Microeconomics Definitions Flashcards
Social optimum level of output
the level of production or consumption where marginal social benefit is equal to marginal social cost
Social optimum equilibrium
occurs in a market where the benefit society receives from the consumption of the next unit is equal to the cost incurred by society of the next unit (MSB = MSC)
Social costs
the total costs to society from the production or consumption of a good. Social cost = private costs + external costs (negative externalities).
Spillover effect
Externalities caused by the production or consumption of a good that affects people who are not directly involved in its production or consumption
Welfare
Well-being of society
Allocatively efficient output
This occurs where marginal social cost equals marginal social benefit (MSC = MSB) – this is called the socially optimum level or output.
Cap and Trade scheme or tradable permits
A scheme in which a country , of a group of countries, set a limit (or cap) on the amount of pollutants that can be legally emitted by a firm, and the firms are allotted permits. Firms that become for efficient and pollute less can sell their permits in the market, firms that do not must buy permits in the market or they will receive heavy fines.
Carbon Tax
A tax per unit of carbon emissions or fossil fuels as a policy to deal with the problem of climate change.
Market mechanism
The process by which prices rise or fall as a result of changes in demand and supply. Signals and incentives are given to producers and consumers to produce more or less or consume more or less.
Assymetric information
When one party to a transaction has access to relevant information that the other party doesn’t. i.e. doctor.
Tradable Permits (carbon credits)
Tradable emissions permits are used in an environmental regulatory scheme where the sources of the pollutant to be regulated (most often an air pollutant) are given permits to release a specified number of tons of the pollutant. The government issues only a limited number of permits consistent with the desired level of emissions. The owners of the permits may keep them and release the pollutants, or reduce their emissions and sell the permits. The fact that the permits have value as an item to be sold gives the owner an incentive to reduce their emissions
Internalize the externality
Making the user or producer pay or be responsible for the externality.
Free Riders
Those who benefit from a good or service without paying a share or its cost – this is why the market will not provide public goods.
Demerit good
A good with negative externalities that has costs for society.
i.e over consumption of alcohol impairs judgement, can cause violence and is a cause of many road accidents – market price of alcohol does not reflect social costs. So an overprovision of demerit goods.
Merit good
A good with positive externalities that benefits society.
i.e education, health care – the market will only provide at a private optimum level and hence under produce (provide) the socially optimum level. So an underprovision of merit goods!
Common Good or Resource
a good that can be attained by any person. It is non- excludable, but rivalrous.
Fish in the ocean, timber on accessible public land, wild game animals on public lands.
- A major concern with common resources is overuse, especially when there are poor social-management systems in place to protect the core resource.
- Common resources that are not owned by anyone are called open-access resources.
Private goods
Goods and services that are excludable and rivalrous and are therefore provided by the market.
Publicly provided goods
Goods and services that would be provided by the market but because of their positive externalities are wholly or partly provided by the government, .
Public goods
Goods and services that everyone can consume at the same time, and are non-rivalrous and non-excludable (see below) and therefore would not be normally provided by the private market.
i.e parks, street lighting, defense.
Excludable
People are excluded from using the good unless they pay a price for it.
Rivalrous
A good is rivalrous if the use of it by one person prevents the use of another.
i.e pen, computer.
Negative externalities (also called social costs)
Costs of economic activity that are not accounted for in production costs or price.
i.e pollution from nearby chemical factory is imposed on others outside the economic activity.
Positive externalities (also called social benefits)
Benefits of economic activity that are not accounted for in production costs or price.
i.e. Vaccination for flu will benefit all.
Externalities
is an effect of production or consumption that is not taken into account by producers or consumers that affects the utility or costs of other producers or consumers (third party).
Allocative Efficiency
Refers to the efficiency with which markets are allocating resources. A market will be efficient when it is producing the right goods for the right people at the right time.
Another way of looking at it is you cannot make someone better off
without making someone else worse off.
Market Failure
When a market fails to produce efficient outcomes, and in particular, the failure of the price mechanism to achieve an optimum allocation of resources.
- occurs when social costs and benefits are not reflected in the market price, and the market mechanism does not these cost and benefits.
