Microeconomics Definitions

Question 1

Social optimum level of output

Answer 1

the level of production or consumption where marginal social benefit is equal to marginal social cost

Question 2

Social optimum equilibrium

Answer 2

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)

Question 3

Social costs

Answer 3

the total costs to society from the production or consumption of a good. Social cost = private costs + external costs (negative externalities).

Question 4

Spillover effect

Answer 4

Externalities caused by the production or consumption of a good that affects people who are not directly involved in its production or consumption

Question 5

Welfare

Answer 5

Well-being of society

Question 6

Allocatively efficient output

Answer 6

This occurs where marginal social cost equals marginal social benefit (MSC = MSB) – this is called the socially optimum level or output.

Question 7

Cap and Trade scheme or tradable permits

Answer 7

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.

Question 8

Carbon Tax

Answer 8

A tax per unit of carbon emissions or fossil fuels as a policy to deal with the problem of climate change.

Question 9

Market mechanism

Answer 9

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.

Question 10

Assymetric information

Answer 10

When one party to a transaction has access to relevant information that the other party doesn’t. i.e. doctor.

Question 11

Tradable Permits (carbon credits)

Answer 11

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

Question 12

Internalize the externality

Answer 12

Making the user or producer pay or be responsible for the externality.

Question 13

Free Riders

Answer 13

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.

Question 14

Demerit good

Answer 14

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.

Question 15

Merit good

Answer 15

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!

Question 16

Common Good or Resource

Answer 16

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.

Question 17

Private goods

Answer 17

Goods and services that are excludable and rivalrous and are therefore provided by the market.

Question 18

Publicly provided goods

Answer 18

Goods and services that would be provided by the market but because of their positive externalities are wholly or partly provided by the government, .

Question 19

Public goods

Answer 19

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.

Question 20

Excludable

Answer 20

People are excluded from using the good unless they pay a price for it.

Question 21

Rivalrous

Answer 21

A good is rivalrous if the use of it by one person prevents the use of another.
i.e pen, computer.

Question 22

Negative externalities (also called social costs)

Answer 22

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.

Question 23

Positive externalities (also called social benefits)

Answer 23

Benefits of economic activity that are not accounted for in production costs or price.
i.e. Vaccination for flu will benefit all.

Question 24

Externalities

Answer 24

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).

Question 25

Allocative Efficiency

Answer 25

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.

Question 26

Market Failure

Answer 26

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.

Question 27

Parallel Market (black or informal)

Answer 27

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 .

Question 28

Price floor or Minimum pricing

Answer 28

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.

Question 29

Price Ceiling or Maximum pricing

Answer 29

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.

Question 30

Resource Allocation with tax

Answer 30

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.

Question 31

Government Revenue

Answer 31

The amount of government revenue/income that will be achieved/collected through a tax.

Question 32

Incidence or burden of a tax

Answer 32

who actually pays the tax, what percentage is paid by the sellers/producers and what percentage is paid by the buyers/consumers

Question 33

Ad Valorem tax

Answer 33

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.

Question 34

Flat rate or specific tax

Answer 34

when a specific amount is imposed on a good. | i.e. $3 on every bottle of alcohol

Question 35

Indirect tax

Answer 35

is an expenditure and sales tax upon goods and services – collected by sellers and passed onto governments.

Question 36

Direct tax

Answer 36

is a tax upon income – it directly taxes wages, rent, interest and profit

Question 37

Subsidy

Answer 37

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

Question 38

Primary products

Answer 38

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.

Question 39

Perfectly Elastic

Answer 39

Means that one variable is unresponsive to changes in another. Any change in price results in supply or demand falling to zero.

Question 40

Perfectly Inelastic

Answer 40

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.

Question 41

Income Elasticity of Demand Definition (YED)

Answer 41

the responsiveness of demand for a good to a change in consumer incomes. Formula: YED = %_∆ Qd % ∆ Y

Question 42

Cross Price Elasticity Definition (XED or CPED)

Answer 42

the responsiveness of a demand for one good to a change in the price of another good. Formula: CPEDab = % ∆ Qd a % ∆ Price b

Question 43

Price Elasticity of Supply (PES)

Answer 43

The responsiveness of a quantity supplied to a change in price. PES formula: PES = % ∆Qs % ∆ Price

Question 44

Price Elasticity of Demand (PED)

Answer 44

The responsiveness of the quantity demanded to a change in price. PED formula: PED = % ∆ QD % ∆ Price

Question 45

Elasticity

Answer 45

the measure of responsiveness in one variable when another changes.

