Unit 2: Microeconomics Flashcards
1
Q
Abnormal profit
A
This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).
2
Q
Abuse of market power
A
When a firm acts with the intention to eliminate competitors or to prevent entry of new firms in a market.
3
Q
Adverse selection
A
A type of market failure involving asymmetric information, where the party with the incomplete information is induced to withdraw from the market. The buyer, for example, of a used car, may hesitate to buy without knowing about the quality of the vehicle. The seller, for example of health insurance, may hesitate to sell a policy without knowing the health of the buyer.
4
Q
Allocative efficiency
A
Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).
5
Q
Allocative inefficiency
A
When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB ≠ MSC.
6
Q
Anchoring
A
Refers to situations when people rely on a piece of information that is not necessarily relevant as a reference point when making a decision.
7
Q
Anti-monopoly regulation
A
Laws and regulations that are intended to restrict anti-competitive behaviour of firms that are abusing their market power.
8
Q
Asymmetric information
A
A type of market failure where one party in an economic transaction has access to more or better information than the other party.
9
Q
Barriers to entry
A
Anything that deters entry of new firms into a market, for example, licenses or patents.
10
Q
Behavioural economics
A
A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents. It challenges the assumption that economic agents (consumers or firms) will always make rational choices with the aim of maximizing with respect to some objective.
11
Q
Biases
A
Systematic deviations from rational choice decision-making.
12
Q
Bounded rationality
A
A term introduced by Herbert Simon that suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximize with respect to some objectives (such as utility), and thus choose to satisfice. They therefore are rational only within limits.
13
Q
Bounded self-control
A
The idea that individuals, even when they know what they want, may not be able to act in their interests. Findings of bounded self-control include evidence of procrastination (for example, among students, professionals and others) that may result in self-harm, and submitting to temptation (for example, dieters).
14
Q
Bounded selfishness
A
The idea that people do not always maximize self-interest but also have concern for the well-being of others as shown by volunteer work and charity contributions.
15
Q
Capital
A
Physical capital refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. Human capital refers to the education, training, skills and experience embodied in the labour force of a country.
16
Q
Carbon (emissions) taxes
A
Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.
17
Q
Choice architecture
A
The design of environments based on the idea that the layout, sequencing, and range of choices available affect the decisions made by consumers.
18
Q
Collective self-governance
A
In the case of a common pool resource, such as a fishery, users solve the problem of overuse by devising rules concerning the obligations of the users, the monitoring of the use of the resource, penalties of abuse, and conflict resolution.
19
Q
Collusive oligopoly
A
A market where firms agree to fix price and/or to engage in other anticompetitive behaviour.
20
Q
Common pool resources
A
A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.
21
Q
Competitive market
A
A market with many firms acting independently where no firm has the ability to control the price.
22
Q
Competitive supply
A
When goods that a firm is producing use the same resources in their production process. The goods thus compete with each other for the use of the same resources.
23
Q
Complements
A
Goods that are jointly consumed, for example, coffee and sugar.
24
Q
Concentration ratios
A
The proportion of industry sales accounted for by the largest firms; the greater this proportion, the greater the degree of market power of the firms in the industry.
25
Consumer nudges
Small design changes that include positive reinforcement and indirect suggestions that can influence the behaviour of consumers.
26
Consumer surplus
The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.
27
CSR
Corporate social responsibility: A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.
28
Default choice
When a choice is made by default, meaning that when given a choice it is the option that is selected when one does not do anything.
29
Demand
The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.
30
Demand curve
A curve illustrating the relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus. It is normally downward sloping.
31
Demerit goods
Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.
32
Deregulation
Policies that reduce or eliminate regulations related to the operation of firms so that production costs decrease - resulting in increased competition and higher levels of output.
33
Economies of scale
Falling average costs that a firm experiences when it increases its scale of operations.
34
Elasticity
A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).
35
Engel curve
A curve showing the relationship between consumers’ income and quantity demanded of a good. It indicates whether a good is normal or inferior.
36
Equilibrium
A state of balance that is self-perpetuating in the absence of any outside disturbance.
