1
Q
Behavioural economics
A
Research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants.
2
Q
Ceteris paribus
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To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus – i.e. all other influencing factors are held constant.
3
Q
Economic assumptions
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“In his 1953 essay titled “The Methodology of Positive Economics
4
Q
Economic model
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A simplified representation of economic processes. This representation can be used to gain a better understanding of the theory.
5
Q
Methodology
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A system of methods used in a particular area of study or activity.
6
Q
Microeconomics
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Study of economics at the level of the individual firm, industry or consumer/household.
7
Q
Moral judgement
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Decisions that evaluate situations, courses of action and behaviour that are based on intuition, feelings and emotions.
8
Q
Normative statements
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Normative statements express an opinion about what ought to be. They are subjective statements - i.e. they carry value judgments. For example, the level of duty on petrol is unfair and unfairly penalizes motorists.
9
Q
Political judgement
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Judgements about policy measures depending upon the political values held.
10
Q
Positive statement
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Objective statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation. For example: “A rise in consumer incomes will lead to a rise in the demand for new cars.” Or “A fall in the exchange rate will lead to an increase in exports overseas.”
11
Q
Unintended consequences
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Outcomes that are not the ones foreseen and intended by a purposeful action. In government intervention in markets there is usually at least one and often many unintended consequences partly because economics is a social science and we cannot predict accurately how producer and consumers will react.
12
Q
Value judgement
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A view of the rightness or wrongness of something, based on a personal view.
13
Q
Barter
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The practice of exchanging one good or service for another without using money.
14
Q
Basic economic problem
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There are infinite wants but finite factor resources with which to satisfy them.
15
Q
Constraints
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Limits to what we can afford to consume – we have to operate within a budget and make choices from those sets that are feasible/affordable. There is always a set of conceivable things that are actually available, and another set of that are not.
16
Q
Economic agent
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A participant in an economic system – be it a consumer, business or the government.
17
Q
Economic goods
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Goods that require factor inputs to produce, and therefore have an opportunity cost.
18
Q
Free goods
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Free goods do not use up any factor inputs when supplied. Free goods have a zero-opportunity cost i.e. the marginal cost of supplying an extra unit of a free good is zero.
19
Q
Households
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Private consumers living in an accommodation unit.
20
Q
Manufacturing
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The use of machines, tools and labour to make things for use or sale. The is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale.
21
Q
Needs
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Humans have many different types of wants and needs - economic, social and psychological. A need is essential for survival; food satisfies hungry people. A want is something desirable but not essential to survival e.g. cola quenches thirst.
22
Q
Capital goods
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Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from “financial capital”, meaning funds which are available to finance the production or acquisition of real capital.
23
Q
Entrepreneur
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An entrepreneur is an individual who seeks to supply products to a market for a rate of return (i.e. a profit). Entrepreneurs will often invest their own financial capital in a business and take on the risks associated with a business investment.
24
Q
Factor incomes
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Factor incomes are the rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit.
25
Factors of production
Factors of production are the inputs available to supply goods and services: Land - Natural resources available for production; Labour - The human input into the production process; Capital - goods used in the supply of other products e.g. technology, factories and specialized machinery; Enterprise - Entrepreneurs organise factors of production and take risks; Know-how - Information required to develop, produce and bring products to the market.
26
Income
Income represents a flow of earnings from using factors of production to generate an output of goods and services. For example, wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital.
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Inputs
Labour, capital and other resources used in the production of goods and services.
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Interest
Interest is the reward to the ownership of capital.
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Land
Natural resources available for production.
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Labour
Mental and physical effort by humans.
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Non-renewable resources
Non-renewable resources are resources which are finite and cannot be replaced. Minerals, fossil fuels and so on are all non-renewable resources.
32
Profit
The monetary reward for entrepreneurship.
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Renewable resources
Renewable resources (in theory) are replaceable if the rate of extraction of the resource is less than the natural rate at which the resource renews. Examples of renewable resources are solar energy, oxygen, biomass, fish stocks and forestry.
34
Rent
Rent is income typically associated with the ownership of land, but which can also include rental income from leasing out other assets such as cars, capital equipment.
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Wages
The monetary reward for labour.
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Finite resources
There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. By producing more for an ever-increasing population, we may destroy the natural resources of the planet.
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Opportunity cost
The cost of any choice in terms of the next best alternative foregone.
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Rationing
Rationing is a way of allocating scarce goods and services when market demand exceeds available supply. There are many ways of rationing including by price, by consumer income, by assessment of need, by education level and by age, gender, nationality.
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Scarcity
Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
40
Allocative efficiency
Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production.
41
Concave production possibility frontier
A concave PPF is "bowed outwards". This means there is a rising marginal opportunity cost as you produce more of one good. This is because there is imperfect factor mobility. E.g. labour/land/capital is more suited towards the production of one good than another.
42
Consumer goods
Goods bought and used by consumers and households. They are the end result of manufacturing.
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Economic efficiency
Economic efficiency is about making best or optimum use of our scarce resources among competing ends so that economic and social welfare is maximised over time.
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Economic growth
An increase in the productive potential of a country – shown by an outward shift of the production possibility frontier.
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Pareto efficiency
In neoclassical economics, an action done in an economy that harms no one and helps at least one person. A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.
46
Production possibility frontier
A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently.
47
Productive potential
The amount of output an economy could produce if all of its resources were fully and efficiently employed.
48
Trade-off
A trade-off implies that choices have to be made between different objectives of policy for example a trade-off between economic growth and inflation.
49
Unemployed resources
Factors of production that are not currently being used to produce an output.
50
Incentives
Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.
51
Marginal utility
The amount of utility derived from consuming one more unit of output.
52
Market incentives
Signals that motivate economic actors to change their behaviour perhaps in the direction of greater economic efficiency.
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Profit maximisation
The assumption that producers wish to produce an output that will create maximum profit levels.
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Rational choice
Rational choice involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs.
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Total utility
The total satisfaction received from consuming a given amount of a good or service.
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Utility
Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service.
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Utility maximisation
The assumption that consumers behave rationally in allocating their limited budget between different products so as to maximise total satisfaction from their purchases.
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Asymmetric information
Where parties have unequal access to information in a market.
59
Information failure
Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially 'wrong' choices.
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Symmetric information
For markets to work, there needs to be symmetric information i.e. consumers and producers have the same level of knowledge about the products, and they know everything there is to know about them and the effects of consuming them.
