econ a level key words (ann)

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