Microeconomic definitions

Macroeconomics

A branch of economics focused on the study of an economy as a whole.

Microeconomics

A branch of economics focused on the study of individuals, firms and specific industries.

Economic goods

A good that is scarce, has opportunity cost.

Price elasticity of supply

A measure of responsiveness of quantity supplied of a good to a change in its price.

Price elasticity of demand

A measure of the responsiveness of the quantity demanded of a good to a change in it's price.

Utility

A measure of the satisfaction that the consumption of a product provides, often measured by how much a person is willing to pay for it.

Specific (flat) tax

A tax that adds a fixed value to the price of a product.

Ad valorem tax

A tax that adds a percentage of the value of a product onto it's price.

Transition economy

A transition economy or transitional economy is an economy which is changing from a centrally planned economy to a market economy. Transition economies undergo a set of structural transformations intended to develop market-based institutions.

Market

An abstract arena in which buyers and sellers of a good come together to exchange.

Development

An improvement in the standard of living (quality of life) of a society. Development is a subjective concept which is difficult to quantify.

Actual growth

An increase in output as shown by a movement from one point in the PPC, towards the PPC.

Potential growth

An increase in production possibilities shown by a shifting outwards of PPC. Changes in the determinants of LRAS can cause an increase in potential output (quality and quantity of resources, technology and infrastructure, market freedom and incentives)

Economic growth

An increase in the level of total economic activity of a society, usually measured by real GDP. Growth is an objective, quantifiable concept

Commodity agreements

An international commodity agreement is an undertaking by a group of countries to stabilize trade, supplies, and prices of a commodity for the benefit of participating countries. An agreement usually involves a consensus on quantities traded, prices, and stock management.

Law of demand

Ceteris paribus, there is a negative (inverse) relationship between price and quantity demanded.

Law of supply

Ceteris paribus, there is a positive (direct) relationship between price and quantity supplied.

Resources

Factors of production. Land, labour, capital and entrepreneurship

Veblen (ostentatious) good

Good whose sole purpose is to show of wealth

Normal goods

Goods a person will buy more of if their income rises, there is a positive YED.

Inferior goods

Goods a person will demand less of due to an increase in income, for example bus tickets. YED is negative.

Substitute goods

Goods that carry out the same function, and don't differ very much. Coca cola and pepsi are substitutes.

Merit goods

Goods that create positive externalities

Cap and trade scheme (tradable emissions permits)

Government determines an acceptable level of pollution at an output level and caps the pollution at this level, distributing permits to produce at this level to firms. This provides incentives for firms to produce more efficiently.

Adverse selection

In general those who want to buy insurance are the ones who expect to have costly medical bills

Positive economics

Statement of fact, can be proven or disproven

Normative economics

Statement of opinion, cannot be proven or disproven

Consumer surplus

The difference between the maximum price a consumer is willing to pay for a product and the actual price they pay.

Demand

The relationship between the price of a product and it's quantity demanded at every price level in a given period of time.

Supply

The relationship between the price of a product and it's quantity supplied at every price level in a given period of time.

Labour

The work that individuals provide in the production of goods or services.

Black market

Underground economy in which goods and services are traded illegally

Opportunity cost

Value of the next best alternative foregone when an economic decision is made.

Moral hazard

When a person has insurance they are more likely to act in a risky way

Land

Any natural resource, including actual soil but also animals and raw materials.

Capital

Anything that increases the productivity of other factors of production.

Minimum (floor) price

Artificially high price, set above equilibrium, designed to help suppliers. (labour market)

Maximum (ceiling) price

Artificially low price, set below equilibrium, designed to help demanders in an economy. (low income housing market)

Law of diminishing marginal utility

As a consumer consumes more and more units of a product, the marginal utility of each additional unit diminishes

Giffen good

Basic food staple

Potential output

A change in a determinant of LRAS may cause possible output levels to increase. Eg a new technology being created.