Parallel Market (black or informal)
Is unrecorded activity where no tax is paid and regulations can be avoided .
-Difficult to measure but is can vary from 5% to 20% in various economies. One possible way of measurement is the difference between National Income and National Expenditure .
Price floor or Minimum pricing
lower limit/floor set by government the price charged to consumer may not fall. A minimum price is usually set above the equilibrium as an aid to producers, and tends to create a market surplus.
Price Ceiling or Maximum pricing
Prices are imposed by government below the equilibrium price and are designed to help consumers by making prices cheaper than they would otherwise be, and tends to create a market shortage.
Resource Allocation with tax
The way that resources within an economy are split between their various uses – the way in which resources are used. How will resource allocation change with the imposition of the tax.
Government Revenue
The amount of government revenue/income that will be achieved/collected through a tax.
Incidence or burden of a tax
who actually pays the tax, what percentage is paid by the sellers/producers and what percentage is paid by the buyers/consumers
Ad Valorem tax
is a tax expressed as a percentage – most common form of indirect tax – when the price of a good changes the tax going to the government automatically changes as well. It changes the slope of the new supply curve.
Flat rate or specific tax
when a specific amount is imposed on a good.
i.e. $3 on every bottle of alcohol
Indirect tax
is an expenditure and sales tax upon goods and services – collected by sellers and passed onto governments.
Direct tax
is a tax upon income – it directly taxes wages, rent, interest and profit
Subsidy
effectively a negative tax – financial assistance made by governments to enterprises/business/firms/producers which will lower the price and increase production.
i.e. payments to producers to assist with expansion
Primary products
goods that are available from cultivating raw materials without a manufacturing process.
• Significant primary product industries include, agriculture, fishing, mining, and forestry.
• oil, water, fish, fruit, crops, wood.
Perfectly Elastic
Means that one variable is unresponsive to changes in another. Any change in price results in supply or demand falling to zero.
Perfectly Inelastic
Means that one variable is unresponsive to changes in another. Change in price will have no effect on change in quantity demanded or quantity supplied.
Income Elasticity of Demand Definition (YED)
the responsiveness of demand for a good to a change in consumer incomes.
Formula: YED = %_∆ Qd
% ∆ Y
Cross Price Elasticity Definition (XED or CPED)
the responsiveness of a demand for one good to a change in the price of another good.
Formula: CPEDab = % ∆ Qd a
% ∆ Price b
Price Elasticity of Supply (PES)
The responsiveness of a quantity supplied to a change in price.
PES formula: PES = % ∆Qs
% ∆ Price
Price Elasticity of Demand (PED)
The responsiveness of the quantity demanded to a change in price.
PED formula: PED = % ∆ QD
% ∆ Price
Elasticity
the measure of responsiveness in one variable when another changes.
Producer Surplus
Is the difference between the minimum price a producer would accept to supply a given quantity of a good and the price actually received. It is the gap between the Supply Curve (the marginal cost curve) and the equilibrium price.
Consumer Surplus
Is when consumers are able to by a good for less than they were willing to pay. It is the area between the demand curve and equilibrium price.
Allocative Efficiency
Refers to the efficiency with which markets are allocating resources. A market will be efficient when it is producing the right goods for the right people at the right time.
-Another way of looking at it is you cannot make someone better off without making someone else worse off.
Equilibrium Price
The price at which the quantity buyers demand of a product equals the quantity suppliers are willing to supply so the market is cleared
Law of supply
Suppliers will supply more of a good at a higher price and less at a lower price all things being equal – a positive relationship.
Supply
The quantity which sellers are willing to sell of a particular good or service at a given price at a given point in time.
Substitutes
Goods that can be used for the same purpose and are in competitio0n with one another, and are therefore alternatives for each other. Substitutes will have positive cross elasticity of demand
Complements
Two good that consumed together. A change in the price of one will have an inverse effect on demand and price of the other.
Inferior Goods
Goods where demand falls as income increase
i.e. buses, bicycles in Manila… but many gray areas in many MDC’s (The Netherlands) bikes are considered a normal good as people become aware of environmental and health issues whereas in China bikes would now be an inferior good)
Normal Goods
Goods where demand increases as income increases
i.e. cars in the PI.
