Micro Definitions Flashcards
Market
Any place, physical or virtual, where the buyers and sellers of goods and services meet
Competitive Market
Market for a good with large numbers of buys and sellers, where the single seller has very little or no market power
Demand
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
Law of Demand
As the price of a good increases, the quantity demanded of the good decreases, ceteris paribus and vice versa
Marginal benefit
The additional utility or satisfaction derived by an increase or decrease in the amount of a good or service consumed
Determinants of demand
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
Substitute goods
Goods with similar characteristics and demand for it will increase when the price of another good increases and vice versa.
(Close and remote substitutes)
Complementary goods
Goods which are consumed together and are typically consumed together, so the demand for one is decreased by the price increase of the other
Excess supply
Where the quantity supplied exceeds the quantity demanded, producing a surplus. The price is above the equilibrium price
Excess demand
Where the quantity demanded exceeds the quantity supplied, causing a shortage. The price is below the equilibrium price
Resource allocation
The manner by which society manages and rations its resources
Allocative efficiency
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
Productive efficiency
Producing goods by using fewest possible resources/lowest possible cost
Consumer surplus
The difference between the highest price consumers are willing and able to pay for goods, and the actual price they end up paying
Producer surplus
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.
Marginal social benefit
The extra benefit or utility derived from the use/consumption of a good- including both private and external benefit
Marginal private benefit
The benefits enjoyed by the individual consumer for a particular good
Marginal social cost
The extra cost to society of producing an additional unit of output, including both the private cost and external costs.
Marginal private cost
The change in producer’s total cost from selling an additional unit of output
Price elasticity of demand
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
Primary Commodities
Goods that come directly from natural resources or ‘land’ - unprocessed raw materials
Manufactured goods
Man-made goods that have been produced from raw materials- processed through a production process
Indirect Tax
A tax imposed upon expenditure and is added to the selling price of the good
Subsidy
A grant paid by the government to support a firm - financial support
Market failure
Any situation where the allocation of resources by a free market is not efficient - failure to produce at a point of maximal community surplus
Price ceiling
A maximum legally allowable price for a good set by the government
Price floor
A minimum legally allowable price for a good set by the government
Externality
External costs or benefits to a third party when a good or service is produced or consumed
Merit goods
Goods/Services considered to be beneficial for people that would be under-provided by the market and so under-consumed (MSB>MSC)
Public goods
Goods/Services which would not be provided if left to the market. They are non-rivalry and non-excludible - typically provided by the government
Non-rivalrous
One person’s consumption of the good does not prevent others from enjoying it
Non-excludable
When the producer cannot prevent particular individuals from enjoying its benefits
Demerit good
The MSC exceeds the MSB - considered to be harmful to people - would be over-provided by the market and so over consumed
Tragedy of the Commons
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
Tradeable permits
Permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. Firms may trade these permits for money
Common Access Resources
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
Scarcity
The limited availability of economic resources relative to society’s unlimited demand for goods/services