37
Excess demand
Occurs when quantity demanded at some price is greater than quantity supplied.
38
Excess supply
Occurs when quantity supplied at some price is greater than quantity demanded.
39
Excludable
A characteristic that most goods have that refers to the ability of producers to charge a price and thus exclude whoever is not willing or able to pay for it from enjoying it.
40
Externalities
External costs or benefits to third parties when a good or service is produced or consumed. An externality arises when an economic activity imposes costs or creates benefits on third parties for which they are not compensated or do not pay for respectively.
41
Framing
In behavioural economics, the term refers to the way choices are presented as a simple change of the “frame”, that may affect the choice made. For example, highlighting the positive or the negative aspects of the same choice may lead to different decisions.
42
Free rider problem
Arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it.
43
Game theory
A branch of mathematics that studies the strategic interaction of decision-makers that may be individuals, firms, countries, and so on.
44
Homogeneous product
Goods that are considered identical across firms in the eyes of consumers; examples include mostly primary sector goods like corn, wheat or copper.
45
Imperfect competition
A market structure where firms have a degree of market power as they face a negatively sloped demand curve and can thus set price.
46
Imperfect information
When the information about a market or a transaction is incomplete.
47
Incentive role of prices
Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.
48
Income elasticity of demand (YED)
The responsiveness of demand for a good or service to a change in income.
49
Indirect taxes
Taxes on expenditure to buy goods and services.
50
Inferior goods
Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.
51
Joint supply
Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other.
52
Law of demand
A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus.
53
Law of diminishing marginal returns
A short-run law of production stating that as more and more units of the variable factor (usually labour) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate or, equivalently, marginal product starts to decrease.
54
Law of diminishing marginal utility
The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases.
55
Law of supply
A law stating that as the price of a good rises, the quantity supplied will rise over a certain period of time, ceteris paribus.
56
Long run (microeconomics)
The period of time when all factors of production are variable.
57
Loss (economic)
Occurs when total costs of a firm are greater than total revenues. It is equal to total cost minus total revenue.
58
Luxury goods
Goods that are not considered essential by consumers therefore they have a price elastic demand (PED > 1), or income elastic demand (YED > 1).
59
Mandated choices
Choices made by consumers who are required to state whether or not they wish to take part in an action.
60
Manufactured products
Products or goods that have been produced by workers often working with capital goods.
61
Marginal benefit
The extra or additional benefit enjoyed by consumers that arises from consuming one more unit of output.
62
Marginal costs
The extra or additional costs of producing one more unit of output.
63
Market
Any arrangement where buyers and sellers interact to carry out an economic transaction.
64
Market concentration
The extent to which the total sales in a market are accounted for by the largest firms, providing an indication of the degree of market power in the industry. It is measured by the concentration ratio.
65
Market demand
The sum of the individual demand curves for a product of all the consumers in a market.
66
Market equilibrium
In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply. A competitive market equilibrium occurs if in a free competitive market.
67
Market failure
The failure of markets to achieve allocative efficiency. Markets fail to produce the output at which marginal social benefits are equal to marginal social costs; social or community surplus (consumer surplus + producer surplus) is not maximized.
68
Market mechanism
The system in which the forces of demand and supply determine the prices of products. Also known as the price mechanism.
69
Market power
The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition (or P > MC).
70
Market share
The percentage of total sales in a market accounted for by one firm.
71
Market supply
The horizontal sum of the individual supply curves for a product of all the producers in a market.
72
Maximum price
A price set by a government or other authority that is below the market equilibrium price of a good or service, also known as a price ceiling.
73
Merit goods
Goods or services considered to be beneficial for people that are under-provided by the market and so under-consumed, mainly due to positive consumption externalities.
74
Minimum price
A price set by a government or other authority above the market equilibrium price of a good or service, also known as a price floor.
75
Minimum wage
A type of price floor where the wage rate or the price of labour is set above the market equilibrium wage rate.
76
Natural monopoly
A monopoly that can produce enough output to cover the entire needs of a market while still experiencing economies of scale. Its average costs will therefore be lower than those of two or more firms in the market.
77
Necessity
The degree to which a good is necessary or essential.
