Micro Definitions Flashcards
Scarcity
Situation that arises because people have unlimited wants in the face of limited resources.
Economics Goods
Goods that are scarce.
Free good
Goods that are not normally regarded as scarce. No opportunity cost.
Poverty
A situation in which individuals lack the basic necessities of life and have low incomes relative to their fellow citizens.
Needs
Things that are essential for human survival.
Wants
Things that are non-essential desires.
choice
Deciding what to buy or sell from a range of possible options.
basic economic problem
People just choose how best to use their limited resources because not all needs and wants can be satisfied.
Firm (Business)
An organisation that produces output (goods or services).
Household
A person or people that engage in economic activity as one or together.
Government
The group of MPs with responsibility to develop and implement policy and laws.
Rationality
Economic agents acting in their best interests.
Utility
The benefit derived from the consumption of a good or service.
Incentive
A thing that motivates or encourages someone to do something.
Positive statement
A statement about what is. ie. facts
normative statement
a statement involving a value judgement about what ought to be.
Value judgement
A statement based in your opinion or beliefs, rather on facts.
factor of production
Resources used in the production process, or inputs into production, including land, labour, capital and enterprise.
trade-off
a situation in which the choice of one alternative requires the sacrifice of another.
opportunity cost
in decision making, the value of the next best alternative forgone.
production possible curve (PPC)
a curve showing the maximum combinations of goods or services than can be produced in a set period of time given available resources.
capital goods
Goods used as part of the production process, such as machinery or factory buildings.
consumer goods
Goods produced for present use (consumption).
long run economic growth
an expansion in the productive capacity of the economy
specialisation
the process of concentrating on a task or activity in order to become expert in it.
division of labour
a process whereby the production is broken down into a sequence of stages, and workers are assigned to particular stages.
barter system
an economy without money so that transactions in goods and services rely on direct exchange.
Money as medium of exchange
function of money that enables transactions to take place.
Labour productivity
output per worker per unit of input
demand
quantity of good or seduce that consumers are willing and able to buy give its price.
joint demand
Demand for goods which are interdependent, such that they are demanded together.
composite demand
Demand for a good that has multiple uses.
competitive demand
Demand for goods that are in competition with each other.
Ceteris Paribus
Latin phrase ‘all other things being equal’ - when we focus on changes in one variable while holding other influences constant.
law of demand
a law that states there is an inverse relationship between quantity demanded and the price of a good to service, ceteris paribus.
normal good
One where quantity demanded increases in response to an increase in consumer incomes.
Inferior good
One where the quantity demanded decreases in response to an increase in consumer incomes.
substitutes
Two goods are said to be substitutes if consumers regard them as alternatives.
complements
two goods are said to be complements if people tend to consume them jointly, so an increase in the price of one good causes demand of the other to fall.
extension
a movement along the demand curve to the right
extension
a movement along the demand curve to the right
contraction
a movement along the demand curve to the left
competitive market
a market in which individual firms cannot influence the price of the good or service they are selling, because of competition from other firms.
competitive supply
a situation in which a firm can use its factors of production to produce alternative products.
joint supply
where a firm produces more than one product together.
Consumer surplus
value that consumers gain from consuming a good or service over and above the price paid.
Producer surplus
The difference between the price recieved by firms for a good or service and the price at which they would have been prepared to supply that good or service.
market equilibrium
occurs in a market when the price is such that the quantity that consumers wish to buy is exactly balanced by the quantity that firms wish to supply.
excess supply
a situation in which the quantity that firms are willing and able to supply exceeds the quantity that consumers wish to demand at the going price (also known as surplus).
excess demand
the quantity that consumers wish to demand at the going price exceeds the quantity that firms are willing and able to supply (also known as a shortage).
disequilibrium
a shortage or a surplus exists so the market does not clear.
elasticity
a measure of sensitivity of one variable to changes in another variable.
price elasticity of demand (PED)
a measure of sensitivity of quantity demanded to a change in the price of a good or service.
elastic
a term used when price elasticity of demand is between -1 and negative infinity.
inelastic
a term used when price elasticity of demand is between -1 and 0.
unit elastic
a term used when the price elasticity of demand is equal to negative 1.
income elasticity of income (YED)
a measure of sensitivity of quantity demanded to a change in consumer incomes.
superior good (luxury good)
One for which the income elasticity of demand is positive and greater than 1, such that as income rises, consumers spend proportionally more on the good.
National Minimum Wage
the minimum pay per hour most workers under the age of 23 are entitled to by law.
National living wage
The minimum pay per hour most workers over the age of 23 are entitled to by law.
VAT (value added tax)
A tax added to price of services and goods. VAT is usually 20%.
