Studied by 4 people
Scarcity
Where demand exceeds supply at price = 0 infinite wants, finite resources
Factors of production
A productive resource: land, labour, capital, entrepreneurship
Capital (K)
Man-made aids to production
Enterprise/entrepreneurship
The risk-taking role undertaken by owners of a business as they combine other factors of production in the pursuit of profit
Investment (micro)
Spending by firms on new capital stock or repair of existing stock
Depreciation
The rate at which capital or currency loses value over time
Opportunity cost
The cost of the next best option foregone
PPF (production possibility frontier)
The combinations of two goods which an economy is capable of producing using all its resources in the most efficient way
Productive efficiency
Production at the lowest point on the average cost curve (i.e. where MC=AC)
Positive economics
The study of economic propositions which are empirically verifiable
Normative economics
The study of economic propositions which contain value judgements
Rationality
The notion that economic agents make decisions that best promote their perception of what is in their own best interest and adjust their behaviour accordingly
Utility
The satisfaction to an individual from consuming a product.
Diminishing Marginal Utility
As an individual consumes more of a product, each successive unit generates less utility (i.e. marginal utility falls with consumption).
Non-Rational Decision Making
When individuals make decisions as economic agents that does not serve their own selfish interest
Altruism
Behaviour motivated by concern for other's welfare rather than one's own.
Framing
The notion that consumer choice depends on the way the question is presented (rather than on an objective comparison of competing options).
Nudges
When government tries to influence consumers to make better choices by making small changes to the way those choices are made, rather than by denying choice.
Demand (D or Qd)
The quantity of a good consumers are willing and able to buy at a given price at a given time
Supply
The quantity of a good producers are willing and able to sell at a given price at a given time
Market
The place (physical or otherwise) where buyers are in contract with sellers to arrange sale of goods
Equilibrium
The price and quantity (traded) which is acceptable to both buyers and sellers so long as conditions of demand and supply stay constant i.e. neither excess demand or excess supply exists at this market price, with these D and S curves
Ceteris Paribus
(Latin) All other factors remaining constant
Market Disequilibrium
A combination of price and quantity traded which has a tendency to change for the given demand and supply conditions (curves)
Joint Demand
When demand for one good involves demand for another good (complement)
Joint Supply
Where supply of one good necessarily involves supply of another
Derived Demand
Demand for a good or service not for its own sake but for its own use in production of a final good or service
Composite Demand
Where a good is demanded for two or more separate uses (ceteris paribus)
Income Elasticity of Demand (YED)
The responsiveness of the quantity demanded for a good in response to a change in income. (ceteris paribus)
Cross Elasticity of Demand (XED)
The responsiveness of quantity demanded of one good (A) to a change in price of another (B)
Price Elasticity of Supply (PES)
The responsiveness of quantity supplied to a change in price
Normal Good
A good whose demand rises as income rises.
Inferior Good
A good whose demand falls as income rises
Substitute Good
A good which is an alternative to a particular good from the consumer's point of view
Sales Tax (VAT)
Tax levied on the sale of goods.
Subsidy
Government payment to producer for production of goods intended to lower the market price
Economic System
The institutional means for resolving the problems of resource allocation in an economy
Mixed Economy
Where resource allocation is undertaken by a combination of state planning and market forces, depending on the product
Capitalist/Free Market Economy
An economy where markets determine resource allocation with minimal state intervention.
