micro economics key deifinitions year 1

micro economics key deifinitions year 1

Average cost

Total cost of production divided by output.

Average revenue

Total revenue divided by output.

Capital productivity

Output per unit of capital.

Diseconomies of scale

As output increases, long-run average cost rises.

Division of labour

Different workers perform different tasks in the course of producing a good or service.

Economies of scale

As output increases, long-run average cost falls.

External economies of scale

Falling long run average costs resulting from the growth of the industry or market of which the firm is a part.

Fixed costs

Costs of production which do not change with output.

Internal economies of scale

Economies of scale resulting from the growth of the firm itself.

Labour productivity

Output per worker in a given time period.

Long run

The time period in which no factors of production are fixed and in which all the factors of production can be varied.

Productivity

Output per unit of input in a given time period.

Short run

The time period in which at least one factor of production is fixed and cannot be varied.

Technical economies of scale

Economies of scale generated through the use of more efficient capital goods.

Total cost

Fixed cost + variable cost.

Total revenue

The money a firm receives from selling its output, calculated by multiplying the price by the quantity sold.

Variable costs

Costs of production which change with the amount that is produced.

Automation

Where machines operate other machines.

Average fixed cost

Total cost divided by output (TFC ÷ Q = ???)

Average revenue

Total revenue divided by output.

Average variable cost

TVC ÷ Q.

Increasing returns to scale

When the scale of all the factors of production employed increases, output increases at a higher rate.

Constant returns to scale

When the scale of all the factors of production employed increases, output increases at the same rate.

Decreasing returns to scale

When the scale of all the factors of production employed increases, output increases at a slower rate.

Law of diminishing returns

As more of a variable factor of production is added to a fixed amount of another marginal produce may at first rise but then it will fall. This is due to overcrowding of a fixed factor of production such as capital.

Minimum efficient scale

The lowest output at which the firm is able produce at the minimum LRAC.

Sunk costs

Costs that have already been incurred and cannot be recovered if a firm leaves a market.

Total revenue

The money received by a firm from selling its total output. It is calculated by P x Q.

Maximum price/Price ceiling

A price above which it is illegal to trade. The aim is to reduce the price for the consumer.

Indirect tax

A tax is imposed on producers by the government that increases the costs of production of firms. Examples include duties on cigarettes, alcohol and fuel and also VAT.

Regulation

A set of rules imposed by government, that seeks to restict the behaviour of firms.

Property rights

The exclusive authority to determine how a resource is used.

Subsidies

A payment from governments to firms to encourage greater production of a good or service.

Pollution permits

A restriction on the amount of pollution firms can create. In some systems, unused quota can be sold to other firms.

Minimum price

A price floor placed on a market. It is illegal for firms to sell the good or service below this price. The aim is to reduce demand by increasing the price.

Rent control

An example of a maximum price in the market for rented housing.

Carbon tax

A tax on the carbon emissions of companies, usually per unit of carbon emitted

Government failure

Occurs when the cost of intervention is greater than the benefit / when the government intervention results in a net welfare loss

Complete market failure

A market fails to function at all, and a 'missing market' is the result.

Consumption externality

When consumption of a good or a service imposes external costs or benefits on third parties.

Demerit good

A good that is harmful to the consumer. It is overconsumed due to consumers not considering the negative externalities in consumption or due to information failure.

External benefit

The benefits to third parties from an economic transaction.

External cost

The cost to third parties from an economic transaction.

Externality

A spillover effect experienced by a third party from an economic transaction.

Free-rider problem

Occurs when non-excludability leads to a situation in which not enough customers choose to pay for a good, preferring instead to free ride.

Market failure

When the market mechanism leads to a misallocation of resources.

Merit good

A good that is underconsumed by consumers due to positive externalities in consumption or information failure.

Missing market

A situation in which there is no market. A free market will not produce these type of goods.

Negative externality

A negative spillover effect to a third party resulting from an economic transaction.

Non-excludability

A characteristic of a public good which means that if it is provided for one person it is provided for all. No one can be exluded from benefiting from it.

Non-rivalry

A characteristic of a public good which means that when a good is consumed by one person, it does not reduce the amount available for others.

Partial market failure

A market does function, but it delivers the 'wrong' quantity of a good or service, which results in a misallocation of resources.

Positive externality

A positive spillover effect to a third party resulting from an economic transaction.

