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