Law of demand
Consumers will demand more of a good at a lower price and less at a higher price, ceteris paribus – this is an inverse relationship
Demand
the quantity which buyers are willing to purchase of a particular good or service at a given price over a given period of time, all things being equal.
Price mechanism
Is the process by which prices rise or fall as a result of changes in demand and supply. PRICE acts as a Signal and incentive to producers and consumers to produce more or less or consume more or less.
Price Mechanism
Is the process by which prices rise or fall as a result of changes in demand and supply. PRICE acts as a Signal and incentive to producers and consumers to produce more or less or consume more or less.
Market
An organization or arrangement through which goods and services are exchanged – do not have to physically meet
Markets can be local (bikes in Fort Bonifacio), national (cars in the Philippines) or international (mobile phone market for Asia)
Economic Development
is a much broader concept that purely economic growth, involving non-economic and often quite intangible improvements in the standard of living, for example freedom of speech, freedom from oppression, health care, education and employment
It is very difficult to totally define as it involves normative or value judgments (always state this!!), but remember some areas can be quantified as well.
Economic Growth
is the increase in a country’s output over time; that is an increase in national income.
Sustainable Development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
(a key definition – from the UN in 1987)
Mixed Economy
an economy where economic decisions are made partly by the government and partly through the market. (nearly every economy in the world)
Free Market Economy
an economy where all economic decisions are taken by individual households and firms, with no government intervention.
Command Economy
An economy where all economic decisions are made by a central authority. Usually associated with a socialist or communist economic system
Private sector
That part of the economy that is characterized by private ownership of the means of production by profit seeking individuals.
Public sector
That part of the economy where goods and services are provided by the government,
i.e. public hospitals, roads, schools, parks and gardens.
The law of increasing opportunity costs
Countries,/businesses must give an increasing amount to receive a decreasing amount as they shift from one industry to another. Resources are NOT perfectly adaptable from one in industry to the next.
Production Possibility Curve
A curve showing all the possible combinations of two goods that a country can produce within a specified time with all its resources fully and efficiently used. The boundary between what is attainable and what is unattainable, given the current resources.
Free Good
Commodities that have no price and no opportunity cost,
i.e fresh air and sunshine
Economic Good
Things people want that are scarce – there is an opportunity cost involved.
Opportunity Cost
Cost measured in terms of the next best alternative forgone.
Utility
Benefits or satisfaction gained from consuming goods and services – hard to measure but we assume consumers make decisions based on maximizing utility.
Choice
The result of the economic problem of scarcity, and how you allocate resources to deal with the economic problem.
Ceteris Paribus
All things being equal – one of the assumptions used in many economic models, where an individual factor is changed while all others are held constant.
Enterprise/Entrepreneurship
organizing land, labour and production in the production of goods or services (profit or loss)
Capital
capital resources; man-made resources used in the production process i.e. machines in a factory
(capital)
Labor
human resources, physical or mental
Land
natural resources; i.e trees, ocean, fertile land, minerals, sunshine (rent)
Resource allocation
Analysis of how scarce resources (‘factors of production’) are distributed among producers, and how scarce goods and services are apportioned among consumers.
• Allocation of resources is a CENTRAL THEME in economics (which is essentially a study of how resources are allocated) and is associated with economic efficiency and maximization of utility.
Scarcity
A situation where unlimited wants exist but the resources available to meet them are limited.
Normative Statement
a value judgment about what ought or should happen,
i.e. more money should be spent on teacher’s salaries and less on WMD’s.
Positive Statement
A statement that can be verified by empirical observation
i.e. Brazil has the largest income gap in Latin America.
Microeconomics
The branch of economics that studies individual units.
i.e. sections of households, firms and industries and the way in which they make economic decisions. (both macro and microeconomics look at the three basic questions below)
What to produce?
How to produce?
For whom to produce?
Economics
Concerned with the production of goods and services, and the consumption of these goods and services. Every country whether rich or poor has to make choices and is confronted with the key economic problem of scarcity.
Economics as a social science
It is concerned with human beings and the social systems by which they organize their activities to satisfy basic material needs (i.e, education, knowledge, food, golf and shelter)
