Business Economics Flashcards
(169 cards)
1
Q
Ceteris Paribus
A
Ceteris Paribus, a Latin phrase, roughly means “holding other things constant”. This term is most widely used in economics and finance as a shorthand indication of the effect of one economic variable on another, keeping all other variables constant that could render an effect on the second variable.
2
Q
Variable Cost Ratio
A
The variable cost ratio is an expression of a company’s variable production costs as a percentage of sales, calculated as variable costs divided by total revenues. It compares costs that change with levels of production to the amount of revenues generated by production. This contrasts with fixed costs that remain constant regardless of production levels.
3
Q
Correlation Coefficient
A
The correlation coefficient is a measure that determines the degree to which two variables’ movements are associated. The range of values for the correlation coefficient is -1.0 to 1.0. If a calculated correlation is greater than 1.0 or less than -1.0, a mistake has been made. A correlation of -1.0 indicates a perfect negative correlation, while a correlation of 1.0 indicates a perfect positive correlation.
4
Q
Random Variable
A
A random variable is a variable whose value is unknown or a function that assigns values to each of an experiment’s outcomes. Random variables are often designated by letters and can be classified as discrete, which are variables that have specific values, or continuous, which are variables that can have values within a continuous range.
5
Q
Production Function
A
The amount of output that will result from one or more combinations of input. The function describes differing technologies capable of producing the same thing.
6
Q
Inelastic Demand
A
Inelastic is an economic term used to describe the situation in which the quantity demanded or supplied of a good or service is unaffected when the price of that good or service changes. Inelastic means when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ purchasing habits also remain unchanged.
7
Q
Income
A
The amount of profit, interest, rent, labour earnings and other payments (including transfers from the government) received, net of taxes paid, measured over a period of time such as a year. Your income is the maximum amount that you could consume and leave your wealth unchanged. It is also referred to as disposable income, to distinguish it from pre-tax income that is not all available to be spent.
8
Q
Gross Domestic Product
A
A measure of the market value of the output of the economy in a given period.
9
Q
Technological Progress
A
A change in the technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of output.
10
Q
Demographic Transition
A
A slowdown in population growth as the fall in death rate is more than balanced by a fall in birth rates.
11
Q
Economic System
A
An economic system is a way of organising the production and distribution of goods and services in an entire economy.
12
Q
Capitalism
A
Capitalism is an economic system in which private property, markets, and firms play an important role.
13
Q
Institution
A
The economic definition of an institution refers to the laws and social customs governing the process of production and distribution (who gets what) of goods and services, and how these change over time.
14
Q
Capital Goods
A
The equipment, buildings, raw materials, and other inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used.
15
Q
Market
A
These allow people to exchange products and services for their mutual benefit.
16
Q
Firm
A
A business organisation which employs people, and purchases inputs, to produce and market goods and services at prices that more than cover the cost of production.
17
Q
Labour Market
A
In this market employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side.
18
Q
Demand Side
A
The side of the market on which those participating are offering money in return for some other good or service.
19
Q
Supply Side
A
The side of the market on which those participating are offering something in return for money.
20
Q
Causality
A
A direction from cause to effect. A variable is said to be causal if a change in this variable produces a change in (“causes”) another. While a correlation is simply an assessment that two things move together, causality establishes the mechanism accounting for the association: causality is therefore a more restrictive concept.
21
Q
Natural Experiment
A
An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as in the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of the experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausible argued to be random.
22
Q
Monopoly
A
A firm that is the only seller of a product without close substitutes; also refers to a market with only one seller. We usually research the label for cases where there are no close substitutes from other firms.
23
Q
Too Big To Fail
A
A characteristic of large banks, whose central importance to the economy ensures they will be saved by the government if they are in financial difficulty. If a bank is too big to fail, it does not bear all the costs of its activities and is likely to take bigger risks.
24
Q
Capitalist Revolution
A
Rapid improvements in technology combined with the emergence of a new economic system.
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Development State
A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other policies.
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Gini Coefficient
A measure of inequality of a quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of the quantity).
