Thursday, January 7, 2010

Micro Economic AS Definitions - AQA textbook and 'Market imperfections' revision cue cards

Abnormal Profit- the profit over and above normal profit

Asymmetric information- when either a buyer or seller has more information than the other party.

Barriers to Entry- factors which make it difficult or impossible for firms to enter an industry and compete with existing producers.

Basic Economic Problem- Resources are scarce but wants are infinite. Resources have to be allocated between competing uses because wants are infinite whilst resources are scarce.

Branded Good- a named good which in the perception of its buyers is different from other similar goods on the market.

Buffer Stocks Scheme- a buffer stock system is used to stabilise prices in agricultural and other commodity markets. An organisation buys and sells in the open market so as to maintain an minimum price in the market for a product.

Capital Costs- some industries are expensive in terms of set up, e.g. car manufacture. Barrier to entry in a market.


Ceterus Paribus- the assumption that all other variables within the model remain constant whilst one change is being considered.

Chain of Command- the number of people a decision must go through before it is acted on – longer in a large firm. Part of managerial problems arising in diseconomies of scale.

Complementary Good- a good which is purchased with other goods to satisfy a want.

Composite Demand- when a good is demanded for two or more distinct uses. Eg, increased demand for oil in the chemical industry will result in a fall in the supply of oil to the petrol industry because oil is in composite demand.

Conglomerate Merger- a merger between two firms producing unrelated products.

Consumer Surplus- the difference between how much buyers are prepared to pay for a good and what they actually pay.

Demerit Good- a good that is over provided by the market mechanism. It is over consumed and poses negative externalities in the economy.

Derived Demand- when the demand for one good is the result of or derived from the demand of another good. Eg, An increase in the demand for cars will lead to an increase in the demand for steel. Steel is said to be in derived demand from cars.

Division of Labour- specialisation by workers.

Diseconomies of Scale- a rise in the average costs of production as output rises.

Dynamic Efficiency- occurs when the resources are allocated efficiently over time

Economies of Scale- a fall in the average costs of production as output rises. Can also act as a Barrier to Entry.

Elastic Demand- Where the price elasticity of demand I greater than 1. The responsiveness of demand I proportionally greater than the change in price. Demand is infinitely elastic if price elasticity of the demand is infinity.

Free Rider- a person or organisation which receives the benefits that others have paid for without making any contribution themselves. Mainly associated with public goods.

Indirect Taxes and Elasticity- The government uses indirect taxes such as duties to discourage the consumption of demerit goods (e.g. cigarettes), which are considered to be over-provided by the free market system. The effectiveness of indirect taxes in reducing the consumption of demerit goods depends to a large extent on the elasticity of demand for the product.

Inelastic Demand- where the price elasticity of demand is less than 1. The responsiveness of demand is proportionally less than the change in price. Demand is infinitely inelastic if price elasticity of demand is zero.

Inferior Good- A good the demand for which falls as income rises. The income elasticity of demand is therefore negative.

Internal Economies of Scale- are reductions in a firm's long-run average costs that it can take advantage of as it increases its level of output

Giffen Good- In economics and consumer theory, a Giffen good is one which people consume more of as price rises, violating the law of demand. E.g. Bread

Government Failure- occurs when government intervention results in a sub-optimal allocation of resources. When trying to rectify market failure, or achieve some other policy objective, the government actually makes matters worse.

Homogeneous Goods- goods which are identical.

Horizontal Merger- a merger between two firms in the same industry at the same stages of production.

Joint Supply- when two or more goods are produced together, so that a change in supply of one good will necessarily change the supply of the other goods with which it is in joint supply. Eg. Increase demand/supply in Beef will lead to increased supply of Leather.

Legal Barriers- organisations may be granted a monopoly by the government, e.g. the post office has a monopoly on postage under £1 in the UK. Patents also prevent competition and provide a barrier to entry.

Lorenz Curve- indicates the degree of inequality in a society.


Market- any convenient set of arrangements by which buyers and sellers communicate to exchange goods and services.

