econ ib exam

all econ definitions

ad valorem tax

a tax whose amount is based on the value of the transaction expressed as a percentage (ex. 20% on a pack of cigarettes, so the value of the tax increases as the price of the good increases)

allocative efficiency

a state in which suppliers are producing the optimal mix of goods and services required by consumers. Allocative efficiency occurs when the company producers at the point where cost and value to consumers is at the same level

asymetric information

a market faliure in which one party in a transaction possesses more knowledge of the transacted product than the other party

average product

an output that is produced on average, by each unit of the variable production factor in a given time period. It is calculated by dividing total output by the number of units of input used.

average revenue

an output that is produced on average, by each unit of the variable production factor calculated by dividing total revenue by the quantity sold.

average total cost

cost per unit of output

barriers to entry

way of preventing entry of a company to the industry such as high startup costs, strict regulations, or strong brand loyalty that protect existing firms from new competitors.

branding

a process in which a company develops a name, tern, sign, symbol, design or any other feauture that allows consumers to identify the goods and services of a business and to differentiate them from those of competitors

break even price

the price at which a firm is able to make normal profit (zero economic profit) in the long run with no economic profit. profits are equal to the cost

cap and trading schemes

government-mandated, market-based approach to controlling pollution by providing economic incentives for achieving reductions in the emission of pollutants: a central authority (usually government body) allocates or sells a limited number of permits to discharge specific quantities of a specific pollutant per time period. Polluters are required to hold permits in amount to hold permits in amout equal to their emissions. Polluters that want to increase their emissions must buy permits from other willing to sell them

carbon tax

a tax on fossil fuels intended to reduce theemission of carbon dioxide

cartel

a group of firms making price arrangemnts

ceteris parabus

“all other things equal” everything other that the price of th goods is expected to stay the same

collusion

the collaboration of frims to charge the same price

common access resources

resources that everyone has access to so its very hard to exclude people from using them

community surplus

total welfare loss created in the economy, the sum of consumers and producer surplus

complementary good

a good that is consumed along with another good (bike and helmets)

concentration ratio

a measure of the percentage market share in an industry held by the largest firms within that industry

constant returns to scale

the situation in which an average cost is constant when production is increased

consumer surplus

the extra satisfaction gained by consumers from paying a price that is lower than they price they were prepared to pay

corporate social responsability (CSR)

the responsability that a business has towards all stakeholders in which it follows a set of ethical guidelines on how the company should conduct its business

cross price elasticity of demand

a measure for the effect a change in price one product has on the demand for a certain product

decreasing returns to scale

the situation in which an average cost is increasing when production is increased

demande curve

a curve showing how the demand for a good or service varies with changes in price

demerit good

goods of which the consumption has negative consequences on society

differentiated products

products that do not have perfect substitutes

diseconomies of scale

a situation that occurs when the long term average cost of production increase as the scale of operations increases beyond a certain level

economic cost

the opportunity cost of all resources employed by the firm (including entreprenuershsip)

economic profit or abnormal profit

a situation in which total revenues exceed total cost

economies of scale

a situation that occurs when an output increases due to ability to sell to a larger market, reducing the cost per unit output

elastic demand

the percentage change in demand is more than the percentage change in price

elastic supply

the percentage change in supply is larger than the percentage change in price

equilibrium price

the market price where the quantity of goods supplied is equal to the quanitty of goods demanded

equilibrium quantity

the quanity of goods demanded at the point of market equilibrium

excess demand

a situation in which the quantity of a good or service demanded is higher than the quantity supplied

excess supply

the quantity of a good or service supplied is higher than the quantity demanded

excludable characteristics of a good

people can be excluded from the use of the good

explicit cost

normal business expenses that are tanglible and easy to track. purchase of raw material, hiring new workers, purchase of assets

externality

a situation in which production or consumption of a good has an effect on a third party that was not considered in the decision

factors of production

all the inputs that are used in the production of final goods and services. they include land, labour, capital and enterprise

first degree price discimination

charging consumers the maximum price that they are willing to pay

fixed costs

costs that always remain constant nd do not change in the short run (rent, salaries)

formal collusion

when firms secretly agree on a price and all firms participating in the collusion know that they are participating and know the negotiated price

free rider problem

a market failure that occurs when people take advantage of being able to use (public) goods without paying for it

