Economics definitions BULK

(WIll have) everything (most) in it

Absolute poverty

When an individual or household is unable to purchase the basic necessities to sustain a civilised life.

Adverse selection

Similar to asymmetric information, a situation in which people who buy insurance often have a better idea of their riskiness than the insurance provider.

Allocative efficiency

Producing the mix of goods and services that society values the most.

Altruism

Acting with concern for others, especially the less fortunate.

Anchoring

A bias in decision making where individuals rely too heavily on specific pieces of information (‘anchors’).

Average fixed cost

Total fixed costs divided by output

Average revenue

Revenue per unit of output

Average variable cost

Total variable costs divided by output

Average total cost

Total costs (TFC + TVC) divided by output

Capital market

Where securities such as shares and bonds are issued to raise medium to long-term finance.

Cartel

A collusive agreement by firms to fix prices and/or restrict output.

Choice architecture

The ways in which choices are presented to consumers, designed to encourage them to act in socially desirable ways.

Collusion

Tacit agreement between firms regarding prices in order to raise profit.

Competition Policy

Government efforts to prohibit anti-competitive markets.

Concentration ratio

The market share of the n largest firms in an industry.

Constant returns to scale

When the scale of a firm’s operations increases, output increases at the same rate.

Consumer surplus

Maximum price a consumer is willing to pay for a good minus the market price.

Contestable market

Any industry where there are no significant barriers to entry or exit.

Cost Benefit Analysis

Investment appraisal technique used to assess whether public sector projects are likely to produce net welfare gain for society.

Cost-plus pricing

Where firms set price at average cost plus a notional profit margin.

Creative destruction

Where markets are effectively destroyed and rebuilt over time with new technologies and innovations.

Deadweight loss

Net loss of welfare from not producing at the socially optimal output.

Decile

10% segment of a population

Decreasing returns to scale

When the scale of a firm’s operations increases, output increases at a slower rate.

Default choice

An option which is automatically selected unless a choice is indicated, e.g. with regard to opting in/ out of pension contributions.

Deregulation

Removal of government regulations to boost competition in a market.

Derived demand

When the demand for a product or factor of production comes from the demand for another product.

Diminishing returns

The fall in marginal product that eventually results as additional unit of a variable factor of production are added to a fixed factor.

Diminishing marginal utility

For an individual consumer, the extra utility or satisfaction gained from consuming successive units of a good or service falls.

Diseconomies of scale

Where an increase in the scale of production leads to an increase in average total costs for firms.

Distribution of income

How income is shared out between individuals, regions or countries.

Distribution of wealth

How wealth is distributed between individuals, regions or countries.

Divorce of ownership

(from control). In large firms the owners (shareholders) are different from those who manage and may pursue different objectives.

Dynamic efficiency

When resources are allocated efficiently over time.

Economic welfare

The benefit or satisfaction an individual gets from the allocation of resources

Economies of scale

Where an increase in the scale of production leads to reduction in average total costs for firms.

Elasticity of demand for labour

The responsiveness of demand for labour to a change in wage rate.

Elasticity of supply of labour

The responsiveness of supply of labour to a change in wage rate.

Equality

Where everybody is treated the same (e.g. in terms of taxation or income)

The factors of production

Capital (equipment), enterprise, land, labour

Factor market

The market for a factor of production that makes other goods or services.

Fairness

Acting with regard to treating people fairly (e.g. sharing resources)

Fixed costs

Costs of production that do not vary with output.

FOREX market

The Foreign Exchange market. Large, global, decentralised market for currencies.

Framing

The idea that how something is presented to consumers influences their choices.

Gini coefficient

A statistical measure of inequality.

0 = perfect equality

1 = perfect inequality

Government failure

When government intervention to correct market failure does not improve the allocation of resources.

Hit and run competition

When a new entrant to a market can quickly make profits and then leave, due to low barriers to entry.

Horizontal equity

The equal treatment of people in the same circumstances.

Incidence of tax

The proportion of tax passed on to the consumer.

Income

A flow of money earned over a period of time.

Increasing returns to scale

When the scale of a firm’s operations increases, output increases at a faster rate.

Indirect tax

A tax on spending.

Internal growth

Self-financed growth of a company.

Kinked demand curve

Demand curve facing an ologopolist which is relatively elastic if price is raised but relatively inelastic if price is reduced.

Limit pricing

Where existing firms attempt to prevent new entry by pricing low so that new entrants will not make normal profits.

Long run

Period of time when all factors of production are variable.

Lorenz curve

Graphical representation of inequality.

Mandated choice

Where people are required by law to make a choice.

Marginal cost

The addition to total costs from producing an extra unit of labour.

Marginal revenue

The addition to total revenue from producing an extra unit of output.

Marginal revenue product

(MRP). The addition to total revenue from employing an extra unit of labour.

Marginal utility

The additional welfare or satisfaction gained from consuming one extra unit of a good or service.

Market failure

When the free market fails to achieve an efficient or equitable allocation of resources.

Maximum price

A price ceiling above which the price of a good or service is not allowed to increase.

Merger

The joining of two previously separate firms into one.

Minimum efficient scale

MES. The output at which a firm can produce at the lowest unit cost.

Minimum price

A price floor below which the price of a good or service is not allowed to decrease.

Monopolistic competition

A market structure in which there are many relatively small firms but each sells a slightly differentiated product.

Monopoly

A market structure dominated by a single seller of a good or service.

Monopsony

Single dominant buyer in a market.

Moral hazard

When indiivduals and firms are protected against an event, they tend to take more risk in relation to that event.

National Minimum Wage

A floor below which wages cannot legally fall.

Negative externalities

Cost imposed on a third party not involved with the consumption or production of the good.

Net advantage

The sum of the monetary and non-monetary benefits of working.

Non-price competition

Competition on the basis of non-price factors, e.g. branding or product differentiation.

Normal profit

The minimum reward which the entrepreneur needs to stay in long term production.

Nudges

Factors designed to encourage people to act in socially desirable ways.

Oligopoly

A market structure where a few large forms dominate.

Opportunity cost

The next best alternative given up when an economic decision is made.

Optimal tax

Tax equal to external cost per unit. Also k own as a Pigouvian tax.

Partial market failure

Where the free market provides a product but with a misallocation of resources.

Perfect competition

An extremely competitive market structure.

Predatory pricing

A short run strategy where a form undercuts rivals on price to below cost.

Price discrimination

Where a firm sells identical products at different prices to different buyers for reasons other than differing costs of supply.

Price leadership

The setting of prices by a dominant firm in a market that are then followed by other firms.

Producer surplus

The surplus of price received over the minimum price the producer would be prepared to accept.

Pollution permit

A permit (sometimes tradable) sold to firms by the government, allowing them to pollute up to a certain limit.

Positive externality

A beneficial spillover effect to those parties of a market transaction.

Poverty trap

The disincentive to work when someone on benefits faces a very high marginal tax rate if they undertake (more) work.