Market Failure- Occurs when resources are inefficiently allocated because the market mechanism is working imperfectly. Sub-optimal allocation of resources. Examples of market failure are:

  • The abuse of monopoly power

  • the presence of externalities

  • the under-provision of merit goods

  • the non-provision of public goods

  • Inequality in the economy.

Merit Good- a good which is under provided by the market mechanism. Creates positive externalities in the economy. Eg, Education, Healthcare

Monopoly- any firm large enough to dominate a market, i.e. set prices or restrict output. A sole supplier to a marker with over 25% of the market. High barriers of entry to the industry means no competition.

Negative Externalities- also known as external costs, occur when a producer or consumer places costs on a third party.

Normal Profit- the profit that the firm could make by using its resources in their next best use. Normal profit is an economic cost.

Normative Economics- Value judgement about the way in which scarce resources are being allocated.

Occupational Immobility- the inability of workers to move between professions. Causes include Imperfect Knowledge, Family Ties, Housing and Workers having job-specific, non-transferable skills.
Opportunity Cost- the benefits foregone of the next best alternative

Perfect Competition- a market structure where there are many buyers and sellers, where there is freedom of entry and exits to the market, where there is perfect knowledge and where all firms produce a homogeneous good.

Perfectly Elastic Good- Buyers are prepared to purchase all they can obtain at some given price but none at all at a higher price.

Perfectly Inelastic Good- Quantity demanded does not change at all as price increases. Numerical measure: 0.

Polluter Pays Principle- refers to the idea that those who cause environmental damage have an obligation to pay for its clean-up costs. Means that taxes and charges should be used to deal with pollution.
Positive Economics- the scientific or objective study of the allocation of resources.

Positive Externalities- also known as external benefits, occur when the benefit to an individual of his or her consumption or production is less than the overall benefit to society. Goods that have positive externalities such as merit goods are often under-provided by the free market system; therefore the existence of positive externalities is an example of market failure.

Private Good- a good where consumption by one person results in the good not being available for consumption by another.

Producer Surplus- the difference between the market price which firms receive and the price at which they are prepared to supply.
Productivity- output per unit of input employed

Productive Efficiency- is achieved when production is achieved at the lowest cost.

Property Rights- market failures, in particular negative externalities, often occur because the property rights to resources are inadequately defined or enforced.

Public Interest- Competition Commission believes that consumers benefit from lower prices, a wider range of choice, more innovation and higher quality products and services.

Public Good or Pure Public Good- a good where consumption by one person does not reduce the amount available for consumption by another person and where once provided, all individuals benefit or suffer whether they wish to or not. Non-rivalry, non-diminishing and non-excludability are the characteristics of a public good. Eg, Street Lighting, Defence.

Restrictive Practices- firms may try to prevent competition deliberately, e.g. by forcing a retailer to stock only their produce. One of the barriers to entry.

Span of control- the number of people an individual manager is responsible for – is wider in a large firm. Part of managerial problems that lead to diseconomies of scale.

Specialisation- a system of organisation where economic units such as households or nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.

Static Efficiency- occurs when resources are allocated efficiently at a point in time.

Substitute Good- a good which can be replaced by another to satisfy a want.

Sunk Costs- if you were to leave an industry, then although you might be able to recoup some costs (e.g. by selling machinery), some costs would be lost forever (e.g. money spent on advertising). One of the barriers to entry/exit.

Superior Good- Superior goods make up a larger proportion of consumption as income rises, and therefore are a type of normal goods in consumer theory. A good the demand for which is income elastic.

Sustainable Development- economic development which provides for the economic well-being of the present generation without compromising the ability of future generations to provide for themselves.

Technical Efficiency- is achieved when a given quantity of output is produced with the minimum number of inputs.

Tradeable Permits- are used in an attempt to reduce negative externalities, particularly those caused by environmental degradation.

Unitary Elasticity- Quantity demanded changes by exactly the same percentage as the price does. Numerical measure: 1.

Vertical Merger- a merger between two firms at different production stages in the same industry.

No comments:

Post a Comment