Definitions Flashcards
(168 cards)
1
Q
What is demand?
A
The amount that consumers are willing and able to buy at each given price level.
2
Q
What is effective demand?
A
Demand backed by an ability to pay.
3
Q
What is latent demand?
A
Demand that’s not backed by an ability to pay.
4
Q
What is utility?
A
The value/satisfaction that a consumer gets from a unit of a good.
5
Q
What does ‘utility falls with consumption’ mean?
A
As we buy more, the benefit we receive from each extra unit falls.
6
Q
What is a substitute?
A
A replacement for another product.
7
Q
What is a complimentary good?
A
Goods that are consumed together.
8
Q
What is a normal good?
A
Goods or services that will see an increase in demand when income rises.
9
Q
What is an inferior good?
A
Goods or services that will see demand fall when income rises.
10
Q
What is composite demand?
A
A good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the supply for the other purposes.
E.g. steel for cars and steel for bridges
11
Q
What is derived demand?
A
When the demand for one good or service comes from the demand for another good or service. That is, the good is a component of the other good.
Also known as joint supply.
E.g. beef for eating and leather
12
Q
What is opportunity cost?
A
The next best alternative forgone when an economic decision is made.
It is the next best alternative, not a range of alternatives.
13
Q
What is PeD?
A
Price elasticity of demand.
It measures the responsiveness of quantity demanded to a change in the price of the good.
14
Q
What is YeD?
A
Income elasticity of demand.
It measures the responsiveness of quantity demanded to a change in income.
15
Q
What is supply?
A
The amount offered for sale by producers at each given price level.
16
Q
What are the three functions of price?
A
Rationing function.
Incentive function.
Signalling function.
17
Q
What is XPeD?
A
Cross Price Elasticity of Demand.
It measures the responsiveness of quantity demanded of one good to a change in price of another good.
18
Q
What is PeS?
A
Price Elasticity of Supply.
It measures the responsiveness of quantity supplied to changes in price.
19
Q
What are some determinants of demand?
A
Changes in income. Changes in the law. Prices of complimentary products. Advertising and Publicity. Prices of substitutes. Consumer confidence. Changes in population. Fashion. Interest rates.
20
Q
What are the four factors of production?
A
Land
Labour
Capital
Enterprise
21
Q
What are some determinants of supply?
A
Prices of raw materials. Technological improvements. Changes in labour productivity. Wage rates. Joint supply. Subsidies. Expectations about future prices.
22
Q
What are some types of direct taxes?
A
Income tax
Corporation tax
23
Q
What are some types of indirect taxes?
A
VAT
Sugar, Cigarettes, Alcohol, Petrol taxes - sin taxes
24
Q
What is an equilibrium?
A
The price at which demand is equal to supply and there is no tendency to change.
It is called the market clearing price.
25
What is a disequilibrium?
The price at which market supply does not equal demand.
There is likely to be a further change or reaction by buyers or sellers.
26
What is the market mechanism?
The mechanism which calculates/determines the equilibrium.
27
What is consumer welfare/surplus?
It is the difference between how much a consumer is willing to pay for the good and how much they actually do.
It is a measure of welfare.
28
What is producer welfare/surplus?
It is the difference between how much producers are willing to sell the good for and how much they actually sell the good for.
29
What is excess supply?
When quantity supplied at a particular price is greater than quantity demanded, there is a disequilibrium.
30
What is a price floor or minimum price?
A price level below which the price of the good or service is not allowed to decrease.
31
What is a price ceiling or maximum price?
A price level above which the price of a good or service is not allowed to increase.
32
What is excess demand?
When quantity demanded at a particular price level is greater than quantity supplied.
33
What is a commodity?
A good or service that is traded, but usually refers to raw materials or semi-manufactured goods that are traded in bulk.
34
What is a value judgement?
They are statements or opinions expressed that are not testable or cannot be verified and depend very much on the views of the individual and the values they hold.
35
What is a normative statement?
They are opinions that require value judgements to be made.
36
What is a positive statement?
A statement that can be tested against real world data.
