Microeconomics Flashcards
(177 cards)
1
Q
Basic economic problem
A
Resources have to be allocated between competing uses because wants are infinite whilst resources are scarce
2
Q
Choice
A
Economic choices involve the alternative uses of scarce resources
3
Q
Economic goods
A
Goods which are scarce because their use has an opportunity cost
4
Q
Free goods
A
Goods which are unlimited in supply and which therefore have no opportunity cost
5
Q
Margin
A
A point of possible change
6
Q
Needs
A
The minimum which is necessary for a person to survive as a human being
7
Q
Opportunity cost
A
The benefit forgone for the next best alternative
8
Q
Production Possibility Frontier (PPF)
A
A curve which shows the maximum potential level of output of one good given a level of output for all other goods in the economy, with all its resources fully and efficiently employed
9
Q
Scarce resources
A
Resources which are limited in supply so that choices have to be made about their use
10
Q
Wants
A
Desires for the consumption of goods and services
11
Q
Consumer/consumption goods
A
Goods that are produced to satisfy the consumption demands of the present
12
Q
Depreciation/Capital consumption
A
The wearing out of capital over time
13
Q
Capital productivity
A
Output per unit of capital employed
14
Q
Division of labour
A
Where a productive process is broken down into a sequence of jobs with a particular worker doing one or a few only of them
15
Q
Factors of Production
A
The inputs to the production process
16
Q
Land
A
All natural resources
17
Q
Capital
A
The stock of manufactured resources used in the production of goods and services
18
Q
Entrepreneurs
A
Individuals who seek out profitable opportunities for production and take risks in attempting to exploit these
19
Q
Labour
A
The workforce
20
Q
Fixed capital
A
Economic resources which are used to transform working capital into goods and services
21
Q
Human capital
A
The value of the productive potential of an individual or group of workers (It is made up of the skills, talents, education and training of an individual group and represents the value of future earning and production)
22
Q
Labour productivity
A
Output per worker
23
Q
Market
A
Any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services
24
Q
Non-renewable resources
A
Resources exploited in such a way that they are being reduced over time
25
Primary sector
Extractive and agricultural industries
26
Productivity
Output per unit of input
27
Profits
The reward to the owners of a business
28
Renewable resources
Resources which can be exploited over and over again because they have the potential to renew themselves
29
Secondary sector
Production of goods, mainly manufactured
30
Stakeholders
Groups of people who have an interest in a firm, such as shareholders, customers, supplied, the local community and government
31
Sustainable resource
A renewable resource which is being exploited in such a way that it will not diminish or run out
32
Tertiary sector
Production of services
33
Unit labour costs
Cost of employing labour per unit of output or production
34
Utility
The satisfaction derived from consuming a good
35
Welfare
The well being of an economic agent or group of economic agents
36
Base period
The period with which all other values in a series are compared
37
Index number
An indicator showing the relative value of one number to another from a base of 100
38
Nominal values
Values unadjusted for the effects of inflation
39
Real values
Values adjusted for inflation
40
Ceteris paribus
The assumption that all other variables within the model remain constant whilst one change is being considered ("All other things being equal/constant")
41
Equilibrium
The point where what is expected or planned it equal to what is realised or actually happens
42
Normative economics
The study and presentation of policy prescriptions involving value judgements about the way scarce resources are allocated
43
Normative statement
A statement which cannot be supported or refuted because it is a value judgement
44
Partial model
A model with few variables
45
General models
A model with many variables
46
Positive economics
The scientific or objective study of the allocation of resources
47
Positive statement
A statement which can be supported or refuted by evidence
48
Static model
A model in which time is not a variable
49
Dynamic model
A model in which time is a variable explicit
50
Scientific method
A method which subjects theories or hypotheses to falsification by empirical evidence
51
Theory or model
A hypothesis which is capable of refutation by empirical evidence
52
Command/planned economy
An economy system where government allocated resources in a society through planning
53
Economic system
A complex network of individuals, organisations and institutions and their social and legal interrelationships
54
Free market economy
An economic system which resolves the basic economic problem through the market mechanism
55
Market mechanism (aka the price system)
The way prices respond to changes in demand and supply for a product, service or factor input so that a new market equilibrium is reached
56
Mixed economy
An economy where both the free market mechanism and the government planning process allocate a significant proportion of total resources
57
Consumer surplus
The difference between how much buyers are prepared to pay for a good and what they actually pay
58
(Effective) Demand
The quantity purchased of a good at any given price over a period of time
59
Law of Demand
Says that demand is inversely related to price, all other things being equal
60
Individual demand curve
The demand curve for an individual consumer, firm or other economic unit
61
Market demand curve
The sum of all individual demand curves
62
Competitive demand
When two or more goods are substitutes for each other
63
Complement
A good which is purchased with another good (the XED of the complement is negative)
64
Composite demand
When a good is demanded for two or more distinct uses
65
Derived demand
When the demand for one good is the result of another good
66
Joint demand
When two or more goods are brought together
67
Joint supply
When two or more goods are produced together so that a change in supply of one good will necessarily change the supply of the other good(s) with which it is in joint supply
