Glossary

Externality

Arises in a market when one economic agent’s actions affect the welfare of others in ways that are not reflected in market prices.

Utility

The amount of satisfaction derived from consumption.

Moral hazard

The tendency of a person to take on more risk because they believe someone else (for example, taxpayers or an insurer) will bear the financial consequences if the risk materialises.

Bounded rationality

Capacity for reasoned decision that is constrained by lack of time and ability to process information.

Asymmetric information

Where one party to an arrangement knows something that another does not and which, had it been known, would have affected the terms of the agreement.

Neoliberal

Describes a perspective which favours capitalism and freely operating markets as a way of organising economic interactions.

Capitalism

Social system in which physical and financial capital are mainly privately owned with strong protection of private property rights.

Perfect competition

Describes a market where a number of conditions are met, for example where no supplier has market power and all agents have perfect information

Market failure

Occurs where the operation of a market does not result in the most efficient allocation of resources or a situation where a market cannot develop.

Marginal revenue

The change in total revenue resulting from the sale of an additional unit of output.

Marginal cost

The increase in total costs as a result of producing one additional unit of output.

Marginal utility

The additional utility gained when an additional unit of a good is consumed.

Law of diminishing marginal utility

As the total amount consumed increases, the marginal utility from each additional unit declines.

Opportunity cost

The opportunity cost of producing (or consuming) a unit of good X is the amount of the next best alternative good Y that could be produced (or consumed) with the same resources.

Equilibrium

Position in which there is no impetus for agents to change their behaviour or decisions.

Perfect competition

Describes a market where a number of conditions are met, for example where no supplier has market power and all agents have perfect information

Price-taker

Describes a buyer or seller that has to accept the price set by the market as given.

Premium

The sum of money a policyholder pays to have insurance cover. This might be paid as a single lump sum or, more usually, annually or in monthly instalments.

Policyholder

The customer who has bought insurance.

Payout

The sum of money the policyholder gets from the insurance if they make a successful claim.

Excess

(also called a deductible in the US). The first part of any loss that must be borne by the policyholder themselves.

Risk pooling

The sum of money a policyholder pays to have insurance cover. This might be paid as a single lump sum or, more usually, annually or in monthly instalments.

Risk-based pricing

(also called risk-reflective pricing). Charging consumers a higher amount if the likelihood of their claiming (in the case of insurance) or defaulting (in the case of loans) is higher.

Risk segmentation

Dividing a pool of consumers for a particular type of insurance into smaller sub-pools on the basis of characteristics that are thought to predict the risk of claiming.

Adverse selection

The tendency for people who have a greater than average chance of suffering an event to apply for insurance to a greater extent than other people.

Discounting

The process of re-evaluating future income and costs in terms of what they are worth in the present.

Transfer payment

Payment from one economic agent or sector to another not in exchange for goods or services.

Sensitivity analysis

Process used to see how the results of an analysis might change if the value of key factors were different from those assumed in the main calculation.