homogeneous products

products that are exactly the same

implicit cost

the opportunity cost of the usage of resources currently owned by the company

incentive function of a price

a higher price is an incentive for producers to produce more to increase profit

income elasticity of demand

is used to measure the effect that the change in income of consumers has on he demand for a certain product

income elastic

the percentage change in demand for a good is larger than the percent change in income

increasing returns to scale

the situation in which an average cost in decreasing when production is increased

indirect taxes

taxes imposed on certain goods to discurage the consumption of goods that can create externalities (demerit goods). tax levied on the sale of goods

indivisibilities

a state in which some production factors cannot be divided into smaller pieces

inelastic demand

the percentage change in demand is less than the percentage change in price

inelastic supply

the percentage change in supply is less than the change in price

inferior good

goods for which demand decreases when income increases

interdependence

mutual dependence between two parties

law of demand

when price increases, ceteris parabus, quantity demanded decreaes

law of diminishing retuns

a phenomenon in which the more of the variable factor is added, there is a point beyond which total product only rises at a dimishing rate

law of supply

higher price will incease quantity supplied, ceteris parabus

legal barriers

the government’s attempts to prevent entry into the market by law

long-run

time period in which all factors of production are variable but the state of technology is fixed. all planning takes place in the long run

loss

a negative economic profit, when total cost exceeds total revenue

luxury good

a good for which demand increases more than proportionally as income rises

manufactured goods

products that have been made (manufactured) from raw materials

marginal costs

the amoun of the increase in total cost when producing one more unit of output

marginal private cost

costs of production that are taken into account in a firm’s decision making process

marginal private benefit

benefits the individual enjoys from the consumption of an extra unit of a good

marginal product

an extra output that is produced by using one extra unit of the variable factor

marginal revenue

the extra revenue that a firm gains by selling one ore product in a given time period

marginal social benefit

the benefit of consumption of one extra unit to society

marginal social cost

the cost of production of one extra unit to society

market equilibrium

a state where the supply in the market is equal to the demand in the market

market failure

failure of the market to achieve allocative efficiency resulting in an overallocation or underallocation of resources

market segment

a group of people who share one or more common characteristics

merit goods

goods which the consumption has positive consquences on society

monopolistic competition

a market structure in which there is a large number of firms that sell similar but slightly different products. barriers to entry and extit are absent

monopoly

a market structure characterised by a single seller who has a complete control of the entire supply of goods or of a service in a certain area or market. there are significant barriers to entry and exit and there are no close subsitutes to the good the monopolist firm sells

monopoly power

a market failure in which one party (the monopolist) controls a large share (25% or more) of a particular market

nationalisation

the process of transforming private assets into public assets by bringing them under the public ownership of a national government

natural monopoly

a situation in which there are only enough economies of scale to support one firm

necessity goods

goods whose consumption is essential to human survival

negative externalities

the cost that are sufferend by a third party (that does not get compensated) as a result of an economic transaction

negative externality of consumption

a neg. ext. caused by the consumption of a good (MPB>MSB)

negative extermality of production

neg. ext. caused by the production of a good (MSC>MPC)

non-excludable characteristics of a good

people cannot be excluded from the use of the good

non-price competitor

the rivalry between suppliers based on other aspects than price (quality of service, packaging, advertising)

non-price rationing

the use of methods othern than price that have the effect of limiting consumption or demand

non-rivalrous characteristics of a good

more people can use the same good at the same time

normal good

any good for which demand increases when income increases

normal profit

a situation in which total revenue equals total cost

perfect competition

a market structure in which there are a lot of producers that ahave no market power and produce and sell a homogenous product, barriers to entry or exit are absent, there is perfect information and perfect resource mobility

perfect information

a feature of perfect competition in which everyone knows everything

perfectly elastic demand

the percentage change in demand is infinite when price changes, when price increases demand will drop to zero, when price increases demand will go back to infinity

perfectly elastic supply

the percentage change in supply is infinite when price changes, when the price decreases price will drop to zero, when price increases supply goes back to infinity

perfectly inelastic demand

demand does not change when price changes

perfectly inelastic supply

supply does not change when price changes

positive externality

the benefits that are enjoyed by a third party (that does not pay for them) as a result of an economic transaction

positive externality of consumption

pos. ext. caused by the consumption of a good (MSB>MPB)

positive externality of production

pos. ext. caused by the production of a good (MPC>MSC)

perfect resource mobility

resources can move from location to location at zero cost