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Lorenz Curve
A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have: the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, the Lorenz curve would be a straight line with a slope of one; the extent to which the curve falls below this perfect equality line is a measure of inequality.
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Economics
The study of how people interact with each other, and with their natural surroundings, in providing livelihoods, and how this changes over time.
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Democracy
A political system, defined by individual rights such as freedom of speech, assembly, and the press, fair elections in which virtually all adults are eligible to vote and in which the loser leaves office.
30
Constant Prices
Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time.
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Purchasing Power Parity
A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies.
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Equilibrium
A situation that is self-perpetuating. In this case, something of interest does not change unless a force is introduced from outside that alters the basic data describing the situation.
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Relative Prices
The price of one good or service, relative to another.
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Incentives
Economic rewards or punishments, which influence the benefits and costs of alternative courses of action.
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Diminishing Average Product of Labour
A situation which, as more labour is used in a given production process, the average product of that labour typically falls.
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Reservation Option
A person's next best alternative to a particular transaction.
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Economic Rent
A payment or other benefit received above and beyond what the individual would have received in the next best alternative.
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Isocost Line
A line all of the points of which indicate combinations of inputs that cost a given total amount. With two inputs, it is negatively sloped: the more of one you buy, the less of the other you can afford if your budget is fixed.
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Innovation Rents
Profits in excess of economic profits that an innovator gets by introducing a new technology, organisational form or marketing strategy. Also known as Schumperterian rents.
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Constrained Choice Problem
These problems provide a way to think rigorously about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.
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Scarcity
A good that is valued, and for which there is an opportunity cost for acquiring more.
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Opportunity Cost
When taking an action implies forgoing the opportunity for the next best alternative action, the opportunity cost of action is the net benefit of the alternative.
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Marginal Product
At each point on the production function, the marginal product is the additional amount of output that could be produced if the input was increased by one unit, while holding others constant.
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Indifference Curve
A curve the points of which indicate the combinations of goods that provide a given level of utility to the individual.
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Marginal Rate of Substitution
The MRS corresponds to the trade-off that a problem is willing to make between two goods. At any point, this is the slope of the indifference curve.
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Marginal Rate of Transformation (MRT)
The MRT is the quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier.
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Feasible Set
All of the combinations of the things under consideration that a decision-maker could chose given the economic, physical or other constraints to which he or she is subject.
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Budget Constraint
An equation of all combinations of goods and services that one could acquire that exactly exhausts one's budgetary resources.
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Income Effect
The effect that the additional income would have if there were no change in the opportunity cost.
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Substitution Effect
The effect of the change in the opportunity cost, given the new level of utility.
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Social Dilemma
A situation in which actions taken independently by individuals in pursuit of their own private property objectives results in an outcome which is inferior to some other outcome that is feasible, and which could have occurred if people acted together rather than as individuals.
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Free Ride
When there is a cost to individual action, but the others in the group benefit from this action without contributing, the term refers to action taken by these others.
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Alturism
The willingness to bear a cost in order to benefit somebody else.
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Game Theory
A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows the benefits they receive depend on the actions taken by all.
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Social Interactions
Situations in which there are many people, and the actions taken by each person affects that person's outcome - and other people's outcomes as well.
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Strategic Interaction
A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that actions of others affect them).
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Strategy
An action (or course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person's actions, but also the actions of others.
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Game
A mathematical representation of strategic interaction describing the players, the feasible strategies, the information that the players have, and their payoffs.
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Division of Labour
The specialisation of producers to carry out different tasks in the production process.
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Payoff
The benefit to each player associated with the joint actions of all players.
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Best Response
In game theory, the strategy that will yield the highest payoff, given the strategy the other person selects.
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Dominant Strategies
Actions that yield the highest payoff for a player, no matter what other players do.
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Dominant Strategy Equilibrium
An outcome of a game in which each player plays his or her dominant strategy.
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Reciprocity
A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind.
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Inequality Aversion
A person of this type may care about her own income or wealth, but also prefers an economy with smaller economic differences among its members.
