Studied by 45 people
market
any kind of arrangement where buyers and sellers of a good or service meet to carry out an exchange
individual demand
the various quantities of a good the consumer is willing and able to buy at all possible prices at a particular time
law of demand
there is a negative relationship between the price of a good and it’s quantity demanded
market demand
the sum of all individual demands of a good
non-price determinants of demand
the variables other than price that can influence demand, changes cause shifts in the demand curve
law of diminishing marginal utility
as consumption of a good increases, marginal utility decreases with each additional unit showing a consumer will be willing to buy an additional unit only if the price falls
substitution effect
if the price of a good falls the consumer substitutes (buys more) of the now less expensive good, increasing quantity demanded.
income effect
if there is a fall in price, the consumers real income (known as purchasing power) has increased, and the quantity demanded increases
individual supply
the various quantities of a good a firm is willing and able to produce and supply to the market
law of supply
as price increases, so does supply
market supply
the total quantities of a good that firms are willing and able to supply in the market
vertical supply curve
even as the price increases, the quantity supplied cannot increase, and remains constant
short run
a time period during which at least one input is fixed and cannot be changed by the firm
long run
a time period when all inputs can be changed
total product
the total quantity of output produced by the firm
marginal product
the extra or additional output produced by one additional unit of variable input
law of diminishing marginal returns
as more units of variable input are added to one or more fixed inputs, the marginal product first increases but then begins to decrease
marginal cost
the additional cost of producing one more unit of output
price mechanism
the interaction of demand and supply in a free market
consumer surplus
the difference between the amount the consumer is willing to pay for a product and the price they have actually paid
producer surplus
the amount the producer is willing to sell a a product for and the price they actually sell at
allocative efficiency
the level of output where the marginal utility = the marginal cost such that consumers and producers get the maximum possible benefit
profit maximization rule
when marginal cost (MC) = marginal revenue (MR) then no additional profit can be extracted by producing another unit of output
revenue maximization rule
producing up to the level of output where marginal revenue (MR) = 0
sales maximization rule
the level of output where average costs (AC) = average revenue (AR)
satisficing
the pursuit of satisfactory outcomes rather than profit maximization where businesses aim to meet a minimum standard of performance
corporate social responsibility
conducting business activity in an ethical way and balancing interests of stakeholders with the wider community
price elasticity of demand
reveals how responsive the change in quantity demanded is to a change in price
perfectly inelastic
when PED = 0 the quantity demanded is completely unresponsive to a change in price
relatively inelastic
when 0 > PED < 1 the percentage change in quantity demanded is less than proportional to the percentage change in price
unitary elastic
when PED = 1 the percentage change in quantity demanded is exactly equal to the percentage change in price
relatively elastic
when PED > 1 the percentage change in quantity demanded is more than proportional to the percentage change in price
perfectly elastic
when PED is infinite the percentage change in quantity demanded will fall to 0 with any change in price
Income elasticity of demand
reveals how responsive the change in quantity demanded is to a change in income
Income inelastic (necessity good)
when 0 < YED > 1 the quantity demanded increases less than proportionally to the change in income
Income elastic (luxury good)
when YED > 1 the quantity demanded increases more than proportionally to the reveals how responsive the change in income
inferior good
when YED < 0 the quantity demanded decreases when income increases
price elasticity of supply
the responsiveness the change in quantity supplied is to a change in price
indirect tax
a tax paid on the consumption of a good only if consumers make a purchase
specific tax
a fixed tax paid per unit of output
ad valorem tax
a tax which is a percentage of the purchase price
subsidy
a per unit amount of money given to a firm by the government to increase production and provision of a good
price ceiling
a maximum price set by the government below the existing free market equilibrium price and sellers cannot legally sell at a higher price
price floor
a minimum price set by the government above the existing free market equilibrium price
legislation
the process of creating laws
regulation
the process of monitoring and enforcing laws
market failure
when there is a less-than-optimum allocation of resources from a societal viewpoint
negative externality of production
when the market is failing due to an overprovision of a good as only private costs are considered by producers
negative externality of consumption
when the market is failing due to an over-consumption of a good as only private costs are considered by consumers
positive externality of production
when the market is failing due to an under-provision of a good as only the private benefits are considered by producers
positive externality of consumption
when the market is failing due to an under-consumption of a good as only the private benefits are considered by consumers
common pool resources
resources which are non-excludable (anyone can access them) but rivalrous (finite in supply) in consumption
tragedy of commons
occurs when common pool resources are used in production in an unsustainable way
carbon tax
a tax that producers who emit greenhouse gasses have to pay for each ton of emissions
public good
goods which are beneficial to society but which will not be provided by private firms due being non-excludable (anyone can access them) and non-rivalrous (infinite supply)
free rider problem
a situation where if a firm provides public goods, customers realize they can still access goods even without paying
market structures
the characteristics of the market in which a firm or industry operates
monopolistic market
a market structure in which there are many firms offering a similar product with slight differentiation
oligopoly market
a market structure in which a few large firms dominate the industry with each firm having significant market power
monopoly market
a market structure in which there is a singular supplier of a product and has the power to influence the market supply and price
market power
the ability of a firm to influence and control the conditions in a specific market, allowing them impact on price, output and other market variables
perfect competition market
a market structure in which firms have low market power, market share and a low industry concentration ratio
firms making abnormal profit in the short-run
where the average revenue (AR) > average costs (AC)
firms making losses in the short-run
where the average revenue (AR) < average costs (AC)
loss minimization position
when the market price (AR) is below the average total cost (ATC) but above the marginal cost (MC) of production
natural monopoly
when the most efficient number of firms is one, which usually occurs in utility industries and are regulated by governments
collusive behavior
when firms cooperate to fix prices and restrict output
non-collusive behavior
when firms actively compete to maintain or increase market share
overt collusion
when firms explicitly agree to limit competition or raise prices
tacit collusion
when firms avoid formal agreements but closely monitor each others behavior usually following the lead of the largest firm, and adjust to match
game theory
a mathematical framework which is used by firms to ensure optimal decisions are made in a setting where there is a high level of interdependence
price wars
when competitors repeatedly lower prices to undercut each other in an attempt to gain market share
predatory pricing
the practice of lowering prices when a new competitor joins in order to drive them out
limit pricing
when firms set a limit on how high the price will go in the industry
Note 
Flashcard (63)