37
What is economics?
It is the production of goods and services to satisfy needs and wants and thereby improve economic welfare.
38
What is the payment/reward for land?
Rent
39
What is the payment/reward for labour?
Wages
40
What is the payment/reward for capital?
Interest
41
What is the payment/reward for enterprise?
Profit
42
What is capital?
It is the stock of goods or machines used to make other goods and services. It is NOT money.
43
What is economic welfare?
It is the economic well-being of an individual or group within society or an economy.
44
What is the Production Possibility Frontier (PPF)?
It indicated the maximum possible output that can be achieved given a rider set of resources and technology in a particular time period.
45
What factors shift PPF to the right?
Investment in new technology,
Introduction of new resources such as minerals,
Increased supply of labour through increase in population and migration,
Improvements to human capital through education and training,
Encouraging entrepreneurship,
Increased productivity.
46
What is human capacity?
The skills, abilities, motivation and knowledge of labour.
47
What is productivity?
Measuring the ratio of inputs to outputs.
48
What factors shift PPF to the left?
```
Emigration,
War,
Decline in investment in capital,
Disease,
Disaster.
```
49
What is the productive efficiency?
This is achieved in an economy when it is not possible to make anyone better off without making someone worse off, or you cannot produce more of one good without making less of another.
At A-Level it also means producing at lowest average costs.
50
What is allocative efficiency?
It occurs when the available economic resources are used to produce the combination of goods and services that best matches people's tastes and preferences.
51
What is a market?
Where goods and services are sold and purchased.
52
When does a market failure occur?
When the free market, left alone, fails to deliver an efficient allocation of resources.
The result is loss of economic welfare.
Results in economic inefficiency.
53
What causes consumer surplus to increase and decrease?
Increased CS:
- increase in supply
- increase in demand
Decreased CS:
- decrease in supply
- decrease in demand
54
What causes producer surplus to increase and decrease?
Increased PS:
- increase in supply
- increase in demand
Decreased PS:
- decrease in supply
- decrease in demand
55
What is a missing market?
A situation in which there is no market because the functions of price have broken down.
e.g. street lights, roads
56
What does a complete market failure result in?
A missing market.
57
What is a partial market failure?
It is where a market exists but contributes to resource misallocation.
e.g. education, healthcare
58
What are the main causes of a market failure?
- positive and negative externalities,
- merit and demerit gods,
- public goods,
- monopoly and other market imperfections,
- inequalities in the distribution of income and wealth,
- factor immobility causing unemployment,
- imperfect information.
59
What is a public good?
A good that possesses the characteristics of non-excludability, non-rivalry in consumption and it is non-rejectable.
60
What does non-excludability mean?
Once provided, no person can be excluded from benefiting.
Non-payers can enjoy the benefits of consumption at no financial cost to them. these people are known as free riders. e.g. using a neighbours WiFi, saying you have a TV licence to watch BBC iPlayer.
61
What does non-rivalry mean?
Consumption of the good by one person does not reduce the amount available for consumption by another person.
62
What does non-rejectable mean?
If a public good is provided, we cannot avoid it.
63
What is a quasi-public good?
A good that has some of the qualities of a public good but does not fully possess the three required characteristics of non-rivalry, non-excludability and non-rejectability.
64
What is a private good?
A good that is excludable, rival and rejectable in consumption.
65
What are externalities?
Costs or benefits that spill over to third parties external to a market transaction.
66
What is a positive externality?
A positive spillover effect to third parties of a market transaction; social benefits exceed private benefits.
67
What is a negative externality?
A negative spillover effect to third parties of a market transaction; social costs exceed private costs.
68
What is the marginal private cost?
The cost to an individual or firm of an economic transaction.
69
What is the marginal external cost?
The spillover cost to third parties of an economic transaction.
70
What is the marginal social cost?
The full cost to society of an economic transaction, including private and external costs.
71
What is the incidence of tax?
The proportion of a tax that suppliers are able to pass onto consumers.
The higher the incidence of tax, the more the suppliers are able to pass onto consumers.