68
Substitute
A good which can be replaced with another to satisfy a want (the XED of the substitute is positive)
69
Elastic demand
The responsiveness of demand is proportionally less than the change in price (PED>1)
70
Infinitely elastic demand
PED = infinity
71
Inelastic demand
The responsiveness of demand is proportionally less than the change in price (PED<1)
72
Infinitely inelastic demand
PED = 0
73
Price elasticity of demand (PED)
The proportionate response of changes in quantity demanded to a proportionate change in price (responsiveness of demand to a change in price)
74
PED formula
%ΔQd / %ΔP
75
Unitary elasticity
The responsiveness of demand is proportionally equal to the change in price (PED = 1)
76
Cross-price elasticity or demand (XED)
A measure of the responsiveness of quantity demanded of one good to a change in price of another good
77
XED formula
%ΔQd of good A / %ΔP of good B
78
Income elasticity of demand (YED)
A measure of the responsiveness of quantity demanded to a change in income
79
YED formula
%ΔQd / %ΔY
80
Price elasticity of supply (PES)
A measure of the responsiveness of quantity supplied to a change in price
81
PES formula
%ΔQs / %ΔP
82
Giffen good
A special type of inferior good where demand increases when price increases
83
Income
The flow of payments (e.g. salaries, dividends, interest) over a period of time
84
Income effect
The impact on quantity demanded of a change in price due to a change in consumers' real income which results from this change in price
85
Inferior good
A good where demand falls as income increases (YED = positive)
86
Substitution effect
The impact on quantity demanded due to a change in prices, assuming that consumer's real incomes stay the same (i.e. impact of a change in price excluding the income effect)
87
Wealth effect
Where people feel better off because of an increase in the value of their assets and spend more as a result
88
Ad valorem tax
Tax levied as a percentage of the value of the good
89
Incidence of tax
The ultimate distribution of the tax burden on the taxpayers
90
Specific or unit tax
tax levied per unit
91
Subsidy
A grant given by government to firms to encourage production of a good or service
92
Allocative or economic efficiency
occurs when resources are distributed in such a way as to maximise consumer welfare
93
Allocative efficiency on a graph
P = MC = AR
94
Dynamic efficiency
Occurs when resources are allocated efficiently over time
95
Market failure
When resources are inefficiently allocated due to imperfections in the working of the market mechanism
96
Static efficiency
Occurs when resources are allocated efficiently at a point in time
97
Technical efficiency
Achieved when a given quantity of output is produced with the minimum number of inputs (required for productive efficiency)
98
Productive efficiency
Achieved when production is achieved at lowest average cost (MC = AC)
99
Positive consumption externality
When the social benefits of consumption are higher than the private benefits of consumption
100
Deadweight loss
Net welfare loss from not producing the socially optimal quantity
101
Externality
The difference between social costs and benefits and private costs and benefits
102
Marginal social and private costs or benefits
The social and private costs or benefits of the last unit either produced or consumed
103
Negative externality
The spillover costs inflicted on third parties not party to the transaction which are not reflected in the market price and which are not compensated
104
Positive externality
The spillover benefit enjoyed by third parties not party to the transaction and for which they have not had to pay
105
Private cost or benefit
The cost or benefit of an activity to an individual economic unit (e.g. individual or firm)
106
Production externalities
When the social costs of production differ from the private costs of production
107
Social cost or benefit
The cost or benefit of an activity to society as a whole
108
Free rider
A person or organisation which receives benefits which other have paid for without making any contribution themselves
109
Merit good
A good which is underprovided and underconsumed by the market mechanism
110
Demerit good
A good which is overprovided and overconsumed by the market mechanism
111
Private good
A good which possesses the characteristics of rivalry and excludability
112
Public good (pure)
A good which possesses the characteristics of non-rivalry; non-excludability; and non-rejectability
113
Rivalry
Once consumed the good cannot be consumed by any one else
114
Excludability
It is possible to prevent someone else from consuming the good
115
Non-excludability
One provided, it is impossible to prevent any economic agent from consuming the good
116
Non-rejectability
One provided, it is impossible for any economic agent not to consume the good
117
Non-rivalry/non-diminishability
Consumption by one economic agent does not reduce the amount available for consumption by others
118
Quasi-public good
A good which may not perfectly possess the characteristics of being non-excludable and non-rival (e.f. motorways)
119
Principal-agent problem
Occurs when the goals of the principals, those standing to gain or lose from a decisions, are different from agents, those making decisions on behalf of the principals
120
Symmetric information
Where buyers and sellers have access to the same information
121
Asymmetric information
Where buyers and sellers have different amounts of information
122
Buffer stock scheme
A scheme whereby an organization buys and sells in the open market so as to maintain a minimum price in the market for a product
123
National minimum wage
A floor below which wages cannot legally fall
124
Tradable permit
A legal right to pollute a fixed amount which can be bought and sold between firms
125
Government failure
Occurs when government intervention leads to a net welfare loss compared to the free market solution
126
Optimal tax (aka Pigouvian tax)
A tax equal to marginal external cost, aiming to 'internalise the externality'
127
Public choice theory
Theory about how and why public spending and taxation decisions are made
128
Working/circulating capital
