Unit 1 Microeconomics Flashcards
accounting costs
payments made by a firm in order to acquire resources
abnormal profit
earned when a firm’s revenues are greater that its economic costs (TR > TC)
actual growth
occurs when previously unemployed factors of production are brought into use; represented by a movement from a point within a PPC to a new point nearer to the PPC
actual output
production of goods and services that is achieved in an economy in a given time period
ad valorem taxes
indirect taxes as a fixed percentage of the price of the good or service
allocative efficiency
level of output where marginal cost of producing a good is equal to average revenue, or the price (MC = AR)
barriers to entry
obstacles that may be in the way of potential newcomers to a market
break-even price
price where average revenue is equal to average total cost (AR = ATC); below this price, the firm will shut down in the long run
capital
factor of production that is made by humans and used to produce goods and services; it occurs as a result of investment
cartel
formal agreement between firms in an industry to undertake concerted actions to limit competition
ceteris paribus
(“all other things being equal”) assumption that there is a change in one of the variables, holding the other variables constant
collusive oligopoly
where a few firms in an oligopoly act together to avoid competition by resorting to agreements to fix prices or output
competition
occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market
complementary good
goods used in combination with each other; they have a negative XED
consumer surplus
additional benefit received by consumers by paying a price that is lower than they are willing to pay
fixed costs FC
cost of production that don’t change with the level of output
variable costs VC
costs of production that vary with the level of output
total costs TC
sum of fixed and variable costs (TC = FC + VC)
average costs AC
total costs of production per unit (AC = TC/Q)
credit
borrowed money
marginal costs MC
additional cost of producing an additional unit of output (MC = ΔTC/ΔQ)
demerit goods
products that are considered to be harmful for people
cross elasticity of demand XED
measure of responsiveness of the quantity of one good demanded in response to a change in the price of another good
demand
quantity of a product that consumers are willing and able to buy at a given price in a given time period
demand curve
a downward-sloping curve or line illustrating the inverse relationship between price and quantity demanded
demand schedule
a table showing the quantity of a product demanded at each price
determinants of demand
variables (other than price) that can influence demand; a change in any determinant of demand causes a shift of the demand curve
determinants of supply
variables (other than price) that can influence supply; a change in any determinant of supply causes a shift of the supply curve
direct taxes
taxes directly paid to the government, e.g. income tax
diseconomies of scale
increase in average costs in the long run
economic costs
sum of accounting and opportunity (implicit) costs
economic good
any good or service that requires scarce resources and thus has a price
economies of scale
fall in average costs in the long run
elastic demand
change in price of a good and service will cause a proportionately larger change in quantity demanded
elasticity
measure of the responsiveness of a variable to changes in any of the variable’s determinants
entrepreneurship
factor of production that brings together the other three factors of production with the aim of making profit
equilibrium
point where the quantity demanded is equal to quantity supplied; this creates the market clearing prices, where there is no surplus or shortage
excess demand or shortage
the quantity demanded is greater than the quantity supplied; it occurs where the price of a good is lower than the equilibrium price
factors of production
land, labour, capital and entrepreneurship
excess supply or surplus
the quantity supplied is greater than the quantity demanded; it occurs where the price of a good is higher than the equilibrium price
flat rate taxes
indirect taxes where a fixed amount is added to the price of a good or service
free good
any good that is not scarce, and thus has no price, e.g. air, sea water
game theory
a method of analysing the way that the “players” in an interdependent relationship (such as oligopoly) make strategic decisions
incentive function of price
prices give producers the incentive either to increase or decrease the quantity they supply; a rising price gives the producers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues
incidence of tax
(burden of tax) amount of an indirect tax paid by consumers or producers of a good
indirect taxes
taxes placed upon the expenditure on a good and service, e.g. sales tax, MWSt
income elasticity of demand YED
measure of the responsiveness of demand for a good to a change in consumers’ income
inelastic demand
change in price of a good and service will cause a proportionately smaller change in quantity demanded
inferior good
good whose demand falls as income rises; an inferior good has negative YED
informal market
part of an economy that lies outside the formal economy, consisting of economic activities that are unregistered and legally unregulated
labour
work done by humans that is used to produce goods and services
land
all raw materials that are used to produce goods and services
law of demand
as the price of a product increases, the quantity demanded decreases, ceteris paribus
law of diminishing average returns
in the short run, as extra units of a variable factor are added to a fixed factor, the output per unit of the variable factor will eventually fall
law of diminishing marginal returns
in the short run, as extra units of a variable factor are added to a fixed factor, the addition to total output (MP) will eventually fall
law of supply
as the price of a product increases, the quantity supplied increases, ceteris paribus
linear demand function
an equation in the form Qd = a – bP which shows the relationship between the price and the quantity of a product demanded
linear supply function
an equation in the form Qs = c + dP which shows the relationship between the price and the quantity of a product supplied
long run (microeconomics)
in terms of the theory of the firm, the period of time in which all factors are variable
market economy
economy where individuals and firms own the resources and make the economic decisions; prices are set by demand and supply
long-run average cost curve LRAC
graphical representation of long-run average costs; the LRAC is u-shaped due to economies and diseconomies of scale
manufactured goods
goods that have been processed by workers
marginal private benefit MPB
extra benefit to the consumer of consuming an additional unit of output
marginal private cost MPC
extra cost to the producer of producing an additional unit of output
marginal social benefit MSB
extra benefit of consuming an additional unit of output, including both the private benefit and the external benefit
market place
where buyers and sellers of a product come together to make an exchange, but doesn’t need to be a physical place
marginal social cost MSC
extra cost to society of producing an additional unit of output, including both the private cost and the external cost
market failure
