Micro Definitions

Question 1

Market

Answer 1

Any place, physical or virtual, where the buyers and sellers of goods and services meet

Question 2

Competitive Market

Answer 2

Market for a good with large numbers of buys and sellers, where the single seller has very little or no market power

Question 3

Demand

Answer 3

The quantity of a good or service that consumers are willing and able to buy at a given price during a specific time period, ceteris paribus

Question 4

Law of Demand

Answer 4

As the price of a good increases, the quantity demanded of the good decreases, ceteris paribus and vice versa

Question 5

Marginal benefit

Answer 5

The additional utility or satisfaction derived by an increase or decrease in the amount of a good or service consumed

Question 6

Determinants of demand

Answer 6

Price: change in quantity demanded
Non-price variables: change in demand/shift of curve
- Income- normal and inferior goods
- Price of related goods
- Taste and preferences
- Expectations of future prices and income

Question 7

Substitute goods

Answer 7

Goods with similar characteristics and demand for it will increase when the price of another good increases and vice versa.
(Close and remote substitutes)

Question 8

Complementary goods

Answer 8

Goods which are consumed together and are typically consumed together, so the demand for one is decreased by the price increase of the other

Question 9

Excess supply

Answer 9

Where the quantity supplied exceeds the quantity demanded, producing a surplus. The price is above the equilibrium price

Question 10

Excess demand

Answer 10

Where the quantity demanded exceeds the quantity supplied, causing a shortage. The price is below the equilibrium price

Question 11

Resource allocation

Answer 11

The manner by which society manages and rations its resources

Question 12

Allocative efficiency

Answer 12

The optimal combination of goods from a society’s point of view- no one can be better off without making someone else worse off (pareto optimality)
Where marginal benefit = marginal cost

Question 13

Productive efficiency

Answer 13

Producing goods by using fewest possible resources/lowest possible cost

Question 14

Consumer surplus

Answer 14

The difference between the highest price consumers are willing and able to pay for goods, and the actual price they end up paying

Question 15

Producer surplus

Answer 15

The difference between the lowest price producers are willing and able to sell the good, and the actual price they end up receiving for it.

Question 16

Marginal social benefit

Answer 16

The extra benefit or utility derived from the use/consumption of a good- including both private and external benefit

Question 17

Marginal private benefit

Answer 17

The benefits enjoyed by the individual consumer for a particular good

Question 18

Marginal social cost

Answer 18

The extra cost to society of producing an additional unit of output, including both the private cost and external costs.

Question 19

Marginal private cost

Answer 19

The change in producer’s total cost from selling an additional unit of output

Question 20

Price elasticity of demand

Answer 20

Measure of the responsiveness to the quantity demanded of a good or service to changes in its own price 
PED > 1: elastic 
PED = 1: unitary elastic
01: inelastic 
PED= 0: perfectly inelastic 
PED= infinity: perfectly elastic

Question 21

Primary Commodities

Answer 21

Goods that come directly from natural resources or ‘land’ - unprocessed raw materials

Question 22

Manufactured goods

Answer 22

Man-made goods that have been produced from raw materials- processed through a production process

Question 23

Indirect Tax

Answer 23

A tax imposed upon expenditure and is added to the selling price of the good

Question 24

Subsidy

Answer 24

A grant paid by the government to support a firm - financial support

Question 25

Market failure

Answer 25

Any situation where the allocation of resources by a free market is not efficient - failure to produce at a point of maximal community surplus

Question 26

Price ceiling

Answer 26

A maximum legally allowable price for a good set by the government

Question 27

Price floor

Answer 27

A minimum legally allowable price for a good set by the government

Question 28

Externality

Answer 28

External costs or benefits to a third party when a good or service is produced or consumed

Question 29

Merit goods

Answer 29

Goods/Services considered to be beneficial for people that would be under-provided by the market and so under-consumed (MSB>MSC)

Question 30

Public goods

Answer 30

Goods/Services which would not be provided if left to the market. They are non-rivalry and non-excludible - typically provided by the government

Question 31

Non-rivalrous

Answer 31

One person’s consumption of the good does not prevent others from enjoying it

Question 32

Non-excludable

Answer 32

When the producer cannot prevent particular individuals from enjoying its benefits

Question 33

Demerit good

Answer 33

The MSC exceeds the MSB - considered to be harmful to people - would be over-provided by the market and so over consumed

Question 34

Tragedy of the Commons

Answer 34

A situation with common access resources, where individual users acting independently, according to their own self-interest, go against the common good of all users by depleting or spoiling that resource through their collective action

Question 35

Tradeable permits

Answer 35

Permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. Firms may trade these permits for money

Question 36

Common Access Resources

Answer 36

Resources that are not owned by anyone, do not have a price, and are available to use without payment. They are rivalrous and non-excludable

Question 37

Scarcity

Answer 37

The limited availability of economic resources relative to society’s unlimited demand for goods/services