micro definitions Flashcards
market
where buyer sand sellers of goods or services are linked together to carry out an exchange
demand
quantity of goods/ services consumer is willing and able to buy at a different price points
law of demand
negative relationship between the price of a good and its quantity demanded over a time period, ceteris paribus
market demand
sum of all individual demands for a good
normal good
demand for good varies directly with income
inferior good
demand for good varies inversely with income
substitute goods
goods that can satisfy a similar need
complementary goods
the goods tend to be used together
eg. remote and batteries
supply
quantity of goods/ services a firm is willing and able to produce and supply to the market for sale at a different price points
law of supply
positive relationship between the quantity of supplied and its price over a particular time period, ceteris paribus
competitive supply
when goods are alternative products a firm can produce with limited resources
joint supply
goods produced together from the same origin
eg. leather and milk
market supply
sum of all individual firms’ supplies for a good
total cost
all cost of production incurred by a firm
subsidy
financial support to producers that reduces costs of production
surplus
quantity supply exceeds the quantity demanded
shortage
quantity demanded exceeds the quantity supplied
market equilibrium
quantity demanded is equal to quantity supplied with no tendency to change
price mechanism
rationing method that uses price to control the demand and supply of a good/service in order to reallocate resources
signals
prices communicate information to decision makers
incentives
prices motivates decision makers to respond to the information
allocative efficiency
producing the combination of goods mostly wanted by the society in a free market
answers: what to produce
marginal benefit
extra benefit you get from each additional unit of something
consumer surplus
highest price consumers are willing to pay for a good - price actually paid
producer surplus
price received by firms for selling their good - lowest price they are willing to accept to produce the good
social surplus
sum of consumer and producer surplus
social welfare
amount of consumer and producer surplus
- when social surplus is maximum, social welfare is maximum
welfare loss (deadweight loss)
social surplus that are lost to society because resources are not allocated efficiently
ped
measure of the responsiveness of the quantity of a good demanded to changes in its price
necessities
goods/services considered to be essential
luxuries
not necessary/essential
total revenue
amount of money received by firms with they sell a good
yed
responsiveness of demand to changes in income
pes
measure of the responsiveness of the quantity supplied to changes in its price of a good
command and control
government laws and regulations that must be followed
price controls
setting of minimum or maximum prices by the government so that prices are unable to adjust to their equilibrium level determined by demand and supply
price ceiling
maximum price set below the equilibrium by the government
price floor
minimum price set above the equilibrium
indirect taxes
a regressive tax imposed on spending to buy goods and services so the tax burden can be shifted to the consumers
income
sum of money that a business or individual receives in exchange of sale of goods or services, or capital investment
individual demand
demand schedule for any individuals
income effect
when price declines, amount of the product which can be purchased using the same money rises
nominal income
face value of income
substitution effect
the decrease in demand for a product that can be attributed to consumers switching to cheaper alternatives when its price rises
market disequilibrium
at any other price other than the equilibrium price
price mechanism + invisible hand
guided by self interest
rationing
controlled distribution of resources
marginal benefit
consumers buy goods/services because it provides them with extra satisfaction
productive efficiency
involving production with the fewest possible resources
answers: how to produce
direct tax
tax imposed on income, profits and wealth
excise tax
indirect tax on a specific good or service
specific tax
fixed amount of tax imposed on good/service sold per unit
ad valorem tax
tax calculated as fixed percentage of the price of the good/service
goods and services tax + value added tax
imposed on all goods and services
tradable permits
permits that the government gives firms to allow them to produce up to a set amount of carbon each year
natural monopoly
- a single firm can produce at a lower average costs than 2 or more firms because of large economies of scale
- normally firms with huge fixed costs
economies of scale
decreases in the average cost of production over the long run as a firm increases all its inputs
diseconomies of scale
increases in the average cost of production over the long run as a firm increases all its inputs
