Key Microeconomic Definitions Flashcards
Scarcity
Resources available for the production of g&s (limited) are insufficient to satisfy all human wants (unlimited)
Opportunity cost
Net benefit that could be derived from the NEXT BEST alternative foregone
Production Possibilities Curve (PPC)
Shows the COMBINATIONS of the maximum amount of 2 goods the economy can produce within a certain period, usually a year
- fixed level of technology
- all available resources are fully and efficiently employed
What are the assumptions of PPC?
- Specific period
- No change in state of technology (quality)
- Total available resources unchanged (quantity)
- All resources are fully utilised; latest technology used
What microeconomic concepts can the PPC show?
- scarcity (attainable vs unattainable)
- choice and allocative efficiency (a point on PPC)
- opportunity cost (downward-sloping, concave to origin)
- productive efficiency (on PPC)
What macroeconomic concepts can the PPC show?
- full employment (on PPC) vs unemployment (inside PPC)
- actual growth (inside to on PPC)
- potential growth (outward shift of PPC)
- investment-consumption choice; capital depreciation
Decision-making framework by economic agents
- Benefits vs costs
- Objectives
- Constraints
- Information
- Perspectives
- Intended, unintended consequences
Consumer decision-making
Maximise net total benefits (utility) (MC = MR)
- what to consume
- how much to consume
Producer decision-making
Maximise total profits (MC = MR)
- what to produce (consumer preference; goods market; SR vs LR exit decision)
- how much to produce (DD-SS intersection; goods market)
- how to produce (method of production; factor market)
Government decision-making
Maximise net total social welfare (MSB = MSC)
- whether to intervene
- best policy to undertake
- how many units to produce (merit goods, public goods, infrastructure; MSB = MSC)
Consumer constraints
Income; time (service)
Producer constraints
Financial resources; fixed factors in SR
Government constraints
Resources; financial resources; fiscal budget
Demand
Quantity of a good or service that consumers are WILLING and ABLE to consume at various prices, in a given time period
- downward-sloping due to LDMU
- shifted by TIGERP
Supply
Quantity of a good or service that producers are WILLING and ABLE to sell at various prices in a given time period
- upward-sloping due to LDMR
- shifted by PERMS
Income elasticity of demand (YED)
Measures responsiveness of demand to a change in income of a good, c.p
- normal (necessity / luxury)
- inferior
- factors: nature of good, changing perception due to income level…
Cross-price elasticity of demand (XED)
Measures responsiveness of demand for one commodity to a change in price of another commodity, c.p
- complementary
- substitutes
- independent
- factor: closeness of subs
Price elasticity of demand (PED)
Measures responsiveness of Qd for a good to a change in its price, c.p
- sign always (-)
- price elastic vs inelastic
- factors: no. and closeness of available subs (PDA), proportion of Y spent on good, time period
Price elasticity of supply (PES)
Measures responsiveness of Qs to a change in price, c.p
- always (+)
- price elastic vs inelastic
- factors: time period, MC as o/p changes (spare capacity, mobile f.o.p), definition of good
Limitations of elasticity concepts
- assumes c.p
- based on past data
- based on small changes in price / income / price of other goods; inaccurate estimation
Consumer surplus
Difference between the maximum price that consumers are willing and able to pay for a good or service and the total amount they actually pay
Indirect tax
Compulsory levy imposed on the sale of goods and services, which the producer has the legal responsibility to pay to the government
Producer surplus
Difference between the minimum price that producers are willing and able to supply for a good for and the price they actually receive
Subsidy
A payment made by the government to producers to encourage the production of certain g&s, but not made in exchange for any goods and services