Resources that are in the production system waiting to be transformed into goods or other materials before being finally sold to consumers
129
Capital goods
Goods that are used in the production of other goods
130
Private sector
The part of the economy owned by individuals, companies and charities
131
Public sector
The part of the economy where production is organised by the state of the government
132
Sub-market
A market which is a distinct and identifiable part of a larger market
133
Disutility
Negative utility or satisfaction or benefit derived from consuming a good or a set of goods
134
Economic welfare
The level of well-being or prosperity or living standards of an individual or group of individuals
135
Neo-classical theory
A theory of economic which typically starts with the assumption that economic agents will maximise their benefits and act rationally, and which develops how resources will be allocated in markets and at what price through the forces of demand and supply
136
Conditions of demand
Factors other than price which lead to changes in demand and are associated with shifts in the demand curve
137
Contraction of demand
When quantity demanded for a good falls because its price rises (shown by a movement up the demand curve)
138
Extension of demand
When quantity demanded for a good increases because its price falls (shown by movement down the demand curve)
139
Law of diminishing marginal utility
The value or utility that individual consumers gain from the last product consumed falls the greater the number consumed
140
Arc price elasticity of demand
The price elasticity of demand between two points on the demand curve
141
Point price elasticity of demand
The price elasticity of demand at a point on the demand curve measuring an infinitely small change in price
142
Total expenditure
Quantity bought times the average price of the product
143
Total revenue
Quantity sold times the average price of product
144
Conditions of supply
Factors other than price which lead to changes in supply and are associated with shifts in the supply curve
145
Individual supply curve
The supply curve of an individual producer
146
Long run
The period of time when all factor inputs can be varied but the state of technology remains constant
147
Market supply curve
The supply curve of all producers within the market (in a perfectly competitive market it can be calculated by summing the supply curves of individual producers)
148
Supply
The quantity of goods that suppliers are willing to sell at any given price over a period of time
149
Elasticity of demand for labour
The responsiveness of the quantity demanded of labour to changes in the price of labour, the wage rate
150
Marginal physical product
The physical addition to output of an extra unit of variable factor of production
151
Marginal revenue product
The value of the physical addition to output of an extra unit of a variable factor of production
152
Total physical product
The total output of a given quantity of factors of production
153
Unit labour cost
The cost of employing labour per unit of output or production
154
Activity or participation rates
The percentage or proportion of any given population in the labour force
155
Economically active
The number of workers in the workforce who are in a job or are unemployed
156
Net migration
Immigration minus emigration
157
Population of working age
Size of the population aged between the school leaving age and the state retirement age
158
Workforce or labour force or working population
Those economically active and therefore in work or seeking work
159
Workforce jobs
The number of workers in employment (excludes the unemployed)
160
Bilateral monopoly
When a single buyer faces a single seller in a market
161
Collective bargaining
When trade unions bargain with employers on behalf of their members
162
Individual bargaining
When an individual worker bargains with an individual employer over pay and conditions of work
163
Productivity bargaining
When pay negotiations take place centres on increases in labour productivity and how they should be rewarded in higher pay
164
Complete market failure
When a market fails to supply any of a good which is demanded, creating a missing market
165
Missing market
A market where the market mechanism fails to supply any of a good
166
Partial market failure
When a market for a good exists but there is overproduction or underproduction of the good
167
Imperfect information
When buyers and sellers or both lack information to make an informed decision to make an informed decision
168
Information failure
When buyers or sellers or both don't have information that is available to make a decision
169
Moral hazard
When an economic agent makes a decision in their own interest knowing that there are potential adverse risks, and that if problems result, the cost will be partly borne by other economic agents
170
Transfer earnings
The minimum income a worker needs in order to supply their labour
171
Economic rent
The extra income a worker receives – above the minimum level they need in order to work (income earned from a factor of production which is greater than the minimum necessary to bring the factor of production into operation)
172
Which factors shift the demand curve?
1) Price of related goods or services (i.e. substitutes and compliments)
2) Income of the buyer
3) Tastes or preferences of the buyer
4) The expectation of the buyer (especially about future prices)
173
Prospect Theory
1) Faced with a risky choice leading to gains, individuals are risk-averse, preferring solutions that lead to a lower expected utility but with a higher certainty (concave value function) but when faced with a risky choice leading to losses, individuals are risk-seeking, preferring solutions that lead to a lower expected utility as long as it has the potential to avoid losses (convex value function)
2) People attribute excessive weight to events with low probabilities and insufficient weight to events with high probability
174
Who developed the Prospect Theory?
Daniel Kahneman
175
Who developed the concept of bounded rationality?
Herbert Simon
176
Selective rationality
People sometimes choose not to take into account all the information available
177
Who developed the concept of selective rationality?
Harvey Leibenstein
