Econ Test 1 terms

Allocative efficiency

refers to producing the quantity of goods mostly wanted by society, and allocative efficiency is the level of output where marginal cost is equal to marginal benefit at competitive market equilibrium

Allocative inefficiency

when the marginal social cost of producing a good is not equal to the marginal social benefit of the good to society; it occurs when the marginal cost of producing a good (including any external costs) is not equal to the price charged to consumers.

Anchoring

Anchoring involves the use of irrelevant information to make decisions, which often occurs due to it being the first piece of information that the consumer happens to come across.

Asymmetric information

This is where one party in an economic transaction has access to more or better information than the other party.

Bounded rationality

This suggests that most consumers and businesses do not have enough information to make fully-informed choices and so opt to satisfice, rather than maximise their utility.

Bounded self-control

In reality, consumers are often not rational in their self-control and do not stop consuming, even when it is sensible to stop. They consume even though the price of the good or service is greater than the marginal utility they gain from consumption.

Bounded selfishness

Concern for the well-being of others.

Choice architecture

Choice architecture suggests that the decisions that we make are affected by the layout, sequencing, and range of choices that are available.

Competitive supply

This exists where products are produced by the same factors of production, and so compete for these resources for their production.

Complements

Goods are used in combination with each other. For example, digital cameras and memory cards.

Consumer nudges

Positive reinforcement and indirect suggestions used to influence the behaviour and decision making of consumers but do not restrict choice

Consumer surplus

The additional benefit/utility received by consumers by paying a price that is lower than they are willing to pay.

Corporate social responsibility

An approach taken by firms where they attempt to produce responsibly/ethically towards the community and environment, demonstrating a positive impact on society.

Default choices

This is when consumers are automatically enrolled in a system, so that the consumer will "make" this choice if he/she takes no action.

Demand

The willingness and ability of consumers to purchase a quantity of a good or service at a given price point in a given time period, ceteris paribus

Demand curve

This shows the inverse relationship between the price of a good or service and the quantity demanded. It is normally downward sloping.

Ceteris paribus

all other factors remain constant

Efficiency

Efficiency is a quantifiable concept, determined by the ratio of useful output to total input.

Elasticity

A measure of the responsiveness of something to a change in one of its determinants.

Engel curve

A curve showing the relationship between income and quantity demanded.

Equilibrium

A state of rest, self-perpetuating in the absence of any outside disturbance.

Excess demand

This occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.

Excess supply

This occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.

Framing

This is the way that choices are described and presented. Changing the framing of a choice may affect tastes and preferences.

Imperfect competition

A market structure showing some, but not all, features of perfect competition.

Imperfect information

This exists where some stakeholders in an economic transaction have more access to knowledge than others.

Incentive effect

Prices give producers the incentive to either increase or decrease the quantity that they supply. A rising price gives producers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues.

Income effect

When a decrease in the price of a good or service that is being consumed means that consumers experience an increase in real income, usually allowing them to purchase more of the product. The income effect may be negative.

Income elasticity of demand (YED)

A measure of the responsiveness of the demand for a good or service to a change in income.

Indirect taxes

These are taxes on expenditure. They are added to the selling price of a good or service.

Inferior goods

A good where the demand for it decreases as income increases and more superior goods are purchased.

Joint supply

Goods which are produced together, or where the production of one good involves the production of another product (for example, as a by-product of production).

Law of demand

As the price of a good falls, the quantity demanded will normally increase, ceteris paribus

Law of supply

As the price of a good rises, the quantity supplied will normally rise, ceteris paribus

Mandated choices

Mandated choices are when consumers are required to state whether or not they wish to take part in an action.

Manufactured goods

Goods that have been processed by workers.

Marginal costs

Marginal costs are the additional costs of producing one more unit of output.

Marginal social benefit (MSB)

The extra benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.

Marginal social cost (MSC)

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Marginal utility

The extra utility derived from consuming one more unit of a good or service.

Market

A market is where buyers and sellers come together to carry out an economic transaction.

Market demand

The horizontal sum of the individual demand curves for a product of all the consumers in a market.

Market equilibrium

The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply. Allocative efficiency is achieved

Market failure

The failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.

Market mechanism

This is the system in which the forces of demand and supply determine the prices of products. Also known as the price mechanism.

