Paper 1 (micro) definitions

Term Definition
Factors of production Factors of production (land, labour, capital and enterprise) that are
(= economic resources) combined into goods and services which possess the utility to satisfy
human wants and needs.
Land All the resources found in the natural environment
Labour Human resources
Capital Man made resources, consisting of fixed capital such as machinery and
buildings and circulating capital such as stocks of finished goods.
Enterprise The skills involved in combining other factors of production, spotting
gaps in the market and accepting risk.
Scarcity (= the basic Economic resources are finite, but human wants and needs are infinite.
economic problem) Choices must therefore be made about which wants and needs to
satisfy.
The basic economic The basic economic problem of scarcity is restated by Samuelson in the
problem (= scarcity) form of three questions that must be answered in allocating resources:
 What to produce?
 How to produce it?
 Who to produce it for?
Economic activity The central purpose of economic activity is to combine scarce resources
into goods and services that possess the utility to satisfy human wants
and needs.
Opportunity cost The cost of a decision expressed in terms of the next best alternative
foregone.
Goods Tangible economic outputs (they have a physical form)
Services Intangible economic outputs (they don’t have a physical form)
Free goods Goods that involve no opportunity cost in production (eg sunlight)
Positive economics A positive statement is a statement of fact or a testable hypothesis
Normative economics A normative statement is a statement of opinion (a value judgement)
Social science A science that studies human behaviour such as Economics, Psychology
and Sociology. These fields follow the scientific method of constructing
hypotheses and gathering empirical data to test them. However, the
data gathered in social sciences is about human behaviour which lacks
the predictability of the behaviour of a gas or a chemical. It is also
impossible to hold all variables constant to examine the impact of
changing just one variable as can be done in pure sciences under
laboratory conditions. In the real world, for example, multiple factors
affecting the price of housing change at the same time, making the job
of testing the impact of a rise in income on house prices more difficult.
Economists may assume ceteris paribus when stating hypotheses, but
testing these hypotheses is challenging.
Ceteris paribus “All other things being equal”
Production possibility A production possibility frontier shows the maximum possible
frontier (PPF) combinations of output using the available stock of resources.
Outwards shift of the This shows an increase in production possibilities (economic growth)
PPF resulting from either (i) more resources becoming available or (ii) better
quality resources becoming available. It is the equivalent of an increase
in long run aggregate supply (= potential output = economic capacity)
Inwards shift of the PPF This shows a decline in production possibilities as a result of fewer
resources being available or resources becoming less productive. It

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may result from factors such as war and destruction of resources and
disease leading to high death rates. It may also result from depreciation
of capital, dwindling of skills, environmental resource degradation.
Demand The quantity of a good or service that consumers are willing to
purchase at a given price over a given period of time.
Effective demand Where the wish to purchase a good or service is supported by the
ability to pay.
Demand schedule A table showing the demand for a good or service at various possible
prices over a given period of time.
Demand curve The graphical version of a demand schedule.
Extension of demand A movement along the demand curve showing that more of a good is
demanded at a lower price.
Contraction of demand A movement along the demand curve showing that less of a good is
demanded at a lower price.
Conditions of demand A demand curve is drawn on the assumption of ceteris paribus, that all
things affecting demand other than the price are held constant. The
factors that are held constant are the conditions of demand and if one
of them changes, demand will increase (shift to the right) or decrease
(shift to the left). The main conditions of demand are: The price of
substitutes, the price of complements, national income, tastes and
fashions, advertising, interest rates, the size of the population,
seasonality and government policy.
Substitutes Goods that are in competitive demand (eg butter and margarine)
Complements Goods that are in joint demand (eg games consoles and games)
Derived demand Where a good or service is demanded as a factor of production for
another. Labour demand is a derived demand.
Composite demand Where a good or service is demanded for more than one purpose (eg
steel is demanded for making cars and for construction)
Supply The amount of a good or service that firms are willing and able to
supply at a given price over a given period of time
Supply schedule A table showing the supply of a good or service at various possible
prices over a given period of time.
Supply curve The graphical version of a supply schedule.
Extension of supply A movement along the supply curve showing that more of a good is
supplied at a higher price.
Contraction of supply A movement along the supply curve showing that less of a good is
supplied at a lower price.
Conditions of supply. A supply curve is drawn on the assumption of ceteris paribus, that all
things affecting demand other than the price are held constant. The
factors that are held constant are the conditions of supply and if one of
them changes, supply will increase (shift to the right) or decrease (shift
to the left). The main conditions of supply are: the price of factors of
production, the productivity of factors of production and government
policy (indirect taxes and subsidies). In sum, if the costs of production
increase, supply will decrease.
Excess demand Where the quantity demanded of a good or service is greater than the
quantity supplied at the ruling market price. This gives firms a reason
to change their behaviour by raising prices.
Excess supply Where the quantity demanded of a good or service is less than the

