Definitions Micro Flashcards
Individual Demand
The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.
Law of Demand
According to the law of demand, there is a negative relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus: as the price of the good increases, quantity demanded falls; as the price falls, quantity demanded increases, ceteris paribus.
Market Demand
Market demand is a sum of all individual consumer demands in an economy, ultimately being represented by a market demand curve & the law of demand.
Individual Supply
The supply of an individual firm indicates the various quantities of a good (or service) a firm is willing and able to produce and supply to the market for sale at different possible prices, during a particular time period, ceteris paribus.
Law of Supply
According to the law of supply, there is a positive relationship between the quantity of a good supplied over a particular time period and its price, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases; as the price falls, the quantity supplied also falls, ceteris paribus.
Market Supply
Market supply is the sum of all individual firm supplies of a good in an economy, ultimately being represented by a market supply curve & the law of supply.
Rationing
Rationing is a method of apportioning or parcelling out goods and services among consumers or households. The market mechanism uses price rationing for this purpose, which involves the use of prices freely determined in markets. This simply means that whether a consumer will get a good is determined by the price of that good. All those who are willing and able to pay the price of a good or service gets.
Signals & Incentives
The key to the market’s ability to allocate resources can be found in the signalling and incentive functions of prices in resource allocation. As signals, prices communicate information to decision-makers. As incentives, prices motivate decision-makers to respond to the information.
Consumer Surplus
Consumer surplus is the maximum price consumers are willing to pay for a good minus the actual price paid. As a result, CS is the extra utility gained from paying a price lower than what consumers were willing and able to pay due to the market equilibrium. Consumer surplus is the area under the demand curve and below the price paid by the consumer, up to the quantity purchased.
Social Surplus
Social or community surplus or total welfare is the consumer surplus and the producer surplus added together. There is maximum social surplus when the market is at equilibrium, or allocative efficiency. It is the total excess utility for society.
Producer Surplus
Producer surplus is the price received by producers for selling their goods minus the lowest price they are willing to accept to produce the good. As a result, PS is the extra uility from being able to supply at a lower price but selling at a higher price than willing and able to. Producer surplus is shown as the area above the firms’ supply curve and below the price received by the firm, up to the quantity produced.
(Competitive Market) Equilibrium
Competitive market equilibrium: quantity demanded equals quantity supplied, and there is no tendency for the price to change. In a market disequilibrium, there is excess demand (shortage) or excess supply (surplus), and the forces of demand and supply cause the price to change until the market reaches equilibrium. Resources are efficiently allocated, the best allocation for society.
Allocative Efficiency
Allocative efficiency refers to producing the quantity & combination of goods mostly wanted by society. Allocative efficiency is achieved when the economy allocates its resources so that the society gets the most benefits from consumption. Since allocative efficiency refers to producing what consumers mostly want, it answers the what/how much to produce question in the best possible way. Consumers get the max benefit, and no one is better off without someone being worse off.
Excess Supply
When more of a product is being supplied to a market than is demanded at a given price.
Total Revenue
Total revenue (TR) is the amount of money received by firms when they sell a good (or service), and is equal to the price (P) of the good times the quantity (Q) of the good sold. Therefore, TR = R = PX Q.
Price Elasticity of Demand
Price elasticity of demand (PED) is a measure of the responsiveness of the quantity of a good demanded to changes in its price. PED is calculated along a given demand curve. In general, if quantity demanded is highly responsive to a change in price, demand is referred to as being price elastic; if quantity demanded is not very responsive, demand is price inelastic.
Excess Demand
When more of a product is demanded than supplied at a given price.
Income Elasticity of Demand
Income elasticity of demand (YED) is a measure of the responsiveness of demand to changes in income and involves demand curve shifts. It provides information on the direction of change of demand given a change in income (increase or decrease) and the size of the change (size of demand curve shifts).
The Engel Curve
The Engel curve shows a continuum: at very low incomes a good may be a luxury; as income increases it becomes a necessity and finally at high income levels it becomes inferior.
Price Elasticity of Supply
Price elasticity of supply (PES) is a measure of the responsiveness of the quantity of a good supplied to changes in its price. PES is calculated along a given supply curve. In general, if there is a relatively large responsiveness of quantity supplied, supply is referred to as being elastic; if there is a relatively small responsiveness, supply is inelastic.
Price Controls
The setting of minimum or maximum prices by the government (or private organisations) so that prices are unable to adjust to their equilibrium level determined by demand and supply. Price controls result in market disequilibrium, and therefore in shortages (excess demand) or surpluses (excess supply).
Price Ceiling
A price ceiling is a maximum price set below the equilibrium price, in order to make goods more affordable to people on low incomes.
Price Floor
A price floor is a minimum price set below the equilibrium price, in order to provide income support to farmers or to increase the wages of low-skilled workers.
Indirect Taxes
Indirect taxes are imposed on spending to buy goods and services. They are paid partly by consumers, but paid to government by firms (indirect)
Specific Tax
A fixed amount of tax imposed upon a product per unit consumed. This is added to the production cost of the good or service but burdens are distributed between consumers (in the form of higher prices) and producers (in the form of lost sales)
Tax Burdens
The proportion of a tax that are paid by consumers, in the form of higher prices, and the proportion of tax paid by producers, in the form of lost sales.
