Microeconomics keyterms

  • Created by: Richard98
  • Created on: 17-03-17 16:56
Abnormal, supernormal or economic profits
Profits above normal profits
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Allocative efficiency
Achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences
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Arbitrage
A process by which prices in two market segments will be equalised as a result of purchase and resale by market participants
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Average cost
Total cost divided by the quantity produced; sometimes known as unit cost
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Average revenue
The average revenue received by the firm per unit of output; it is total revenue divided by the quantity sold
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Barrier to entry
A characteristic of a market that prevents new firms from readily joining the market
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Behavioural economics
A branch of economics that builds on the psychology of human behaviour in decision making
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Budget line
Shows the boundary of an individual's consumption set, given the amount available to spend and the prices of the goods
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Cartel
An agreement between firms on price and output with the intention of maximising their joint profits
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Competition Policy
An area of economic policy designed to promote competition within markets to encourage efficiency and protect consumer interests
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Conglomerate merger
A merger between two firms operating in different markets
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Constant returns to scale
Found when long-run average cost remains constant with an increase in output - in other words, when output and costs rise at the same time
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Contestale market
A market in which the existing firm makes only normal profit, as it cannot set a price higher than average cost without attracting entry, owing to the absence of barriers to entry and sunk costs
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Corporate social responsibility
Actions that a firm takes in order to demonstrate its commitment to behaving in the public interest
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Dependency ratio
The ratio of those aged 15 or below and 65 and above to the working population
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Derived demand
Demand for a good not for its own sake, but for what it produces, e.g. labour is demanded for the output it produces
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Discount
A process whereby the future valuation of a cost or benefit is reduced in order to provide an estimate of its present value
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Discrimination
A situation in a labour market where some people receive lower wages that cannot be explained by economic factors
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Diseconomies of scale
Occur for a firm when an increase in the scale of production leads to higher long-run average costs
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Dominant strategy
A situation in game theory where a player's best strategy is independent of those chosen by others
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Dynamic efficiency
A view of efficiency that takes into account the effect of innovation and technical progress on productive and allocative efficiency in the long run
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Economic rent
A payment received by a factor of production over and above what would be needed to keep it in its present use
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Economically active
Active in the labour force, including the employed, the self-employed and the unemployed
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Economies of scale
Occur for a firm when an increase in the sscale of production leads to production at lower long-run average cost
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Economies of scope
Economies arising when average cost falls as a firm increases output across a range of different products
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Environmental kuznets curve
A relationship between economic growth and environmental degradation, under which environmental degradation at first increases as an economy expands, but then may improve at higher average income levels
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Equi-marginal principle
That a consumer does best in utility terms by consuming at the point where the ratio of marginal utilites from two goods is equal to the ratio of their prices
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External economies of scale
Economies of scale that arise from the expansion of the industry in which a firm is operating
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Externality
A cost or a benefit that is external to a market transaction, borne by a third party, and not reflected in market prices
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Firm
An organisation that brings together factors of production in order to produce output
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Fixed costs
Costs that do not vary with the level of output
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Game theory
A method of modelling the strategic interaction between firms in an oligopoly
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Horizontal merger
A merger between two firms at the same stage of production in the same industry
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Human capital
The stock of skills and expertise that contribute to a worker's productivity
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Hypothecation
In the context of the transport sector, the principle that revenues raised from taxing transport should be used to improve the transport system
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ILO unemployment rate
Measure of the percentage of the workforce who are without jobs but are available for work, willing to work and looking for work.
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Income effect of a price change
reflects the way that a change in the price of a good affects purchasing power
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Industry long-run supply curve (LRS)
Under perfect competition, the curve that, for the typical firm in the industry, is horizontal at the minimum point of the long-run average cost curve
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Informal labour market
Economic activity that is not registered or recorded, and is not part of the formal labour market
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Internal economies of scale
Econoies of scale that arise from the expansion of a firm
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Internalising an externality
An attempt to deal with an externality by bringing an external cost of benefit into the price system
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Labour productivity
A measure of output per worker, or output per hour worked
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Law of diminishing marginal utility
State that the more units of a good that are consumed, the lower the utility from consuming those additional units
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Law of diminishing returns
A law stating that if a firm increases its inputs of one factor of production while holding inputs of the other factor fixed, eventually the firm will get diminishing marginal returns from the variable factor
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Living wage
An estimate of how much income households need to afford an acceptable standard of living
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Long run
The period over which the firm is able to vary the input of all its factors for production
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Marginal cost
The cost of producing an additional unit of output
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Marginal physical product of labour (MPP)
The additional quantity of output produced by an additional unit of labour input
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Marginal principle
The idea that economic agents may take decisions by considering the effect of small changes from the existing situation
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Marginal productivity theory
A theory which argues that the demand for labour depends upon balancing the revenue that a firm gains from employing an additional unit of labour against the marginal cost of that unit of labour
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Marginal revenue
The additional revenue received by the firm if it sells an additional unit of output
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Marginal revenue product of labour (MRP)
The additional revenue received by a firm as it increases output by using an additional unit of labour input i.e the marginal physical product of labour multiplied by the marginal revenue received by the firm
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Marginal utility
The additional utility gained from consuming an extra unit of a good or service
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Market structure