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quantity supplied at the ruling market price. This gives firms a reason
to change their behaviour by lowering prices.
Equilibrium Equilibrium exists when the market clears, such that the quantity
demanded is equal to the quantity supplied at the ruling market price.

An equilibrium is a state of rest in the market. This is because

consumers are able to purchase the quantity of the good that they wish
to at the ruling market price, and firms are able to sell the quantity they
wish to. This means that no market participant has a reason to change
their behaviour, so that the market will remain in equilibrium unless
one of the conditions of demand or supply changes.
Price elasticity of % ^ Qd / % ^ P
demand (PED)
Income elasticity of % ^ Qd /% ^ Y
demand (XED)
Cross price elasticity % ^ Qd Good A/ % ^ P Good B
(XED) of demand for
good A with respect to
price of good B
Elastic Demand responds more than proportionately to a change in price or
income. Ignoring the sign, elasticity is in the range one to infinity.
Unitary elasticity Demand responds proportionately to a change in price or income.
Ignoring the sign, elasticity is one.
Inelastic Demand responds less than proportionately to a change in price or
income. Ignoring the sign, elasticity is in the range zero to one.
Normal good A good with positive YED
Inferior good A good with negative YED
Giffen good A necessity such as a staple food which has a positive PED because
when the price rises there is little income left to spend on other
products and thus any remaining income is also spent on the good in
question.
Veblen good A good purchased for reasons of ostentation which has a positive PED.
The higher price makes the good more exclusive and thus more
attractive. Diamonds or top of the range sports cars may be examples.
The price mechanism Changes in the relative prices of goods serve to allocate scarce
resources via the rationing, signalling and incentive functions of prices.
Rationing function An increase in price serves to ration available supplies of a good to
those who are willing to pay the most (in economic theory, this is those
who gain most utility)
Signalling function Prices convey information to market participants. For example, an
increase in price when costs remain unchanged conveys information
about an increase in demand to suppliers
Incentive function Price changes incentivise changes of behaviour on the part of market
participants. For example, a higher price following a demand increase
raises profit margins for firms, incentivising them to extend supply.
Cost of production Opportunity cost of the factors of production used to make a product or
service (the revenue they could have generated in their next best use)
Fixed costs Costs which do not vary with output and have to be paid in the short
run even if no output is produced (e.g. rent of premises)

