Microeconomics and Intro Flashcards
Scarcity
Resources and factors of production are finite while human wants and needs are finite. There are not enough resources to produce everything that is necessary to satisfy human beings’ needs and wants completely.
Choice
An act of selecting between two or more possibilities; choice is necessary when scarcity requires decisions about how to use resources to meet needs and wants
Efficiency
Improved resource use; producing the same good with fewer resources
Equity
The concept of fairness or evenness
Economic well-being
Multidimensional concept: quality of life, with material, relational and subjective dimensions
Sustainability
The ability of the present generation to meet its needs without compromising the ability of future generations to meet their own needs
Change
The process or act of becoming different
Interdependence
When two or more individuals are mutually reliant on one another to survive or thrive
Intervention
When the government intervenes in the market to solve market failure
Resources/factors of production
All the inputs used to produce goods and services (machines, workers, space, materials)
Land
Land itself, everything that is under and above the land and everything that is found in and under the sea. Natural resources - eg minerals, oil reserves, natural gas, forests, rivers and lakes.
Labour
The human factor needed for production - physical and mental effort that people contribute to the production of goods and services.
Capital
Physical capital stock used to produce goods and services - manufactured resources (eg machines, factories, roads and tools), capital goods and investment goods
Entrepreneurship
Entrepreneur carries out the following tasks: starting up a business, employing and organising FOPs, risk taking
A special human skill - ability to develop new businesses by organising the 3 other factors of production to produce goods and services
Opportunity cost
The next best alternative that is given up when an economic division is made
PPC
Production possibility curve - a model that illustrates all the maximum possible combinations of producing 2 goods in an imaginary economy, using the resources and technology available to the economy at that point in time.
Free market economy
A rationing system where all economic decisions are taken by consumers and producers through the price mechanism without government intervention, and resources are privately owned by people and firms.
Centralised economy
A rationing system where all economic decisions are taken at the centre by the government. There is no private property; all resources are owned by the state. Also called ‘centrally planned economy’.
Utility
A measure of satisfaction of usefulness a consumer received when they consume a product
Primary commodities
A commodity is a primary good, and is an important input to production. Oil, iron ore and timber are all examples of commodities.
Manufactured goods
Human-made goods that have been produced from raw materials transformed through a production process.
Microeconomics
The area of economics that studies the behaviour of individual economic agents, such as households, firms, industries and the government, and how they make economic decisions
Demand
The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific time period, ceteris paribus.
Complements
Goods that are usually consumed together (joint demand), such that one good has little use without the other (eg tennis ball and racket)
Substitutes
Goods that have very similar characteristics and uses to consumers so that they switch between them easily
Supply
The quantity of goods and services that producers are willing and able to offer at various prices during a given time period, ceteris paribus.
Joint supply
When two or more goods are derived from the same product, so it isn’t feasible to produce more of one without producing more of the other. Typically a ‘main’ product and a by-product.
By-product
A secondary product made during the production of something else
Price gouging
Charging an abnormally high price for a good/service, usually to take advantage of extreme changes in demand that occur in exceptional situations (eg demand for food after natural disaster)
Dumping
When a firm exports their goods at a price below production cost or below price charged in the home market, often to get rid of surplus supply or gain foothold in a new market
Competitive supply
When the production of two goods use similar resources and processes. Producing more of one product means producing less of the other.
Economies of scale
A firm’s ability to produce with lower average costs when they grow in size
Equilibrium
A state at which the quantity demanded equals the quantity supplied, set at the equilibrium price, which results from the interaction between consumers and producers in markets where there are no surpluses or shortages and the market has cleared
The point where supply curve crosses demand curve
Disequilibrium
A state where quantity demanded does not exactly equal quantity supplied, due to changes in the external environment (non-price determinants)
Non-price determinants
All factors affecting demand/supply other than the price, causing the entire curve to shift
Shortage
Excess demand: when the quantity demanded is greater than the quantity supplied; occurs when the price in the market is below the equilibrium price
Surplus
Excess supply: when the quantity demanded is less than the quantity supplied; occurs when the price in the market is above the equilibrium price
Price mechanism
The way in which changes in price affect quantity demanded and quantity supplied, thus determining how scarce resources are allocated in an economy
Signal/signalling
A function of the price mechanism - info to consumers and producers about what should be consumed and produced (eg the price the good is sold at)
Incentives
Where motivation is provided to consumers and producers to reallocate resources in a market (eg due to rise/fall in prices)
Rationing
The controlled distribution of resources, to determine who can buy certain goods in a market (eg those who can pay, first come first served, etc)
Community surplus
The sum of consumer and producer surplus - total benefit gained by society when the market is at equilibrium
Producer surplus
The difference between the lowest price producers are willing and able to offer the good at and the actual price they receive for it. It is the extra benefit that producers receive from selling an amount of output at a higher price than the one at which they were prepared to sell it/
Triangle above supply curve, below equilibrium price
Consumer surplus
The difference between the highest price consumers are willing and able to pay for a good and the actual price they pay; extra benefit they receive for paying lower than what they were prepared to
Triangle below demand curve, above equilibrium price
Productive efficiency
Producing goods by using the fewest possible resources (lowest possible cost of production)
Allocative efficiency
Producing the optimal combination of goods from society’s point of view; when resources are allocated in such a way that no one can be better off without making someone else worse off