Invisible Hand
Where resources are allocated by the decentralised decision making of consumers and producers acting through markets, without any centralised (state) planning
Consumer Sovereignty
The production of goods is directed by consumer demand
Laissez faire
Where government does not interfere with the functioning of markets
Rationing
A scarce number of goods or services are allocated to those who place the most (monetary) value in them
Incentives
Financial motivations for people to take certain actions
Signalling
Prices convey information to consumers and producers about resource allocation
Market failure
The misallocation of resources, i.e. where MSB≠MSC. In a capitalist economy, it is the only justification for government intervention
Government failure
Where government intervention results in a) an increase in market failure, or b) where the costs of intervention outweigh the benefits derived to society from the intervention
Monopoly
A single seller in the market or industry
Public good
A good with non-excludability and non-rivalry (which is therefore almost impossible for private firms to sell)
Quasi-public goods
Goods which exhibit partial non-excludability or non-rivalry
Negative externality
When the production or consumption of a product results in a cost to a third party not directly involved in the market transaction
Positive externality
Where the production and consumption of a good or service benefits a third party not directly involved in the market transaction
Property right
A legal entitlement to the exclusive use of a resource (can be bought or sold)
Marginal private cost (MPC)
The addition to total cost to the firm from an extra unit of production
Marginal external cost (MEC)
The additional (external) cost suffered by the third party from an extra unit of production
Marginal social cost (MSC)
The additional cost to society (i.e. firm + third party) from an extra unit of production
Marginal private benefit (MPB)
The additional benefit to the consumer from an extra unit of production
Marginal external benefit (MEB)
The additional external benefit to third parties from an extra unit of production
Marginal social benefit (MSB)
The additional benefit to society (i.e. consumers + third parties) from an extra unit of production
Social optimal production
Output where allocative efficiency is maximised, i.e., MSB = MSC.
Deadweight loss
Net welfare lost from not producing at the society optimal production
Optimal tax
Tax equal to marginal external cost
Regulation
Rules from government requiring firms to modify their production techniques, output or price.
Tradable Emissions Permit (TEP)
A legal right to pollute a fixed amount which can be bought or sold between firms.
Demerit good
A good which consumers over-consume at market prices because they underestimate the long term harm to themselves.
Merit good
A good which consumers under-consume at market prices because they underestimate the long term benefits to themselves.
Asymmetric information
Situation where buyers know more about the value of a product than sellers (or vice versa)
Labour immobility
When workers cannot move into alternative employment in other regions or other occupation
Progressive tax
A tax which takes a higher proportion of income as income rises
Productivity
Output per factor input
Unit cost (average cost)
Cost per unit of output
Specialisation
Where a factor of production is devoted to a specific job in the production process
Division of labour
Where labour specialises in the performance of a particular part of the production process
Money
Whatever is generally acceptable in exchange for goods and services or labour
Short run
Period of time when at least one factor of production is fixed
Long run
Period of time when all factors of production are variable
Marginal product
The addition to total output from an extra factor employed
Average product
Output per worker
Law of diminishing marginal returns
The fall in marginal product as additional units of the variable factor of production are added to the fixed factors
Fixed cost
A cost which is independent of output in the short run
Variable cost
A cost which is related to output produced in the short run
Marginal cost
The addition to total cost from producing an extra unit of output
Average cost
The cost per unit
Economy of scale
The gains in efficiency (fall in unit costs) from expanding the scale of production, I.e., from expanding all factors of production in the long run
Diseconomies of scale
The rise in unit cost as a firm expands its scale of production in the long run
Minimum efficient scale
The lowest output at which a firm can produce at the lowest unit costs possible for the given technology
Average revenue
The revenue per unit of output
Marginal revenue
The addition to total revenue from producing an extra unit of output
Normal profit
The minimum (accounting) profit which the entrepreneur needs to stay in long term production
Super normal profit
Profit in excess of normal profit
Profit maximisation
Price and output are chosen to maximise supernormal profit
Revenue maximisation
Price and output are chosen to maximise total revenue
Sales maximisation
Price and output are chosen to maximise sales volume
Satisficing
Managers aim to make a satisfactory profit (anything at or above a minimum level)
Perfect competition
Market structure with many buyers and sellers, homogenous goods, no barriers to exit or entry, and producers are price takers
Monopolistic competition
An industry with a large number of sellers each selling goods which are close but are not perfect substitutes
Concentration ratio
The market share of the largest few firms in an industry (e.g. 5-firm concentration ratio is the sum of the 5 largest firms' market share)
Oligopoly
A market dominated by a few firms
Kinked demand curve
Demand curve facing an oligopolist which is relatively price elastic if price is raised but relatively price inelastic if price is reduced
Non price competition
Where firms attempt to make more profit without cutting price
Note 
Flashcard (46)