occurs when the production of a good doesn’t take place at the socially efficient level of output (allocative efficiency where MSC = MSB)
market structure
characteristics of a market organization that determine the behaviour of firms within the industry
maximum price or price ceiling
price set by the government below the equilibrium price where the market price is not allowed to rise in order to support the consumers of the product (essential goods, house rentals
monopolistic competition
market structure characterized by a large number of small firms, producing differentiated products, with no barriers to entry or exit
minimum price or price floor
price set by the government above the equilibrium price where the market price is not allowed to fall in order to support the producers of the product (minimum wages, agricultural products)
monopoly
market structure characterized where there is only one firm, or a dominant firm, in the industry; there are high barriers to entry
negative externality of consumption
external costs to a third party that occur when a product is consumed
negative externality of production
external costs to a third party that occur when a product is produced
non-collusive oligopoly
where firms in an oligopoly do not resort to agreements to fix prices or output; competition tends to be non-price; prices tend to be stable
non-price competition
occurs when firms compete with each other on the basis of methods other than price
normal good
good whose demand rises as income rises; a normal good has positive YED
normative economics
deals with areas that are open to personal opinion
oligopoly
market structure characterized by a small number of large firms dominating the industry due to high barriers to entry
opportunity cost
next best alternative foregone when an economic decision is made
perfect competition
market structure characterized by a large number of firms, producing homogeneous products, each of which is too small to influence the market; the firms are price takers because of this; there are no barriers to entry or exit
planned economy
economy where the government owns all resources and makes all economic decisions
positive economics
deals with areas that can be proven wrong or right by looking at the facts
positive externality of consumption
external benefits to a third party that occur when a product is consumed
positive externality of production
external benefits to a third party that occur when a product is produced
potential growth
occurs when the quantity and/or quality of factors of production within an economy is increased; it is represented by an outward shift of the PPC
potential output
possible production that would be achieved in an economy if all available factor were employed
price controls
setting of minimum or maximum prices by the government so that prices are unable to adjust to their equilibrium level determined by demand and supply
price discrimination
occurs when a producer charges a different price to different customers for an identical good or service
price elasticity of demand PED
measure of the responsiveness of the quantity demanded of a good and service to a change in its price
price elasticity of supply PES
measure of the responsiveness of the quantity supplied of a good and service to a change in its price
price taker
in perfect competition, each firm is a price taker, taking the equilibrium price set in the market
primary products
(commodity) any product that is produced in the primary sector, which includes agriculture, forestry, fishing and extractive industries
primary sector
part of the economy that is dominated by agriculture, forestry, fishing and extractive activities such as mining
private sector
sector owned by private individuals that produce goods and services
producer surplus
additional benefit received by producers by receiving a price that is higher than the price they were willing to receive
total product TP
total output of a firm at a given level of input
average product AP
output per unit of the variable factor (TP/V)
marginal product MP
extra output that is produced by using an extra unit of a variable factor (MP = ΔTP/ΔV)
product differentiation
strategy employed by producers where they attempt to make their products different from those of their competitors; it is a form of non-price competition
production possibility curve PPC
shows the maximum combinations of goods and services that can be produced by an economy in a given time period, if all resources in the economy are being used fully and efficiently
productive efficiency
when production is achieved at the lowest cost per unit of output
normal profit
where TR = TC or revenue is equal to total costs of production, including opportunity costs (or implicit costs)
abnormal profit or supernormal profit
where TR > TC or revenue is greater than total costs of production, including opportunity costs (or implicit costs)
loss
where TR < TC or revenue is smaller than total costs of production, including opportunity costs (or implicit costs)
profit maximizing level of output
where marginal cost is equal to marginal revenue (MC = MR)
public good
product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy
public sector
sector owned by the government that provides goods and services
rationing
method used to divide something up between interested users by making resource allocation and output/income distribution decisions
revenue
income received by a firm from selling its product
total revenue TR
price of a product multiplied by the quantity sold (TR = p x q)
average revenue AR
total revenue per unit sold (AR = TR/Q)
marginal revenue MR
extra revenue that a firm gains when it sells one more unit of a product (MR = ΔTR/ΔQ)
scarcity
excess of human wants over what can actually be allocated to fulfill these wants
secondary sector
part of an economy that includes manufacturing
short run (microeconomics)
in terms of the theory of the firm, the period of time in which at least one factor of production (usually capital) is fixed
short-run average cost curve SRAC
graphical representation of short-run average costs; the SRAC is u-shaped due to the law of diminishing marginal returns
shut-down price
price where average revenue is equal to average variable cost (AR = AVC); below this price, the firm will shut down in the short run
signalling function of price
prices give signal to both producers and consumers: a rising price gives a signal to producers that they should increase their quantity supplied and signals to consumers that they should decrease the quantity demanded, and vice versa
subsidy
amount of money given to producers of a product by the government
substitute good
goods which can be used in place of each other; they have positive XED
supply
quantity of a product that producers are willing and able to supply at a given price in a given time period
supply curve
an upward-sloping curve or line illustrating the direct relationship between price and quantity supplied
supply schedule
a table showing the quantity of a product supplied at each price
tertiary sector
part of an economy that includes commerce, finance, transport and all other services (e.g. education, health care)
transition economy
economy in the process of moving from a planned economy towards a more market-oriented economic system
utlilty
satisfaction or pleasure from consuming a good or service
price leader
a dominant firm in the market sets the price and also initiates any price changes