61
Altruism
The phenomenon in behavioural science for humans to behave with more kindness and fairness than would be the case if they behaved rationally. The ultimatum game is a good example of the principle. Altruism is often linked to the concept of inequity aversion i.e. humans do not like unequal outcomes. Whilst this is usually seen as positive, it can also result in a negative outcome e.g. a person being willing to forego a gain / reward if it means that someone else won't gain an even better reward.
62
Anchoring
The use of (usually) irrelevant information as a reference point for helping to make an estimate of an unknown piece of information. In other words, people use an "anchor point" of an event or a value that they know in order to make a decision or estimate. Behavioural scientists describe this as a cognitive bias.
63
Automatic thinking
Also known as system 1 thinking – people tend to consider what automatically comes to mind (narrow frame). Automatic thinking is effortless and intuitive.
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Bias
A bias is a systematic deviation from what is believed to be rational choice, which typically means that people are expected or assumed to add and weigh up all available information before making a decision.
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Bounded rationality
The idea that the cognitive, decision-making capacity of humans cannot be fully rational because of a number of limits that we face. These limits include: Information failure – there may be not enough information, or it may be unreliable, or maybe not all possibilities or consequences have been considered; The amount of time that we have to make our decisions; The limits of the human brain to process every piece of information and consider every single possibility; The impact of emotions on decision making. The result is that we usually end up making satisficing decisions, rather than optimising decisions.
66
Bounded self-control
This concept is closely linked to that of bounded rationality. Rationally, and according to neoclassical economic theory, consumers know when the price of a good/service exceeds the marginal utility they gain from consuming that good/service – in this rational world of homo economicus, consumers stop consuming. In reality, though, there is evidence to suggest that consumers often do not stop consuming even when it makes sense to stop – think about overeating, excessive investment in a particular stock or share and so on. Many behavioural scientists link bounded self-control to the concept of hyperbolic discounting i.e. valuing the present much more than the future and making decisions that their "future self" would not like.
67
Confirmation bias
Occurs when people seek out or evaluate information in a way that fits with their existing thinking and preconceptions. For example, a consumer may have a chosen favourite brand and will then seek out positive reviews of this product to help confirm that they have made the right choice.
68
Habit
This refers to a rigid pattern of behaviour followed by a person. For example, it could refer to the subconscious purchase of identical items each week, or the pattern followed by someone who always lights up a cigarette, without thinking, when they make a cup of coffee. Habit is often linked with System 1 thinking. It is also often linked with the idea of the status quo bias, when people stick with a previous decision, even if it is no longer the most appropriate decision.
69
Herding / herd behaviour
A phenomenon in which individuals act collectively as part of a group, often making decisions as a group that they would not make as an individual. There are 2 generally accepted explanations: firstly, the social pressure to conform means that individuals want to be accepted; secondly, individuals find it hard to believe that a large group could be wrong and follow the group's behaviour in the mistaken belief that the group knows something that the individual doesn't.
70
Heuristics
In general terms, a heuristic is a method or technique that people use to help them make a decision or solve a problem more quickly. We often use the phrase rule of thumb to mean the same thing. The outcome from using the heuristic may not be perfect or optimised but is usually "good enough". The term was developed, along with bounded rationality and satisficing, by the cognitive scientist Herbert Simon.
71
Rule of thumb
Occurs when people seek out or evaluate information in a way that fits with their existing thinking and preconceptions. For example, a consumer may have a chosen favourite brand and will then seek out positive reviews of this product to help confirm that they have made the right choice.
72
Social norms
Our day-to-day behaviour in markets is influenced by prevailing social norms or social customs. Examples include: The changing social stigma of drink-driving and speeding on the roads, observing white lines in car parks and queuing behaviour in shops. Social norms become accepted by the majority of a given community of people.
73
Choice architecture
This refers to a scenario in which the environment in which someone must make a decision has been carefully designed to try and influence that decision. This term was developed by Richard Thaler and Cass Sunstein in 2008 in their book 'Nudge'. In short, choice architecture is the framing of a choice in order to manipulate the outcome of someone's decision.
74
Commitment devices
Commitment contracts (devices) can reinforce decisions to adopt healthful behaviours. They impose a penalty if people do not reach a goal – invoking loss aversion. Examples might include: Committing yourself to a diet using an online app; Commitment to joining a locally-based savings scheme /credit union; Commitment signals to a partner using an expensive gift.
75
Computational weakness
Irrationality arises when consumer's decisions are dominated by computational weakness. This occurs when consumers find it difficult to calculate the probability of something happening when they make their purchasing decisions. For example, people may underestimate the long-term health outcomes of eating processed meats or relying heavily on prescription painkillers.
76
Default Choice
The default choice or default option is one that a consumer "selects" if he or she does nothing. Studies have shown that consumers rarely change the default settings. So, the nature of the default option strongly affects consumer behaviour. Therefore, if the default option or setting is changed, then consumer behaviour will change.
77
Mandated choice
A situation or scenario in which people must make a decision in advance with respect to whether they wish to participate in a particular action – they are required by law to make that choice. These decisions are usually "public policy" decisions e.g. deciding whether to donate your organs when you die, deciding whether to make a "living will" etc.
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Negative framing
A technique used by choice architects in which someone is persuaded to make a decision based on negative consequences e.g. if you choose to park in that space then there is a chance that your car could be towed away.
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Nudge
A nudge is a technique used by choice architects in order to change someone's behaviour in an easy and low-cost way, without reducing the number of choices available. It has been described as "libertarian paternalism".
80
Priming
Our behaviour is influenced by cues that work subconsciously and prime us to behave / choose in certain ways. For example, the playing of certain types of music in a shopping mall / priming through aroma e.g. by the placing of a bakery in the supermarket.
81
Restricted Choice
Because of the existence of bounded rationality, consumers can find it really difficult to make effective decisions when the number of choices or options is large; this may result in them failing to make any decision. Therefore, restricting the number of available choices may be more likely to cause consumers to act and actually make a decision, resulting in a more efficient outcome.
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Positive framing
A technique used by choice architects in which someone is persuaded to make a decision based on positive consequences e.g. if you make a donation to our charity today we promise never to ask you for money again.
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Demand
Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
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Demand curve
A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price falls.
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Effective demand
Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand.
