Microeconomics Definitions -

Non-price determinants of supply

1. Costs factors of production (land, labour, capital and entrepreneurship) 2. Technology 3. Price related goods (joint/competitive supply) 4. Expectations 5. Direct taxes and subsidies 6. The number of firms in the market

Supply curve

A curve or line showing the relationship between the price of a product and the quantity supplied over a range of prices

Tariff

A duty (tax) that is placed upon imports to protect domestic industries from foreign competition

Inferior goods

A good whose demand falls as income rises, negative income elasticity

Production possiblity curve

A graph that shows the different rates of production of two goods that an individual or group can efficiently produce with limited productive and fully employed resources within a specified time with

Income elasticity of demand

A measure of the responsiveness of demand for a good to a cahnge in consumers' income, YED = %∆ in D/%∆ in Y

Elasticity

A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Price floor or minimum pricing

A minimum price set by the government or other authority below which te product may not be sold in order to support the producers of a product

Resource allocation

A primary focus of the study of economics to examine the way that scarce factors of production are sued (allocated) to meet unlimited demand

Tradable permits (carbon credits)

A process whereby each country is allocated certain levels of pollution (or carbon emissions). Countries that do not use their quota can then trade their permits to countries that have used more than their quota

Public good

A product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants

Positive statement

A statement that can be verified by empirical observation, a value-free statement which can be tested by an appeal of facts

Economic growth

A steady growth in the productive capacity of the economy (and so a growth of national income), therefore growth in GDP

Giffen good

A type of inferior good for which an increase in the price raises the quantity demanded, as a result of a positive income effect larger than the normal negative substition effect

Normative statement

A value judgement about what ought or should happen

Labour

All forms of human input, both physical and mental, into current production

Mixed economy

An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion

Command economy

An economy where all economic decisions are made by a central authority. Usually associated with a socialist or communist economic system

Flat rate or specific tax

An indirect tax where a fixed amount is added to the price of a good or service

Ad valorem tax

An indirect tax where a given percentage is added to price of a good or service, e.g. VAT

Free good

Commodities that have no price and no opportunity cost eg. fresh air and sunshine

Private goods

Goods and services that are excludable and rivalrous and are therefore provided by the market

Veblen good

Goods are bought as a display of wealth for ostentatious reasons - so if price rises, people will buy more of them and buy less when they are cheaper.

Manufactured goods

Goods that have been processed by workers

Complementary good

Goods used in combination with each other, negative cross-price elasticity

Joint supply

Goods which are produced together, or where production of one good involves the production of another good (e.g. meat and leather)

Substitute good

Goods which can be sued in place of each ohter, positive cross-price elasticity

Quota

Import barriers that set limits on the quantity or value of imports that may be imported into a country

Land and raw materials

Inputs into production that are provided by nature

Market failure

Occurs when the production of a good does not take place at the socially efficient level of output, allocative efficiency where MSC=MSB

Non-excludable

Once produced, no once can be stopped form using the good/service (free-riders)

Perfectly elastic

One variable is unresponsive to changes in another. Any change in price results in supply or demand falling to zero

Incidence of tax

The distribution of the burden of tax between sellers and buyers

Private sector

The part of the economy that is characterized by private ownership of the means of production by profit seeking individuals

Demand

The quantity which buyers are willing to and able to purchase of a particular good or service at a given price over a given period of time, ceteris paribus

Choice

The result of the economic problem of scarcity, and how you allocate resources to deal with the economic problem

Production

The transformation of inputs into outputs by firms in order to earn profits (or to meet some other objective)

Non-rival

The use by one does not limit/reduce the use by another

Free riders

Those who benefit from a good or service without paying a share or its cost - this is why the market will not provide public goods

Homogeneous product

Undifferentiated products, that are identical to or indistinguishable from one another produced in perfect competition

Parallel/underground market (black or informal)

Unrecorded activity where no tax is paid and regulations can be avoided

Law of demand

As the price of a product increases, the quantity demanded decreases, ceteris paribus

Non-price determinants of demand

1. Income (inferior and normal goods) 2. Preferences 3. Prices of related goods (subsitutes and complements) 4. Demographic changes

Demand curve

A curve or line showing the relationship between the price of a product and quantity demanded over a range of prices over a given time period, for an indivudal consumer or group of consumer, more usually a whole market

Common market

A customs union with common policies on product regulation, and free movement of goods, services, capital and labour

Normal goods

A good for which demand rises as income rises, positive income elasticity

Economic good

A good or service that is limited in supply, therefore it is scarce and has an opportunity cost

Price ceiling or maximum pricing

A maximum price set by the government or other authority above which the product may not be sold in order to support the consumers of the product

Price elasticity of demand

A measure of the responsiveness of the quantity of a good demanded to a change in its price, PED = %∆ in Qd/%∆ in price

