Economic Principles 1

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  • Created by: amyclaire
  • Created on: 05-01-19 17:16
Adverse Selection
When the terms offered by someone mean the other person won't take part.
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Antitrust policy
Gov policy & laws to limit monopoly power & prevent cartels
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Arbitrage
Buying something in one market to sell at a higher price in another
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Artificially scarce good/ club good
Public good that is excludable eg. Netflix subscription
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Asymmetric information
Info relevant to some in an interaction, known by some but not others
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Average product
Total output divided by a particular input eg. workers, hours
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Bank Money
Money in the form of bank deposits created by commercial banks by extending credit
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Bargaining gap
The difference between the real wage that firms wish to offer to provide incentives to work, and the real wage that allows firms the markup to max profits given competition
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Bargaining power
The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction
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Base Money
Cash held, and balances held by commercial banks at the central bank (reserves)
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Best Response
Strategy that will give a player the highest payoff, given the strategies other players select
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Beveridge Curve
Inverse relationship between unemployment rate and job vacancy rate (each expressed as a fraction of the labour force)
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Bond
Financial asset where issuer promises to pay a given amount over time
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Broad Money
Stock of money in circulation, bank and base money in hands of non bank public
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Budget Constraint
Equation representing all combinations of goods and services one could acquire that exhaust one's budget
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Capacity- constrained
Firm has more orders for its output than it can fill
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Capacity Utilisation Rate
Extent to which a firm/ industry/ economy is producing as much as the stock of its capital goods and knowledge will allow
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Capital goods
Equipment, buildings and other durable inputs used to produce, including intellectual property
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Capital intensity
Capital goods per worker
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Capital productivity
Output p unit of capital good
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Capitalism
Economic system where private property, markets & firms are important
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Causality
From cause to effect, establishes change in 1 variable produces change in another
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Ceteris Paribus
Other things equal, holding other things constant
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Co- insurance
Pooling savings across households for a household to maintain consumption during temporary fall in income
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Common pool resource
Rival good that is non excludable eg. public fishery
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Comparative Advantage
If the cost of producing an additional unit of a good relative to cost of producing another good is lower than another person's cost to produce the same two goods
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Competitive equilibrium
All buyers/ sellers price takers, at prevailing market price, q supplied= q demanded
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Concave function
Line segment between any 2 points lies entirely below curve representing function
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Conspicuous consumption
Purchase to publicly display social status
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Constant prices
Adjusted for inflation/ deflation so a unit of currency represents the same buying power in different time periods
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Constrained optimisation problem
Decision maker chooses value of 1 or more variables to achieve an objective subject to a constraint which determines a feasible set
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Consumer surplus
Consumer's willingness to pay minus price summed across all units sold
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Correlation coefficient
How closely associated 2 variables are and whether they tend to take similar values
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Deadweight loss
Loss of total surplus relative to a Pareto efficient allocation
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Discount Rate
Measure of impatience, how much person values an additional unit of consumption now relative to later, slope of indifference curve for C now and later, minus 1
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Dominant Strategy Equilibrium
Outcome where every player plays his dominant strategy, the action yielding the highest payoff no matter what other players do
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Dominant technology
Tech that produces same amount at lower cost than alternative
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Economic cost
Out of pocket cost plus opportunity cost
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Economic profit
Revenue minus costs including opportunity cost of capital
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Economic rent
Benefit received above what individual would have received in best alternative
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Economically feasible
Policies for which desire outcomes are a nash equilibrium so private economic actors won't undo the desire effects
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Economies of agglomeration
Advantages when located close to other firms in same industries
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Economies of scope
Cost savings when 2 or more products are produced jointly by a single firm rather than 2 separate firms
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Efficiency wages
Payment of employer above reservation wage to motivate employee
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Employment rate
Employed/ population of working age
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Employment rent
Value of job exceeds value of unemployment, cost of job loss
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Endowment
Facts affecting income such as wealth, land, shares, schooling,
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Equilibrium
self perpetuating, State in which no tendency for qs to change or market price, unless some change in determinants
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Equilibrium unemployment
People seeking work but without jobs, intersection of wage and price setting curves, nash equilibrium of labour market
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Equity
Individuals own investment, net worth
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Expropriation risk
Probability asset will be taken from owner by gov/ other actor
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Fallacy of composition
Mistaken inference that what is true of parts must be true of the whole
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Final Income
Value of goods/ services a household can consume, disposable income minus VAT plus public services value
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Financial accelerator
Ability to borrow increases when value of collateral pledged goes up
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Firm specific asset
Something a person owns/ can do that has more value in their current firm than next best alternative
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Fiscal multiplier
Total change in output by an initial change in gov spending
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Fisher equation
Real interest rate as difference between nominal interest rate & expected inflation
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Goods market equilibrium
Point where output/ AD for goods, continue at this level unless something changes spending
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Great moderation
Period of low volatility in aggregate output in advanced economies between 1980 and 2008
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Problem of hidden actions
WHen some action taken is not known by another
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Hidden attributes
When some attribute of the person in an exchange is not know by the other parties
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Impatience
Preference to move consumption to the present, derived from pure impatience or diminishing marginal returns to consumption
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Income effect
The effect the additional income would have if there were no change in price/ opportunity cost
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Index
Measure of the amount of something in one period compared to a different base period of value 100
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Inflation stabilising rate of unemployment
Unemployment rate at which inflation is constant, natural rate of unemployment