Cross elasticity of demand
a measure of sensitivity of quantity demanded to a change in the price of some other good or service.
Loss leader
A product sold at a price below its market cost to stimulate other sales of more profitable goods or services.
marginal price
the idea that economic agents may take decisions by considering to effect of small changes from the existing.
rational decision making
a decision that allows an economic agent to maximise their objective, by setting the marginal benefit of action and equal to its marginal cost.
marginal utility
the additional utility gained from consuming an extra unit of a good or service.
law of diminishing marginal utility
states that the more units of a good that see consumed, the lower the utility from consuming those additional units.
market failure
a situation in which the free market mechanism does not lead to an optimal allocation of resources.
private cost
a cost incurred by an individual as part of its production or other economic activities.
external cost
a cost that is associated with an individual production or other economic activities, which is borne by a third party.
marginal social cost (MSC)
the cost to society of producing an extra unit of good.
marginal private cost (MPC)
the cost to an individual or consuming an extra unit of a good. (SAME AS THE SUPPLY CURVE ON GRAPH).
marginal external cost
additional cost to society, not considered by the individual consuming an extra unit of a good.
private benefit
a benefit gained by an individual as part of its consumption.
external benefit
A benefit gained by an individual’s consumption, which spill over to a third party.
social benefit (equation)
private benefit + external benefit
marginal social benefit (MSB)
the additional benefit that society gains from consuming an extra unit of a good.
Marginal private benefit (MPB)
additional benefit that a consumer gains from consuming an extra unit of a good. (SAME AS DEMAND CURVE ON GRAPHS)
marginal external benefit
the additional benefit to society, not considered by the individual consuming an extra unit of a good.
externality
a cost or a benefit that is external to a market transaction, and is thus not reflected in market prices.
negative externality of consumption
a negative externality caused by consumption that has a negative external benefit borne by third party.
positive externality of consumption
a positive externality caused by consumption that leads to external benefits for a third party.
production externality
an externality that affects the production side of a market, which may be either positive or negative.
negative production externality
a negative externality caused by production that has an external cost borne by a third party.
information failure
a type of market failure where economic agent slack sufficient information to make fully informed decisions.
asymmetric information
a situation in which some participant in a market have better information about market conditions than others.
adverse selection
A situation in which a person at risk is more likely to take out insurance.
moral hazard
a situation in which a person who has taken out insurance is prone to taking more risk.
merit good
a good that brings unanticipated benefits to consumers, such that society believes it will be under consumed in a free market.
demerit good
a good that brings less benefit to consumers than they expect, such that too much will be consumed by individuals in a free market.
private good
a good that, once consumed by one person, cannot be consumed by somebody else - such a good has excludability and is rivalrous.
public good
a good that is non-exclusive and non-rivalrous - consumers cannot be excluded from consuming the good, and consumption by one person does not affect the amount of the good available for others to consume
non-excludability
a situation in which it is not possible to provide a product to one person without allowing others to consume it as well.
non-rivalry
a situation in which one person’s consumption of a food does not prevent others from consuming it as well.
non-rejectability
a situation in which an individual cannot avoid consuming a good.
free-rider problem
when an individual cannot be excluded from consuming a good, and so has no incentive to pay for its provision.
quasi-public good
a good that has some, but not all, the characteristics of public goods.
quasi
a prefix that means ‘almost’ or ‘in part’
tax
compulsory fees levied on individuals or firms by government.
indirect tax
a tax levied on expenditure on good or services.
direct tax
a tax charges directly to an individual based on a component of income.
incidence of tax
the way in which the burden of paying a sales tax is divided between buyers and sellers.
specific tax
A tax of a fixed amount imposed on purchases of a commodity.
ad valorem tax
a tax levied on a commodity set as a percentage of the selling price.
excess burden of a sales tax
the dead weight loss to society following the imposition of a sales tax.
polluters pays principle
an argument that a firm causing pollution should be charged the full external cost that it inflicts on society.
Subsidy
A grant given by the government to producers.
State provision
Government expenditure (state provision) is where the government decides which goods or services to provide and then spends money providing them.
price control
A legal maximum or minimum price
Price floor
A legal minimum price
Price ceiling
A legal maximum price
merger
Two or more firms joining to form a new firm.
cartel
an agreement between firms on price and/ or output with the intention of maximising their joint profits.
buffer stock
a scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when supply is low.
legislation
laws created by government to enforce regulations.
regulation
rules created by government to control activities of producers and consumers by changing their behaviour.
prohibition
an attempt to prevent the consumption of a demerit good by declaring it illegal.
information provision
when the government educates the public to help comsumers make better choices.