If PeD is inelastic the incidence of tax is high.
72
What is the marginal private benefit?
The benefit to an individual or firm of an economic transaction.
73
What is the marginal external benefit?
The spillover benefit to third parties of an economic transaction.
74
What is the marginal social benefit?
The full benefit of an economic transaction, including private and external benefits.
75
What is a merit good?
A good that would be under-consumed in a free market, as individuals do not fully perceive the benefits obtained from consumption.
They generate positive externalities.
e.g. vaccines, NHS, museums, education, dentist.
76
What is a demerit good?
A good that is over-consumed in a free market, as it brings less overall benefit to consumers than they realise.
Consumption can lead to negative externalities.
e.g. sugar, smoking, alcohol, gambling, fast food.
77
What is a monopoly?
A market structure that is dominated by a single seller of a good.
In economic terms, a business with 25% market share is considered a monopoly.
A pure monopoly exists where only one firm supplies the market. e.g. nationalised companies.
78
Why aren’t monopolies desirable?
- no/little incentive to innovate,
- no choice,
- restrict supply,
- raise prices,
- fall in surplus.
79
Why is competition desirable in a market?
- quality of products is better,
- innovation,
- greater supply which leads to lower prices,
- consumer surplus,
- more choice.
80
What benefits do monopolies have?
- international competitiveness,
| - benefit from economies of scale
81
What is occupational immobility of labour?
As patterns of demand and employment change, many workers may find it difficult to easily secure new jobs since they may lack the necessary skills.
82
What is geographical immobility of labour?
Where workers find it difficult to move where employment opportunities may be, due to family ties and differences in housing costs.
83
What is government failure?
When government intervention to correct market failure does not improve the allocation of resources or leads to a worsening of the situation.
84
What are the main causes of government failure?
- inadequate information,
- conflicting objectives,
- administrative costs,
- unintended consequences.
85
What is the division of labour?
Breaking the production process down into a sequence of tasks, with workers assigned to particular tasks.
86
What are some benefits of division of labour?
- increased productivity,
- workers become specialised in their tasks,
- wage costs are lower = lower average costs,
- allows for use of specialist machinery.
87
What is specialisation?
A worker only performing on task or a narrow range of tasks. It allows different firms specialising in producing different goods or services.
88
What is the law of diminishing returns?
A short term law which states that as a variable factor of production is added to a fixed factor of production, eventually both the marginal and average returns to the variable factor will begin to fall.
89
What is the short-run?
The time period in which at least one factor of production is fixed (premises) and cannot be varied.
90
What is the long-run?
The time period in which no factors of production are fixed and in which all the factors of production can be varied.
91
What are economies of scale?
As the scale of production of a firm increases, the long run average costs will fall.
92
What are internal economies of scale?
Cost saving resulting from the growth of the firm itself.
93
What are external economies of scale?
Cost saving resulting from the growth of the industry or market of which the firm is a part of.
94
What are the types of internal economies of scale?
- research and development,
- financial,
- marketing,
- technical,
- managerial,
- purchasing (bulk buying)
95
What are the types of external economies of scale?
- infrastructure,
- research and development,
- technology,
- transport,
- healthcare,
- improved education.
96
What are diseconomies of scale?
As the scale of production of a firm increases, the long run average cost increases.
97
What do diseconomies of scale arise from?
- managerial diseconomies of scale,
- communication failure,
- motivational diseconomies of scale.
98
What is the minimum efficient scale?
The lowest output which the firm is able to produce at the minimum achievable LRAC.
99
What is invention?
making something entirely new; something that did not exist at all before.
100
What is innovation?
Improving something.
101
What is technological change?
A term that describes the overall effect of invention, innovation and the diffusion or spread of technology in the economy.
102
What are the effects of technological change on methods of production?
- more capital intensive economy,
- move towards the division of labour and specialisation,
- less skilled workers needed if they are operating machines that greatly assist production,
- more skilled workers needed to maintain/improve/design the machinery,
- less labour employed,
- requires investment.