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Variable costs Costs which vary proportionately with output (e.g. food for a
restaurant)
Revenue The money generated from sales of a good or service.
Total revenue = Price x Quantity
Profit Total revenue – Total cost
The reward to enterprise as a factor of production
Normal profit An economic profit of zero
Revenue just covers the opportunity cost of factors used
The level of profit required to keep factors in their current use
Supernormal profit An economic profit greater than zero
Abnormal profit Any profit above normal profit
Monopoly profit Factors generate more revenue in this use than in any alternative
Short run The period in which at least one factor of production (e.g. capital) is
fixed in quantity.
Long run The period in which all factors are variable and it is possible to move to
a new scale of production.
The very long run The period in which technological change is possible
The law of diminishing As more of a variable factor of production is added to a given stock of a
returns fixed factor, the marginal product of the variable factor will eventually
decline.
Economies of scale Savings in the unit cost as output increases and the firm moves to a
larger scale of production.
External economies of Savings in the unit cost of production as a result of the growth of the
scale industry of which the firm is a part.
Market A place in which buyers and sellers meet to exchange goods and
services
Market structure The characteristics which define a market: Number of buyers and
sellers, homogeneity or differentiation of products, degree of
knowledge enjoyed by participants, height of the entry barriers
Structure-conduct- The theory that the structural characteristics of a market determine the
performance behaviour of firms and the market outcome in terms of efficiency and
fairness.
Entry barriers Factors which raise the cost of new entry to a market; costs facing new
entrants but not incumbent firms;
Structural (natural) Barriers posed by the nature of the production process – for example,
entry barriers high capital costs or a high minimum efficient scale of production
Statutory (legal) entry Legal barriers to entry. In some cases this creates a statutory monopoly
barriers such as Severn Trent Water.
Strategic (artificial) Entry barriers erected by firms, for example by heavy branding and
entry barriers advertising or investing in spare capacity.
Perfect knowledge Where all market participants (firms and consumers) have full
knowledge of the characteristics of the products sold by different firms
in the market and of the prices charged.
Homogenous products Products which are identical to one another and are therefore perfect
substitutes. There is no branding of the products – e.g. currencies
Differentiated products Products which are substitutes but may have physical differences or
image differences created by branding – e.g. cola
Price-taker A firm which has to accept the market price for its product, usually due
to a large number of other firms producing similar or identical products.

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The demand curve for a price-taker is perfectly elastic.
Price-maker A firm which has the power to set its prices, for example by raising
them above that of other firms in the market. Price making power is
enjoyed by monopolists or firms with consumer loyalty arising from
factors such as product differentiation, consumer inertia or imperfect
information. A price-maker faces a downward sloping demand curve.
Concentrated market A market in which the majority of the market is accounted for by a
small number of firms. The market has a high concentration ratio.
x- firm Concentration The combined market share of the largest x firms. E.g. The four firm
ratio concentration ratio for UK supermarkets was 77% in April 2012
Perfect competition A market with many buyers and sellers, homogenous products, perfect
knowledge for all market participants and no barriers to entry or exit
Monopoly A market dominated by a single supplier with high or insurmountable
barriers to entry - e.g. local water markets
Oligopoly A concentrated market dominated by a few large firms. Firms produce
differentiated products and significant entry barriers are usually
present. The firms in the market are interdependent – e.g. car market
Interdependence Describes the situation where the outcome of a firm’s strategy depends
on the actions and reactions of its rivals.
Uncertainty Describes the fact that oligopolistic firms do not know what the actions
and reactions of rival firms will be. Uncertainty results from the fact
that collusion is not permitted. Even if it were, there would still be a
likelihood that collusive agreements would be broken by some firms.
Collusion The formal or implied co-ordination of activity by firms. Collusion might
typically include co-ordination of pricing or output decisions. Proctor
and Gamble and Unilever were found guilty of fixing prices of washing
powder in the EU market in April 2011.
Formal collusion Agreements between firms to co-ordinate their activities, perhaps
acting as a joint monopoly. Examples of formal collusion include cartel
agreements, price fixing and bid rigging.
Informal collusion Co-ordination of the activities of firms through a mutual recognition
Tacit collusion that it is in their best interests. Firms may come to follow a price-leader
in the market, for example, or recognise that it is in their mutual
interests not to engage in price competition.
Price competition Firms charge the lowest prices possible in order to try to win market
share from their rivals.
Predatory pricing An aggressive pricing strategy designed to drive rivals out of the
market. It typically involves pricing below the cost of production for an
extended period of time.
Loss-leader pricing Pricing a particular product at below the cost of production in order to
stimulate demand for other products sold by the firm. Common in
supermarket retailing.
Cross subsidisation Using profits from one product or service to sustain a loss making
product or service.
Non-price competition Firms attempt to win customers through branding and marketing,
resulting in differentiated products. Non-price competition often aims
to reduce the elasticity of demand for a firm’s product thus giving it
more price-making power.
Price discrimination The practice of charging different consumers different prices for the

