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Micro Theme 1 Key Terms Flashcards

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1
Q

Behavioural
economics

A

Research that adds elements of psychology to traditional models in an attempt
to better understand decision-making by investors, consumers and other
economic participants.

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2
Q

Ceteris paribus

A

To simplify analysis, economists isolate the relationship between two variables
by assuming ceteris paribus – i.e. all other influencing factors are held
constant

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3
Q

Economic
assumptions

A

In his 1953 essay titled “The Methodology of Positive Economics, Milton
Friedman explained why economists need to make assumptions to provide
useful predictions. Friedman understood economics couldn’t use the scientific
method as neatly as chemistry or physics, but he still saw the scientific method
as the basis. Friedman stated economists would have to rely on “uncontrolled
experience rather than on controlled experiment.”

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4
Q

Economic model

A

A simplified representation of economic processes. This representation can be
used to gain a better understanding of the theory.

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5
Q

Microeconomics

A

Study of economics at the level of the individual firm, industry or
consumer/household

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6
Q

Unintended
consequences

A

Outcomes that are not the ones foreseen and intended by a purposeful action.
In government intervention in markets there is usually at least one and often
many unintended consequences partly because economics is a social science
and we cannot predict accurately how producer and consumers will react.

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7
Q

Normative
statements

A

Normative statements express an opinion about what ought to be. They are
subjective statements - i.e. they carry value judgments. For example, the level of
duty on petrol is unfair and unfairly penalizes motorists.

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8
Q

Positive statement

A

Objective statements that can be tested or rejected by referring to the available
evidence. Positive economics deals with objective explanation. For example: “A rise
in consumer incomes will lead to a rise in the demand for new cars.” Or “A fall in the
exchange rate will lead to an increase in exports overseas.”

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9
Q

Value judgement

A

A view of the rightness or wrongness of something, based on a personal view

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10
Q

Barter

A

The practice of exchanging one good or service for another without using money.

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11
Q

Basic economic
problem

A

There are infinite wants but finite factor resources with which to satisfy them.

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12
Q

Capital goods

A

Producer or capital goods such as plant (factories) and machinery and equipment
are useful not in themselves but for the goods and services they can help produce
in the future. Distinguished from “financial capital”, meaning funds which are
available to finance the production or acquisition of real capital.

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13
Q

Constraints

A

Limits to what we can afford to consume – we have to operate within a budget and
therefore must make choices from those sets that are feasible/affordable. There is
always a set of conceivable things that are actually available, and another set of
that are not.

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14
Q

Economic agent

A

A participant in an economic system – be it a consumer, business or the
government.

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15
Q

Entrepreneur

A

An entrepreneur is an individual who seeks to supply products to a market for a rate
of return (i.e. a profit). Entrepreneurs will often invest their own financial capital in a
business and take on the risks associated with a business investment.

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16
Q

Factor incomes

A

Factor incomes are the rewards to factors of production. Labour receives wages
and salaries, land earns rent, capital earns interest and enterprise earns profit.

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17
Q

Factors of
production

A

Factors of production are the inputs available to supply goods and services:
Land - Natural resources available for production
Labour - The human input into the production process
Capital - goods used in the supply of other products e.g. technology, factories and
specialized machinery
Enterprise - Entrepreneurs organise factors of production and take risks
Know-how - Information required to develop, produce and bring products to the
market.

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18
Q

Finite resources

A

There are only a finite number of workers, machines, acres of land and reserves of
oil and other natural resources on the earth. By producing more for an everincreasing population, we may destroy the natural resources of the planet.

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19
Q

Free goods

A

Free goods do not use up any factor inputs when supplied. Free goods have a
zero-opportunity cost i.e. the marginal cost of supplying an extra unit of a free good
is zero.

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20
Q

Inputs

A

Labour, capital and other resources used in the production of goods and services

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21
Q

Interest

A

Interest is the reward to the ownership of capital.

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21
Q

Land

A

Natural resources available for production.

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21
Q

Labour

A

Physical and mental effort by humans

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22
Q

Manufacturing

A

The use of machines, tools and labour to make things for use or sale. The is most
commonly applied to industrial production, in which raw materials are transformed
into finished goods on a large scale.