Free goods

A good that is abundant; is obtained without opportunity cost, has no price. Eg Oxygen

Income elasticity of demand

A measure of how a change in income affects the change in quantity demanded of a good.

Cross elasticity of demand

A measure of how a change in price of good A will affect the change in quantity demanded of good B. XED is negative for complementary goods and positive for substitute goods.

Ceteris paribus

All other things being equal

Law of increasing opportunity cost

As an economy increases its output of a particular product, the opportunity cost of each additional unit of output increases. (because resources are not perfectly transferable from one type of production to another eg cows making guns)

Buffer stock scheme

Because of the importance of agriculture, and because farmers incomes are unstable, the government intervenes in the market for agricultural goods to keep price within a target range through buying or selling the good.

Sustainable development

Development which meets the needs of the present without compromising the ability of future generations to meet their needs.

Production possibilities curve

Diagram showing scarcity, choice and the law of increasing opportunity cost.

Demerit goods

Good that create negative externalities

Complementary goods

Good which are used together, printers and ink for example.

Common access resources

Large scale resources with the characteristic of non-excludability. Eg forests, fisheries. Results in tragedy of the commons as the resource is depleted. Government can ban consumption, tax, subsidize alternatives or formalize property rights.

Negative externalities

Negative spill over effects on third parties. For example, when a person smokes a cigarette, third parties suffer from passive smoking.

Public goods

Non-rivalrous (one person consuming does not stop another consuming) and non-excludable (cannot prevent those who haven't paid consuming). Eg national defence and flood barrier. In a free market these would be underproduced, government intervention is needed through making everyone pay with tax.

Positive externalities

Positive spill over benefits for third parties resulting in a free rider effect. For example, when one person receives a vaccination there is a great free rider effect, since people who did not get a vaccination are now less likely to get the disease

Free market economy

Private individuals own the factors of production and the 3 basic questions are answered by market forces.

Tax incidence

Refers to how the burden of paying the tax was shared between consumers and producers. Did consumers pay more of the tax, or did producers?

Demand curve

Slopes downwards, slope is determined by elasticity. The curve is determined by, income, tastes/styles/preferences, prices of related goods, and demographic changes.

Supply curve

Slopes upwards, slope is determined by elasticity. The curve is determined by resource prices, prices of related goods, technology & productivity, number of sellers and taxes & subsidies.

Economics

Study of how society allocates its scarce resources to best satisfy its unlimited needs and wants

Indirect tax

Taxes levied on expenditure, sales tax on products, excise tax on overproduced goods such as cigarettes. May be ad valoren or flat.

Entrepreneurship

The activity that individuals undertake when they organize resources into a system of production. It involves risk since they have to pay of their costs of production before earning revenue from sales. The entrepreneur is payed in normal profit.

Actual output

The actual level of output.

Scarcity

The basic economic problem that arises because people have unlimited wants but resources are limited.

Planned (command) economy

The central authority (government) owns the factors of production and answers the 3 basic questions.

Producer surplus

The difference between the minimum price at which a producer is willing to sell, and the actual price at which it is sold.

Equilibrium price

The price where supply and demand intersect.

Elastic demand

When PED is greater than 1, a change in price will lead to a proportionally greater change in quantity demanded

Inelastic demand

When PED is less than 1, a change in price will lead to a proportionally smaller change in quantity demanded

Asymmetric information

When one party in an economic exchange has imperfect information about the product or the other party, resulting in the exchange not taking place and the market failure of underproduction. Eg restaurants, government give health and safety rating. From sellers perspective, insurance.

Welfare loss (and unrealized potential welfare gain)

When the community surplus is not being maximized. Lost community surplus is welfare loss. Basically welfare loss is the opportunity cost of producing too much of a product whilst unrealized potential welfare gain is the opportunity cost of not producing a product.

Market failure

When the free market fails to produce the socially optimum level of output in a particular industry.