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Excess demand
The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price.
87
Law of demand
The law of demand is that there is an inverse relationship between the price of a good and demand. As prices fall, we see an expansion of demand. If price rises, there should be a contraction of demand.
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Perverse demand curve
A perverse demand curve is one which slopes upwards from left to right. Therefore an increase in price leads to an increase in demand. This may happen where goods are strongly affected by price expectations.
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Willingness to pay
The maximum price a consumer is prepared pay to obtain a product.
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Complements
Two complements are said to be in joint demand. Examples include: fish and chips, iron ore and steel, hardware and software for digital products.
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Cross price elasticity of demand
Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity, we make an important distinction between substitute products and complementary goods and services.
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Derived demand
Derived demand is demand that comes from (is derived) from the demand for something else. Thus, the demand for machinery is derived from the demand for consumer goods that the machinery can make. If there is low demand for consumer goods, there is low demand for the machinery that can make them.
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Elastic demand
Demand for which the coefficient of price elasticity of demand is greater than 1.
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Income elasticity of demand
Measures the relationship between a change in quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income.
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Inelastic demand
When the coefficient of price elasticity of demand is less than 1. (Ped<1)
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Inferior good
When demand for a product falls as real incomes increases. Income elasticity is negative.
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Luxury good
Luxury goods and services have an income elasticity of demand with a coefficient of more than +1 i.e. a 5% rise in real incomes might lead to an increase in demand of 20% giving a coefficient of YED of +4.
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Necessities
Necessities typically have a low own-price elasticity of demand (consumers are not sensitive to a change in price) and a low but positive income elasticity of demand (YED >0 but <+1). Examples might include milk, cereals, toothpaste and bread.
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Normal goods
Normal goods have a positive income elasticity of demand. Necessities have a coefficient of income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income.
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Price elasticity of demand
Price elasticity of demand measures the responsiveness or sensitivity of demand for a product following a change in its own price.
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Real income
The money earned from employment after the distorting effects of inflation have been removed.
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Substitutes
Goods in competitive demand and act as replacements for another product.
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Total revenue
The amount of money earned by a firm from selling its output. TR = P X Q
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Unit elasticity of demand
A demand curve with unitary price elasticity has a coefficient of PED equal to 1 (unity) throughout. Total spending on the product will be the same at each price level. Government intervention will not affect total spending on the product.
105
Unrelated goods
Goods or services that have no relationship between them in which case the cross-price elasticity of demand will be zero.
106
Competitive supply
Goods in competitive supply are alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots. An electronics factory can produce smart-phones or smartwatches.
107
Excess supply
When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price.
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Law of supply
The law of supply is that there is a positive relationship between the price of a good and demand. As prices rise, we see an expansion of supply. If price fall, there should be a contraction of supply.
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Market supply
Market supply is the total amount of an item producers are willing and able to sell at different prices, over a given period of time e.g. one month.
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Supply
Quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.
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Supply chain
Different stages of making, distributing and selling a good or service from the production of parts, through to distribution and sale of the product.
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Supply curve
The relationship between market price and quantity supplied onto the market.
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Elastic supply
Where the coefficient of price elasticity of supply is greater than +1.
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Elasticity of supply
Price elasticity of supply measures the relationship between change in quantity supplied and a change in market price.
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Inelastic supply
When the coefficient of price elasticity of supply is less than +1. (Pes<1)
116
Price elasticity of supply
Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change in price. Supply responds positively to price, so PES is positive.
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Disequilibrium
Prices where demand and supply are out of balance are points of disequilibrium. There is either excess demand (market prices too low) or excess supply (market prices too high).
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Equilibrium
Equilibrium means 'at rest' or 'a state of balance' - i.e. a situation where there is no tendency for change.
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Health rationing
Health rationing occurs when the demand for health care services outstrips the available resources leading to waiting lists and delays for health treatment.
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Invisible hand
Adam Smith described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest.
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Price mechanism
The means by which decisions of consumers and businesses interact to determine the allocation of resources. The free-market price mechanism clearly does NOT ensure an equitable distribution of resources and can lead to market failure.
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Price signals
Changes in price act as a signal about how resources should be allocated. A rise in price encourages producers to switch into making that good but encourages consumers to use an alternative substitute product (therefore rationing the product).
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Shortage
A situation in which quantity demanded is greater than quantity supplied.
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Signalling
Prices have a signalling function because the price in a market sends important information to producers and consumers.
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Composite demand
Composite demand is when the good has multiple uses. So, the demand for bricks is made up of many demands e.g. house building demand and factory building demand. Milk can be made into cream, cheese, yoghurts etc.
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Competitive demand
Goods that are substitutes and act as replacements for another product.
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Joint demand
Two products are said to be in joint demand when the demand for one leads to the demand for the other. Examples include fish and chips, iron ore and steel, hardware and software for digital products.
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Joint supply
Joint supply describes a situation where an increase or decrease in the supply of one good leads to an increase or decrease in supply of another by-product. For example, an expansion in the volume of beef production will lead to a rising market supply of beef hides.
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Labour Productivity
A measure of labour efficiency = output per person employed in a given time frame.
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Productivity
A measure of efficiency = output per unit of input employed in a given time frame.
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Adam Smith
One of the founding fathers of modern economics. His most famous work was the Wealth of Nations (1776) - a study of the progress of nations where people act according to their own self-interest - which improves the public good.
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Alienation
A sociological term to describe the estrangement many workers feel from their work, which may reduce their motivation and productivity. It is sometimes argued that alienation is a result of the division of labour because workers are not involved with the satisfaction of producing a finished product.
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Division of labour
The specialization of labour in specific tasks, intended to increase productivity.
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Medium of exchange
Money is any asset that is widely acceptable as a medium of exchange when buying goods and services in markets. It facilitates transactions between buyer and seller.
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Money
Money – in its various forms – fulfils various key functions including a medium of exchange, a unit of account, a store of value and a standard of deferred payment.
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Specialisation
A method of production where a business or area focuses on the production of a limited scope of products or services to gain greater productive efficiency.
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Store of value
A function of money in that it can be used to save and be exchanged at a later time.
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Average returns
The total amount of output produced divided by the number of inputs employed to produce that output.
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Constant returns
When an increase in inputs (capital and labour) results in a proportional increase in output. For example, if 10% more inputs are employed, output will increase by 10%.