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23
Needs
Humans have many different types of wants and needs - economic, social and psychological. A need is essential for survival; food satisfies hungry people. A want is something desirable but not essential to survival e.g. cola quenches thirst.
24
Non-renewable resources
Non-renewable resources are resources which are finite and cannot be replaced. Minerals, fossil fuels and so on are all non-renewable resources.
25
Rationing
Rationing is a way of allocating scarce goods and services when market demand exceeds available supply. There are many ways of rationing including by price, by consumer income, by assessment of need, by education level and by age, gender, nationality.
25
Opportunity cost
The cost of any choice in terms of the next best alternative foregone
26
Renewable resources
Renewable resources (in theory) are replaceable if the rate of extraction of the resource is less than the natural rate at which the resource renews. Examples of renewable resources are solar energy, oxygen, biomass, fish stocks and forestry.
27
Rent
Rent is income typically associated with the ownership of land, but which can also include rental income from leasing out other assets such as cars, capital equipment.
28
Scarcity
Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
29
Allocative efficiency
Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production.
30
Capital goods
Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from "financial capital", meaning funds which are available to finance the production or acquisition of real capital
31
Concave production possibility frontier
A concave PPF is “bowed outwards”. This means there is a rising marginal opportunity cost as you produce more of one good. This is because there is imperfect factor mobility. E.g. labour/land/capital is more suited towards the production of one good than another.
32
Consumer goods
Goods bought and used by consumers and households. They are the end result of manufacturing.
33
Economic efficiency
Economic efficiency is about making best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time.
34
Economic growth
An increase in the productive potential of a country – shown by an outward shift of the production possibility frontier.
35
Pareto efficiency
In neoclassical economics, an action done in an economy that harms no one and helps at least one person. A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.
36
Production possibility frontier
A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.
37
Productive potential
The amount of output an economy could produce if all of its resources were fully and efficiently employed.
38
Trade-off
A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.
39
Adam Smith
One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith's discussion of the advantages of division of labour remains a potent idea.
40
Alienation
A sociological term to describe the estrangement many workers feel from their work, which may reduce their motivation and productivity. It is sometimes argued that alienation is a result of the division of labour because workers are not involved with the satisfaction of producing a finished product, and do not feel part of a team
41
Division of labour
The specialization of labour in specific tasks, intended to increase productivity.
42
Measure of value
A function of money where it can be used to judge the value of a good or service.
43
Medium of exchange
Money is any asset that is widely acceptable as a medium of exchange when buying goods and services in markets. It facilitates transactions between buyer and seller.
44
Method of deferred payment
A function of money that allows a system of making payments at a later date.
45
Money
Money is defined best by what money does. Money – in its various forms – fulfils various key functions including a medium of exchange, a unit of account, a store of value and a standard of deferred payment.
46
Specialisation
A method of production where a business or area focuses on the production of a limited scope of products or services to gain greater productive efficiency.
47
Standard of deferred payment
A function of money - the accepted way, in a given market, to settle a debt.
48
Store of value
A function of money in that it can be used to save and be exchanged at a later time.
48
Unit of account
A function of money, a nominal unit of measure or currency used to value/cost products, assets (e.g. houses), debts, incomes and spending.
48
Adam Smith
One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good. Smith's discussion of the advantages of division of labour remains a potent idea.
48
Command economy
An economic system where most factor resources are allocated by the government, with few officially sanctioned private markets (e.g. ex-Soviet bloc countries prior to their transition into market economies, modern-day North Korea and Venezuela).
48
Capitalist economy
An economic system organised along capitalist lines uses market-determined prices to guide our choices about the production and distribution of goods. One key role for the state is to maintain the rule of law and protect private property.
48
Consumer sovereignty
Consumer sovereignty exists when an economic system allows scarce resources to be allocated to producing goods and services that reflect the wishes of consumers. Sovereignty can be distorted by the effects of persuasive or misleading advertising
48
Free market
System of buying and selling that is not under the control of the government, and where people can buy and sell freely, or an economy where free markets exist, and most companies and property are not owned by the state.
48
Economic planning
Government policies aimed at influencing trends in the economy.
49
Karl Marx
A German philosopher, economist and political theorist. He was a hugely influential thinker and co-authored the pamphlet ‘The Communist Manifesto’ which was published in 1948 and asserted that all human history has been based on class struggles, but that these would ultimately disappear with the victory of the proletariat. 1818 – 1883.
49