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Social Preferences
Preferences that place a value on what happens to other people, and on acting morally, even if it results in lower payoffs for the individual.
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Zero Sum Game
A game in which the payoffs of the individuals sum to zero, for all combinations of strategies they might pursue.
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Utility
An indicator of the value that one places on an outcome such that higher valued outcomes will be chosen over lower valued ones when both are feasible.
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Public Good
A good for which use by one person does not reduce its availability to others.
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Social Norms
An understanding that is common to most members of society about what people should do in a given situation when their actions affect others.
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Repeated Game
A gamie in which the same interaction (same payoffs, players, feasible actions) may be repeated.
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Cooperation
Participating in a common project in such a way that mutual benefits occur.
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Revealed Preference
A way of studying preferences by reverse engineering the motives of an individual from observations about his or her actions.
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Fairness
A way to evaluate allocation based on one's conception of justice.
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Sequential Game
A game in which one player choses a strategy first and this is known to the other player or players. The game is sequential because the proposer moves first.
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Simultaneous Game
A game in which players chose strategies simultaneously. The prisoners' dilemma game is simultaneous.
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Minimum Acceptable Offer
In the ultimatum game, the least offer by the proposer that will not be rejected.
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Nash Equilibrium
A situation in which each party is doing the best it can, given what each of the others is doing.
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Surplus
The sum of the consumer and producer surpluses.
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Power
The ability to do (and get) the things one wants in opposition to the interventions of others.
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Bargaining Power
The extent of a person's advantage in securing a large share of the rents made in a possible interaction.
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Pareto Efficient
An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off.
83
Pareto Efficiency Curve
The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term.
84
Substantive Judgements of Fairness
Judgements based on how the characteristics of the allocation itself, not how it was determined.
85
Procedural Judgements of Fairness
An evaluation of an outcome based on on characteristics of the outcome itself (for example, how unequal it is), but on how the allocation came about.
86
Wage Curve
The cure showing the real wage in the economy as a whole that has to be paid at a given level of employment or employment rate to secure adequate worker effort.
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Worker's Best Response Function
The amount of work that the worker will perform for each wage that the employer may offer.
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Firm-Specific Assets
Something that a person owns or can do that is more value in the individual's current firm than in their next best alternative.
89
Incomplete Contract
A contract that does not specify in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange.
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Employment Rent
The economic rent a worker receives when the value to her of a job exceeds the value of her next best alternative (that is, unemployment).
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Division of Labour
The specialisation of producers to carry out different tasks in the production process. Also known as specialisation.
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Reservation Wage
What an employee would get either in alternative employment, or from an unemployment benefit of other support, were he or she not employed in the employee's current job.
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Trade Union
An organisation consisting predominantly of employees, the principal activities of which include the negotiation of rates of pay and conditions of employment for its members.
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Differentiated Product
Each product is produced by a single firm and has unique characteristics that differentiate each firm's products from those of other firms.
95
Economies of scale
These occur when doubling all the inputs to a production process more than doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on prices it pays for its inputs. Also known as increasing returns to scale in production.
96
Willingness to Pay (WTP)
An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of good.
97
Demand Curve
The demand curve gives the quantity consumers will buy at each possible price.
98
Consumer Surplus
The consumer's willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold.
99
Producer Surplus
The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold.
100
Deadweight Loss
A loss of total surplus relative to a Pareto Efficient allocation.
101
Price Elasticity of Demand
The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number.
102
Profit Margin
The difference between the price and the marginal cost.
103
Constrained Optimisation Problem
Problems in which a decision-maker choses the values of one or more variables to achieve an objective (such as maximising profit) subject to a constraint that determines the feasible set.
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Profit Curve
This shows the real wage paid when firms choose their profit-maximising price. The corresponding level of profit received by the owners depends on how much competition there is in the economy.
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Order Book
A record of limit orders placed by buyers and sellers, but not yet fulfilled.
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Asset Price Bubble
Sustained and significant rise in the price of an asset fuelled by expectations of future price increases.
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Fundamental Value of a Share
A measure of the benefit today of holding the asset now and in the future.