103
What are the effects of technological change on costs of production?
- fixed costs will rise when starting up production,
| - variable costs (labour) will fall but the employed workers are skilled so may be more expensive.
104
What is productivity?
Output per unit of input.
105
What is static efficiency?
Efficiency at a moment in time.
106
What is dynamic efficiency?
Occurs in the long run, leading to the development of new products and more efficient processes that improve productive efficiency.
107
What can technological change do?
- lead to the development of new products e.g. drones, apple watch
- lead to the development of new markets e.g. Netflix
- may destroy existing markets e.g. blockbuster, kodak film, hmv
108
What is creative destruction?
Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations.
109
What is marginal revenue?
The addition to the total revenue resulting from the sale of one more unit of the product.
110
What is normal profit?
The minimum profit a firm must make to stay in business, which is, however, insufficient to attract new firms into the market.
111
What are supernormal profits?
Profits above normal profits.
| Also known as abnormal profits.
112
What are the role of profits?
- creation of business incentives,
- creation of worker incentives,
- creation of shareholder incentives,
- profit as a reward for innovation and risk taking,
- profit as a source of business finance,
- profit and economic efficiency.
113
What is rational behaviour?
Acting in pursuit of self-interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed.
114
What is behavioural economics?
A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.
115
What is bounded rationality?
When making decisions, an individual's rationality is limited by the information they have, the limitations of their mind and the finite amount of time available in which to make decisions.
116
What is satisficing?
Achieving a satisfactory outcome rather than the best possible outcome (it will do).
117
What is bounded self-control?
Limited self-control in which individuals lack the self control to act in what they see as their self-interest.
118
What is cognitive bias?
One sided/skewed thinking or reasoning.
119
What are some biases in decision making?
- rule of thumb
- anchoring
- altruism
- availability
- social norms
120
What is anchoring?
The previous price that a person paid for a product acts as an anchor and affects their consumption decisions in the future.
It may affect savings decisions.
121
What is choice architecture?
A framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making.
122
What is framing?
How something is presented.
123
What is loss aversion?
People's tendency to prefer to avoid making losses to acquire potential gains.
124
What are nudges?
A nudge tries to alter people's behaviour in a predictable way without forbidding any options or significantly changing economic incentives.
125
What is default choice?
An option that is selected automatically unless an alternative is specified.
126
What are mandated choices?
When people are required by law to make a decision.
127
What is restricted choice?
Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. If there are too many choices, people may make a poorly thought-out decision or not make any choice.
128
What are entry barriers?
Obstacles that make it difficult for a new firm to enter a market.
E.g high startup costs
129
What are exit barriers?
Obstacles that make it difficult for an established firm to leave a market.
E.g specialised machinery
130
What are natural barriers?
Barriers that result from inherent features of the industry, such as economies of scale or high research costs and development costs; not barriers that have been erected artificially.
E.g mining
131
What are sunk costs?
Costs that have already been incurred and can not be recovered.
E.g market research.
132
What are artificial barriers?
Barriers erected by the firms themselves.
| E.g parents, legislation
133
What are some examples of artificial barriers?
- Patents
- product differentiation
- advertising and marketing
- first mover advantage
- limit pricing
- predatory pricing
134
What are the objectives of firms?
- profit maximisation
- sales maximisation
- growth maximisation
- market share maximisation
- survival
- quality
- corporate social responsibility
- revenue maximisation
135
What is the basic assumption of firms?
That they are profit maximisers.
136
What is a PLC?
A public limited company.
- company is split into shares that can be bought on the stock market by anyone so they will own a percentage of the company.
137
What is the divorce of ownership and control?
When the owners and those who manage the firm are different groups with different objectives.
-only applies to plc’s
138
What is the principal agent problem?
The principal (owner) appoints an agent (director/manager) to perform tasks on his/her behalf.
But the incentives of the agent may differ from those of the principal.
139
What objective do we assume all firms have?
Short-Run Profit Maximisation
This occurs at Q where MC=MR
140
What is satisficing?
Achieving a satisfactory outcome rather than the best possible outcome.