Price elasticity of supply

A measure of the responsiveness of the quantity of a good suplied to a change in its price, PES = %∆ in Qs/%∆ in price

Cross price elasticity of demand

A measure of the responsiveness of the quantity of one good demanded in response to a change in the price of a related good, XED = %∆ in Qd of good A/%∆ price good B

Productive efficiency

Achieved when firms produce the maximum amount of output for a given amount of inputs, at the lowest possible average cost curve

Factors of production

All the economic resources (input) necessary to produce a society's goods and services, such as land, labour, capital and entrepreneurship

Ceteris paribus

All things being equal - one of the assumptions used in many economic models, where an individual factor is changed while all others are held constant

Free market economy

An economy where all economic decisions are taken by individual households and firms, with no government intervention

Law of supply

As the price of a product increases, the quantity supplied increases, ceteris paribus

Utility

Benefits or satisfaction gained from consuming goods and services - hard to measure but we assume consumers make decisions based on maximizing utility

Allocative efficiency

Best allocation of resources from society's point of view is at competitive market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost)

Economics

Concerned with the production of goods and services, and the consumption of these goods and services

Opportunity cost

Cost of the next best alternative use of money, time, or resources when one choice is made rather than another

Externalities

Costs or benefits of economic activity which are met by others rather then the party which causes them

Sustainable development or Sustainability

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Internalize the externality

Making the user pay or be responsible

Excess supply

Occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded

Excess demand

Occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied

Perfectly inelastic

One variable is unresponsive to changes in another. Change in price will have no effect on change in quantity demanded or quantity supplied

Incentive function of price

Price give producers the incentive either to increase or decresae the quantity they supply

Signalling function of price

Prices give signal to both producer and consumers, rising price signal producers should increase quantity supplied whereas, signals consumers decrease quantity demanded

Differentiated product

Products distinguished from similar products by characteristics like quality, design, location, and method of promotion

Merit good

Products that are considered to be beneficial for people that would be underprovided or underconsumed in a purely free market economy

Demerit good

Products that are considered to be harmful for people, that would be overprovided or overconsumer in purely free market economy

Primary commodities

Raw materials

Common access resources (common pool resources or common property resources)

Resources which have similar to public goods in that it is impossible to prevent people from using or consuming the resource

Direct taxation

Taxation imposed on people's income or wealth and on firms' profit

Indirect tax

Taxes placed upon the expenditure on a good or servies, such as value added or goods and services tax

Consumer surplus

The additional benefit or utility received by consumers by paying a price that is lower than they are willing to pay

Producer surplus

The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive

Supply

The amount of a good or service that producers are willing and able to supply at a given price in a given time period

Subsidy

The amount of money given to producers of a product by the government

Positive externalities of consumption or production (social benefits)

The external benefits to a third party that occur when a product is consumed or produced

Negative externalities of consumption or production (social costs)

The external costs to a third party that occur when a produc is being consumed or produced

Marginal private costs

The extra (private) costs to the producer of producing an additional unit of output

Marginal social benefits

The extra benefit or utility to society of consuming an additional unit of output, including both private benefit and the external benefits

Marginal private benefits

The extra benefit or utility to the consumer of consuming an additional unit of output

Marginal social costs

The extra cost to society of producing an additional unit of output, including both private benefit and the external benefits

Entrepreneurship or management

The factor of production that brings together the other three factors of production with the aim of making profit

Capital

The factor of production that is made by humans and is used to produce goods and services, it occurs as a results of investment

Economic development

The improvement of living standards by economic growth.

Market

The interaction between buyers and sellers

Welfare loss (Dead weight loss)

The loss of total societal welfare (consumer and produce surplus) that occurs when a market is producing at a level of output that is not socially optimal (where MSB=MSC)

Public sector

The part of the economy where goods and services are provided by the government, i.e. public hospitals, roads, schools, parks and gardens.

Long run

The period of time long enough for all factors to be variable

Short run

The period of time which at least one factor of production (usually capital) is fixed

Market equilibrium

The point where the quantity of product demanded is equal to the quantity of a product supplied, market clearing price and quanitty where there is no excess demand or supply

Price mechanism

The process by which prices rise or fall as a result of changes in demand and supply. Signals and incentives are given to producers and consumers to produce more or less or consume more or less

Market mechanism

The process by which prices rise or fall as a result of changes in demand and supply. Signals and incentives are given to producers and consumers to produce more or less or consume more or less.

Microeconomics

The study of the behaviour (supply and demand) of individual markets

Principal-agent dilemma

When employing an agent, the principal may not be sure if they are working in their (principal's) best interest or their own (agents) best interest

Incidence

Who actually pays the tax, what percentage is paid by the sellers/producers and what percentage is paid by the buyers/consumers