UVI MICRO DEFIT

Rational behaviour (the traditional view)

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

Behavioural economics

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

Moral hazard

the tendency of individuals and firms, once insured against some contingency, to behave so as to make that contingency more likely

adverse selection

a situation in which people who buy insurance often have a better idea of the risks they face than do the sellers of insurance. people who know they face large risks are more likely to buy insurance than people who face smaller risks.

bounded rationality

limited rationality; when making decisions an individuals rationality is limited by the information they have, the limitations of their minds, and the finite amount of time available

cognitive bias

a mistake in reasoning or in some other mental thought process occurring as a result of, for example, using rule of thumb or holding onto ones preferences and beliefs, regardless of contrary information

rule of thumb (heuristic)

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

anchoring

cognitive bias describing the human tendency when making decisions to rely too heavily on the first piece of information offered. individuals use an initial piece of information when making subsequent decisions

asymmetric information

when one party to a market transaction possesses less information relevant to the exchange than the other

bounded self control

limited self control, individuals lack the self control to act in what they see as their self-interest

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

social norms

forms or patterns of behaviour considered acceptable by a society or social group

altruism

concern for the welfare of others

choice architecture

a framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making

framing

how something is presented influences the choices people make

default choice

an option that is selected automatically unless an alternative is specified

mandated choice

people are required by law to make a decision

restricted choice

offering people a limited number of options so that they are not overwhelmed by the complexity of the situation. if there are too many choices, people may make a poorly thought-out decision or mot make any decision

nudges

factors which encourage people to think and act in particular ways. Nudges try to shift group and individual behaviour in ways which comply with desirable social norms.

fixed cost

a cost of production that does not vary as output changes

variable costs

costs that vary as output changes

average cost

total cost/output

marginal cost

the additional cost of producing one extra unit

short run

the period during which at least one factor of production is fixed (usually capital is fixed, and labour is allowed to vary).

long run

period of time during which all factors of production can become variable

law of diminishing returns

in the short term, as a variable factor of production is added to a fixed factor of production, both the marginal and average returns to the variable factor will begin to fall.

minimum efficient sclae

the lowest output at which a firm can produce at the lowest point on the LRAC curve

economies of scale

an increase in output leads to lower average costs

diseconomies of scale

an increase in output leads to higher average costs

price maker

when a firm faces a downward-sloping demand curve for its product, it possesses the market power to set the price at which it sells the product.

price taker

a firm which is so small that it has to accept the ruling market price. If the firm raises its price, it loses all its sales; if it cuts its price, it gains no advantage.

profit

revenue - cost

normal profit

the minimum amount of profit required to keep a firm in business

supernormal/ abnormal profit

the amount received in excess to normal profit

profit maximisation

where a firm produces up to the point where MC = MR

satisficing

achieving a satisfactory outcome rather than the best possible outcome

divorce of ownership from control

the owners and those who manage the firm are different groups with different objectives

productive efficiency

the level of output at which goods are produced at the lowest possible average cost (lowest point on the AC)

allocative efficiency

occurs when it is impossible to improve overall economic welfare by reallocating resources between markets. Price must equal marginal cost (P = MC)

static efficiency

efficiency at a point in time (if it both productively and allocatively efficient)

dynamic efficiency

efficiency over time (due to new products, new production techniques and processes which increase economic growth)

X-inefficient

when companies do not reduce costs to the lowest level (due to lack of competitive pressure)

consumer surplus

a measure of the economic welfare enjoyed by consumers: the difference between what a consumer is willing and able to buy a good for and what they actually pay.

producer surplus

a measure of the economic welfare enjoyed by firms or producers: the difference between the price a firm receives and the minimum price it would be prepared to accept.

creative destruction

capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations.

innovation

improves on or makes a significant contribution to something that has already been invented

invention

making something entirely new; something that did not exist before at all

technological change

a term that is used to describe the overall effect of invention, innovation and the spread of technology in the economy

perfect competition

market structure where there are many buyers and sellers, so no individual can buy or sell at any price other than the going price. Characteristics:
o No barriers to entry or exit
o Infinitely many buyers and sellers, who are infinitely small
o Homogeneous products, and all buyers and sellers have perfect information & knowledge
o Therefore firms are price takers

monopolistic competition

a market structure with the following characteristics:
o Fairly low barriers to entry
o Many small firms
o Products are differentiated to an extent, there is imperfect information
o Firms have some price making power

