Economics - MICRO Flashcards
All definitions for SL MICRO Economics
Demand
Quantity of a good or service that customers are willing and able to buy at a given price, per period of time
Law of demand
that the quantity demanded of a product will fall if the price increases, and vice versa
Income effect
one of three factors accounting for the downward sloping demand curve. As the price of a product falls, consumers’ real income increases so they are able to buy more goods and services at lower prices.
Substitution effect
states that as the price of a product falls, more people can buy the product, so choose this over rival products, that is, it causes consumers to replace higher priced products with lower priced ones.
Market
any place where transactions take place between buyers and sellers.
market demand curve
refers to the sum of all individual demand for a product at each price level.
non-price determinants of demand
various factors other than the price of a good or service that affect the demand for the product
normal goods
products that customers tend to buy more of as their real income level increases. This includes both necessities and luxury goods and services.
inferior goods
products with a negative income elasticity of demand. Demand falls when real income level increases.
What are the non-price determinants of supply?
Income, tastes and preferences, number of consumers, price of related products, future price expectations
Complementary goods
products that are jointly demanded, for example, torches and batteries.
Substitutes
products that are in competitive demand because they can be used in place of each other. Like tea and coffee.
Movement along a demand curve
caused by price changes only. A fall in price causes quantity demanded to expand while an increase in price causes quantity demanded to contract.
A contraction in demand
when there is a fall in the quantity demanded for a product following an increase in price.
An expansion in demand
when there is an increase in the quantity demanded for a product following a fall in its price.
An increase in demand
rightwards shift of the entire demand curve for a product, caused by favourable changes in non-price factors that affect demand.
decrease in demand
to a leftwards shift of the entire demand curve for a product, caused by unfavourable changes in non-price factors that affect demand.
A shift of demand curve
when there is a change in non-price factors that affects the demand for a product.
Supply
Amount of a good or service that firms are willing and able to provide at any particular price, per time period.
law of supply
there is a direct relationship between quantity supplied and price, ceteris paribus.
law of diminishing marginal returns
what happens to the output of products when a firm uses more variable inputs while keeping at least one factor of production fixed. States that by employing additional variable factors of production, the marginal returns will eventually decline.
short run
a period of time when at least one factor of production is fixed. Where other factor inputs are variable.
long run
period of time when no factors of production are fixed.
Marginal cost
refers to the cost of producing an additional unit of output.
Market supply
refers to the sum of all individual supply of producers at each price level for a given product.
non-price determinants of supply
are various factors other than the price of a good or service that affect the supply of the product
What are the non-price determinants of supply?
Costs of factors of production, price of related goods, indirect taxes and subsidies, future price expectations, changes in technology, number of firms in the industry.
competitive supply
means the output of one product prevents or limits the production of alternative products, due to competing resources.
Joint supply
refers to the supply of a product that results in the output of at least one by-product.
Indirect taxes
government levies on expenditure, rather than on incomes.
Movement along supply curve
if the price of the product changes.
Expansion along supply curve
caused by higher price for the product.
contraction along supply curve
caused by lower price for the product.
Shifts of the supply curve
when there is a change in the non-price factors of supply. Shift of entire curve.
Market equilibrium
when the quantity demanded is equal to the quantity supplied of a product.
Equilibrium
condition that holds when a market is cleared of any shortage or surplus. Happens at the price where the quantity demanded for a product is equal to the quantity supplied.
Market disequilibrium
when the quantity demanded for a product is either higher or lower than the quantity supplied in the market. There is either a shortage or surplus.
Excess supply
disequilibrium situation where the price of a product is set above the equilibrium price, creating a surplus.
surplus
supply of a product exceeds demand, because price is set higher than the market equilibrium price.
excess demand
when the price is set below the equilibrium, there is a shortage.
Price mechanism
the interactions between buyers and sellers in the free market in order to allocate resources, thereby determining production and consumption choices.
signalling function
is an aspect of the price mechanism in allocating resources by providing information where resources are needed (in markets where prices increase).
Incentive function
aspect of the price mechanism in allocating resources as price changes provide an incentive for producers and consumers to change their behaviour in order to maximise their benefits.
Rationing function
price mechanism deters some consumers from buying a product or resource owing to higher prices thereby rationing it. Rations scarce resources when demand exceeds supply.
consumer surplus
the gain to buyers who can purchase a product at a price lower than what they are willing and able to pay.
producer surplus
the gain to firms that receive a price higher than the price they are willing and able to sell at.
community/social surplus
sum of consumer and producer surplus at a given market price and output, maximising economic welfare.
allocative efficiency
socially optimal situation when resources are distributed in such a way that consumer and producers get the maximum possible benefit. No one made better off without making someone else worse.
Market failure
any situation when the price mechanism (free market forces) allocates scarce resources in an inefficient way.
Elasticity of demand
a measure of how the quantity demanded for a product changes owing to a change in a factor that affects demand, such as price or real disposable income.
Price elastic demand
demand for a product that is relatively responsive to changes in the product’s price, value of PED > 1.
Price inelastic demand
demand for a product that is relatively unresponsive to changes in price, value of PED < 1.
Price elasticity of demand
degree of responsiveness of demand for a product after a change in price.
change in quantity demanded
movement along demand curve due to price changes.
perfectly price elastic demand
when the demand for a product exists at one price only, as customers are highly responsive to changes in price. Change in price leads to zero demand for the product.
perfectly price inelastic demand
when the demand for a product is unresponsive to changes in price. Due to the absence of any available substitutes.
