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Economics > Microeconomics definitions > Flashcards

Microeconomics definitions Flashcards

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

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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

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3
Q

Income elasticity of supply (YED)

A

A measure of the responsiveness/sensitivity of quantity demanded to a % change in income

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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

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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

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6
Q

Price elasticity of supply (PES)

A

A measure of the responsiveness/sensitivity of quantity supplied to a % change in price

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7
Q

Market

A

Where suppliers and consumers come together for the purpose of trade

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8
Q

Equilibrium

A

Classical economic equlibrium is a condition where market forces are balanced

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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

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10
Q

Joint demand

A

Demand for goods which are interdependent, such that they are demanded together (printer & printer cartridges)

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11
Q

Composite demand

A

Demand for a good which has multiple uses (oil used as petrol and also for manufacturing plastics)

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12
Q

Competitive demand

A

Demand for goods that are in competition with each other (these goods are also known as substitute goods)

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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

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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

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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

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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

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17
Q

Incentive function of prices

A

Prices incentivise firms to supply more or less goods and services

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18
Q

Rationing function of prices

A

Prices can ration scarce resources by increasing or decreasing demand through willingness and ability to pay

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19
Q

Allocating function of prices

A

Prices can ultimately help to allocate scarce resources amongst competing uses

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20
Q

Public goods

A

Goods which are non-excluable and non-rivalrous

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21
Q

Private goods

A

Goods which are excludable and rivalrous

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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

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23
Q

Quasi-public goods

A

Goods which demonstrate one feature of a public good

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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

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25
Q

Private costs

A

A cost incurred by an individual (firm or consumer) as part of production or other economic activities

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26
Q

External costs

A

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

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27
Q

Social costs

A

The total cost to society of a particular action

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28
Q

Private benefit

A

The benefits directly accruing to a particular action

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29
Q

External benefit

A

The benefits that accrue as a consequence of externalities to third parties

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30
Q

Social benefit

A

The total benefits to a society of a particular action

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31
Q

Negative externalities of consumption

A

A situation in which MPB > MSB

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32
Q

Negative externalities of production

A

A situation in which MSC > MPC

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33
Q

Positive externalities of consumption

A

A situation in which MSB > MPB

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34
Q

Positive externalities of production

A

A situation in which MPC > MSC

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35
Q

Merit goods

A

Goods that generate positive externalities

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36
Q

Demerit goods

A

Goods that generate negative externalities

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37
Q

Information failure

A

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

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38
Q

Asymmetric information

A

A situation in which some participants in the market have more information about market conditions than others

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39
Q

Productive efficiency

A

When firms produce maximum output at min AC

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40
Q

Allocative efficiency

A

The point at which market price = MC and consumer satisfaction is maximised

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41
Q

Indirect taxation

A

A tax levied on goods and services

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42
Q

Subsidies

A

Grants given by the government to producers to encourage production of a good or service by lowering firms’ costs of production

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43
Q

State provision

A

The act of providing or supply by the government, free at the point of consumption

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44
Q

Regulation

A

Rules and controls which ‘restrict market freedom’ but provide minimum standards

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45
Q

Deregulation

A

Removing rules and controls which ‘restrict market freedom’ but provide minimum standards

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46
Q

Minimum pricing

A

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

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47
Q

Maximum pricing

A

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

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48
Q

Nationalisation

A

The process of transforming private assets into state-owned public assets

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49
Q

Privatisation

A

The process of transforming state-owned public goods into private ownership and control

50
Q

Competition policy

A

Policies which aim to promote competition based upon the idea that competitive markets are central to investment, efficiency, innovation and growth

51
Q

Extension of private property rights

A

A situation in which property is sold to private owners in order to reduce depletion of resources

52
Q

Tradable pollution permits

A

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
Q

Partial market failure

A

A situation in which resources are misallocated

54
Q

Complete market failure

A

A situation in which there are missing markets

55
Q

Government failure

A

A misallocation of resources arising from government intervention

56
Q

Productivity

A

The value of output per worker per unit of time

57
Q

Labour productivity

A

The amount of real gross domestic product (GDP) produced by an hour of labour

58
Q

Specialisation

A

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
Q

Division of labour

A

A process whereby the production process is broken down into numerous stages and workers are assigned to different stages

60
Q

The law of diminishing marginal returns

A

The decrease in the marginal output of a production process as the amount of a single factor of production is increased

61
Q

Short-run

A

A period of time in which at least one factor of production must remain fixed in supply

62
Q

Long-run

A

A period of time in which it is possible to change the supply of all factors of production

63
Q

Fixed costs

A

Costs that do not change in the short-run with changes in output

64
Q

Variable costs

A

Costs that change with changes in output

65
Q

Unit labour costs

A

The cost of labour per unit of output

66
Q

Internal economies of scale

A

Where an increase in the scale of production leads to a fall in LRAC due to the growth of the firm

67
Q

Internal diseconomies of scale

A

Where an increase in the scale of production leads to a rise in LRAC due to the growth of the firm