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same product where there is no difference in the cost of production
First degree price The practice of charging each consumer a different price, namely the
discrimination price they are willing to pay for the product. Amazon has been accused
of using customer sales data to target individual prices at customers.
Second degree price The practice of discounting spare capacity in a market, for example
discrimination shortly before the departure date for a holiday.

Third degree price The practice of segmenting markets by time, place, income or age of
discrimination consumers, with different prices charged to each segment.
Contestable markets Markets with low or zero barriers to entry and exit and some potential
for post-entry supernormal profit. The absence of sunk costs is a
particularly important feature of a contestable market/
Entry limit pricing The practice of incumbent firms reducing prices in order to suppress
the signalling function and deter new entry.
Hit and run Firms entering a contestable market in order to make a for a short
competition period of time to make a supernormal profit before leaving again,
perhaps following predatory action by an incumbent.
Static efficiency Efficiency at a given point in time. Allocative, productive and technical
efficiency are all aspects of static efficiency.
Allocative efficiency Allocating scarce resources to where they produce the most utility.
P=MC, so that the last unit of the good is valued by the consumer at
exactly what it cost to produce.
Productive efficiency Production at the lowest possible unit cost. All available economies of
scale are exploited and the minimum efficient scale of production (MES)
is achieved.
Technical efficiency Producing at the lowest cost of production for a given level of output.
All points on the AC curve are technically efficient.
Dynamic efficiency Allocating resources so as to meet society’s changing wants and needs
over time. Dynamic efficiency is closely associated with technological
change and thus may require resources to be devoted to investment
and research and development rather than current consumption.
Dynamic efficiency is also associated with falling production costs over
time.
Vertical equity The fair treatment of those whose circumstances differ.
Horizontal equity The fair treatment of those whose circumstances are the same.
Minimum efficient The lowest level of output for which the lowest possible unit cost of
scale production is achieved, with all available economies of scale exploited.
Privatisation The transfer of economic activity from the public sector to private firms.
Privatisation can occur in a number of forms including the sale of a
state owned firm to private shareholders (Royal Mail, October 2013),
the sale of state assets (such as gold) to private owners, contracting out
of public services (such as school catering) and the Private Finance
Initiative.
Nationalisation The transfer of economic activity from the private to state sector, in
particular the nationalisation of privately owned firms. A number of
banks were fully or partly nationalised during the financial crisis,
including RBS and Lloyds.
Contracting out The practice of paying private firms to provide services on behalf of the
government (e.g. school, hospital cleaning and catering, running of

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leisure services.