The market environment within which firms operate
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Minimum efficient scale
The level of output at which long-run average cost stops falling as output increases
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Minimum wage
Legislation under which firms are not allowed to pay a wage below some threshold level set by the government
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Monopolistic competition
A market that shares some characteristics of monopoly and some of perfect competition
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Monopoly
A firm of market structure in which there is only one seller of a good or service. Firms owns more than 25% of the market share
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monopsony
A market in which there is a single buyer of a good, service of a factor of production
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Multinational corporation
a firm that conducts its operations in a number of countries
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Nash equilibrium
A situation occurring within a game when each player's chosen strategy maximises payoffs given the other player's choice, so no player has an incentive to alter behaviour
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Natural monopoly
Monopoly that arises in an industry in which there are such substantial economies of scale that only one firm is viable
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Net present value
The estimated value in the current time period of the discounted future net benefit of a project
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N-firm concentration ratio
A measure of the market share of the largest n firms in an industry
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NIMBY (not in my back yard)
A syndrome under which people are happy to support the construction of an unsightly or unsocial facility, so long as it is not in their back yard
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Non-pecuniary benefits
Benefits offered to workers by firms that are not financial in nature
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Non-renewable resource
A resource that cannot be renewed once its supply is exhausted
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Normal profit
The return needed for a firm to stay in a market in the long run
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Oligopoly
A market with a few sellers, in which each firm must take account of the behaviour and likely behaviour of rival firms in the industry
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Participation rate
The percentage of the population in a given age group who are economically active
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Perfect competition
A form of market structure that produces allocative and productive efficiency in long-run equilibrium
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Perfect/first-degree price discrimination
A situation arising in a market whereby a monopoly firm is able to charge each consumer a different price
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Predatory pricing
An anti-competitive strategy in which a firm sets price below average variable cost in an attempt to force a rival or rivals out of the market a
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Price taker
A firm that must accept whatever price is set in the market as a whole
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Principal-agent problem
Arises from conflict between the objectives of the principals and their agents, who take decisions on their behalf
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Prisoners' dilemma
An example of game theory with a range of applications in oligopoly theory
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Product differentiation
A strategy adopted by firms that marks their product as being different from their competitors
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Productive efficiency
When a firm operates at minimum average cost, choosing an appropriate combination of inputs and producing the maximum output possible from those inputs
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Rational decision making
A decision that allows an economic agent to maximise their objective, by setting the marginal benefit of an action equal to its marginal cost
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Real earning
The level of earnings adjusted for the price level; the rate of change of real earnings is thus the rate of change of earnings adjusted for inflation (the rate of change of prices)
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Relevant market
A market to be investigated under competition law, defined in such a way that no major substitutes are omitted but no non-substitutes are included
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Renewable resource
A resource that can replenish itself over time
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Replacement ratio
The ratio of unemployment benefits to the wage that a claimant could receive in employment
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Satisfying
Behaviour under which the managers of firms aim to produce stisfactory results for the firm (e.g. in terms of profits) rather than trying to maximise them
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Shadow price
An estimate of the monetary value of an item that does not carry a market price
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Short run
The period over which a firm is free to vary its input of one factor of production (labour), but faces fixed inputs of the other factors of production
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Short-run supply curve
For a firm operating under perfect competition, the curve given by its short-run marginal cost curve above the price at which MC = SAVC; for the industry, the horizontal sum of the supply curves of the individual firms
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Social cost-benefit analysis (CBA)
A process of evaluating the worth of a project by comparing its costs and benefits, including both direct and social costs and benefits - including externality effects
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Static efficiency
Efficiency at a particular point in time
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Substitution effect of a price change
Reflects the way that a change in the price of a good affect relative prices
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Sunk costs
Costs incurred by a firm that cannot be recovered if the firm ceases trading
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Sustainable development
'Development that meets that needs of the present without compromising the ability of future generations to meet their own needs'
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Tacit collusion
A situation occurring when firms refrain from competing on price, but without communication or formal agreement between them
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Total cost
The sum of all costs that are incurred in producing a given level of output
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Total factor productivity
The average productivity of all factors, measured as the total output divided by the total amount of inputs used
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Total revenue
The revenue received by a firm from its sales of a good or service; it is the quantity sold, multiplied by the price
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Trade union
An organisation of workers that negotiates with employers on behalf of its members
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Transfer earnings
The minimum payment required to keep a factor of production in its present use
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Unemployment rap
A situation in which people choose to be unemployed because the level of unemployment benefit is high relative to the wage available in low-paid occupations
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Unit labour cost
Wages, salaries and other costs of using labour, divided by output per worker
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Utility
The satisfaction received from consuming a good or service
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Variable costs
Costs that vary with the level of output
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Vertical merger
A merger between two firms in the same industry, but at different stages of the production process
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Workforce
People who are economically active, either employed or unemployed
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Working population
People between the ages of 16 and 64
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X-inefficiency
Occurs when a firm is not operating at minimum costs, perhaps because of organisational slack
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Card 2

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Allocative efficiency

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Achieved when society is producing the appropriate bundle of goods and services relative to consumer preferences

Card 3

Front

Arbitrage

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Card 4

Front

Average cost

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Card 5

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Average revenue

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