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Decreasing returns
When an increase in inputs (capital and labour) results in a proportionally smaller increase in output. For example, if 10% more inputs are employed, output will increase by 5%.
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Diminishing returns
As more of a variable factor (e.g. labour) is added to a fixed factor (e.g. capital), a firm will reach a point where it has a disproportionate quantity of labour to capital and so the marginal product of labour will fall, thus raising marginal costs.
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Increasing returns
When an increase in inputs (capital and labour) results in a proportionally larger increase in output. For example, if 10% more inputs are employed, output will increase by 20%.
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Law of diminishing returns
The law of diminishing marginal returns states that employing an additional factor of production will eventually cause a relatively smaller increase in output. This occurs only in the short run when at least one factor of production is fixed (e.g. capital) and so increasing a variable factor (e.g. labour) will result in the extra workers getting in each other's way, reducing productivity.
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Long run
Time period in which all factor inputs may be varied but the basic technology of production is unchanged.
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Marginal returns
The amount that output increases by when one more unit of input is employed.
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Returns to scale
In the long run, all factors of production are variable. How the output of a business responds to a change in factor inputs is called returns to scale.
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Short run
A time frame when there is at least one fixed factor of production – usually the amount of capital and/or land used in the production process.
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Total returns
The total amount of output produced from a given number of inputs.
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Average total cost
Total cost per unit of output = Total cost / output = TC/Q.
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Average fixed cost
Total fixed cost per unit of output = TFC/Q.
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Average variable cost
Total variable cost per unit of output = TVC/Q.
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Capacity
The amount that can be produced by a plant, company, or economy (industrial capacity) over a given period of time.
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Capital intensive
When an industry or production process requires a relatively large amount of capital (fixed assets) or proportionately more capital than labour.
154
Cost synergies
Cost synergies are the cost savings that a buyer aims to achieve as a result of taking over or merging with another business.
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Cost-plus pricing
Where a firm fixes the price for its product by adding a fixed percentage profit margin to the average cost of production.
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Fixed cost
Business expenses that do not vary directly with the level of output in the short run.
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Marginal cost
The change in total costs from increasing output by one extra unit.
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Producer surplus
The difference between what producers are willing and able to supply a good and the price they receive. Shown by the area above the supply curve and below market price.
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Production function
The relationship between a firm's output and the quantities of factor inputs (labour, capital, land) that it employs.
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Sunk costs
Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable.
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Total cost
Total cost = total fixed cost + total variable cost (TC=TFC + TVC).
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Total fixed cost
All fixed costs added together.
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Total variable cost
All variable costs added together.
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Variable cost
Variable costs are business costs that vary directly with output since more variable inputs are required to increase output. Also known as prime costs.
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Diseconomies of scale (internal)
A business may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising LRAC. For example, a firm increases all inputs by 300%, its output increases by 200%.
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Economies of scale
Falling long run average cost as output increases in the long run.
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Economies of scope
Where it is cheaper for a business to produce a broader range of products.
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Excess capacity
The difference between the current output of a business and the total amount it could produce in the current time period.
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Experience curve
Falling unit costs as production of a product or service increases, because the company learns more about it, workers become more skillful. Also known as learning by doing.
170
External diseconomies of scale
When the growth of an industry leads to higher costs for businesses that are part of that industry – for example, increased traffic congestion, higher costs of renting buildings.
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External economies of scale
When the expansion of an industry leads to the development of ancillary services which benefit suppliers in the industry – causing a downward sloping industry supply curve.
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Internal economies
Reductions in long run average cost from an expansion of the size of a business.
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Minimum efficient scale
Scale of production where internal economies of scale have been fully exploited. Corresponds to the lowest point on the long run average cost curve (LRAC).
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Optimal plant size
Optimal plant is the size where costs are minimized, i.e. when all economies of scale have been obtained, but diseconomies have not set in.
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Average revenue
Total revenue per unit of output = TR/Q.
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Break-even output
The break-even price is when price = average total cost (P=AC). Normal profits made.
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Consumer surplus
The difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay (the market price).
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Marginal revenue
The revenue earned from selling the last unit of output. It is the addition to total revenue each time an extra unit is sold.
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Revenue maximization
Revenue maximization is an output when marginal revenue = zero (MR=0).
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Revenue synergies
The ability to sell more or raise prices after a merger e.g. marketing and selling complementary products; cross-selling into a new customer base and sharing distribution channels.
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Abnormal profit
Profit in excess of normal profit - also known as supernormal profit or monopoly profit. Abnormal profits may be maintained in a monopolistic market in the long run because of barriers to entry.
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Marginal profit
The increase in profit when one more unit is sold or the difference between MR and MC. If MR = £20 and MC = £14 then marginal profit = £6.
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Monopoly profit
A firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors. Barriers to entry protect monopoly profit in the long run.
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Normal profit
Normal profit is the transfer earnings of the entrepreneur i.e. the minimum reward necessary to keep her in her present industry. Normal profit is therefore treated as a fixed cost, included in the average, but not the marginal cost curve.
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Profit margin
The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control their operating costs.
186
Profit per unit
Profit per unit (or the profit margin) = AR – ATC. In markets where demand is price inelastic, a business may be able to raise price well above average cost earning a higher profit margin on each unit sold.
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Retained profit
Profit retained by a business for its own use and which is not paid back to the company's shareholders or paid in taxation to the government.
188
Shut down price
In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable cost (P>AVC).
189
Supernormal profit
A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost (P>AC). Also called abnormal profit.
190
Creative destruction
First introduced by the Austrian School economist Joseph Schumpeter. It refers to the dynamic effects of innovation in markets - for example where new products or business models lead to a reallocation of resources. Some jobs are lost but others are created.
191
Innovation
The commercial development of exploiting new or improved goods and services.
192
Invention
The creation of a new product, service or concept.
193
Barriers to entry
Factors which make it difficult or expensive for new firms to enter a market to compete with existing suppliers. Examples include patents; brand loyalty among consumers; the high costs of buying capital equipment and the need to win licences/franchises.
194
Barriers to exit
The costs associated with a decision to leave a market / industry, for example, lost goodwill with customers, redundancy costs and the reduced value of equipment sold at rock-bottom prices in a fire-sale of assets.
195
Innocent barriers to entry
Also known as structural entry barriers – arise when established firms have lower unit costs than potential rival firms. Might come about from first mover advantage.