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Positive Feedback
A process whereby some initial change sets in motion a process that magnifies the initial change.
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Market Failure
When markets allocate resources in a Pareto-inefficient way.
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External Effect (externality)
A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a complete contract. It is called an external effect because the effect in question is outside the contract.
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Incomplete Contract
A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange.
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Asymmetric Information
Information that is relevant to the parties in an economic interaction, but is known by some but not by others.
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Verifiable Information
Information that can be used to enforce a contract.
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Pigouvian Tax
A tax levied on firms generating negative external effects so as to correct an inefficient market outcome. This type of tax is named after the economist Arthur Pigou.
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Marginal Social Cost
The cost of producing one additional unit of output for individuals both involved in the production process and exterior to it. Marginal social cost is the sum of the marginal private cost and the marginal external cost.
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Public Good
A good for which use by one person does not reduce its availability to others.
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Positional Good
A good for which one person having more necessarily implies another having less.
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Veblen Effect
People care not only about what they have but also what they have relative to what other people have. Named after Thorstein Veblen, an economist and sociologist.
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Crowding Out
The observed negative effect when economic incentives displace people's ethical or other-regarding motivations. In this case we say that incentives may have this effect on social preferences. A second use of the term is to refer to the effect of an increase in government spending, as would be expected for example in an economy working at full capacity utilisation, or when final expansion is associated with a rise in interest rate.
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Merit Goods
Goods that should be available to everyone, independently of their pay.
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Patent
A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time it effectively allows the owner to be a monopolist or exclusive user.
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Fiscal Multiplier
The total (direct and indirect) change in the output caused by an initial change in government spending.
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Marginal Propensity to Consume
The change in consumption when disposable income changes by one unit.
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Marginal Propensity to Import
The change in total imports associated with a change in total income.
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Consumption Function (aggregate)
An equation that shows how consumption spending in the economy as a whole depends on other variables: for example, in a multiplier model, the other variables are current disposable income and autonomous consumption.
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Investment Function
An equation that shows how the investment spending in the economy as a whole depends on other variables, namely, the interest rate and profit expectations.
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Goods Market Equilibrium
The point at which output equals the aggregate demand for goods produced in the home economy. The economy will continue producing at this output level unless something changes spending behaviour.
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Autonomous Consumption
Consumption that is independent of income.
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Autonomous Demand
Components of aggregate demand that are independent of current income.
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Target Wealth
Target wealth is the level of wealth that the household aims to hold, based on its economic goals (or preferences) and expectations. We assume that households try to maintain this level of wealth in the face of changes in their economic situation , as long as it is possible to do so.
131
Balance Sheet
A record of assets, liabilities and net worth of an economic actor such as a household, bank, firm or government.
132
Financial Accelerator
The mechanism through with firms' and households' ability to borrow increases when the value of the collateral they have pledged to the lender (often a bank) goes up.
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Automatic Stabilisers
Characteristics of the tax and transfer system in an economy that have the effect of offsetting an expansion or contraction of the economy.
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Fiscal Stimulus
The use by the government of fiscal policy (via a combination of tax cuts and spending increases) with the intention of increasing aggregate demand.
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Paradox of Thrift
The paradox is that if a single individual consumes less, her savings will increase; but if everyone consumes less, the result may be lower rather than higher savings overall. The attempt to increase saving is thwarted if an increase in the saving rate is unmatched by an increase in investment (or other source of aggregate demand such as government spending on goods and services). The outcome is a reduction in aggregate demand and lower output so that actual levels of saving do not increase.
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Government Budget Balance
The excess of government purchases of goods and services plus interest payments and transfers including pensions over tax and other forms of revenue.
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Government Budget Deficit
When the government budget balance is negative.
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Government Budget Surplus
When the government budget balance is positive.
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Primary Deficit
The government deficit (its revenue minus its expenditure) excluding interest payments to debt.
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Government Debt
The sum of all the bonds the government has sold over the years to finance its deficits, minus the ones that have matured.
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Supply Side (aggregate economy)
How labour and capital are used to produce goods and services. It uses the labour market model (also referred to as the wage curve and profit curve model).