68
Q

External economies of scale

A

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
Q

External diseconomies of scale

A

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
Q

Purchasing economies of scale

A

When firms buy in bulk, they often pay less per unit purchased
(suppliers have certainty of revenue from large firms as customers)

71
Q

Financial economies of scale

A

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
Q

Technical economies of scale

A

Large firms can afford to use expensive, high tech equipment and use it efficiently (complement/substitute capital for labour)

73
Q

Profit maximisation

A

Achieving the highest possible profit where marginal profit equals marginal revenue

74
Q

Normal profit

A

The minimum level of profit needed to keep a firm in the market in the long run (AC = AR)

75
Q

Supernormal profit

A

Profit above and beyond that needed to keep a firm in the market in the long run

76
Q

Principal-agent problem

A

Arises from the the conflict between the objectives of the principals and their agents, who take decisions on their behalf

77
Q

Growth maximisation

A

The objective of increasing the size of a firm as much as possible (potential objective for managers)

78
Q

The divorce of ownership and control

A

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
Q

Profit satisficing

A

Aiming for a satisfactory level of profit rather than the highest level of profit possible

80
Q

Minimum profit constraint

A

The minimum amount of profit a firm must make in order to satisfy their shareholders

81
Q

Perfect competition

A

A theoretical market structure in which firms make normal profit and static efficiency is achieved

82
Q

Pure monopoly

A

A single seller in a market

83
Q

X - inefficiency

A

Organisational slack. Spending by a firm on luxuries above that which is required. e.g. First class flights or champagne dinners

84
Q

Revenue maximisation

A

Producing up to the point where MR = 0, can be used to increase market share or boost the status of a manager

85
Q

General price discrimination / 1st degree price discrimination

A

Charging different prices to diffferent consumers for the same product for reasons not associated with cost

86
Q

2nd degree price discrimination

A

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
Q

3rd degree price discrimination

A

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
Q

What must be the case for price discrimination to occur?

A

The firm must have a degree of monopoly power

89
Q

Natural monopoly

A

A firm which has exceptionally high fixed costs, which provide high barriers to entry, and are spread across increasing levels of output

90
Q

Monopolistic competition

A

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
Q

Game theory

A

A theory of how decision makers are influenced by the actions and reactions of others

92
Q

Oligopoly

A

A market structure dominated by a few large firms

93
Q

Interdependence

A

Where the actions of one firm influence the sales and revenue of other firms in the market

94
Q

Concentration ratio

A

The percentage of an industry which can be accounted for by the largest firms

95
Q

Contestable markets

A

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
Q

Hit and run entry

A

Entering a market to extract excess profits and subsequently leaving the market

97
Q

Sunk costs

A

Costs which cannot be retrieved e.g. advertising

98
Q

Creative destruction

A

The threat of innovation incentivising monopolies to reinvest profits to also innovate and maintain market share

99
Q

Corporate social resonsibility

A

The commitment from a firm to carry out business in an ethical way

100
Q

Minimum efficient scale

A

The lowest level of output at which full advantage can be taken of economies of scale

101
Q

Human capital

A

The skills, knowledge and experience that workers possess

102
Q

Marginal Revenue Product of Labour (MRP)

A

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
Q

Marginal product of labour (MPL or MPP)

A

The change in output that results from employing one more worker

104
Q

Elasticity of demand for labour

A

% change in quantity of labour demanded / % change in wage rate

105
Q

Income effect of wage rise

A

A higher wage means workers can achieve a target income by working less hours. Therefore, an individual will want to work fewer hours

106
Q

Substitution effect of wage rise

A

A higher wage makes work more attractive than leisure. Therefore, an individual will want to work more hours

107
Q

Short-run supply of labour

A

A time period over which workers cannot change jobs

108
Q

Long-run supply of labour

A

A time period over which workers can change jobs

109
Q

Pecuniary factors

A

Of or pertaining to money

110
Q

Non-pecuniary factors

A

Not pertaining to money

111
Q

Trade unions

A

Labour organisations that look to negotiate the pay and conditions of employment on behalf of their members

112
Q

Monopsony

A

A market situation in which there is a single buyer of labour

113
Q

Bilateral monopoly

A

A market structure consisting of both a monopoly (a single seller) and a monopsony (a single buyer)

114
Q

Income inequality

A

Differences between the income levels of different groups within the economy

115
Q

Wealth inequality

A

Differences between the wealth levels of different groups within the economy

116
Q

What is the difference between wealth and income?

A

Wealth is a stock and income is a flow

117
Q

Lorenz curve

A

A diagram commonly used to illustrate income or wealth distribution, named after the American statistician, Max Otto Lorenz

118
Q

Gini coefficient

A

An indicator used to make international comparisons of income inequality. It can be found by using the Lorenz curve

119
Q

Relative poverty

A

Those with less than 60% of a country’s median income

120
Q

Absolute poverty

A

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
Q

Vicious cycle of poverty

A

Born into poverty, poor education, low skilled jobs or occupational unemployment, inheritance is far smaller than rich households (cycle restarts)

122
Q

Regulatory capture

A

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

Economics (9 decks)

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