IB Microeconomics Terms Flashcards

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Abnormal profit

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This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).

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Allocative efficiency

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Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).

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Allocative inefficiency

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When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB ≠ MSC.

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Asymmetric information

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A type of market failure where one party in an economic transaction has access to more or better information than the other party.

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Average costs

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Total costs per unit of output produced.

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Average revenue

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Revenue earned per unit sold; average revenue is thus equal to the price of the good.

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Behavioural economics

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A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents.

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Biases

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Systematic deviations from rational choice decision-making.

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Bounded rationality

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A term introduced by Herbert Simon that suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximise with respect to some objectives (such as utility), and thus choose to satisfice.

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Break-even price

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The price at which total revenue is just equal to total cost.