The Principal Agent Problem occurs when there is a conflict in interest between ‘the principal’, and ‘the agent’. The principal refers to the individual that delegates authority and responsibility to the agent. So the agent acts on behalf of the principal. The problem then arises where the interests of the agent and the principal do not align.
Asymmetric information or information asymmetry is where one party in a transaction has more information than the other. In other words, the seller of a good may know more about its true worth than the consumer of that good.
In economics, an externality refers to a cost or benefit that is imposed onto a third party. These can come in the form of ‘positive externalities’ — that create a benefit to a third party. Or, ‘negative externalities’ — that create a cost to a third party.
A substitute good is not necessarily just a physical product; it can also be a service. So to define substitute goods: it is a product or service that is used in place of another.
A Complementary good is a product or service that adds value to another. In other words, two goods that the consumer uses together. For example, cereal and milk, or a DVD and a DVD player.
The income effect is where a change in income has a subsequent effect on demand. In other words, as consumers incomes rise, they will demand more goods and services.
Marginal Utility is the enjoyment or satisfaction that a consumer gains for each additional unit they consume. So it calculates the utility beyond the first product or service consumed (the marginal amount).
Adverse selection occurs when either the buyer or seller has more information about the product or service than the other. In other words, the buyer or seller knows that the products value is greater than its worth.
A consumer good, also known as a ‘final good’, is the end product a business produces and is purchased by the consumer. For example, microwaves, fridges, t-shirts, and washing machines, are all examples of consumer goods. They are final goods that the consumer purchases.
Price gouging is where the seller increases the prices of their goods or services to a level considered unreasonable and unfair. It arises due to a sharp surge in demand, normally as a result of natural disaster such as a hurricane or earthquake.