Private Finance PFI. The construction and financing of major public sector investment
Initiative projects by private firms who own the facilities created. The
government then takes a long term lease on the facility (e.g. a new
hospital)
Internal markets The creation of a market within an organisation such as the NHS. E.g.
GP fundholders buying hospital treatments on behalf of their patients,
creating a demand and a supply side to the market.
Industry regulators Independent bodies created by the government to oversee the conduct
of firms in particular industries, e.g. OFWAT/OFGEM. Industry
regulators are charged with promoting competition, encouraging
investment, protecting the environment and protecting the interests of
consumers.
Price regulation Setting of price controls in order to improve the functioning of a
market. Industry regulators frequently use RPI-X or RPI+K formulae,
imposing a maximum price or price ceiling. Minimum prices have been
suggested as a measure to reduce alcohol consumption.
RPI - X Price regulation which allows firms to put up their prices only by x% less
than the rate of RPI inflation, thus imposing a real price cut. This
restricts the revenue side of the business but allows firms to increase
profits by cutting costs and becoming more efficient.
RPI + K Price regulation which allows firms to put up their prices by k% more
than the rate of RPI inflation, allowing a real price increase. The K
factor is typically used to allow the firm to generate funds for
investment purposes
Yardstick competition The process by which a regulator can judge the potential performance
improvements of a firm by reference to the performance of a similar
firm (e.g. comparing one regional water monopoly with another).
Public interest criterion The criterion used by the competition authorities to decide whether to
allow a merger to go ahead or to take action in cases of tacit collusion.
A merger serves the public interest if it leads to social benefits which
exceed social costs.
Merger The voluntary integration of two firms to create a single company
Take-over The hostile acquisition of one company by another.
External growth The growth of a firm through merger or take-over activity
Internal growth The growth of a firm from within, for example by gaining market share,
Organic growth undertaking investment or by product differentiation.
Small firm Micro firms defined by the EU as those with less than 10 employees and
small firms those with less than 50. Small firms could also be defined in
terms of the amount of capital employed or turnover.
Medium firm Defined by the EU as firms with less than 250 employees
Technological change Consists of innovation (small changes to a firm’s practices or products)
or invention (the discovery of new technology). Technological change
can sustain existing products or disrupt the status quo.
Research and The devoting of resources to attempts to generate innovations or
development inventions.
Patent The granting of temporary monopoly power over an invention or
innovation to those who have generated it. This helps to encourage

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Paper 1 (micro) definitions
technological advance by offering the prospect of significant return on
resources devoted to research and development.
Intellectual property The right of ownership of ideas, granted through patents or copyrights.
rights Intellectual property rights exist for authors, musicians and inventors,
for example.
First mover advantage The possible gain from being the first firm to market with a new
product or the first firm to adopt a new technology or business practice.
There may also be gains from not being the first mover (for example the
ability to learn from the experience of other firms).

Market failure The failure of markets to achieve efficient allocation of resources of fair
outcomes.
Social optimum The allocation of resources to a market which maximises net social
benefit. Social optimum is achieved in markets when MSB = MSC.
Cost-benefit principle Economic activity creates a net benefit if its social benefit exceeds its
social costs.
Cost-benefit analysis A method of appraising major investment projects by identifying all
private and external costs and benefits and attaching a monetary value
to them.
Environmental market Market failures pertaining to land as an economic resource.
failure
Resource depletion The diminishing of supply of availability of a natural resource over time,
either because the resource is non-renewable or because it is harvested
at a faster rate than it can replenish.
Resource degradation The reduced productivity of a natural resource, for example due to
pollution.
Externalities Spill-over effects on third parties from the actions of another economic
agent. Those who suffer external costs have no way of using the
market to gain compensation. Those who generate external benefits
have no way of using the market to get payment for doing so.
Property rights The exclusive and legally protected ownership of a good or resource.
Those who own resources can charge others for using them.
Tradable pollution Permits allow firms to emit a given quantity of pollution. Any spare
permits permits can be sold to other firms on an open market. Tradable
permits are also sometimes called a ‘cap and trade’ system. The EU’s
carbon trading scheme is an example.
Pollution tax A tax charged on firms per unit of pollution emitted. The UK’s climate
change levy is an example.
Polluter pays principle The evaluation of environmental policies using the criterion that those
who are responsible for generating pollution should pay for doing so.
Internalising Measures which permit externalities to be incorporated into market
externalities prices or which allow externalities to be traded. A more complete
allocation of environmental property rights would internalise
externalities for example.
Merit good A good which is under-consumed in a free market system, such as
education or healthcare.
Demerit goods A good which is over-consumed in a free market system, such as alcohol
or cigarettes.
Public goods Goods which are non-rivalrous and non-excludable. This leads to the