196
Legal barriers to entry
Legal barriers include patent protection, legal franchises, trademarks and copyright.
197
Local monopoly
A monopoly limited to a specific geographical area.
198
Market structure
The structure of a market is described by the number of firms competing for the demand of consumers, the nature of costs, the extent of barriers to entry and also the bargaining power of consumers on the demand–side of the market.
199
Monopolistic competition
A low-concentration market structure with many competing firms each of whom supplies a slightly differentiated product and where entry barriers are low.
200
Monopoly
A pure monopoly is a single seller of a product in a given market or industry.
201
Monopoly power
Selling power arising from a firm having a large enough share of the industry to be able to set prices. Barriers to entry help protect monopoly power and profits in the long run.
202
Oligopoly
A market dominated by a few large suppliers. Market concentration is high with typically the leading five firms taking over sixty per cent of total market sales.
203
Perfect competition
A market with many competing firms and no entry barriers where each product is homogenous and where no single firm has any control over the market price.
204
Product differentiation
When a business seeks to distinguish what are essentially the same products from one another by real or illusory means.
205
Strategic barriers to entry
Strategic actions by an existing business in a market that discourages potential entrants from coming into the industry, may involve price wars, advertising and use of patents.
206
Strategic behaviour
Decisions that take into account the market power and reactions of other firms.
207
Structural barriers to entry
Cost advantages of existing, established firms in a market – they might have benefitted from economies of scale, vertical integration and built up high levels of customer loyalty.
208
Agency problem
Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm.
209
Business ethics
Business ethics is concerned with the social responsibility of management towards the firm's major stakeholders, the environment and society in general.
210
Competitive advantage
When a company has an advantage over another in selling a product or service.
211
Corporate governance
Practices, principles and values that guide a firm and its activities.
212
Corporate social responsibility (CSR)
Happens when companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders on a voluntary basis.
213
Divorce of ownership from control
This occurs when the owners of a business do not control the day-to-day decisions made in the business. The owners of a company normally elect a Board of Directors to control the business's resources for them.
214
Multinational
A company with subsidiaries or manufacturing bases in several countries.
215
Principal agent problem
This is an asymmetric information problem. Owners often cannot observe directly the day-to-day decisions of management. The performance of the agent is costly and difficult to monitor. Managers may have different objectives than owners.
216
Sales maximisation
Sales maximisation is achieving the highest level of output consistent with a firm making at least normal profit. The sales maximising equilibrium output is where AC=AR.
217
Satisficing
Satisficing involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit.
218
Short-termism
When a business pursues the goal of maximizing short-term profits because of a fear of being taken over or having the stock market mark down the value of the company.
219
Freedom of entry and exit
Zero barriers to entry and zero barriers to exit.
220
Homogeneous goods
Products that are standardised - they are more or less identical to each other.
221
Perfect knowledge
All consumers and producers have complete knowledge about production costs, methods and prices of competitor products.
222
Price taker
When a firm in a perfectly competitive market takes the ruling market price as its demand curve – this contrasts with imperfect competition where businesses have price-setting power.
223
Productive efficiency
The output of productive efficiency occurs when a business in a given market or industry reaches the lowest point of its average cost curve implying an efficient use of scarce resources and a high level of factor productivity.
224
Static efficiency
Measures how much output can be produced from given resources, and whether producers charge a price that reflects fairly the cost of the factors used to produce a product.
225
Non-price competition
Competing not on the basis of price but by other means, such as the quality of the product, packaging, customer service or some other feature.
226
Price maker
A business with price setting power – seen in imperfectly competitive markets.
227
Anti-competitive behaviour
Strategies such as predatory pricing that are designed to limit the degree of competition inside a market.
228
Bi-lateral monopoly
A bilateral monopoly/oligopoly is a situation where there is a single (or few) buyer(s) and seller(s) of a given product in a market.
229
Brand loyalty
The degree to which people regularly buy a particular product and refuse to or are reluctant to change to competing brands.
230
Cartel
An association of businesses or countries that collude to influence production levels and thus the market price of a particular product.
231
Collusion
Collusion takes place when rival companies cooperate for their mutual benefit. When two or more parties act together to influence production and/or price levels, thus preventing fair competition.
232
Concentration ratio
Measures the proportion of an industry's output or employment accounted for by the largest firms. When the concentration ratio is high, an industry has moved towards a monopoly, duopoly or oligopoly.
233
Dominant strategy
A dominant strategy in game theory is one where a single strategy is best for a player regardless of what strategy the other players in the game decide to use.
234
First mover advantage
The idea that a business that creates a new product and which is first into the market can develop a competitive advantage perhaps through learning by doing - making it more difficult and costly for new firms to achieve profitable entry.
235
Game Theory
A "game" happens when there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome (this is known as a pay-off.)
236
Herfindahl Index
A measure of market/industry concentration. The index is calculated by squaring the % market share of each firm in the market and summing these numbers.
237
Interdependence
When the actions of one firm has an effect on competitors. A feature of oligopoly.
238
Joint profit maximisation
Where members of a cartel, duopoly, oligopoly or similar market condition engage in pricing-output decisions designed to maximize the groups' profits as a whole – i.e. acting as if they were a pure monopoly supplier.
239
Kinked demand curve
The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price or another variable.
240
Limit pricing
This is a pricing strategy, where products are sold by a supplier at a price low enough to make it unprofitable for other players to enter the market.
241
Nash Equilibrium
In a Nash Equilibrium, the outcome of a game that occurs is when player A takes the best possible action given the action of player B, and player B takes the best possible action given the action of player A.
242
Overt collusion
Formal and open agreements between firms to undertake actions that are likely to minimise a competitive response. This is illegal in most economies.
243
Pay off matrix
Used in game theory - A payoff matrix is a table used to simplify all of the possible outcomes of a strategic decision.
244
Penetration pricing
A pricing policy used to enter a new market, usually by setting a very low price.
245
Price leadership
When one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing changes prompted by the dominant firm.
246
Price war
Vigorous competition between businesses often in a short-term battle for market share and increased cash-flow.
247
Prisoners' dilemma
A problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so.
248
Predatory pricing
The pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market. This activity is illegal in many economies.
249
Rent seeking behaviour
Behaviour by producers in a market that improves the welfare of one but at the expense of another. A feature of monopoly and oligopoly.
