Microeconomics definitions Flashcards
(122 cards)
1
Q
Demand
A
The quantity of a product that consumers are willing and able to purchase at various prices over a given time period
2
Q
Price elasticity of demand (PED)
A
A measure of the responsiveness/sensitivity of quantity demanded to a % change in the price of a product
3
Q
Income elasticity of supply (YED)
A
A measure of the responsiveness/sensitivity of quantity demanded to a % change in income
4
Q
Cross elasticity of demand (XED)
A
A measure of the responsiveness/sensitivity of quantity demanded of product A to a % change in the price of product B
5
Q
Supply
A
The quantity of a product that producers are willing and able to sell at various prices over a given time period
6
Q
Price elasticity of supply (PES)
A
A measure of the responsiveness/sensitivity of quantity supplied to a % change in price
7
Q
Market
A
Where suppliers and consumers come together for the purpose of trade
8
Q
Equilibrium
A
Classical economic equlibrium is a condition where market forces are balanced
9
Q
Derived demand
A
Demand for a factor of production or a good which arises not from the factor or the good itself but for the good it produces
10
Q
Joint demand
A
Demand for goods which are interdependent, such that they are demanded together (printer & printer cartridges)
11
Q
Composite demand
A
Demand for a good which has multiple uses (oil used as petrol and also for manufacturing plastics)
12
Q
Competitive demand
A
Demand for goods that are in competition with each other (these goods are also known as substitute goods)
13
Q
Joint supply
A
Supply of products which do not compete for firms’ resources (no opportunity cost in supply e.g. sheep -> wool, meat, skin
14
Q
Consumer surplus
A
The difference between the price consumers are willing and able to pay for a product and the price they actually pay
15
Q
Producer surplus
A
The difference between the minimum price suppliers are willing and able to accept for a product and the price they actually sell for
16
Q
Signalling function of prices
A
Prices signal where there are scarcities and surpluses so they signal where resources are required and where they are not
17
Q
Incentive function of prices
A
Prices incentivise firms to supply more or less goods and services
18
Q
Rationing function of prices
A
Prices can ration scarce resources by increasing or decreasing demand through willingness and ability to pay
19
Q
Allocating function of prices
A
Prices can ultimately help to allocate scarce resources amongst competing uses
20
Q
Public goods
A
Goods which are non-excluable and non-rivalrous
21
Q
Private goods
A
Goods which are excludable and rivalrous
22
Q
The free-rider problem
A
When an individual or firm cannot be excluded from consuming a public good, and thus has no incentive to pay for its provision
23
Q
Quasi-public goods
A
Goods which demonstrate one feature of a public good
24
Q
Hardin’s Tragedy of the Commons
A
A situation in which individuals act through self-interest and behave contrary to the common good of all users, by depleting or spoiling common access resources
25
Private costs
A cost incurred by an individual (firm or consumer) as part of production or other economic activities
26
External costs
A cost that is associated with an individual's (a firm or household's) production or other economic activities **which is borne by a third party**
27
Social costs
The total cost to society of a particular action
28
Private benefit
The benefits directly accruing to a particular action
29
External benefit
The benefits that accrue as a consequence of externalities **to third parties**
30
Social benefit
The total benefits to a society of a particular action
31
Negative externalities of consumption
A situation in which MPB > MSB
32
Negative externalities of production
A situation in which MSC > MPC
33
Positive externalities of consumption
A situation in which MSB > MPB
34
Positive externalities of production
A situation in which MPC > MSC
35
Merit goods
Goods that generate positive externalities
36
Demerit goods
Goods that generate negative externalities
37
Information failure
Where consumers lack the full information about the costs and/or benefits of a good and, therefore, make choices that fail to achieve allocative efficiency
38
Asymmetric information
A situation in which some participants in the market have more information about market conditions than others
39
Productive efficiency
When firms produce maximum output **at min AC**
40
Allocative efficiency
The point **at which market price = MC** and consumer satisfaction is maximised
41
Indirect taxation