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Paper 1 (micro) definitions
free-rider problem and may result in a missing market and a total
market failure (e.g. national defence system).
Quasi-public good A good which possesses some of the characteristics of a public good,
but not all. For example, TV signals are non-rivalrous but they are
excludable.
Labour market A place where buyers and sellers of labour meet
Occupational labour The market for workers in a particular profession, such as teaching.
market
Marginal revenue The additional revenue to the firm from employing one extra worker,
product MRP = MPP x MR
Wage The reward to labour as a factor of production; the compensation paid
to workers for sacrifice of their leisure time.
Monopsony employer The sole buyer of a particular type of labour. The state is a near
monopsony employer of teachers and healthcare professionals
Trade union A collective organisation of workers aiming to improve pay and working
conditions.
Perfect labour market Many workers and many employers. Workers are homogeneous
(possessing the same skills), perfect information, no barriers to
entering a market (such as professional qualifications). In an economy-
wide perfect labour market all workers would be paid the same.
Non-monetary rewards Factors such as vocational satisfaction or holidays which encourage
to labour supply of labour to an occupation.
Compensating Differences in pay reflecting the non-monetary rewards or
differentials disadvantages of working in a particular job. E.g. Teachers get paid less
because of vocational satisfaction, oil rig workers get paid more
because of lengthy periods away from home.
Wage discrimination The part of a wage gap which cannot be explained be economic factors
such as differences in marginal revenue product (e.g. some gap still
exists between male and female wages even after all economic
explanations have been accounted for.
Wealth A stock of assets with a marketable value. Housing and pension wealth
are the biggest types of wealth in the UK.
Income A flow derived from assets over a period of time. Income is received as
wages, interest, profit or rent. Benefit payments also form part of the
income of individuals (but not of national income as they are transfer
payments)
The distribution of Describes the proportion of national income enjoyed by those in
income different deciles or quintiles when incomes are arranged in ascending
order.
The distribution of Describes the proportion of national wealth enjoyed by those in
wealth different deciles or quintiles when individual wealth levels are arranged
in ascending order.
Progressive taxation A tax for which the average rate of tax rises with income (e.g. income
tax)
Universal benefits A benefit which is available to all, regardless of income and wealth.
Child benefit was universal until it was withdrawn from higher rate tax
payers in January 2013
Means-tested benefits Benefits which are only available to those whose incomes, wealth and
family circumstances permit them to qualify. Job seeker’s allowance is

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a means-tested benefit.
Redistribution of The use of progressive taxation and either universal or means-tested
income benefits to make the distribution of disposable income more equal than
original income.
Absolute poverty Poverty which threatens continued human survival, with low incomes
resulting in a lack of access to the resources needed to meet basic
human needs, such as food, water, shelter, clothing and sanitation. The
World Bank measures absolute poverty using a threshold income of
$1.25 a day
Relative poverty Poverty relative to other members of the same society. Relative
poverty is typically measured using thresholds such as 60 or 50% of
median income.
Poverty trap The interaction of progressive taxation and means-tested benefits to
reduce incentives to work, effectively trapping some individuals in
poverty. Effective marginal tax rates may be close to or even greater
than 100%
Effective marginal tax The amount of income lost in taxes and reduced benefits as a
rate proportion of any increase in income. E.g. An individual earning an
additional £100 and paying tax of £20 and losing benefits of £60 faces
an effective marginal tax rate of 80%.
Substitution effect The effect of a rise in wages in raising the opportunity cost of leisure,
thereby stimulating extensions of labour supply from individuals.
Income effect The effect of wages on total income. For those with a target income,
the effect of a wage increase or tax cut may be to allow them to enjoy
more leisure time while reaching that target income.
Backward bending The individual’s labour supply is the amount of labour that he/she is
individual labour supply willing to supply at given wages over a given time period. The
curve individual’s labour supply may bend backwards at high levels of wages
because wage increases will make it easier for workers to reach a target
income. This analysis suggests that leisure is a luxury good.
Occupational labour The amount of labour supplied to an occupation at given wages over a
supply given time period. The occupational labour supply curve is usually
upward sloping as higher wages may attract new workers into the
occupation.
Elasticity of labour The percentage change in labour supply divided by the percentage
supply change in wage.
Occupational labour The quantity of labour demanded by firms at given wages over a given
demand time period.
Elasticity of labour The percentage change in labour demand divided by the percentage
demand change in the wage.
Capital-labour The use of machines instead of workers in the production process.
substitution Where capital-labour substitution is easy, the elasticity of labour
demand tends to be greater.
Transfer earnings The payment to a worker sufficient to keep him/her in their current
occupation.
Economic rent Any wage in excess of transfer earnings.
Minimum wage A wage floor designed to increase the wages of low paid workers
Targeting The extent to which poverty alleviation measures are focused on those
most in need of help.