250
Tacit collusion
Where firms undertake actions that are likely to minimize a competitive response, e.g. avoiding price cutting or not attacking each other's market. When firms co-operate but not formally.
251
Zero-sum game
An economic transaction in which whatever is gained by one party must be lost by the other. If one business gains market share, it must be at the expense of the other firms in the market.
252
Deadweight loss
Loss in producer & consumer surplus due to an inefficient level of production.
253
Natural monopoly
For a natural monopoly the long-run average cost curve falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available.
254
Price fixing
Price fixing represents an attempt by suppliers to control supply and fix price at a level close to the level we would expect from a monopoly.
255
Cross-subsidy
A cross subsidy uses profits from one line of business to finance losses in another segment of a market e.g. Royal Mail and 2nd class letters.
256
Price discrimination
When a firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay, supplies extract all consumer surplus.
257
Second degree price discrimination
Businesses selling off packages of a product at surplus capacity at lower prices than the previously published/advertised price – also volume discounts for consumers.
258
Segmented markets
Segmentation involves dividing a broad consumer or business market into sub-groups of consumers based on some type of shared characteristics such as gender, income, location or other factor.
259
Contestable market
Where an entrant has access to all production techniques available to the incumbents, is not prohibited from wooing the incumbent's customers, and entry decisions can be reversed without cost.
260
Hit-and-run competition
When a business enters an industry to take advantage of temporarily high (supernormal) market profits. Common in highly contestable markets.
261
Dynamic efficiency
Dynamic efficiency focuses on changes in the choice available in a market together with the quality/performance of products that we buy. We usually identify a close link dynamic efficiency with the pace of innovation in a market.
262
Human capital
Human capital is a measure of individuals' skills, knowledge, abilities, social attributes, personalities and health attributes. These factors enable individuals to work, and therefore produce something of economic value.
263
Research and development
R&D is spending by businesses towards the innovation, introduction, and improvement of products and processes. R&D leads to greater dynamic efficiency.
264
Technical efficiency
How well and quickly a machine produces high quality goods. When measuring the technical efficiency of a machine, the production costs are not considered important.
265
X-inefficiency
A lack of competition may give a monopolist less of an incentive to invest in new ideas or consider consumer welfare. With X-inefficiency, the actual unit cost of production is higher than cost that we might see in a competitive market.
266
Community surplus
Community surplus is the sum of consumer and producer surplus at a given market price and output. Community surplus is maximised in competitive markets at an equilibrium output when price = marginal cost.
267
Elasticity of labour demand
Elasticity of labour demand measures the responsiveness of demand for labour (employment) when there is a change in the wage rate.
268
Marginal product (MP)
The additional (extra) output as a result of employing one more worker.
269
Marginal revenue product (MRP)
Marginal revenue product of labour (MRPL) is the extra revenue generated when an additional worker is employed. Formula: MRPL = marginal product of labour x marginal revenue.
270
Marginal revenue product theory
The demand curve for labour. A profit-seeking firm should only pay a worker a wage that is less than or equal to that worker's marginal revenue product.
271
Wage elasticity of demand for labour
The responsiveness of the demand for labour to a change in the wage rate of labour. Calculated using the formula: %ΔDL ÷ %ΔW.
272
Discouraged workers
People out of work for a long time who may give up on job search and effectively leave the labour market. They become economically inactive.
273
Geographical mobility of labour
The ability of labour to move around an area, region or country in order to work. Geographical mobility is affected by things such as family ties, transport networks, transferable qualifications and common language.
274
Labour supply (to an industry / occupation)
The labour supply is the number of hours that people are willing and able to supply at a given wage rate. The labour supply curve for any industry or occupation will be upward sloping.
275
Monetary influences on labour supply
The notion that labour supply is affected by the wage rate and other monetary advantages, such as the ability to buy shares, or the existence of bonuses. Also known as pecuniary factors.
276
Non-monetary influences on labour supply
The notion that labour supply is affected by factors other than wages or money, for example, working conditions, the amount of leisure time, the facilities available at work. Also known as non-pecuniary factors.
277
Wage elasticity of supply of labour
The responsiveness of the supply of labour to a change in the wage rate of labour. Calculated using the formula: %ΔSL ÷ %ΔW.
278
Economic rent
Any amount earned by a factor of production, such as labour, above the minimum amount they require to work in a current occupation.
279
Efficiency wage
A theory that suggests it may benefit firms to pay workers a wage higher than their marginal revenue product. Paying a higher wage improves worker morale and can lead to a high quality of people applying for new jobs.
280
Money wages
Also known as "nominal wages"; the actual hourly rate of pay – it is not adjusted for inflation.
281
Perfectly competitive labour market
A hypothetical ideal in which: many suppliers and buyers of labour with no market power; homogeneous labour supply; no government intervention; perfect knowledge of each worker's productivity.
282
Substitution effect (of labour supply)
As the wage rate rises, workers are willing to work more hours and substitute away from their leisure time, because the opportunity cost of leisure time rises with a higher wage rate.
283
Transfer earnings
The minimum reward required to keep factors of production, such as labour, in its current occupation.
284
Compensating (wage) differentials
Higher pay may be earned for relatively low skilled jobs if working conditions are unsociable, unpleasant or dangerous, whereas lower pay may be earned for higher skilled jobs if the working conditions are nice, flexible and safe.
285
Discrimination
The different treatment of people as a result of factors such as age, gender, race, sexual orientation, ethnicity.
286
Gender pay gap
The difference between male and female earnings, usually expressed as a percentage of male earnings. In the UK, the gender pay gap is around 20%.
287
Imperfectly competitive labour market
A labour market in which workers or firms have the power to set and influence wages. Imperfections include monopsony, trade unions, discrimination, poor information and skills shortages.
288
Labour market failure
A labour market in which there is not an efficient allocation of resources. Reasons include: discrimination, economic inactivity, skills shortages, trade unions, monopsony employers, labour immobility.
289
Labour market flexibility
The speed and ability of a labour market to respond to a change in the economy, referring to flexibility in occupation, location, hours worked, pay arrangements and so on.
290
Living wage
A wage that provides enough money for a working person to live decently and provide for their family.
291
Maximum wage
A wage that is set below the equilibrium wage rate. In theory, the outcome would be an excess demand for labour, or a labour shortage.