Benefits to society are maximised
Allocative inefficiency
A situation in which community surplus is not maximised
Elasticity of demand
A measure of the responsiveness of the quantity demanded of a good/service to changes in one of the factors that determines it
Price elasticity of demand (PED)
A measure of how much the quantity demanded of a good changes when there is a change in its own price
%ΔQd/%ΔP
Income elasticity of demand (YED)
A measure of how much the quantity demanded of a good will change in response to a change in consumers’ income
%ΔQ/%ΔY
Can be both positive/negative - normal/inferior goods
Normal good
Goods whose demand increases as people’s incomes increase
Inferior good
Goods whose demand increases as people’s incomes decrease
Price elasticity of supply
A measure of how much the quantity supplied of a good changes when there is a change in its own price
%ΔQs/%ΔP
Relatively elastic
When the change in price/income leads to a very responsive change in quantity demanded/supplied
Relatively inelastic
When a change in price of a good leads to a proportionally smaller change in quantity demanded/supplied
Perfectly elastic
A situation where the percentage change in price would lead to an infinite change in quantity demanded/supplied (horizontal)
Perfectly inelastic
When the quantity demanded/supplied is not responsive at all to changes in price (vertical line)
Unitary elasticity
A situation where the percentage change in price leads to an equal change in quantity supplied/demanded
Luxury good
A good or service whose quantity demanded changes a lot in response to a price change because consumers consider it non-essential
Necessity
A good or service whose quantity demanded doesn’t change much in response to a price change because consumers consider it essential
Government intervention
When the government interferes with the market forces that allocate resources in the economy
Price controls
A form of government intervention - price floors and ceilings - that dictate the price at which a good can be sold in the market
Price ceiling
A maximum price set by the government that is set below the equilibrium price to prevent producers from selling their product above it
Price floor
A minimum price set by the government that are set above the equilibrium price to prevent producers from selling their product below it
Black market
Can be a consequence of price ceilings and floors when there are people who are willing and able to pay higher prices that the legally set maximum price, or willing and able to sell at a lower price than the legally set minimum price
Tax
Payments that have to be made to the government which is then uses to provide public and merit goods to society
Indirect tax (excise tax)
Taxes that are not charged directly on people’s incomes or wealth, but are instead paid indirectly by consumers when they purchase a good (taxes are included in the price of the good)
Taxes that aim to discourage the consumption of particular goods (demerit)
Specific tax
An indirect tax that is a fixed amount imposed on a good or service per unit sold
Percentage/ad valorem tax
An indirect tax that is a fixed percentage changed on the selling price of the good. The amount of tax increases as the price of the good or service increases
Subsidy
Per-unit payments that are used to lower production costs and increase the output of the market, granted by the government to a firm/industry
Regulation
A regulatory body that exists to monitor or regular an industry
Legislation
The laws set out by legislative bodies
Market failure
When there is an inefficient allocation of resources resulting from the presence of externalities, MSB ≠ MSC
Welfare/deadweight loss
The loss of community surplus that is the result of government intervention or market failure
Negative externality of consumption
When the consumption of a good or service generates a negative effect on a third party or society, which has not been factored into the calculation when deciding to consume that good
Positive externality of consumption
When the consumption of a good or service generates a positive effect on a third party or society, which has not been factored into the costs of consumption
Negative externality of production
When the production of a good or service generates a negative effect on a third party or on society as a whole, which has not been factored into the costs of producing the good
Positive externality of production
When the production of a good or service generates a positive effect on a third party or on society as a whole, which has not been factored into the costs of producing the good
Marginal social cost
The extra cost to society of producing one more unit of output (both private and external costs)
Marginal social benefit
The extra benefit/utility to society of consuming one more unit of output (both private and external benefits)
Marginal private cost
The extra cost to a firm of producing one more unit of output (private costs)
Marginal private benefit
The extra benefit/utility to an individual of consuming one more unit of output (private benefits)
Pigouvian tax
Indirect taxes used to reduce the consumption of a demerit good, to resolve negative externalities
Merit good
Goods that are beneficial to the individual and society as a whole, and are usually under-provided in a free market
Demerit good
Goods that have negative effects when consumed and cause negative externalities of consumption
Carbon tax
A method of reducing the level of CO2 emitted from burning fossil fuels; the level of tax varies according to the amount of carbon each fuel contains (fuel w/ more carbon are taxed at higher rates)
Emissions trading/
cap and trade schemes
Imposing of a cap/limit on total amount of CO2 that producers can release into the atmosphere; permits are distributed to producers, which can be bought and sold in the market
Common pool resources
Rivalrous but non-excludable (eg fish in the sea)
Private good
Goods and services that are rivalrous and excludable
Public good
Goods that are necessary and beneficial for society, but are both non-excludable and non-rivalrous, and are thus not provided by the free market. All public gods are merit goods.
Non-excludable: no individual can be excluded from consuming it (ie can’t make them pay)
Non-rivalrous: one individual’s consumption doesn’t prevent/limit another consumer from consuming it at the same time
Free rider problem
When a non-excludable good will not be produced by the free market because no one is willing to pay for it, and they think someone else will pay for it
Quasi-public good
Goods that only exhibit one of the two characteristics of public goods, either non-rivalry or non-excludability, but not both (club goods and common pool resources)
Club good
Excludable but non-rivalrous (eg movie theatre, toll highway, netflix subscription)
Exclusive
The condition that occurs when someone can be prevented from consuming a good or service
Rivalrous
The condition that occurs when someone consuming a good or service prevents someone else from consuming the good or service at the same time
