Microeconomics

Allocative efficiency: Production of maximum output possible, using given quantities of inputs and available techniques of production in the most e?cient manner.

Asymmetric information: A situation in which one party (say, seller) in the market has more information than another party (i.e. buyer).

Invisible hand: According to Adam Smith if individuals conduct their economic activities in their own best interests, the economy will operate at maximum e?ciency, without government requiring to intervene.

Cartel: An organisation of producers agreeing to limit the output of their product in an e?ort to raise prices and Profits. Example: OPEC.

Collusion: An agreement among sellers of a commodity to set a common price or share their commodity market so as to reduce competition among them.

Cost-benefit analysis: actual and potential private and social costs of various economic decisions are compared with actual and potential private and social benefits. Decisions or projects that yield the highest ratio of benefit to cost are usually selected for implementation.

Diminishing returns: If one factor of production is kept unchanged and other factors are added in constant increments, the marginal productivity of variable factors will eventually decline.

Division of labour: Allocation of tasks among workers such that each one engages in tasks that she or she performs most e?ciently. Division of labour promotes worker specialisation and thereby adds to overall labour productivity.

Economies of scale: Economies of scale refers to increase in the scale of production, resulting in reduction in the cost of production per unit of output.

Externality: Any benefit or cost borne by an individual resulting from another person�s behaviour.

Factor mobility: The unrestricted transference or free voluntary movement of factors of production among di?erent uses and geographic locations.

Factor-price distortions: When prices of the factors of production do not reflect their true scarcity values, i.e. their competitive market prices. Factor-price distortions may lead to the use of inappropriate techniques of production.

Imperfect competition: A market situation in which producers have some degree of control over the price of their product. Examples: Monopoly and oligopoly.

Imperfect market: A market where any (or some) features of perfect competition such as, large number of buyers and sellers, free entry and exit, homogeneous product and complete information is absent.

Increasing returns: A more than proportional increase in output that results from a change in the scale of production leading to a reduction in cost per unit as scale enlarges. Generally public utility services such as water supply, electricity, etc., are characterised by increasing returns. This leads to natural monopoly.

Market failure: A phenomenon that results from the existence of market imperfections that weaken the functioning of a free-market economy and the market fails to realise Pareto optimality. Market failure often provides the justification for government intervention.

Pareto optimality: A situation in which no one can be made better o? without making someone else worse o?.

Perfect competition: A market situation characterised by (i) Large number of buyers and sellers; (ii) homogeneous products; (iii) free entry and exit, and (iv) perfect knowledge.

Prisoners� dilemma: A situation in game theory in which all parties would be better o? cooperating than competing, but, given that cooperation has been initially achieved, each party would gain the most by cheating while others stick to the cooperative agreements.

Product di?erentiation: practice of some producers to di?erentiate their products from similar ones through di?erential packaging and/or advertisements.

Written by princy

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