Economic system
An economic system is a network of organisations used to resolve the problem of what, how much, how and for whom to produce.
49
Friedrich Hayek
An Anglo-Austrian economist and philosopher best known for his criticisms of the Keynesian welfare state. His approach stems from the Austrian school of economics and emphasises the limited nature of knowledge. 1899 – 1992.
49
Mixed economy
Where resources are partly allocated by the market and partly by the government.
50
Planned economy
In a planned economy, decisions about what to produce, how much to produce and for whom are decided by central planners working for the government rather than allocated using the price mechanism.
51
Transition economies
Transition economies are involved in a process of moving from a centrally planned economy to a mixed or free market economy.
52
Behavioural economics
Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.
53
Incentives
Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.
54
Income
Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example, wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital.
55
Invisible hand
Adam Smith - one of the founding fathers of modern economics, described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest.
56
Market incentives
Signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency.
57
Profit maximisation
The assumption that producers wish to produce an output that will create maximum profit levels.
58
Rational choice
Rational choice involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs.
59
Utility
Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service.
60
Utility maximisation
The assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases.
61
Consumer goods and services
Consumer goods and services help satisfy our needs and wants directly There is a sub-division between: Consumer durables: Products that provide a steady flow of satisfaction / utility over their working life (e.g. a washing machine or using a smartphone). Consumer non-durables: Products that are used up in the act of consumption e.g. drinking a coffee or turning on the heating) iii) Consumer services: E.g. a hair cut or ticket to a show or sporting event
62
Demand
Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
63
Demand curve
A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price falls.
63
Effective demand
Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand.
64
Diminishing marginal utility
Marginal utility is the change in satisfaction from consuming an extra unit of a good or service. Beyond a certain point, marginal utility may start to fall (diminish). If marginal utility becomes negative, then consuming an extra unit will cause total utility to fall.
65
Excess demand
The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price.
66
Law of demand
The law of demand is that there is an inverse relationship between the price of a good and demand. As prices fall, we see an expansion of demand. If price rises, there should be a contraction of demand.
67
Perverse demand curve
A perverse demand curve is one which slopes upwards from left to right. Therefore, an increase in price leads to an increase in demand. This may happen where goods are strongly affected by price expectations.
68
Willingness to pay
The maximum price a consumer is prepared pay to obtain a product
69
Complements
Two complements are said to be in joint demand. Examples include fish and chips, iron ore and steel, hardware and software for digital products.
69
Cross price elasticity of demand
Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity, we make an important distinction between substitute products and complementary goods and services
70
Derived demand
Derived demand is demand that comes from (is derived) from the demand for something else. Thus, the demand for machinery is derived from the demand for consumer goods that the machinery can make. If there is low demand for consumer goods, there is low demand for the machinery that can make them. Demand for bricks is derived from spending on new construction projects.
70
Elastic demand
Demand for which the coefficient of price elasticity of demand is greater than 1.
71
Income elasticity of demand
Measures the relationship between a change in quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income.
72
Inferior good
When demand for a product falls as real incomes increases. Income elasticity is negative.
72
Inelastic demand
When the coefficient of price elasticity of demand is less than 1. (Ped<1)
73
Luxury good
Luxury goods and services have an income elasticity of demand with a coefficient of more than +1 i.e. a 5% rise in real incomes might lead to an increase in demand of 20% giving a coefficient of YED of +4.
74
Necessities
Necessities typically have a low own-price elasticity of demand (consumers are not sensitive to a change in price) and a low but positive income elasticity of demand (YED >0 but <+1). Examples might include milk, cereals, toothpaste and bread.
75
Normal goods
Normal goods have a positive income elasticity of demand. Necessities have a coefficient of income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income.
76
Price elasticity of demand
Price elasticity of demand measures the responsiveness or sensitivity of demand for a product following a change in its own price
76
Substitutes
Goods in competitive demand that act as replacements for another product.
77
Total revenue
The amount of money earned by a firm from selling its output. TR = P X Q
78
Real income
The money earned from employment after the distorting effects of inflation have been removed.
79
Unit elasticity of demand
A demand curve with unitary price elasticity has a coefficient of PED equal to 1 (unity) throughout. Total spending on the product will be the same at each price level. Government intervention will not affect total spending on the product.
80
Unrelated goods
Goods or services that have no relationship between them in which case the cross-price elasticity of demand will be zero.
81
1.2.4 Supply

Economics Key Terms (1 decks)

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