292
Migration
The movement of people, especially workers, between countries. Immigration refers to people entering a country. Emigration refers to people leaving a country.
293
Minimum wage
A wage that is set above the equilibrium wage rate. In theory, the outcome would be an excess supply of labour, or unemployment. In the UK it is called the National Living Wage.
294
Monopsony employer
A labour market structure in which there is a single powerful buyer of a particular type of labour. A monopsony employer will tend to pay relatively lower wages and employ fewer people than in a highly competitive labour market.
295
National Living Wage
The formal name for the minimum wage in the UK since 2016.
296
Performance related pay (PRP)
A wage or salary paid to a worker in relation to how well or how productively they have worked, usually by assessing performance against pre-agreed objectives.
297
Skills shortage
A type of labour market failure in which not enough labour possesses the skills demanded by employers. Common in occupations which require high-level skills.
298
Wage differentials
The difference in wages between workers. The term can refer to differences in wages between differently skilled workers in the same industry, or similar-skilled workers in different industries.
299
Zero hours contracts
Zero Hours Contracts do not guarantee a minimum number of working hours each week. People on zero-hours contracts are more likely to be young, part time, women, or in full-time education.
300
Bilateral monopoly
A scenario in a labour market in which there is a monopoly supplier of labour (i.e. a trade union) and a monopsony buyer of labour. The wage rate will depend on the relative bargaining power of each.
301
Productivity bargaining
Reaching an agreement between employers and employees in which employees agree to measures that will raise productivity, in return for an increase in pay or improvement in other working conditions.
302
Strike
Action taken by a trade union in which members do not work, usually due to grievances or concerns over working conditions or pay. Also known as industrial action.
303
Trade union
An organised group of employees who work together to represent and protect the rights of workers, usually by using collective bargaining techniques.
304
Unemployment trap
A situation in which there is little financial incentive for someone who is unemployed to start working because the combined loss of welfare benefits and need to pay income tax might result in them being worse off.
305
Union density
The percentage of a labour force that belongs to a trade union.
306
Unit labour costs
The average cost of labour per unit of output. Calculated using the formula: Unit labour cost = total labour cost ÷ total level of output.
307
Universal Credit
A new type of single monthly benefit designed to replace 6 separate benefits for people who are on low income or out of work, including JSA, Income Support, Child Tax Credit, Working Tax Credit, and Housing Benefit.
308
Wildcat strike
Also known as "unofficial industrial action", a wildcat strike is taken by unionised workers without official approval or authorisation by union officials.
309
Capitalism
An economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.
310
Dependency ratio
The (age) dependency ratio is the ratio of dependents (i.e. people younger than 16 or older than 65) to the working-age population.
311
Equality
This is treating all people in exactly the same way regardless of their starting position.
312
Equity
This is fairness or evenness. It involves treating people fairly, but differently, having taken into account their different circumstances.
313
Gini Coefficient
The Gini coefficient measures the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution. Ranges from 0 (perfect equality) to 1 (complete inequality).
314
Income distribution
Income distribution is how income is divided up among all the citizens in a country. The most common measure of income distribution is the Gini Coefficient.
315
Lorenz curve
The Lorenz Curve shows the degree of income inequality in a given economy or population. The further away the Lorenz curve from the line of absolute equality (the 45° line), the greater the degree of income inequality.
316
Quintile ratio
This is the ratio of the average income of the richest 20% of the population to the average income of the poorest 20% of the population. It is a measure of income inequality.
317
Social cohesion
Social cohesion is about how united, connected, trustful, cooperative and tolerant of cultural diversity society is.
318
Social exclusion
Social exclusion occurs when people are denied access to goods and opportunities considered 'normal' in a society.
319
Wealth
The value of assets owned by a household. Assets can include property, shares and savings and marketable wealth such as antiques and other rare items.
320
Wealth inequality
The degree to which wealth is distributed unequally across a population; inequality can be shown using a Lorenz Curve and measured using the Gini coefficient.
321
Absolute poverty
Those people who do not have adequate nutritional intake per day, or do not have adequate shelter or clothing in order to survive. The World Bank reports the number of people below $1.90 a day adjusted for PPP.
322
Deprivation
Deprivation takes into account whether people have access to things essential for a basic standard of living including: clean drinking water, electricity, education, toilet facilities, basic transport and communication.
323
Effective marginal tax rate
The tax rate on each extra £1 of income – it takes into account the impact of direct taxes but also the possible withdrawal of means-tested welfare benefits if people take a paid job.
324
Extreme poverty line
The World Bank measures the scale of extreme poverty as the percentage of a country's population living on less than $1.90 a day adjusted for purchasing power parity.
325
Poverty
There is no single definition of poverty. It has several aspects including: material conditions, economic position (low income, inequality), and social position through lack of entitlement or social exclusion.
326
Poverty Line
An income level that is considered minimally sufficient to sustain a family in terms of food, housing, clothing, medical needs, and so on.
327
Poverty trap
A situation in which there is little incentive for workers in low-paid jobs to earn extra income, because it would result in having to either pay higher direct tax and/or losing some of their welfare benefit payments.
328
Relative poverty
The relative position of some economic unit compared to another. A person can be relatively poor but not absolutely poor – it is really to do with distribution of income in a country.
329
Direct taxes
Direct taxation is levied on income, wealth and profit. Direct taxes include income tax, inheritance tax, national insurance contributions, capital gains tax, and corporation tax. The burden of a direct tax cannot be passed on.
330
Progressive tax
With a progressive tax, the marginal rate of tax rises as income rises. As people earn more income, the rate of tax on each extra pound goes up. This causes a rise in the average rate of tax.
331
Complete market failure
When the market does not exist because of market failure.
332
Demerit goods
A good or service whose consumption is considered unhealthy, degrading or socially undesirable due to the perceived negative effects on the consumers and society as a whole.
333
Externalities
Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.
334
Information gap
Information gaps exist when either the buyer or seller does not have access to the information needed for them to make a fully informed decision.
335
Market failure
Market failure exists when the competitive outcome of markets is not efficient from the point of view of the economy as a whole.
336
Merit good
A product that society values and judges that everyone should have regardless of whether an individual wants them. The government acts paternally in directly providing or subsidising merit goods and services.
337
Partial market failure
The market exists but contributes to resource misallocation.