Question 46

Producer Surplus

Answer 46

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.

Question 47

Consumer Surplus

Answer 47

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.

Question 48

Allocative Efficiency

Answer 48

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.

Question 49

Equilibrium Price

Answer 49

The price at which the quantity buyers demand of a product equals the quantity suppliers are willing to supply so the market is cleared

Question 50

Law of supply

Answer 50

Suppliers will supply more of a good at a higher price and less at a lower price all things being equal – a positive relationship.

Question 51

Supply

Answer 51

The quantity which sellers are willing to sell of a particular good or service at a given price at a given point in time.

Question 52

Substitutes

Answer 52

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

Question 53

Complements

Answer 53

Two good that consumed together. A change in the price of one will have an inverse effect on demand and price of the other.

Question 54

Inferior Goods

Answer 54

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)

Question 55

Normal Goods

Answer 55

Goods where demand increases as income increases | i.e. cars in the PI.

Question 56

Law of demand

Answer 56

Consumers will demand more of a good at a lower price and less at a higher price, ceteris paribus – this is an inverse relationship

Question 57

Demand

Answer 57

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.

Question 58

Price mechanism

Answer 58

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.

Question 59

Price Mechanism

Answer 59

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.

Question 60

Market

Answer 60

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)

Question 61

Economic Development

Answer 61

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.

Question 62

Economic Growth

Answer 62

is the increase in a country’s output over time; that is an increase in national income.

Question 63

Sustainable Development

Answer 63

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)

Question 64

Mixed Economy

Answer 64

an economy where economic decisions are made partly by the government and partly through the market. (nearly every economy in the world)

Question 65

Free Market Economy

Answer 65

an economy where all economic decisions are taken by individual households and firms, with no government intervention.

Question 66

Command Economy

Answer 66

An economy where all economic decisions are made by a central authority. Usually associated with a socialist or communist economic system

Question 67

Private sector

Answer 67

That part of the economy that is characterized by private ownership of the means of production by profit seeking individuals.

Question 68

Public sector

Answer 68

That part of the economy where goods and services are provided by the government, i.e. public hospitals, roads, schools, parks and gardens.

Question 69

The law of increasing opportunity costs

Answer 69

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.

Question 70

Production Possibility Curve

Answer 70

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.

Question 71

Free Good

Answer 71

Commodities that have no price and no opportunity cost, | i.e fresh air and sunshine

Question 72

Economic Good

Answer 72

Things people want that are scarce – there is an opportunity cost involved.

Question 73

Opportunity Cost

Answer 73

Cost measured in terms of the next best alternative forgone.

Question 74

Utility

Answer 74

Benefits or satisfaction gained from consuming goods and services – hard to measure but we assume consumers make decisions based on maximizing utility.

Question 75

Choice

Answer 75

The result of the economic problem of scarcity, and how you allocate resources to deal with the economic problem.

Question 76

Ceteris Paribus

Answer 76

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.

Question 77

Enterprise/Entrepreneurship

Answer 77

organizing land, labour and production in the production of goods or services (profit or loss)

Question 78

Capital

Answer 78

capital resources; man-made resources used in the production process i.e. machines in a factory (capital)

Question 79

Labor

Answer 79

human resources, physical or mental

Question 80

Land

Answer 80

natural resources; i.e trees, ocean, fertile land, minerals, sunshine (rent)

Question 81

Resource allocation

Answer 81

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.

Question 82

Scarcity

Answer 82

A situation where unlimited wants exist but the resources available to meet them are limited.

Question 83

Normative Statement

Answer 83

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.

Question 84

Positive Statement

Answer 84

A statement that can be verified by empirical observation | i.e. Brazil has the largest income gap in Latin America.

Question 85

Microeconomics

Answer 85

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?

Question 86

Economics

Answer 86

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.

Question 87

Economics as a social science

Answer 87

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)