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Innovation rents
Profits in excess of the opportunity cost of capital an innovator gets by invention
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Interest Rate
The price of bringing some buying power forward in time
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Intergenerational elasticity
When comparing parents and grown offspring, the % difference in the 2nd generations status associated with a 1% difference in the adult generation's status
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Joint surplus
Sum of economic rents of all involved in an interaction
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Labour Discipline Model
model that explains how employers set wages so employee receive an economic rent which provides an incentive to work hard to avoid job loss
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Labour force
People who are or wish to work, either employed or unemployed
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Lending Rate
Average rate charged by commercial banks to firms/ households, difference with policy rate is spread on commercial lending
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Leverage Ratio
Value of assets/ equity stake
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Logarithmic scale
Way of measuring a q based on log(x), converts ratio to difference
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Long run equilibrium
Achieved when variables that were held constant in the short run are allowed to adjust as people have time to respond
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MRS
Trade off person willing to make between 2 goods, slope of indifference curve
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MRT
Q that must be sacrificed to acquire 1 additional unit, slope of feasible frontier
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Market capitalisation rate
Rate of return just high enough to induce investors to hold shares in a company, will be high if subject to systemic risk
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Maturity transformation
Borrowing short term & lending long term
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Medium Run
Output, employment, prices & wages endogenous, capital stock, tech, institutions are exogenous
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Menu costs
Resources used in setting & changing prices
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Merit goods
Should be available independently of ability to pay
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Minimum acceptable offer
In ultimatum game, smallest offer by proposer will not be rejected by responder
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Missing Market
Some exchange which if implemented would be mutually beneficial, but doesn't occur due to asymmetric/ non- verifiable info
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Moral Hazard
When one party is deciding an action that affects the other but cannot be controlled by means of a contract due to lack of information
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Multiplier
Mechanism through which the direct and indirect effect of a change in autonomous spending affects aggregate output
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Nash equilibrium
Set of strategies such that each players strategy is a best response to those chosen by everyone else
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Natural Monopoly
Production process where the long run AC curve is sufficiently downward sloping to make it impossible to sustain competition
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Net present value
Present value of a stream of future income minus associated costs
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Network economies of scale
When an increase in the number of users of an output implies an increase in the value of the output to each of them because they are connected to each other
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Non excludable public good
Non rival good for which it is impossible to exclude anyone eg. defence
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Normal profit
Rate of profit= opportunity cost of capital (amount of income an investor could have received by investing unit of capital elsewhere)
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Paradox of thrift
If an individual consumes less, savings will increase, but if everyone consumes less, there will be lower savings overall as the attempt to increase saving is thwarted if an increase in the saving rate is unmatched by an increase investment
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Pareto improvement
Change that benefits at least 1 person without making anyone else worse off
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Pigouvian subsidy/ tax
Encourages/ discourages economic activity with external effects
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Predistribution policy
Gov actions affecting endowments, including education, min wage, anti- discrimination policies
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Present value
Value today of a stream of future income or other benefits, discounted using an interest rate/ discount rate
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Price gap
Difference in price of good in exporting and importing country, including transport cost & trade taxes
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Price Markup
Price minus MC divided by price, inversely proportional to elasticity of demand
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Price- setting curve
Curve giving real wage paid when firms choose p max price
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Primary deficit
Gov deficit excluding interest payments on its debt
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Principal agent relationship
Principal would like agent to act in some way but cannot be enforced
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Prisoners' dilemna
Game where payoffs in dominant strategy equilibrium are lower for each player and in total than if neither player played dominant strategy
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Private good
Rival and excludable
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Producer surplus
Price minus min price it would have been willing to sell good, summed across all units sold
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Production function
Graphical expression of amount of output produced by any amount of input, describes differing tech capable of producing same thing
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Pure impatience
Person values additional unit of consumption now over later, when amount of consumption same now and later- myopia, weakness of will
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Recession
Period when output is declining, or when level of output below normal level
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Redistribution policy
Transfers of gov resulting in final income distribution different from market income
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Residual claimant
Person who receives income left over from project after payment of contractual costs
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Schumpeterian rents
Profits in excess of opportunity cost of capital innovator gets by introducing new tech, form, or strategy
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Subsistence level
Level of living standards such that population will not grow or decline
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Substitution effect
Effect only due to changes in price or opportunity cost, given new level of utility
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Systemic Risk
Threatens financial system
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Target wealth
Level of wealth household aims to hold, based on economic goals/ expectations
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Taylorism
Innovation in management seeking to reduce labour costs, by dividing skilled jobs into separate less skilled tasks to lower wages
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Tragedy of the Commons
Social dilemma where self interested individuals act independently deplete a common resource, lowering payoffs for all
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Unemployment Rate
Ratio of unemployed to total labour force
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Utility
Numerical indicator of value one places on an outcome, such that higher valued outcomes will be chosen
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Wage setting curve
Gives real wage necessary at each level of economy wide employment to provide incentives to work hard
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Willingness to accept
Reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high
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Worker's best response function
Optimal amount of work a worker chooses to perform for each wage the employer may offer
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Zero lower bound
Nominal interest rate cannot be negative, setting a floor on the nominal interest rate
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Other cards in this set

Card 2

Front

Gov policy & laws to limit monopoly power & prevent cartels

Back

Antitrust policy

Card 3

Front

Buying something in one market to sell at a higher price in another

Back

Preview of the back of card 3

Card 4

Front

Public good that is excludable eg. Netflix subscription

Back

Preview of the back of card 4

Card 5

Front

Info relevant to some in an interaction, known by some but not others

Back

Preview of the back of card 5
View more cards

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