Market supply

The horizontal sum of the individual supply curves for a product of all the producers in a market.

Microeconomics

The study of the behaviour of individual consumers, firms, and industries and the determination of market prices and quantities of good, services, and factors of production.

Necessity goods

A good where the demand for it increases as income increases, but the increase in demand is less than proportional to the rise in income.

Normal goods

A good where the demand for it increases as income increases.

Nudge theory

This is generally used to describe situations where nudges (prompts, hints) are used to improve the life and wellbeing of people and society.

Perfect competition

A market structure where there are a very large number of small firms, producing identical products that are incapable of affecting the market supply curve. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

Perfect information

This exists where all stakeholders in an economic transaction have access to the same knowledge.

Perfectly elastic demand

This is where an increase in the price of a good or service leads to a fall in the quantity demanded of the good or service to zero. (PED would be infinity.)

Perfectly elastic supply

This is where a fall in the price of a good or service leads to a fall in the quantity supplied of the good or service to zero. (PES would be infinity.)

Perfectly inelastic demand

This is where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED would be equal to zero.)

Perfectly inelastic supply

This where a change in the price of a good or service leads to no change in the quantity supplied of the good or service. (PES would be equal to zero.)

(Price) elastic demand

This is where a change in the price of a good or service leads to a proportionally larger change in the quantity demanded of the good or service. (PED would be greater than one.)

(Price) elastic supply

This is where a change in the price of a good or service leads to a proportionally larger change in the quantity supplied of the good or service. (PES would be greater than one.)

(Price) inelastic demand

This is where a change in the price of a good or service leads to a proportionally smaller change in the quantity demanded of the good or service. (PED would be less than one.)

(Price) inelastic supply

This is where a change in the price of a good or service leads to a proportionally smaller change in the quantity supplied of the good or service. (PES would be less than one.)

Price elasticity of demand (PED)

A measure of the responsiveness of the quantity demanded of a good or service when there is a change in its price.

Price elasticity of supply (PES)

A measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price.

Price mechanism

The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.

Producer surplus

The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive.

Profit maximisation

Profit maximisation is producing at the level of output where profits are greatest: where marginal revenue equals marginal cost.

Quantity demanded

The willingness and ability to purchase a quantity of a good or service at a certain price over a given time period, ceteris paribus

Quantity supplied

It is the willingness and ability to produce a quantity of a good or service at a given price over a given time period, ceteris paribus

Rationing

An artificial control on the distribution of scarce resources.

Restricted choices

This is when the choice of a consumer is restricted, but still exists.

Satisficing

This occurs when entrepreneurs try to cover their opportunity costs, but do not push themselves significantly further, even though they might be able to earn higher profits. It is essentially a mix of the words "satisfy" and "suffice".

Signalling

The sending of a signal revealing relevant information to a participant in a transaction in order to reduce asymmetric information, and so reduce adverse selection.

Signalling effect

Prices give signal to both producers and consumers. A rising price gives a signal to producers that they should increase their quantity supplied, and signals to consumers that they should decrease the quantity demanded and vice versa.

Social conformity

The prevailing social norms or social customs will influence our daily behaviour/choice making.

Social/community surplus

The combination of consumer surplus and producer surplus.

Socially optimum output

This occurs where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. In different words, it occurs where the marginal cost of producing a good (including any external costs) is equal to the price that is charged to consumers. (P=MC)

Subsidies

Subsidies are financial support paid by governments to firms.

Substitutes

Goods which can be used in place of each other. For example, Adidas running shoes and Nike running shoes.

Substitution effect

When the price of a product falls, relative to other products, there is an incentive to purchase more of the product, since the marginal utility/price ratio has improved.

Supply

This is the willingness and ability of producers to produce a quantity of a good or service at a given price in a given time period, ceteris paribus

Supply curve

This shows the relationship between the price of a good or service and the quantity supplied. It is normally upward sloping.

Tastes

The subjective, individual preferences of consumers.

Total revenue

The aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Unitary elastic demand

This is where a change in the price of a good or service leads to an equal and opposite proportional change in the quantity demanded of the good or service. (PED would be equal to one.)

Unitary elastic supply

This is where a change in the price of a good or service leads to an equal proportional change in the quantity supplied of the good or service. (PES would be equal to one.)

Utility

A measure of the satisfaction derived from purchasing a good or service.