Private benefit

The direct benefit to indivduals from an economic transaction.

Private costs

Costs incurred by an individual or firm as a result of an economic transaction.

Private good

A good that is excludable and rival. Most goods are private goods. This contrast with public goods which are non-rival and non-excludable.

Production externality

When production of a good or a service imposes external costs or benefits on third parties outside of the economic transaction.

Public good

A good that is non-excludable and non-rival.

Quasi-public

A good that displays some characteristics of a public good, but not full. It is not fully non-rival and/or non-excludable.

Social benefit

The total benefit of an activity, including the external benefit as well as the private benefit. Expressed as an equation: social benefit = private benefit + external benefit.

Social cost

The total cost of an activity, including the external cost as well as the private cost. Expressed as an equation: social cost = private cost + external cost.

Cross elasticity of demand (XED)

Measures the responsiveness of the quantity demanded of one good to a change in price of another.

Income elasticity of demand (YED)

Measures the responsiveness of quantity demanded to a change in income.

Price elasticity of demand (PED)

Measures the responsiveness of quantity demanded to a change in price.

Price elasticity of supply (PES)

Measures the responsiveness of quantity supplied to a change in price.

Price inelastic demand

Quantity demanded changes a relatively small amount following a price change. The PED coefficcient is less than 1.

Price elastic demand

Quantity demanded changes a relatively large amount following a price change. The PED coefficient is greater than one.

Unitary elastic

Quantity demanded changes the same % as the price change. The PED coefficient is equal to 1.

Perfectly price inelastic

Quantity demanded does not changes following a price change. The PED coefficient is 0.

Perfectly price elastic

Quantity demanded falls to zero following a price increase. The PED cooefficent is infinity.

Revenue

The incomes firms receive from selling their goods and services. It is calculated at price x quantity sold.

Normal good

As incomes rise, demand increases. YED is positive.

Inferior good

As incomes rise, demand falls. YED is negative.

Substitute good

A good or service than can be consumed in place of another good or service. They are in competitive demand. XED is positive.

Complementary good

A good or service that is often consumed at the same time as another good or service. They are in joint demand. XED is negative.

Income inelastic

Quantity demand changes a relatively small amount following a change in income.

Income elastic

Quantity demand changes a relatively large amount following a change in income.

Altrusim

Concern for the welfare of others.

Anchoring

A cognitive bias describing the human tendency when making decisions that rely too heavily on the first piece of information offered (the so-called 'anchor').

Asymmetric information

When one party involved in a transaction possesses less information than the other.

Availability bias

Occurs when individuals make judgements about the likelihood of future events according to how easy it is to recall examples of similar events.

Behavioural economics

A method of economic analysis that applies psychological insights into human behaviour to explain how individuals make choices and decisions.

Bounded rationality

When making decisions, an individual's rationality is limited by the information they have, the limitations of their cognitive capacity, and the finite amount of time available in which to make decisions.

Bounded self-control

Limited self-control in which individuals lack the self-control to act in what they see as their self-interest.

Choice architecture

How choices can be presented to consumers.

Cognitive bias

A mistake in reasoning or in some other mental thought process occurring as a result of, for example, using rules-of-thumb or holding onto one's preferences and beliefs.

Default choice

An option that is selected automatically unless an alternative is specified.

Framing

How something is presented influences the choices people make.

Diminishing marginal utility

The extra satisfaction derived from a good or service diminishes for each additional unit consumed.

Mandated choice

People are required by law to make a decision.

Marginal utility

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

Nudge

Factors which encourage people to think and act in particular ways.

Rational behaviour

Acting in pursuit of self-interest, which for a consumer means attempting to maximise the welfare, satisfaction or utility gained from the goods and services consumed.

Restricted choice

Offering people a limited number of options so that they are not overwhelmed by the complexity of the situation.

Rule-of-thumb

A rough and practical method or procedure that can be easily applied when making decisions.

Social norms

Forms or patterns of behaviour considered acceptable by a society or group within that society.

Utility

The satisfaction or economic welfare an individual gains from consuming a good or service.

Information failure

Where individuals or firms have a lack of information about economic decisions.

Complementary good

A good in joint demand / a good which is demanded at the same time as the other good.

Composite demand

When a good is demanded for more than one purpose e.g. some crops are in demand for food and biofuel.