A tax levied on goods and services
42
Subsidies
Grants given by the government to producers to encourage production of a good or service by lowering firms' costs of production
43
State provision
The act of providing or supply by the government, free at the point of consumption
44
Regulation
Rules and controls which 'restrict market freedom' but provide minimum standards
45
Deregulation
Removing rules and controls which 'restrict market freedom' but provide minimum standards
46
Minimum pricing
A minimum price is the lowest price that can legally be charged for a good or service and to be effective should fall above the free market equilibrium price
47
Maximum pricing
A maximum price is the highest price that can legally be charged for a good or service and to be effective should fall below the free market equilibrium price
48
Nationalisation
The process of transforming private assets into state-owned public assets
49
Privatisation
The process of transforming state-owned public goods into private ownership and control
50
Competition policy
Policies which aim to promote competition based upon the idea that competitive markets are central to investment, efficiency, innovation and growth
51
Extension of private property rights
A situation in which property is sold to private owners in order to reduce depletion of resources
52
Tradable pollution permits
A permit that allows the owner the emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter
53
Partial market failure
A situation in which resources are misallocated
54
Complete market failure
A situation in which there are missing markets
55
Government failure
A misallocation of resources arising from government intervention
56
Productivity
The value of output per worker per unit of time
57
Labour productivity
The amount of real gross domestic product (GDP) produced by an hour of labour
58
Specialisation
The concentration by a worker, firm or economy on a particular part of the production process or producing a narrow range of goods and services
59
Division of labour
A process whereby the production process is broken down into numerous stages and workers are assigned to different stages
60
The law of diminishing marginal returns
The decrease in the marginal output of a production process as the amount of a single factor of production is increased
61
Short-run
A period of time in which at least one factor of production must remain fixed in supply
62
Long-run
A period of time in which it is possible to change the supply of all factors of production
63
Fixed costs
Costs that **do not change** in the short-run with changes in output
64
Variable costs
Costs that change with changes in output
65
Unit labour costs
The cost of labour per unit of output
66
Internal economies of scale
Where an increase in the scale of production leads to a fall in LRAC due to the growth of the firm
67
Internal diseconomies of scale
Where an increase in the scale of production leads to a rise in LRAC due to the growth of the firm
68
External economies of scale
Where an increase in the scale of production leads to a fall in LRAC due to the growth of the industry in which the firm operates
69
External diseconomies of scale
Where an increase in the scale of production leads to a rise in LRAC due to the growth of the industry in which the firm operates
70
Purchasing economies of scale
When firms buy in bulk, they often pay less per unit purchased
(suppliers have certainty of revenue from large firms as customers)
71
Financial economies of scale
Large firms are considered less of a risk to commercial lenders. They are able to borrow funds at lower rates of interest
(More collateral to fall back on e.g. Glazers at United)
72
Technical economies of scale
Large firms can afford to use expensive, high tech equipment and use it efficiently (complement/substitute capital for labour)
73
Profit maximisation
Achieving the highest possible profit where marginal profit equals marginal revenue
74
Normal profit
The minimum level of profit needed to keep a firm in the market in the long run (AC = AR)
75
Supernormal profit
Profit above and beyond that needed to keep a firm in the market in the long run
76
Principal-agent problem
Arises from the the conflict between the objectives of the principals and their agents, who take decisions on their behalf
77
Growth maximisation
The objective of increasing the size of a firm as much as possible (potential objective for managers)
78
The divorce of ownership and control
In large corporations, shareholders own the firm but may not be able to exercise control. Managers often have control because of the scale of the firm.
