Unit 2: Microeconomics Flashcards
Abnormal profit
This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).
Abuse of market power
When a firm acts with the intention to eliminate competitors or to prevent entry of new firms in a market.
Adverse selection
A type of market failure involving asymmetric information, where the party with the incomplete information is induced to withdraw from the market. The buyer, for example, of a used car, may hesitate to buy without knowing about the quality of the vehicle. The seller, for example of health insurance, may hesitate to sell a policy without knowing the health of the buyer.
Allocative efficiency
Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).
Allocative inefficiency
When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB ≠ MSC.
Anchoring
Refers to situations when people rely on a piece of information that is not necessarily relevant as a reference point when making a decision.
Anti-monopoly regulation
Laws and regulations that are intended to restrict anti-competitive behaviour of firms that are abusing their market power.
Asymmetric information
A type of market failure where one party in an economic transaction has access to more or better information than the other party.
Barriers to entry
Anything that deters entry of new firms into a market, for example, licenses or patents.
Behavioural economics
A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents. It challenges the assumption that economic agents (consumers or firms) will always make rational choices with the aim of maximizing with respect to some objective.
Biases
Systematic deviations from rational choice decision-making.
Bounded rationality
A term introduced by Herbert Simon that suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximize with respect to some objectives (such as utility), and thus choose to satisfice. They therefore are rational only within limits.
Bounded self-control
The idea that individuals, even when they know what they want, may not be able to act in their interests. Findings of bounded self-control include evidence of procrastination (for example, among students, professionals and others) that may result in self-harm, and submitting to temptation (for example, dieters).
Bounded selfishness
The idea that people do not always maximize self-interest but also have concern for the well-being of others as shown by volunteer work and charity contributions.
Capital
Physical capital refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. Human capital refers to the education, training, skills and experience embodied in the labour force of a country.
Carbon (emissions) taxes
Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.
Choice architecture
The design of environments based on the idea that the layout, sequencing, and range of choices available affect the decisions made by consumers.
Collective self-governance
In the case of a common pool resource, such as a fishery, users solve the problem of overuse by devising rules concerning the obligations of the users, the monitoring of the use of the resource, penalties of abuse, and conflict resolution.
Collusive oligopoly
A market where firms agree to fix price and/or to engage in other anticompetitive behaviour.
Common pool resources
A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.
Competitive market
A market with many firms acting independently where no firm has the ability to control the price.
Competitive supply
When goods that a firm is producing use the same resources in their production process. The goods thus compete with each other for the use of the same resources.
Complements
Goods that are jointly consumed, for example, coffee and sugar.
Concentration ratios
The proportion of industry sales accounted for by the largest firms; the greater this proportion, the greater the degree of market power of the firms in the industry.
Consumer nudges
Small design changes that include positive reinforcement and indirect suggestions that can influence the behaviour of consumers.
Consumer surplus
The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.
CSR
Corporate social responsibility: A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.
Default choice
When a choice is made by default, meaning that when given a choice it is the option that is selected when one does not do anything.
Demand
The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.
Demand curve
A curve illustrating the relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus. It is normally downward sloping.
Demerit goods
Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.
Deregulation
Policies that reduce or eliminate regulations related to the operation of firms so that production costs decrease - resulting in increased competition and higher levels of output.
Economies of scale
Falling average costs that a firm experiences when it increases its scale of operations.
Elasticity
A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).
Engel curve
A curve showing the relationship between consumers’ income and quantity demanded of a good. It indicates whether a good is normal or inferior.
Equilibrium
A state of balance that is self-perpetuating in the absence of any outside disturbance.
Excess demand
Occurs when quantity demanded at some price is greater than quantity supplied.
Excess supply
Occurs when quantity supplied at some price is greater than quantity demanded.
Excludable
A characteristic that most goods have that refers to the ability of producers to charge a price and thus exclude whoever is not willing or able to pay for it from enjoying it.
Externalities
External costs or benefits to third parties when a good or service is produced or consumed. An externality arises when an economic activity imposes costs or creates benefits on third parties for which they are not compensated or do not pay for respectively.
Framing
In behavioural economics, the term refers to the way choices are presented as a simple change of the “frame”, that may affect the choice made. For example, highlighting the positive or the negative aspects of the same choice may lead to different decisions.
Free rider problem
Arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it.
Game theory
A branch of mathematics that studies the strategic interaction of decision-makers that may be individuals, firms, countries, and so on.
Homogeneous product
Goods that are considered identical across firms in the eyes of consumers; examples include mostly primary sector goods like corn, wheat or copper.
Imperfect competition
A market structure where firms have a degree of market power as they face a negatively sloped demand curve and can thus set price.
Imperfect information
When the information about a market or a transaction is incomplete.
Incentive role of prices
Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.
Income elasticity of demand (YED)
The responsiveness of demand for a good or service to a change in income.
Indirect taxes
Taxes on expenditure to buy goods and services.
Inferior goods
Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.
Joint supply
Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other.
Law of demand
A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus.
Law of diminishing marginal returns
A short-run law of production stating that as more and more units of the variable factor (usually labour) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate or, equivalently, marginal product starts to decrease.
Law of diminishing marginal utility
The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases.
Law of supply
A law stating that as the price of a good rises, the quantity supplied will rise over a certain period of time, ceteris paribus.
Long run (microeconomics)
The period of time when all factors of production are variable.
Loss (economic)
Occurs when total costs of a firm are greater than total revenues. It is equal to total cost minus total revenue.
Luxury goods
Goods that are not considered essential by consumers therefore they have a price elastic demand (PED > 1), or income elastic demand (YED > 1).
