Definitions Essay Research Paper Utility satisfaction derived

Definitions Essay, Research Paper

Utility: satisfaction derived from consuming a good. Profit: Profit = TR — TC = Q(AR-AC). Normal Profit: profit that the firm could make by using its resources in their next best use (opportunity cost) Supernormal profit: profit above normal profit. Welfare maximization: Adaptive Expectations: where decisions are based upon past information. Rational Expectations: where decisions are based on current information and anticipated future events. Rational economic behavior: Positive: scientific or objective study of the allocation of resources Normative: study and presentation of policy prescriptions involving value judgements about the way in which scarce resources are allocated. (subjective approach to economics) Free Good: goods which are unlimited in supply and which therefore have no opportunity cost. Economic Good: goods which are scarce because their use has an opportunity cost. Scarcity: economic agents (firms, governments,…) can only obtain a limited amount of resources at any moment in time. Choice: economic choices involve the alternative uses of scarce resources Opportunity cost: economic cost of production, benefit lost from the next best alternative. Production possibility frontier: curve which shows the maximum potential level of output of one good given a level of output for all other goods in the economy. Short Run: period of time when at least one factor input cannot be varied. Long Run: period of time when all factor inputs can be varied, but the state of tech. remains constant. Very Long Run: the period of time when the state of technology may change. Factors of Production: Land: all natural resources Labor: workforce Capital: manufactured stock of tools, machines, factories, offices, roads and other resources used in the production of goods and services. Enterpreneurship: those who organize production, and take risks. Market: occurs whenever buyers and sellers are in contact with each other. Ceteris Paribus: ‘all other things remaining the same’, the assumption that all other variables within an economic model remain constant whilst one change is being considered. Externalities: Merit Good: good which is under-provided by the market mechanism. // has positive externalities. Public Good: good where consumption by one person does not reduce the amount available for consumption by another person, (non-excluding / non-rivalrous) leads to the concept of the free rider. i.e.: defense, streetlights. Private Good: Goods which are excludable, rivalrous. Centrally Planned Economy: economic system where the government, through a planning process, allocates resources in society. Free Market Economy: economic system which resolves the basic economic problem through the market mechanism. Normal Good: good where demand increases when income increases (YED > 0) Inferior Good: good where demand falls when income increases (YED <0) Giffen Good: special type of inferior good where demand increases when price increases Veblen Good: (snob goods) goods bought in order to gain status, often sell better at high prices. Speculative goods: a fall in price will discourage people from buying (sometimes) b/c they are afraid of further falls in price. Substitution Effect: if price rises, demand will switch to substitute products. Income Effect: if prices rises, real income will diminish, and demand will change according to whether the good is normal or inferior. Law of Diminishing Returns: if increasing quantities of a variable input are combined with a fixed input, eventually the marginal product and the average product of that variable input will decline. Returns to scale: when the change of percentage output is the same as the percentage change in input. Economies of Scale: a fall in the long run average costs of production as output rises. Internal: resulting b/c of growth in the scale of production within a firm. External: resulting from a growth in the size of the industry in which a firm operates. Types: Technical: automation, specialized equipment, increased dimensions. Financial: easier credit, lower rate of interest. Managerial: specialized departments. Marketing: advertising (brand name, sponsorship, …), packaging. Risk-bearing: diversify. Monopolistic Competition: market structure where a large number of small firms produces non-homogeneous products and where there are no barriers to entry or exit. Oligopoly: market structure where there is a small number of firms in the industry and where each firm is interdependent with other firms. Monopoly: market structure where one firm supplies all output in the industry without facing competition because of high barriers to entry to the industry. Natural Monopoly: where economies of scale are s

o large relative to demand that the dominant producer in the industry will always enjoy lower costs of production than any other potential competitor. Perfect Competition: market structure where there are many buyers and sellers, where there is freedom of entry and exit to the market, perfect knowledge, and where all firms produce a homogeneous product. Imperfect Competition: market structure where there are several firms in industry, each of which has some ability to control the price they set for their product. Horizontal Merger: merger between two firms in the same industry at the same stage of production. Vertical Merger: merger between two firms at different production stages in the same industry. Consumer Sovereignty: when resources are allocated according to the wishes of consumers (i.e.: in a perfectly free market) Profit Maximization: MC = MR Maximum Revenue: MR = 0 Optimal Allocation: Productive Efficiency: production is at lowest cost (MC = AC) Allocative Efficiency: occurs when no one can be made better off by transferring resources from one industry to another without making someone else worse off. (Price = MC) // this is the social optimum Market failure: where resources are inefficiently allocated due to imperfections in the working of the market mechanism. Externality: Negative: if net social cost is greater than net private cost. Positive: if net social benefit is greater than net private benefit. Internalizing: eliminating the externality by bringing it back into the framework of the market mechanism. (i.e.: extending property rights) Private cost and benefit: cost or benefit to an individual economic unit such as a consumer or a firm. Social cost and benefit: cost or benefit to society as a whole. Gross: Net: Domestic Income: excludes the values of incomes generated by assets owned overseas and domestic assets owned by foreigners. National Income: includes the above. Factor Cost: Market prices: Nominal: values unadjusted for the effects of inflation / values at current prices Real: values adjusted for inflation Macroeconomic Policy Objectives: Economic growth and development Full employment Price stability External equilibrium GDP: measure of national income before property income from abroad and depreciation have been accounted for. GDP (factor cost): GDP (market prices) – Taxes (indirect) + Subsidies GNP: a measure of national income including net property income from abroad but before depreciation. Multiplier: figure used to multiply a change in autonomous expenditure, such as investment, to find the final change in income / ratio of the final change in income to the initial change in autonomous expenditure. Accelerator Theory; theory that the level of planned investment is related to past D

Y. (I=f(D

Y) ) Absolute advantage: when a country is able to produce a good more cheaply in absolute terms than another country. Comparative advantage: when a country is able to produce a good more cheaply relative to other goods produced domestically than another country. Free Trade Areas: group of countries between which there is free trade in goods and services but which allows member counties to set their own level of tariffs against non-member countries. Customs unions: Common markets: group of countries between which there is free trade in products and factors of production, and which imposes a common external tariff on imported goods from outside the market. Current Account: pare of Balance of payments where payments for the purchase and sale of goods and services are recorded. Capital Account: part of the B.o.P. where flows of savings, investment and currency are recorded. Long run: Short run: Current Balance: difference between total exports and total imports. Marshall-Lerner Condition: devaluation will result in an improvement on current account if the combined elasticities of demand for exports and imports are greater than 1 (more elastic à

better to devaluate) Terms of Trade: Economic Growth: Economic Development: Human Development Index (HDI): compares countries on the basis of real GDP per capita at PPP, life expectancy, education (literacy and school enrolment) Human Suffering Index (HSI): takes into account factors such as access to clean water, adequate food, and education. Valuing Natural Resources: takes into account growth without the destruction of natural capita. Measure of Economic Welfare (MEW): allows for leisure, non-marketed goods, public amenities, as well as economic ‘bads’ like pollution or ‘regrettables’ like defense spending. Net Social Product (NSP): adjusts for positive and negative externalities to calculate social benefits and social costs, including pollution, divorce, crime and suicide rates.