Unitary price elastic demand
when a given price change of a product leads to the same percentage change in the quantity demanded. PED = 1
Change in demand
shift in the demand curve for a product due to a change in non-price factors affecting demand.
Income elasticity
degree of responsiveness of quantity demanded following a change in the real income of consumers.
income elastic demand
when the percentage change in the quantity demanded of a product is greater than the percentage change in consumers’ real income, YED > 1.
services
intangible products.
luxury products
those goods and services with income elastic demand, YED > 1.
Income inelastic demand
when the percentage change in quantity demanded is less than percentage change in real income. YED < 1.
necessities
products that consumers buy in order to meet their needs. Positive YED value that is less than one.
Normal goods
products consumers tend to buy more of as their real income increases. Includes luxuries, necessities and services.
Engel curve
used to demonstrate the relationship between income and the quantity demanded. Normal goods have positive slope, inferior goods have negative slope.
inferior goods
products with a negative income elasticity of demand.
price elasticity of supply
measures degree of responsiveness of quantity supplied of a product due to a change in its price.
PES = (%∆Qs)/(%∆P)
PES > 1 = elastic
PES < 1 = inelastic
PES = 0 = perfectly inelastic
PES = ∞ = perfectly elastic
PES = 1 = unitary
Price elastic supply
when a change in price leads to a proportionately large change in the quantity supplied.
Price inelastic supply
when a change in price leads to a smaller proportionately change in the quantity supplied.
Unitary price elastic supply
theoretical situation where the percentage change in quantity supplied is equal to the percentage change in price.
What are the determinants of PES?
time, mobility of factors of production, unused capacity, ability to store, rate at which costs increase
mobility of factors of production
level of ease and cost of factor substitution in the production process. Easier it is, the more price elastic supply is.
Inventory/stocks
quantities of goods that a business has available for sale, per time period.
What are the reasons for government intervention in markets?
promote equity, earn government revenue, correct market failure, support firms, influence level of consumption, support households on low income, influence level of production.
Public goods
collective consumption goods provided by the government that are non-rivalrous and non-excludable.
Merit goods
products that create positive externalities when they are produced or consumed (MSB > MPB)
Negative externalities
expenses incurred by third parties in an economic transaction for which no compensation is paid.
What are forms of government intervention in markets?
Price ceilings, price floors, indirect taxes, subsidies, direct provision, command and control.
Price controls
government regulations establishing a maximum or minimum price to be charged for certain goods and services.
Price ceiling
when the government sets a price below the market equilibrium price to encourage output and consumption.
Deadweight loss
reduction in social surplus due to inefficient allocation of resources
Price floor
form of price control that imposes a price guarantee set above the market equilibrium price to encourage supply of a certain good or service.
specific tax/ per unit tax
a fixed amount of tax on each product that is sold.
Ad valorem tax
a percentage tax on the value of a good or service that is sold.
Direct provision
when the government directly provides or supplies goods and services deemed to be in the best interest of the public.
Command and control regulation and legislation
the direct rules or laws governing an activity or industry, stating what is permitted and what is illegal.
Government failure
when the cost of attempting to prevent or correct free market imperfections or distortions turn out to be greater than the social costs of the original market failure.
Private benefits
gains of production and consumption enjoyed by an individual firm or person
private costs
expenses to individual person or firm.
social benefits
total benefits of consumption or production to society, su of private benefits and external benefits
social costs
total costs of consumption or production to society, the sum of private costs and external costs
externalities/ spillover effects
external costs or benefits of an economic transaction, causing the market to fail to achieve the social optimum level of production or consumption.
positive externalities
benefits enjoyed by a third party not directly involved in an economic transaction.
Merit goods #2
products that create positive externalities, MSB > MPB.
Demerit goods
create negative externalities, MSC > MPC, welfare loss in society.
common access resources
are non-excludable but rivalrous. create a situation of tragedy of the commons. result in negative externalities and unsustainable production.
non-excludability
one of the two characteristics of pure public goods, it is not possible to exclude someone from using a good or service even if they have not paid for it.
Tragedy of the commons
refers to degradation, depletion or destruction of a common pool resource caused by the problems of rivalry and overuse.
Market failure - Indirect tax or Pigouvian tax)
form of intervention in response to negative externalities and common pool resources by taxing the producer or consumer in order to make them pay for negative externalities of production and consumption.
Carbon tax
a tax on greenhouse gas emissions or the carbon content of fossil fuels in order to reduce pollution from particular industries by internalising negative externalities of production.
Tradable permits
government regulated emissions trading schemes that limit pollution in an industry to a more socially efficient level. Efficient firms can sell any excess permits that they do not need to use.
Collective self-governance
voluntary communal actions to tackle the problems of negative externalities and the problems associated with the exploitation of common pool resources.
Subsidies
a form of financial assistance from the government to domestic firms by lowering their costs of production in order to help the firms compete against foreign imports. Subsidies encourage output, reduce the price of certain products, or keep down the cost of living for the domestic country’s citizen.
Public goods
collective consumption goods that have the two key characteristics of being non-rivalrous and non-excludable.
non-rivalrous
one of the two characteristics of public goods, the consumption of goods or service by one person does not reduce the amount available for others.
Free rider problem
when people have access to benefit from a good or service without having to pay for it. As a result, the good or service will be under provided or not provided in a free market.
contracting out
approach to government intervention in response to public goods by paying a specialised third-party firm with the expertise to provide a public good, such as refuse collection services.
