microeconomics year 1 terms

Economies of Scale

A fall in Long Run Average Costs due to an increase in a firm's output/scale/size

Fixed cost

A cost that doesn't change with output

Variable Cost

A cost that varies with output

Profit

The difference between total revenue and total costs

Short Run

When one or more factors of production are fixed

Long Run

When all factors of production can vary

Diminishing returns

When marginal output/product falls as output increases, due to a limiting/fixed factor.

Market failure

When the market mechanism causes a misallocation of resources

Government failure

When a government intervention causes a greater misallocation in a market/the economy.

Fundamental Economic Problem

Infinite wants, limited resources

Scarcity

Produced by the fundamental problem of economics

Capital

Used but not used up in the act of production

Interest

Factor payment for capital

Rent

Factor payment for Land

Wages

Factor payment for Labour

Externality

Cost or benefit due to the actions of a third party

Public good

Non-rival and Non-excludable good

Price-Elasticity of Demand

% Change in Demand/% change in Price

Rivalry

Consumption of the good prevents the benefit accruing to another party

Excludable

It's possible to restrict access to the good or service

Social Benefit

Private benefit + External benefit

External Cost

Social cost - private cost

Merit good

Value judgement on a good that should be provided by the government

Specialisation

Increased productivity from restricted scope in production

Division of Labour

Separating the production process into separate jobs to be carried out by different groups or individuals

Joint Supply

Production of one good creates supply in another market as well

Competing supply

Two goods require the same scarce good/service to be made.

Luxury good

Inelastic PeD, Elastic Yed

Necessity good

Inelastic PeD, Inelasic YeD

Veblen Good

Positive PeD, Elastic YeD

Excess Demand

When quantity demanded is greater than quantity supplied

Excess Supply

When quantity supplied is greater than quantity demanded

Inferior Good

Negative YeD

Composite Demand

When a good's demand comes from a number of sources

Derived demand

When a good's demand is greatly dependent on another market's supply/demand

Opportunity Cost

The next best alternative sacrificed

PPF

Graph showing the maximum production of two goods

Allocative Efficiency

P = MC, when resources are used to best match people's tastes and preferences

Productive efficiency

Can't make more of one good without making less of another

Positive statement

A statement that can be tested

Normative statement

A statement that expresses a value judgement

Equilibrium

When price and quantity don't change

Inelastic Price Elasticity of Demand

PeD < 1

Elastic Price Elasticity of Demand

PeD > 1

Complementary Goods

XeD < 0

Substitute Goods

XeD > 0

Oligopoly

Several large firms exist in the market

Marginal product of labour

Revenue gained from hiring another worker

Marginal cost

Cost of producing one more product

Marginal Revenue

Total Revenue gained from selling one more product

Marginal Utility

Utility gained from consuming one more good/service

Price ceiling

Maximum price

Price floor

Minimum price

Non-rival

One person's consumption doesn't reduce the amount available for others

Non-excludable

It's not possible to prevent someone from consuming the good/service, causes a free-rider problem

Perfect competition

Large number of buyers and sellers; perfect information; can buy and sell as much as desired at the market price; price takers; homogenous good; no barriers to entry/exit

Monopoly

A Single firm in the market. Legally, a company with over 25% market share

Barrier to Entry

Something that makes it difficult for new firms to enter the market

Barrier to Exit

Something that makes it difficult for firms to leave the market

Price Taker

Firms that must accept the market price as dictated by supply and demand

Price maker

Where a firm has the power to set the market price

Monopoly power

The degree to which a firm can act as a price maker

Profit Maximisation

MC = MR, where a firm makes the greatest amount of profit possible.

Competitive market

Where firms compete with each other in the market

Market conduct

How firms make decisions in the market, especially on price and output.

Concentration Ratio

The market share of the largest firms.

Sunk Costs

A cost that cannot be recovered when leaving the market

Product differentiation

The process of making products different from each other in the same market, in order to make them less substitutable

Natural monopoly

Where there is only space for a single firm in the market to exploit economies of scale.

Artificial Barriers to Entry

Barriers to entry that are the result of deliberate actions of existing firms to prevent new entrants

Natural Barriers to entry

Existing firms are more productively efficient than new entrants, i.e. can produce at a lower long-run average cost. Often caused by indivisibilities and Economies of scale.

Patent

A government-protected right to be the sole producer of the good.

Invention

The creation of new products or processes

Innovation

Converting inventions into marketable products or services

Limit prices

Prices set low enough to prevent new firms entering the market

Predatory prices

Prices set below average cost (or very low) with the aim of forcing out rival firms in the market

Normal Profit

Zero economic profit - profit earned is equal to the opportunity cost

Abnormal Profit

Profit earned above normal profit.

Homogenous good

The goods are identical

Perfect information

Buyers and Sellers have all the information relevant to the market

Consumer Sovereignty

Consumers collectively determine the combination of price and quantity in the market

Producer Sovereignty

Producers determine the combination of price and quantity in the market

Divorce of ownership from control

The owners and managers of the business are different people and sometimes different objectives

Satisficing

Achieving a satisfactory option rather than the best one

Static Efficiency

Efficiency at a particular point in time

Dynamic efficiency

Efficiency in the Long Run, through the development of new products or improvements to production processes

Monopolistic competition

A market structure with a large number of firms and barriers to entry in the short run, but not in the long run.

Collusion

When firms cooperate.

Cartel

A collusive agreement between firms, usually to fix prices, but it can also include restricting output and preventing new entrants

Imperfect competition

Market structures between perfect competition and pure monopoly

Incentive function of prices

Prices can influence people and firms to change their behaviour

Rationing function of prices

Rising prices rations demand for a scarce good

Allocative function of prices

Changing relative prices allocates resources away from markets with excess supply and towards markets with excess demand

Imperfect information

Where people make the wrong decision due to lacking relevant information, typically about long-run benefits or costs.

Missing market

Where there is no market due to complete market failure

Pure monopoly

When there is only one firm in the market

Resource misallocation

When resources are allocated in a way that doesn't maximize economic welfare

Signaling function of price

Prices provide information to buyers and sellers

Technical Economy of Scale

A cost saving generated through changes to the productive process as the scale/size/output of the firm increases

Managerial Economy of Scale

A cost saving generated through specialization and division of labour within management, for example by hiring specialist managers.