Microeconomics definitions Flashcards
efficiency
making the best possible use of scarce resources to avoid resource waste
allocative efficiency
an allocation of resources that results in producing the combination and quantity of goods and services most preferred by customers
rationing
a method used to apportion something between its interested users
Market
any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange
Competition
a process in which rivals compete in order to obtain some objective
Demand
the various quantities of a good or service the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus (about behaviour of buyers of goods/services/resources)
Law of Demand
there is a negative relationship between the prices of a good and its quantity demanded over a particular time period, ceteris paribus
Non-price determinants of demand
- Income (higher income increases demand for normal goods, decreases demand for inferior goods)
- Tastes and preferences (can change in favour or against the product, causing increase/decrease)
- Price of related goods- movements along other goods’ demand curves (increased price of substitutes increase demand of Good A, increased price of complements decreases demand of Good A)
- Number of consumers (as market demand is sum of individuals, more consumers increases demand)
Supply
the various quantities of a good or service a firm is willing and able to product/supply to the market at different possible prices during a particular time period, ceteris paribus
Law of Supply
there is a positive relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus
Non-price determinants of supply
- Costs of factors of production: factor prices- higher costs decrease supply
- Technology: new improved technology lowers costs of production, increasing supply
- Price of related goods: competitive supply (alternatives): increased price of competing good decreases supply; joint supply (derived from same product): increased price of joint good increases supply
- Producer price expectations: if expect price to rise, supply decreases
- Taxes: (indirect or on profits): treated as if costs of production, increased tax causes decreased supply
- Subsidies (payment to the firm by the government): like fall in costs of production, increase supply
- Number of firms: an increase in the number of firms supplying increases supply
- Shocks (sudden unpredictable events, eg weather, war, catastrophes): affect supply, normally decrease
Competitive market equilibrium
the point where quantity demanded equals quantity supplied (demand an supply curve intersect), and there is no tendency for the price to change.
Consumer surplus
the difference between the highest price consumers are willing to pay and price paid
Producer surplus
the difference between the lowest price sellers are willing to sell a good and price sold
Price elasticity of demand
measure of the responsiveness of the quantity of a good demanded to changes in price
Determinants of PED
- Number and closeness of substitutes: more and closer substitutes, more elastic (more responsive)
- Necessities vs luxuries: necessities (eg food) are less elastic than luxuries
- Length of time: the longer the consumer has to make a decision, the more elastic the demand
- Proportion of income spent on a good: higher proportion of income needed to buy a good, more elastic
Total revenue
the amount of money received by firms when they sell a good, equal to price × quantity.
price elasticity of supply
measure of the responsiveness of the quantity of a good supplied to changes in price
Determinants of PES
- Length of time: the longer the supplier has to adjust inputs, the more elastic the supply
- Mobility of factors of production: if easily shifted between production lines, more elastic
- Spare capacity of firms: higher unused capacity, more elastic
- Ability to store stocks: larger capacity to store, more elastic
- Rate at which costs increase: if increase slowly, more elastic
Income elasticity of demand (YED)
a measure of the responsiveness of demand to changes in income
Reasons for market intervention
- Raise tax revenue (esp taxing inelastic goods)
- Provide support to firms (financial aid to small firms, encourage growth, protect from foreign competitor)
- Provide support to households (helping those without enough income meet basic needs)
- Influence level of production/consumption
- Promote equity/equality (redistribution of income)
- Correct market failure (help achieve allocative efficiency)
Methods of market intervention
- Price controls (floors and ceilings)
- Indirect taxes
- Subsidies
- Direct provision
- Command/control methods/legislation
- Consumer nudges
- Other methods- tariffs, quotas, transfer payments
Price ceiling
a maximum price set below equilibrium by the government to prevent the price of a good or service rising above a fixed level, in order to make the good more affordable to people on low incomes, eg rent and food
Welfare loss
represents social surplus or welfare benefits that are lost to society because resources are not allocated efficiently
Price floor
a minimum price set above equilibrium by the government to prevent the price of a good or service falling below a fixed level, in order to provide income support for farmers or increase wages of low-skilled workers
Tax
a compulsory payment to the government for which no direct benefit is received in return