Micro key terms

abnormal profit

Profit over and above normal profit.

absolute poverty

A condition characterized by severe deprivation of basic human needs, including food, water, and education.

availability bias

Occurs when individuals make judgments about future events based on how easily they can recall similar events.

average cost of labour

Total wage costs divided by the number of workers employed.

cartel

A collusive agreement by firms to fix prices, restrict output, and deter new firms from entering the market.

choice

Choosing between alternatives when making a decision on how to use scarce resources.

allocative efficiency

Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets.

average fixed cost

Total fixed cost divided by the size of output.

choice architecture

A framework that sets out ways choices can be presented to consumers and the impact of that presentation on decision making.

allocative function of prices

Changing relative prices allocate scarce resources away from markets with excess supply into markets with excess demand.

average returns of labour

Total output divided by the total number of workers employed.

average revenue

Total revenue divided by output.

average total cost

Total cost of producing a particular level of output divided by the size of output.

cognitive bias

A systematic error in thinking that affects decisions and judgments.

allocative inefficiency

Occurs when price is greater than or less than marginal cost.

average variable cost

Total variable cost divided by the size of output.

collective bargaining

A process by which wage rates and work conditions are negotiated by unions with employers.

altruism

Concern for the welfare of others.

behavioural economics

A method of economic analysis that applies psychological insights into human behaviour.

command economy

An economy where government officials allocate economic resources.

anchoring

The tendency to rely too heavily on the first piece of information offered when making decisions.

bounded rationality

The limitations of information and mental capacity affecting decision making.

Competition and Markets Authority (CMA)

Government agency responsible for UK competition policy.

artificial barriers

Man-made barriers to market entry.

competition policy

Part of government's microeconomic policy aimed at making goods markets more competitive.

asymmetric information

When one party possesses less information relevant to a transaction than the other.

bounded self-control

Limited self-control to act rationally.

capital good

A good used in the production of other goods.

capital productivity

Output per unit of capital.

competitive demand

When a good is viewed as an alternative to another good.

competitive markets

Markets with many buyers and sellers with good information and easy entry/exit.

complementary goods

Goods that experience joint demand.

complete market failure

A market that fails to function at all.

composite demand

Demand for a good with more than one use; an increase in demand for one use reduces supply for another.

concentration ratio

Measures the market share of the biggest firms in a market.

condition of demand

Determinants other than price that fix the demand curve position.

condition of supply

Determinants other than price that fix the supply curve position.

constant returns to scale

When output increases at the same rate as the increase in all inputs.

consumer good

A good consumed by individuals or households.

consumer surplus

Economic welfare enjoyed by consumers; surplus utility over the price paid.

consumption externality

An externality generated during the consumption of a good.

contestable market

A market with potential for new firms to enter easily.

creative destruction

The process by which capitalism evolves through new technologies replacing old ones.

cross elasticity of demand

Measures the change in demand for a good due to a price change in another good.

deadweight loss

Loss of economic welfare when the maximum total welfare is not achieved.

decrease in demand

A leftward shift of the demand curve.

decrease in supply

A leftward shift of the supply curve.

decreasing returns to scale

When output increases at a slower rate as inputs increase.

default choice

An option selected automatically unless an alternative is specified.

demand

The quantity of a good or service that consumers are willing to buy at given prices.

demerit goods

Goods for which social costs exceed private costs.

deregulation

The removal of previously imposed regulations.

derived demand

Demand for a good wanted not for its own sake but as a result of demand for another good.

diseconomies of scale

Long-run average cost rises as output increases.

disequilibrium

A situation where opposing forces are out of balance.

distribution of income

How income is divided between different groups in society.

distribution of wealth

How wealth is divided among different groups in society.

division of labour

Different workers performing different tasks in production.

divorce of ownership from control

A situation where the owners and managers of a firm have different objectives.

duopoly

A market with only two firms.

dynamic efficiency

Improvements in productive efficiency over time.

economic growth

The increase in the potential level of output an economy can produce.

economic system

The institutions within which a community decides what, how, and for whom to produce.

economic welfare

The economic well-being of individuals or groups within society.

economies of scale

Long-run average cost falls as output increases.

effective demand

Desire for a good backed by the ability to pay.

elasticity

The responsiveness of one variable to a change in another variable.

elasticity of demand for labour

Proportionate change in demand for labour following a wage change.

elasticity of supply of labour

Proportionate change in labour supply following a wage change.

entry barriers

Obstacles making it difficult for new firms to enter a market.

equality

Everyone is treated exactly the same.

equilibrium

A state of rest between opposing forces.

equity

Fair treatment of individuals.

excess demand

When demand exceeds supply at a given price.

excess supply

When supply exceeds demand at a given price.

exchange

To give something in return for something else.

excludable good

Good that people can be excluded from if they do not pay.

exit barriers

Obstacles making it difficult for firms to leave a market.

external diseconomy of scale

An increase in long-run average costs due to market growth.

external economy of scale

A fall in long-run average costs due to market growth.

externality

A public benefit or cost affecting third parties outside the market.

factors of production

Inputs into the production process.

fairness

The quality of being impartial or just.

firm

A productive organization selling goods or services.

fixed cost

A cost of production that does not change with output.

framing

How something is presented influences choices.

free-rider problem

A situation where individuals benefit without paying.

full employment

When all who are able and willing to work are employed.

fundamental economic problem

How to allocate scarce resources to maximize human welfare.

geographical immobility of labour

Workers are unwilling or unable to move to different areas for jobs.

Gini coefficient

Measures income or wealth distribution inequality.

government failure

When government intervention reduces economic welfare.

hypothesis of diminishing marginal utility

Marginal utility decreases with each additional unit consumed.

hit-and-run competition

New entrants can easily profit and exit due to low barriers.

immobility of labour

Inability of labour to move between jobs for various reasons.

incentive function of prices

Prices create incentives for economic behavior changes.

income

The flow of money received by a person or household.

income elasticity of demand

Change in demand due to a change in income.

increase in demand

A rightward shift of the demand curve.

increase in supply

A rightward shift of the supply curve.