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Paper 1 (micro) definitions
Stigma The possible negative social impact on those who receive financial
support such as benefit payments.
Behavioural The fusion of economics with psychology, so that the assumption of
economics rationality is dropped in order to gain a more realistic understanding of
the behaviour of economic agents.
Predictably Systematic biases in human behaviour make our behaviour predictably
irrational irrational. For example, we are reluctant to change from default
choices.
Bounded rationality There are limits to the rationality of human beings as we may not
possess full information and our brains do not have enough computing
power to fully process all the information we receive.
Bounded self-control Humans have limited ability to control their own behaviour and may,
for example, drink heavily even if they realise it is not rational to do so.
Rules of thumb = Thinking short cuts designed to simplify choices, such as always paying
heuristics between £5 and £7 for a bottle of wine.
Social norms Accepted common behaviours that may influence the behaviour of
individuals. Giving cash to your dinner host is socially unacceptable but
giving a bottle of wine conforms with social norms!
Anchoring Economic agents may place too much weight on a single piece of
information, for example the initial price that a product was offered for
before it was discounted in a sale.
Availability bias The availability of an example makes an event seem more likely than it
actually is. For example, recent plane crashes may lead to a fall in
demand for air travel even though it remains statistically the safest
form of travel.
Loss aversion When more weight is place on loss than a gain of equivalent value. For
example, it would be rational to take a 50-50 bet where you will gain £2
by winning but stand only to lose £1 if the bet does not work out.
However, loss aversion may discourage you from taking the bet.
Altruism Acts incentivised entirely by the good of others. Behavioural economics
allows for the possibility of altruism where the traditional assumption
of rationality does not.
Fairness While fairness is a normative concept, behavioural economics allows
that humans may be motivated by their perception of what if fair and
not merely by their own personal gain.
Choice Architecture The notion that how a choice is presented may influence the choice
that is made. For example, placing unhealthy food a few paces away
from the counter should not rationally influence the choice made, but
may well do so in reality.
Nudge The notion that choice architecture can be used to encourage good
behaviours while maintaining the free will of those making choices.
Framing A form of choice architecture in which the wording of a choice is
changed but without changing the meaning. For example, Sky Sports at
£20 a month may sound more attractive than Sky Sports at £240 a year.
Default choice A choice which is made if an active decision to move to an alternative is
not made. Behavioural economics suggests that humans have a strong
tendency to accept default choices, even when little effort is involved in
moving away from the default. Accepting default choices is an example
of our predictable irrationality. The default choice for organ donation

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in the UK was changed to “donate” in 2019, although opting out is still
possible.
Restricted choice The simplification of a choice to a narrow range of options. For
example, energy firms have been forced to reduce the number of tariffs
they offer so that consumers are not overwhelmed by the complexity of
choice (an acknowledgement of our bounded rationality).
Mandated choice This occurs when making a choice is obligatory. In some countries, for
example, people are forced to make a choice about organ donation
when they register for their driving licence.

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