- If the increase in demand for a necessity good is less than proportional to the rise in income; then the necessity good is income elastic.
- If the change in quantity demanded for a necessity good is less than proportional to a change in price; then the necessity good is price inelastic.
78
Negative externalities of consumption
Negative effects suffered by a third party whose interests are not considered when a good or service is consumed, so the third party are therefore not compensated.
79
Negative externalities of production
Negative effects suffered by a third party whose interests are not considered when a good or service is produced, so the third party are therefore not compensated.
80
Non-collusive oligopoly
Firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.
81
Non-excludable
A characteristic of a good, service or resource where it is impossible to prevent a person, or persons, from using it.
82
Non-price competition
Competition between firms that is based on factors other than price, usually taking the form of product differentiation.
83
Non-rivalrous
A characteristic of some goods such that their consumption by one individual does not reduce the ability of others to consume them. It is a characteristic of public goods.
84
Normal goods
A good where the demand for it increases as income increases.
85
Normal profit
The minimum return that must be received by a firm in order to stay in business. A firm earns normal profit when total revenue is equal to total cost, or when average revenue or price is equal to average cost.
86
Nudge theory
Nudges (prompts, hints) are used to influence the choices made by consumers in order to improve the well-being of people and society.
87
Oligopoly
A market structure where there are a few large firms that dominate the market, with high barriers to entry.
88
Payoff matrix
A table showing all possible outcomes of decisions taken by decision-makers in game theory.
89
Perfect competition
A market structure where there is a very large number of small firms, producing identical products, with no barriers to entry or exit, and perfect information. All the firms are thus price takers.
90
Perfect information
Where all stakeholders in an economic transaction have access to the same information.
91
Perfectly elastic demand
Occurs with a horizontal demand curve signifying that any amount can be bought at a particular price. (PED is infinite.)
92
Perfectly elastic supply
Occurs with a horizontal supply curve signifying that any amount can be offered at a particular price. (PES is infinite.)
93
Perfectly inelastic demand
Where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED is equal to zero.)
94
Perfectly inelastic supply
Where a change in the price of a good or service leads to no change in the quantity supplied of the good or service. (PES is equal to zero.)
95
Pigouvian taxes
An indirect tax that is imposed to eliminate the external costs of production or consumption.
96
Positive externalities of consumption
The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is consumed, therefore they do not pay for the benefits they receive.
97
Positive externalities of production
The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is produced, therefore they do not pay for the benefits they receive.
98
Price ceiling
Maximum price: A price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.
99
Price competition
Competition between firms that is based on price, for example, a firm that wants to increase its sales at the expense of other firms will lower its price.
100
Price controls
Prices imposed by an authority, set above or below the equilibrium market price.
101
(Price) elastic demand
Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service in the opposite direction. (PED is greater than one.)
102
Price elasticity of demand
(PED) A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
103
Price elasticity of supply
(PES) A measure of the responsiveness of the quantity supplied of a good or service to a change in its price.
104
Price expectations
The forecasts or views that consumers or firms hold about future price movements that play a role in determining demand.
105
Price floor
Minimum price: A price imposed by an authority and set above the market price. Prices cannot fall below this price.
106
(Price) inelastic demand
Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction. (PED is less than one.)
107
(Price) inelastic supply
Where a change in the price of a good or service leads to a proportionately smaller change in the quantity supplied of the good or service in the same direction. (PES is less than one.)
108
Price maker
A firm that is able to influence the price at which it sells its product. Includes firms in all market structures except perfect competition.
109
Price mechanism
The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.
110
Price taker
A firm that is unable to influence the price at which it sells its product, being forced to accept the price determined in the market. It includes firm in perfect competition.
111
Price war
Occurs when firms successively cut their prices in an effort to match the price cuts of other firms, resulting in lower profits, possibly losses.
112
Privatization
The sale of public assets to the private sector. May be a type of supply-side policy.
113
Producer surplus
The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive.
114
Product differentiation
The process by which firms try to make their products different from the products of other firms in an effort to increase their sales. Differences involve product quality, appearance, services offered and many others.
