more unit of output
Price taker
a firm that is not able to influence market price
Price maker
a firm that can choose what price to sell its goods in the market
Profit
the difference between total revenue and total costs
Normal profit
a cost of production that is just sufficient for a firm to keep operating in a particular industry
Supernormal profit
that which is earned above normal profit
Subnormal profit
that which is earned below normal profit
Monopolistic competition
a market structure where there are many firms, differentiated products and few barriers to entry
Market structure
the way in which a market in organised in terms of certain characteristics which can be used to explain the behaviour of firms in a market
Perfect competition
an ideal market structure that has many buyers and sellers, identical products, no barriers to entry; sometimes referred to as total competition
Imperfect competition
any market structure except for perfect competition
Oligopoly
a market structure with few firms and high barriers to entry
Barriers to entry
restrictions that prevent new firms entering an industry
Pure monopoly
where there is just one seller in the market
Natural monopoly
where with falling long-run average costs, it makes sense to have only one firm providing the good or service.
Concentration ratio
a measure of the combined market share of the biggest three, four or five firms in a market
Predatory pricing
where a firm sells its goods below average variable cost to force competitors out of the market
Limit pricing
where firms deliberately lower prices and abandon a policy of profit maximisation to stop new firms entering a market
Collusion
an anti-competitive action by producers
Barriers to exit
a restriction that prevents a firm leaving a market
Shut-down price
a firm will stop production when price falls below average variable cost
Price competition
where firms compete on price to attract customers
Non-price competition
when firms use methods other than price to attract customers from rival producers
Kinked demand curve
a traditional model of a firms’s behaviour in oligopoly
Price rigidity
where prices are unchanged despite a change in costs
Price leadership
a situation in a market whereby a particular firm has the power to change prices, the result of which is that competitors follow this lead
Cartel
a formal agreement between firms to limit competition by limiting output or fixing prices
X-inefficiency
where the firm’s costs are above those experienced in a more competitive market
Contestable market
a market where entry is free and exit is costless
Contestability
the extent to which barriers to entry into a market are free and exit from the market is costless
Deregulation
when barriers to entry into an industry are removed
Conglomerate
a company with a large number of diversified businesses
Economies of scope
where a reduction in average total cost is made possible by a firm changing the different goods it produces
Diversification
where a firm grows through the production or sale of a wide range of different products
Horizontal integration
where a firm merges or acquires another in the same line of business
Vertical integration
where a firm grows by producing backwards or forwards in its supply chain
Principal-agent problem
where one person (the agent) makes decisions on behalf of another person(the principal)
Profit satisficing
a firm’s objective to make a reasonable or minimum level of profit
Sales maximisation
a firm’s objective to maximise the volume of sales
Cross-subsidisation
profits from one part of a firm are used to offset losses made elsewhere in the business
Revenue maximisation
a firm’s objective to maximise total revenue