oligopoly

a market structure dominated by a few firms; there is a high concentration ratio. It can be defined either by structure (below) or conduct (firms may either compete or collude, so they are interdependent and the outcome is uncertain). Characteristics:
o Quite high barriers to entry
o Dominated by a few large firms
o Products may either be differentiated or homogeneous, there is imperfect information
o Firms have price making power
o Firms are interdependent (where the actions of one firm have an effect on the sales and revenue of other firms in the market)

n-firm concentration ratio

the market share of the n largest firms in an industry

collusion

where firms agree not to compete on price

tacit

where firms have reached an 'agreement' as to how they will behave, based on how they have acted over time

price leader

a firm that establishes the market price that all other firms in the agreement follow

price war

occurs when rival firms continuously lower prices to undercut each other

cartel

a collusive agreement by firms to fix prices, restrict output and/or deter entry of new firms

monopoly

a single seller in the market or industry.

Characteristics:
o There are high barriers to entry, so other firms cannot enter the market.
o The firm is the industry - there is only one firm
o There is only one product, there is imperfect information
o The firm is a price maker

price discrimination

where a firm sells identical products at different prices to different buyers

natural monopoly

a market where it is impossible to fully export economies of scale, so it is uneconomic for more than one firm to supply the market

deadweight loss/welfare loss

the reduction in consumer surplus and producer surplus when output is less than the optimum level

contestable market

an industry were there are no barriers to entry or exit (no sunk costs)

sunk costs

a cost which cannot be recovered on exiting the industry

hit-and-run competition

occurs when a new entrant can 'hit' the market, make profits and then 'run' given that there are no or low barriers to entry

derived demand

labour is demanded because of the output it can produce, not because firms want workers in their own right

marginal revenue product (MRP)

the addition to total revenue from employing an extra worker

marginal physical product (MPP)

the addition to total output from employing an extra worker

wage elasticity of demand for labour

the responsiveness of quantity demanded for labour to a change in the wage rate

wage elasticity of supply for labour

the responsiveness of quantity supplied for labour to a change in wage rate

economically inactive

the percentage of the population who are neither in work nor seeking it

participation rate/ activity rate

the percentage of the population of working age currently in work or actively seeking work

unemployment

the number of people of working age who do not have a job but are actively seeking work

net advantage

the sum of monetary and non-monetary benefits of working

monopsony

single buyer in a market

trade union

an organisation of workers which aims to further the interests of its members (eg to improve wages and working conditions)

national minimum wage (NMW)

a floor below which wages cannot legally fall

national living wage

an adult wage rate, set by the UK government, which all employers must pay from 2016 onward, and which has replaced the adult national minimum wage rate.

discrimination

where groups of workers are treated differently to other workers in the same job regarding pay and employment

occupational immobility of labour

when workers are unwilling or unable to move from one type of job to another eg because different skills are needed.

geographical immobility of labour

unwilling or unable to move from one geographical area to another

equality

means that everyone is treated exactly the same. a completely equal distribution of income means that everybody has the same income.

equity

means that everybody is treated fairly

horizontal equity

the fair/equal treatment of people in the same circumstances

vertical equity

the 'fair' treatment of people in different circumstances (very subjective) this notion is often used to justify taxing richer people more to bring out greater 'fairness'

poverty

the state of not having enough money or income to meet basic needs

absolute poverty

a state where a person is unable to purchase the basic necessities to sustain a civilised life. eg income of less than $1 a day

relative poverty

a state where a person is significantly poorer than the average for the rest of society (eg less than 50% of median income)

income

money earned over a period of time (a 'flow' concept)

wealth

the value of an individuals assets at a point in time (stock concept)

universal benefits

benefits which are paid to all, not dependent on a persons income

means tested benefits

benefits which are not only paid to household who can prove there are poor.

Gini coefficient

a statistical measure of inequality (0 = perfect equality, 1 = maximum inequality)

poverty trap

the disincentive to work when someone on benefits faces a very high effective marginal rate of tax if they start work. (Replacement ratio - the ratio of unemployment benefits to average earnings.)

market failure

when the price mechanism leads to a misallocation of resources

missing market (complete market failure)

the absence of a market for a good or service, mostly commonly in the case of public goods and externalities

partial market failure

a market that produces the wrong quantity of a good/service which results in misallocation

public good

a good which has the characteristics of non-excludability and non-rivalry

quasi public goods

a good which has characteristics of both a public and private good, e.g. it might be non-excludable but rival, or excludable but non-rival.

property rights

the exclusive authority to determine how a resource is used. In the case of a private property right, the owner of private property (such as land) has the right to prevent other people from consuming it unless they are prepared to pay a price to the owner.

demerit goods

a good that is under consumed if left to the free market (due to both externalities and consumers underestimating the long term benefits to themselves)