79
Profit satisficing
Aiming for a satisfactory level of profit rather than the highest level of profit possible
80
Minimum profit constraint
The minimum amount of profit a firm must make in order to satisfy their shareholders
81
Perfect competition
A theoretical market structure in which firms make normal profit and static efficiency is achieved
82
Pure monopoly
A single seller in a market
83
X - inefficiency
Organisational slack. Spending by a firm on luxuries above that which is required. e.g. First class flights or champagne dinners
84
Revenue maximisation
Producing up to the point where MR = 0, can be used to increase market share or boost the status of a manager
85
General price discrimination / 1st degree price discrimination
Charging different prices to diffferent consumers for the same product for reasons not associated with cost
86
2nd degree price discrimination
Where different prices are charged for different quantities of a product (can of coke vs multipack) or for different groups (early vs late ticket buyers)
87
3rd degree price discrimination
Where the same product is sold to different consumers in different markets at different prices. These consumers may be grouped by age, occupation, time or region e.g. prices in London vs prices in Manchester
88
What must be the case for price discrimination to occur?
The firm must have a degree of monopoly power
89
Natural monopoly
A firm which has exceptionally high fixed costs, which provide high barriers to entry, and are spread across increasing levels of output
90
Monopolistic competition
A market structure coined by Chamberlin and Joan Robinson which shows imperfect competition between firms, and acts as a more realistic version of perfect competition
91
Game theory
A theory of how decision makers are influenced by the actions and reactions of others
92
Oligopoly
A market structure dominated by a few large firms
93
Interdependence
Where the actions of one firm influence the sales and revenue of other firms in the market
94
Concentration ratio
The percentage of an industry which can be accounted for by the largest firms
95
Contestable markets
A market structure in which potential firms can influence the behaviour of existing firms and where there is always a threat of potential entry
96
Hit and run entry
Entering a market to extract excess profits and subsequently leaving the market
97
Sunk costs
Costs which cannot be retrieved e.g. advertising
98
Creative destruction
The threat of innovation incentivising monopolies to reinvest profits to also innovate and maintain market share
99
Corporate social resonsibility
The commitment from a firm to carry out business in an ethical way
100
Minimum efficient scale
The lowest level of output at which full advantage can be taken of economies of scale
101
Human capital
The skills, knowledge and experience that workers possess
102
Marginal Revenue Product of Labour (MRP)
According to the theory of MRP, a profit maximising firm (in a perfectly competitive market) will keep employing factors of production until the marginal revenue product of employing one more unit = the marginal costs of employing that unit
103
Marginal product of labour (MPL or MPP)
The change in output that results from employing one more worker
104
Elasticity of demand for labour
% change in quantity of labour demanded / % change in wage rate
105
Income effect of wage rise
A higher wage means workers can achieve a target income by working less hours. Therefore, an individual will want to work fewer hours
106
Substitution effect of wage rise
A higher wage makes work more attractive than leisure. Therefore, an individual will want to work more hours
107
Short-run supply of labour
A time period over which workers cannot change jobs
108
Long-run supply of labour
A time period over which workers can change jobs
109
Pecuniary factors
Of or pertaining to money
110
Non-pecuniary factors
Not pertaining to money
111
Trade unions
Labour organisations that look to negotiate the pay and conditions of employment on behalf of their members
112
Monopsony
A market situation in which there is a single buyer of labour
113
Bilateral monopoly
A market structure consisting of both a monopoly (a single seller) and a monopsony (a single buyer)
114
Income inequality
Differences between the income levels of different groups within the economy
115
Wealth inequality
Differences between the wealth levels of different groups within the economy
116
What is the difference between wealth and income?
Wealth is a stock and income is a flow
117
Lorenz curve
A diagram commonly used to illustrate income or wealth distribution, named after the American statistician, Max Otto Lorenz
118
Gini coefficient
An indicator used to make international comparisons of income inequality. It can be found by using the Lorenz curve
119
Relative poverty
Those with less than 60% of a country's median income
120
Absolute poverty
A condition characterised by severe deprivation of basic human needs. The World Bank defines the absolute poverty line as the % of the country's population living on less than $1.90 a day
121
Vicious cycle of poverty
Born into poverty, poor education, low skilled jobs or occupational unemployment, inheritance is far smaller than rich households (cycle restarts)
122
Regulatory capture
An economic theory that says regulatory agencies may come to be dominated by the industries they are charged with regulating, such that the industry may benefit