141
What are the features of a perfectly competitive market?
- many small firms,
- homogeneous good,
- all firms are price takers,
- perfect knowledge,
- freedom of entry and exit,
- large number of buyers,
- factors of production are completely mobile.
142
What is dynamic efficiency?
Efficiency over time - new products, techniques and processes which increase economic growth.
143
What are the features of a pure monopoly?
- only one firm,
- complete barriers prevent entry and exit of firms,
- firm is a price maker.
144
What is x-inefficiency?
It occurs when a firm lacks the incentive to control costs. It causes the average cost of production to be higher than necessary.
Sometimes called organisational slack.
145
What is a natural monopoly?
When there is only room in a market for one firm to fully exploit the economies of scale that are available. In fact, thst firm never fully exploits the economies of scale meaning it never reaches productive efficiency.
146
What is regulatory capture?
A form of government failure which occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.
147
What is price discrimination?
Charging different prices to different customers for the same product or service, with the prices based on different willingnesses to pay.
148
What are the conditons necessary for price discrimination?
- must be possible to identify different groups of customers -- easily
- different customers must have different price elasticities of demand
- markets must be able to prevent resale
- (need to be a price maker)
149
What are somne methods of price discrimination?
- age of customer
- quantity bought
- geographical
- time
150
What is frist degree price discrimination?
When the discriminating firm can charge a seperate price to each individual customer.
e.g. insurance
151
What is second degree price discrimination?
It means charging a different price for different quantities, such as quantity discounts for bulk purchases.
152
What is third degree price discrimination?
It is when the discriminating firm can charge a seperate price to different groups of customers.
153
What is cross subsidisation?
The consumer who pays more, covers the loss made on a different consumer paying far less for a product.
154
Advantages of price discrimination
- profit maximising as prices match characteristics of the market
- gain producer surplus (greatest in 1st degree, less in 3rd)
- equitable (poorer people can afford things)
- lower prices for some consumers
- can increase sales which may lead to economies of scale
155
Disadvantages of price discrimination
- loss in consumer surplus due to higher prices charged to some (most extreme with 1st, less with 3rd)
- unequal (not everyone is charged the same)
- may be costly to implement (costly to setup, seperate markets and prevent resale)
156
What is an oligopoly?
Where a few large firms have the majority of the market share.
157
What are the features of an oligopoly?
- supply in the industry concentrated in the hands of relatively few firms
- firms must be interdependent
- there are high barriers to entry
- non-price competition
158
What is interdependence?
Where actions by one firm will have an effect on the sales and revenue of another large firm in the market.
e.g. if one firm such as boots spent lots of money on advertising, their sales and revenues may increase while superdrug's sales and revenue will fall
159
What is the concentration ratio?
It is a ratio which indicates the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output.
- the three-firm concentration ratio is the total market share of the three largest firms
160
What is collusion?
Where firms cooperate in their pricing, marketing, research and development and/or output policies.
161
What is price leadership?
The setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market.
162
What is formal collusion?
- restrictive agreements
- price fixing
- dividing the market by area
- predatory prices
- cartels
163
What can collusion lead to?
- strategic alliances
- consumers may benefit from stable prices
- oligopolists save on marketing/advertising and may pass along savings to consumers
164
What is monopolistic competition?
A market structure in which firms have many competitors, but each one sells a slightly different product.
165
Features of monopolistic competition
- large number of buyers and sellers; all act independently ; low concentration ratio
- in the long run there are no/low barriers to entry and exit
- firms produce differentiated or non-homogenous goods; competition is strong, plenty of switching takes place
- producers have some control over price
- onformation is widely spread but not perfect
166
Real life examples of monopolistic competition
- taxi and minibus companies
- bars and nightclubs
- sandwhich bars and coffee shops
167
What is the theory of contestable markets?
It argues that what matters most in a market is the absence of barriers to entry and the levels of sunk costs.
168
What are sunk costs?
Costs that have already been incurred and cannot be recovered.
e.g. legal costs, r&d, training a worker
