Microeconomic key terms Flashcards
Ad valorem tax
An indirect tax imposed on a good where the value of the tax is dependent on the value of the good
Asymmetric information
Where one party has more information than the other, leading to market failure
Capital
One of the four factors of production; goods which can be used in the production process
Capital goods
Goods produced in order to aid production of consumer goods in the future
Ceteris paribus
All else remains equal
Command economy
All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
Complementary goods
Negative XED; if good B becomes more expensive, demand for good A falls
Consumer goods
Goods bought and demanded by households and individuals
Consumer surplus
The difference between the price the consumer is willing to pay and the price they actually pay
Cross elasticity of demand (XED)
The sensitivity of demand for one good (A) to a change in price of another good (B).
%change in QD of good A / %change in P of B
Demand
The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment of time
Diminishing marginal utility
The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping
Division of labour
When labour becomes specialised during the production process so production becomes more efficient.
Economic problem
Scarcity. Infinite wants and needs but finite resources.
Efficiency
When resources are allocated optimally, so every consumer benefits and waste is minimised
Enterprise
One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production
Equilibrium price/quantity
Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded
Excess supply
When price is set too high so supply is greater than demand
Excess demand
When price is set too low so demand is greater than supply
Externalities
The cost or benefit a third party receives from an economic transaction outside of the market mechanism
External cost/benefit
The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit
Free market
An economy where the market mechanism allocates resources so
consumers and producers make decisions about what is produced,
how to produce and for whom
Free rider principle
People who do not pay for a public good still receive benefits from it so the private sector will under-provide the good as they cannot make a profit
Government failure
When government intervention leads to a net welfare loss in society
Habitual behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions
Incidence of tax
The tax burden on the taxpaye
Indirect tax
Taxes on a good which doesn’t go directly to the government, but instead goes to another company, who then pays the government.
Income elasticity of demand (YED)
The responsiveness of demand to a change in income.
%change in QD divided by %change in Y
Inferior goods
YED<0; goods which see a fall in demand as income increases
Information gap
When an economic agent lacks the information needed to make a rational, informed decision
Information provision
When the government intervenes to provide information to correct market failure
Labour
One of the four factors of production; human capital
Land
One of the four factors of production; natural resources such as oil, coal, wheat, physical space
Luxury goods
YED>1; an increase in incomes causes an even bigger increase in demand
Market failure
When the free market fails to allocate resources efficiently
Market forces
Forces in free markets which act to reduce prices when there is excess supply and increase them when there is excess demand
Maximum price
A ceiling price which a firm cannot charge above
Minimum price
A floor price which a firm cannot charge below
Mixed economy
Both the free market mechanism and the government allocate resources
Model
A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words
Negative externalities of production
Where the social costs of producing a good are greater than the private costs of producing the good
Non-excludable
Where someone cannot be prevented from using the good.
- A characteristic of public goods
Non-renewable resources
Resources which cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed
Non-rivalry
A characteristic of public goods; one person’s use of the good does not prevent someone else from using it
Normal goods
YED>0; demand increases as income increase
Normative statement
Subjective statements based on value judgements and opinions; cannot be proven or disproven
Opportunity cost
The value of the next best alternative forgone
Perfectly price elastic good
PED/PES=Infinity; quantity demanded/supplied falls to 0 when price changes
Perfectly price inelastic good
PED/PES=0; quantity demanded/supplied does not change when price changes
Positive externalities of consumption
Where the social benefits of consuming a good are larger than the private benefits of consuming that good
Positive statement
Objective statements which can be tested with factual evidence to be proven or disproven
Possibility production frontier (PPF)
Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
Price elasticity of demand (PED)
The responsiveness of demand to a change in price
%change in QD divided by %change in P
Price elasticity of supply (PES)
The responsive of supply to a change in price.
%change in QD divided by %change in P
Price mechanism
The system of resource allocation based on the free market
movement of prices, determined by the demand and supply curves
Private cost/benefit
The cost/benefit to the individual participating in the economic activity
Private goods
Goods that are rivalry and excludable
Producer surplus
The difference between the price the producer is willing to charge and the price they actually charge
Public goods
Goods that are non-excludable and non-rivalry
Rationality
Decision-making that leads to economic agents maximising their utility
Regulation
Laws to address market failure and promote competition between firms
Relatively price elastic good
When PED/PES>1; demand/supply is relatively responsive to a
change in price so a small change in price leads to a large change in quantity demanded/supplied
Relatively price inelastic good
When PED/PES<1; demand/supply is relatively unresponsive to a change in price so a large change in price leads to a large change in quantity demanded/supplied
Renewable resources
Resources which can be replenished, so the stock of resources can be maintained over a period of time
Scarcity
A shortage of resources in relation to the quantity of human wants.
(More people want a good than is available)
Social cost/benefit
The cost/benefit to society as a whole due to the economic activity
Social optimum position
Where social costs equals social benefits; the amount which should be produced/consumed in order to maximise social welfare
Social science
The study of societies and human behaviour
Specialisation
The production of a limited range of goods by a company/country/individual so they aren’t self-sufficient and have to trade with others
Specific tax
A tax imposed on a good where the value of the tax is dependent on the quantity that is bought
State provision of goods
Through taxation, the government provides public goods or merit goods which are underprovided in the free market
Subsidy Government payments to a producer to lower their costs of production and encourage them to produce more
Subsidy
Government payments to a producer to lower their costs of production and encourage them to produce more
Substitutes
Alternative goods.
Positive XED; if good B becomes more expensive, demand for good A rises
Supply
The ability and willingness to provide a particular good/service at a given price at a given moment in time
Symmetric information
Where buyers and sellers both have access to the same information
Trade pollution permits
Licenses which allow businesses to pollute up to a certain amount.
The government controls the number of licenses and so can control the amount of pollution.
Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute
Unitary price elastic good
When PED/PES=1; a change in price leads to a change in output by the same proportion
Utility
The satisfaction derived from consuming a good