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Demand Side (aggregate economy)
How spending decisions generate demand for goods and services, and as a result, employment and output. It uses the multiplier model.
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Business Cycle
Alternating periods of positive and negative growth rates. The economy goes from boom to recession and back to boom.
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Long Run (model)
The term does not refer to a period of time, but instead to what is exogenous. A long-run cost curve, for example, refers to costs when the firm can fully adjust all of the inputs including its capital goods; but technology and the economy's institutions are exogenous.
145
Medium Run (model)
The term does not refer to a period of time, but instead to what is exogenous: capital stock, technology and institutions are exogenous in the medium run.
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Short Run (model)
The term does not refer to a period of time, but instead what is exogenous: prices, wages, capital stock, technology and institutions are exogenous.
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Globalisation
A process by which the economics of the world become increasingly integrated by the freer flow across national boundaries of goods, investment, finance and to a lesser extent labour. The term is sometimes applied more broadly to include ideas, culture, and even the spread of epidemic diseases.
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Hyperglobalisation
An extreme (and so far hypothetical) type of globalisation in which there is virtually no barrier to the free flows of goods, services and capital.
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Specialisation
This takes place when a country or some other entity produces a more narrow range of goods and services than it consumes, acquiring the goods and services that it does not produce by trade.
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Comparative Advantage
A country has comparative advantage compared to some other country in the production of the good for which it has the greatest absolute advantage, or least productivity disadvantage.
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Price Gap
Difference in the price of a good in the exporting country and the importing country. It takes into account transportation costs and trade taxes. When global markets are in competitive equilibrium, these differences will be entirely due to trade costs.
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Trade Costs
The transport costs, tariffs or other factors incurred in trading between markets in two countries that mean that, for affected goods, the Law of one price will not hold across each market.
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Arbitrage
The practice of buying a good at a low price in a market to sell it at a higher price in another. Traders engaging in arbitrage take advantage of the price difference for the same good between two countries or regions. As long as the trade costs are lower than the price gap, they make a profit.
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Globalisation I and II
Two separate periods of increasing global integration. Globalisation I extended from before 1870 until the outbreak of the first world war in 1914. Globalisation II extended from the end of the second world war into the 21st Century.
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Tariff
A tariff is a tax on a good imported into a country.
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Current Account
The sum of all payments made to a country minus all payments made by the country.
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Current Account Deficit
The excess of the value of a country's imports over the combined value of its exports plus its net earnings from assets abroad.
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Current Account Surplus
The excess of the combined value of its exports and net earnings from assets abroad over the value of its imports.
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Net Capital Flows
The borrowing and lending tracked by the current account.
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Balance of Payments
This records the sources and uses of foreign exchange.
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Gains from Exchange
The benefits that each of two or more people gain from a transaction.
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Foreign Direct Investment (FDI)
Ownership and substantial control over assets in a foreign country.
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Foreign Portfolio Investment
The acquisition of bonds or shares in a foreign country where the holdings of the foreign assets are not sufficiently great to give the owner substantial control over the owned entity. Foreign direct investment by contrast entails ownership and substantial control over the owned assets.
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Economics of Agglomeration
The cost reductions that firms may enjoy when they are located close to times in the same or related industries.
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Learning by Doing
This occurs when the output per unit of inputs declines with greater experience in producing a good or service.
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Infant Industries
A relatively new industrial sector in a country that has relatively high costs, because the recent establishment means that it has few benefits from learning by doing, its small size deprives it of economies of scale, or a lack of similar firms means that it does not benefit from economies of agglomeration. Temporary tariff protection of an infant industry may increase the productivity of the economy in the long run.
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Opportunity Cost
When taking an action A means forgoing the opportunity of the next best alternative, B, the opportunity cost of A is the net benefit of action B.
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Feasible Frontier
The feasible frontier is made up of points, each of which indicates for a given feasible quantity of one good, the maximum feasible quantity of the other.
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Feasible Set
All the combinations of things under consideration that the decision maker could choose given the economic, physical or other constraints he or she faces.