338
Public goods
Pure public goods are non-rival – consumption by one person does not reduce the amount available for another – and non-excludable – it is not possible to provide the good to one person without it being available for others.
339
Excludability
Property of a good whereby a person can be prevented from using it if they do not pay.
340
Free rider problem
Because public goods are non-excludable it is difficult to charge people for benefitting once a product is available. Free riders have no incentive to reveal how much they are willing and able to pay for a public good.
341
Global public goods
Global public goods benefit every country, irrespective of which ones provide them. Examples include: security from war, the rule of law, property rights, and eradication of diseases such as smallpox.
342
Missing market
Missing markets are associated with the difficulties that the free market has in providing pure public goods, which are non-excludable meaning non-payers can enjoy benefits at no financial cost.
343
Non excludability
A characteristic of public goods. Benefits derived from pure public goods cannot be confined solely to those who have paid for it. This gives rise to the free-rider problem.
344
Non-rival consumption
Non-rivalry means that consumption of a good by one person does not reduce the amount available for others. Non-rivalry is one of the key characteristics of a pure public good.
345
Private good
Private goods are excludable, rival in consumption and rejectable.
346
Quasi-public good
A near-public good with some characteristics of a public good. Quasi-public goods are semi-non-rival (up to a point more users don't reduce availability) and semi-non-excludable (possible but costly to exclude non-payers).
347
Tragedy of the Commons
When no one owns a resource, it may get over-used, for example fish stocks and deforestation. Over-use of a renewable resource can lead to a long-term decline in maximum sustainable yield.
348
External benefit
A benefit to a 3rd party agent arising from production and/or consumption.
349
External cost
External costs are those costs faced by a third party for which no appropriate compensation is forthcoming.
350
Marginal external benefit (MEB)
Benefit to third parties from the consumption of an extra unit of output.
351
Marginal external cost (MEC)
Cost to third parties from the production of an additional unit of output.
352
Marginal private benefit (MPB)
Benefit to the consumer of consuming an extra unit of output.
353
Marginal private cost (MPC)
Cost to the producing firm of producing an additional unit of output.
354
Marginal social benefit (MSB)
Total benefit to society from consuming an extra unit. MSB = MPB + MEB.
355
Marginal social cost (MSC)
Total cost to society of producing an extra unit of output. MSC = MPC + MEC.
356
Negative externality
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid.
357
Net social benefit
A measurement of the net impact of an investment project found by estimating the social costs and benefits.
358
Positive externalities
Positive externalities exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training.
359
Property rights
Property rights confer legal control or ownership of a good. For markets to operate efficiently, property rights must be clearly defined and protected.
360
Private benefit
The rewards to individuals, firms or consumers from consuming or producing goods and services. Also known as internal benefit.
361
Private cost
Costs of an economic activity to individuals and firms. Also known as internal costs.
362
Social benefit
The benefit of production or consumption of a product for society as a whole. Social benefit = private benefit + external benefit.
363
Social cost
The cost of production or consumption of a product for society as a whole. Social cost = private cost + external cost.
364
Social efficiency
The socially efficient output is where Social Marginal Cost (SMC) = Social Marginal Benefit (SMB).
365
Spill-over effects
External effects of economic activity which have an impact on outsiders who are not producing or consuming a product – these can be negative (external costs) or positive (external benefits).
366
Geographical immobility
Barriers to changing location to get a job such as house price differentials or lack of commuter routes.
367
Occupational immobility
Barriers to moving easily between jobs such as inappropriate skills.
368
Competition and Markets Authority (CMA)
Main competition policy body in the UK. Their main stated aim is to make markets work well for consumers, businesses and the economy.
369
Competition Policy
Any policy which seeks to promote competition & efficiency in markets and industries.
370
Deregulation
The opening up of markets to competition by reducing one or more barriers to entry. The aim is to increase market supply, stimulate competition and innovation and drive prices down for consumers.
371
Regulation
Government rules and laws that can control the behaviour of producers or consumers in a market.
372
Windfall tax
A tax levied against certain industries when economic conditions allow those industries to earn above-average profits.
373
Privatisation
Selling off a state-run industry to the private sector.
374
Nationalisation
When a government takes over a private sector company.
375
Regulatory capture
A form of government failure, happens when a government agency operates in favour of producers rather than consumers.
376
Indirect tax
An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax.
377
Maximum price
A legally-imposed maximum price in a market that suppliers cannot exceed. To be effective a maximum price has to be set below the free market price.
378
Minimum price
A legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price.
379
Polluter pays principle
The government may choose to intervene in a market to ensure that the firms and consumers who create negative externalities include them when making their decisions e.g. first parties are forced to internalise external costs & benefits through indirect taxes.
380
Pollution permits
Permits allocated in an emissions trading system, for example each permit in the EU trading scheme allows a business to pollute 1 tonne of CO2.
381
Price ceiling
A regulated maximum price in a market – sellers cannot legally offer the product for sale at a price higher than the ceiling. To be effective, a ceiling must be set below the normal free market equilibrium price.
382
Price floor
A minimum price for example a minimum wage in the labour market. Sellers cannot legally under-cut the price floor.
383
Public expenditure
Spending by the government on goods and services, and in order to correct market failures.
384
State provision
Government-provided goods or services - funded through tax revenue to provide goods which have positive externalities or are public goods.
385
Government failure
Policies that cause a deeper market failure. Government failure may range from the trivial, when intervention is merely ineffective, to cases where intervention produces new and more serious problems.
386
Net welfare loss
An overall loss of economic welfare when compared to the starting position.
Economics
flashcards
Decks in class (18)
# Cards
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topic 1: economic methodology and the economic problem21
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topic 2 : individual economic decision making32
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topic 3 : price determination in a competitive market44
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topic 4 production costs and revenue64
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topic 5: perfect competition, imperfectly competitive markets and monopoly110
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topic 6 : the labour market70
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topic 7: distribution of income and wealth, poverty and inequality23
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topic8: market mechanism, market failure and government intervention in markets68
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macro topic1 : measurement of macroeconomic performance30
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macro topic 2: how the macroeconomy works, circular flow of incomr, AD - AS analysis54
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macro topic 3 economic performance67
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macro topic 4 financial markets and monetary policy56
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macro topic 5 : fiscal and supply side policies61
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macro topic 6: the international economy135
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macro key terms401
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micro key terms386
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micro economics equations63
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macro economics equations31
