Economics Definitions

Scaricty

A situation that arises because people have unlimited wants in the face of limited resources

Economic Goods

Goods that are scarce

Free Goods

A product or resource with zero opportunity cost, meaning it is naturally abundant and can be consumed without reducing its availability to others

Poverty

A situation in which individuals lack the basic neccesities OR have low incomes compared to other citizens

Positive Statement

A statement that is objectively true

Normative Statement

A statement involving a value judgement

Factors of production

resources used in the production proccess or inputs into production

Oppourtunity Cost

The value of the next best alternative forgone

Resource allocation

The way in which a society’s productive assets are deployed across alternative uses

Market economy

Market forces are allowed to guide the allocation or resources within an economy

Centrally planned economy

The government guides resourcees allocation within a society

Specialisation

The process of concentrating on a task or activity in order to becom an expert in it

Division of Labour

A process whereby the production procedure is broken down into a sequence of stages and workers are assigned to particular stages

Market

A set of arrangements that allows transactions to take place

Barter System

An economy without money so that transactions in goods and services rely on direct exchange

Joint demand

Demand for goods that are interdependant such that they are demanded together

Composite Demand

Demand for a good that has multiple uses

Competitive Demand

Demand for goods that are in competition with each other

Consumer Surplus

The value that consumers gain from consuming a good or service over and above the price paid

Competitive Market

A market in which individual firms cannot influence the price of the good or service they are selling because of competition from other firms

Marginal Principal

The idea that economic agents may take decisions by considering the effect of small changes from the existing situations

Utility

The satisfactions recieved from consuming a good or service

Allocative Efficiency

A state of the economy where resources are distributed to produce the specific mix of goods and services most desired by society, maximizing total welfare

Market Failure

A situation in which the free market does not lead to a socially optimum allocation of resources such that too much or too little of a good is being consumed

Externality

A cost or benefit that is external to a market transaction, is therefore not reflected in market prices and may affect third parties not involved in the transaction

Production Externality

An externality that affects the production side of the market which may be either positive or negative

Wellfare Loss

The social Loss incurred when the market equilibrum diverges from the socially optimum point (MSB = MSC)

Consumption externality

An externality that affects the consumption side of the market, which may be positive or negative

Moral Hazard

A situation in which a person who has taken out insurance is prone to taking more risk

Merit Good

A good that brings unanticipated benefits benefits to consumers, such that society believes that it will be underconsumed in a free market

Demerit Good

A good that brings less benefit to consumers than they expect, such that too much will be consumed in a free market

Private good

A good that, once consumed by one person, cannot be consumed by somebody wlse - good is excludable and rivalrous

Non - Excludablility

A situation in which it is not possible to provide a product to onw person without allowing other to consume it aswell

Non-Rivalry

A situation in wich one persons consumption of a good does not prevent others from consuming aswell

Public Good

A good thatt is Non-Exclusive, Non-Rival, Non-Rejectable

Free-rider problem

When an individual cannot be excluded from consuming a good, and so has no incentive to pay for its provision

Buffer Stock

A scheme intended to stabalise the price of a commodity by buying excess supply in periods when supply is high and selling when supply is low

Govenment Failure

A misallocation of resources arising from government intervention that causes a less efficient allocation of resources and imposes a welfare loss on society

Law of diminishing marginal returns

A law stating that if a firm was to increase its inputs to one factor of production while keeping other factors fixed, eventually firm will get diminishing marginal returns.

Economies of scale

Occur for a firm when an increase in the scale of production leads to production at a lower long-run average cost

Minimum efficient scale

The level of output at which the long-run average cost stops falling as output increases

Normal Profit

The return needed for a firm to stay in the market in the long run

Principal agent problem

The conflict between objectives of principals and their agents, who take desicions on their behalf

Corporate social responsibility

Actions that a firm takes to demonstrate its commitment to behaving in the public interest

Productive Efficiency

When a firm operates at minimum average cost, choosing an appropriate combination of inputs and producing the maximum output possible from those inputs

Static Efficiency

Efficiency at a particular point in time given the resources and technology available

Barrier to entry

A characteristic of a market that prevents new firms from readily joining the market

Perfect competition

A form of market structure that produces allocative and productive efficiency in the long run

Dynamic efficiency

A view that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run

Natural Monopoly

A monopoly that arises in an industry in which there are such substantial EOS that only one firm is viable

Perfect/First Degree price discrimination

Situation arising whereby a monopoly is able to charge each consumer a different price

Third Degree price discrimination

Situation in which a firm is able to charge groups of consumers a different price for the same product

Oligopoly

A market with few dominant sellers, in which each firm must take account of the behaviour of rival firms in the industry

Cartel

An agreement between firms on price and/or output with the intention of maximising their joint profits

Transfer earnings

The minimum payment required to keep a factor of production in its present use

Trade union

An organisation of workers that negotiates with employers on behalf of its members

Characteristic of Perfect Comp

1. Many Firms

2. Perfect info

3. No Entry/Exit Barriers

4. Firms are profit maximisers

5. Goods are homogenous

X - Inefficiency

When a firm lacks the incentive to control costs. At a given output level the firm is producing above its lowest potential average cost. There is ‘organisational slack’.