115
Profit maximization
A possible objective of firms that involves producing the level of output where profits are greatest: where total revenue minus total cost is greatest or where marginal revenue equals marginal cost.
116
Public goods
Goods or services that have the characteristics of non-rivalry and non-excludability, for example, flood barriers.
117
Quantity demanded
The quantity of a good or service demanded at a particular price over a given time period, ceteris paribus.
118
Quantity supplied
The quantity of a good or service supplied at a particular price over a given time period, ceteris paribus.
119
Rational consumer choice
Occurs when consumers make choices based on the following assumptions: they have consistent tastes and preferences, they have perfect information and they arrange their purchases so as to make their utility as great as possible (maximize it). It is assumed in standard microeconomic theory.
120
Rational producer behaviour
Occurs when firms try to maximize profit. This is an assumption in standard microeconomic theory.
121
Restricted choices
This is when the choice of a consumer is restricted by the government or other authority.
122
Revenues
Payments received by firms when they sell their output.
123
Rivalrous
Goods and services are considered to be rivalrous when the consumption by one person, or group of people, reduces the amount available for others.
124
Rules of thumb
Rules of thumb are mental shortcuts (heuristics) for decision-making to help people make a quick, satisfactory, but often not perfect, decision to a complex choice.
125
Satisficing
A business or firm objective to achieve a satisfactory outcome with respect to one or several objectives, rather than to pursue any one objective at the possible expense of others by optimizing (maximizing), for example, profit, revenue or growth. It is essentially a mix of the words “satisfy” and “suffice”.
126
Screening
In asymmetric information, the use of a screening process by the participant with less information to gain more information regarding a transaction, and so reduce adverse selection.
127
Shortage
Arises when the quantity demanded of a good or services is more than the quantity supplied at some particular price.
128
Short run (microeconomics)
The period of time when at least one factor of production is fixed.
129
Signalling
In asymmetric information, the participant with more information sending a signal revealing relevant information about a transaction to the participant with less information, to reduce adverse selection.
130
Social/community surplus
The sum combination of consumer surplus and producer surplus.
131
Social enterprise
A company whose main objective is to have a social impact rather than to make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve social objectives.
132
Socially optimum output
This occurs where there is allocative efficiency, or where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. Alternatively, it occurs where the marginal cost of producing a good (including any external costs) is equal to the price that is charged to consumers (P = MC for the last unit produced).
133
Subsidies
An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers.
134
Substitutes
Goods that can be used in place of each other, as they satisfy a similar need.
135
Substitution effect
When the price of a product falls relative to other product prices, consumers purchase more of the product as it is now relatively less expensive. This forms part of an explanation of the law of demand.
136
Supply
Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.
137
Supply curve
A curve showing the relationship between the price of a good or service and the quantity supplied, ceteris paribus. It is normally upward sloping.
138
Surplus
An excess of something over something else. It occurs:
• when quantity supplied is greater than quantity demanded at a particular price
• when tax revenues are greater than government spending (budget surplus)
• on an account when credits are greater than debits in the balance of payments.
139
Total costs
All the costs of a firm incurred for the use of resources to produce something.
140
Total revenue
The amount of revenue received by a firm from the sale of a particular quantity of output (equal to price times quantity sold).
141
Tradable permits
Permits to pollute, issued by a governing body, that sets a maximum amount of pollution allowable. These permits may be traded (bought or sold) in a market for such permits.
142
Tragedy of commons
A situation with common pool resources, where individual users acting independently, according to their own self-interest, go against the common good of all users by depleting or spoiling that resource through their collective action.
143
Unitary elastic demand
Occurs when a change in the price of a good or service leads to an equal and opposite proportional change in the quantity demanded of the good or service (PED = 1).
144
Unitary elastic supply
Occurs when a change in the price of a good or service leads to an equal proportional change in the quantity supplied of the good or service (PES = 1).
145
Welfare loss
A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal private benefits.
146
Marginal social benefit (MSB)
The extra or additional benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.
147
Marginal social cost (MSC)
The extra or additional cost to society of producing an additional unit of output, including both the private cost and the external costs.
