Microeconomics: Key terms and definitions to memorise Flashcards
Arithmetic mean
the sum of the items divided by the number of items
Weighted average
an average that takes into account the relative importance of the different items.
Time series
information shown at successive points or intervals of time
Index number
a number showing the variation in, for example, wages or prices, as compared with chosen base period or date.
Economics
the study of how to allocate scarce resources in the most effective way
Household
group of people whose spending decisions are connected
Economic problem
how to allocate scarce resources among alternative uses
Microeconomics
The study of how households and firms make decisions in markets
Macroeconomics
the study of issues that affect economics as a whole
Model
a simplified view of reality that is used by economists as a means of explaining economic relationships
Factor of Production
The resource inputs that are available in an economy for the production of goods and services
Goods
tangible products, i.e. products that can be seen and touched, such as cars, food, washing machines
Services
intangible products, i.e. products that cannot be seen or touched, such as beauty therapy and insurance
Land
natural resources in an economy
labour
the quantity and quality of human resources
Capital
man-made aids to production
Entrepreneurship
the willingness of an entrepreneur to take risks and organise production
Entrepreneur
someone who bears the risks of the business and who organises production
Factor endowment
the stock of factors of production
production
the output of goods and services
Want
anything you would like, irrespective of whether you have the resources to purchase it
Scarcity
a situation where there are insufficient resources to meet all wants
Choice
The selection of appropriate alternatives
Opportunity cost
the cost of the (next) best alternative, which is forgone when a choice is made
Factor endowment
the stock of factors of production
Production
the output of goods and services
Specialisation
The concentration by a worker or workers, firm, region or whole economy on a narrow range of goods and services
Exchange
The process by which goods and services are traded
Subsidy
a payment by a governing body to encourage the production or consumption of a product
Division of labour
the specialisation of labour where the production process is broken down into separate tasks
Productivity
output or production of a good or service, per worker
Production possibility curve
this shows the maximum quantities of different combinations of output of two products, given current resources and the state of technology
Developed economy
an economy with a high level of income per head
Developing economy
an economy with a relatively low level of income per head
Trade-off
‘the calculation involved in deciding on whether to give up one good for another
Economic growth
change in the productive potential of an economy
productive potential
the maximum output than an economy is capable of producing
Economic system
the way in which production is organised in a country or group of countries
Market economy
an economic system whereby resources are allocated through the market forces of demand and supply
price system
a method of allocating resources by the free movement of prices
Supply
the quantity of a product that producers are willing and able to provide at different market prices over a period of time
Demand
the quantity of a product that consumers are able and willing to purchase at various prices over a period of time
Command economy
an economic system in which most resources are state owned and also allocated centrally
Mixed economy
‘an economic system in which resources are allocated through a mixture of the market and direct public sector involvement
Market
where or when buyers and sellers meet to trade or exchange products
sub-market
a recognised or distinguishable part of a market. Also known as a market segment.
demand
the quantity of a product that consumers are able and willing to purchase at various prices over a period of time.
notional demand
the desire for a product
Effective demand
the willingness and ability to buy a product
Ceteris Paribus
assuming other variables remain unchanged
demand curve
this shows the relationship between the quantity demanded and the price of a product
demand schedule
the data that is used to draw the demand curve for a product
Movement along the demand curve
this is in response to a change in the price of a product
consumer surplus
the extra amount that a consumer is willing to pay for a product above the price that is actually paid
Disposable income
Income after taxes on income have been deducted and state benefits have been added
real disposable income
income after taxes on income have been deducted and state benefits have been added and the result has been adjusted to take into account changes in the price level
Normal goods
goods for which an increase in income leads to an increase in demand
inferior goods
goods for which an increase in income leads to a fall in demand
substitute
competing goods
complements
goods for which there is joint demand
change in demand
this is where a change in a non-price factor leads to an increase or decrease in demand for a product
supply
the quantity of a product that producers are willing and able to provide at different market prices over a period of time
proft
the difference between the total revenue of a producer and the total cost
supply curve
this shows the relationship between the quantity supplied and the price of a product
supply schedule
the data used to draw up the supply curve of a product
producer surplus
the difference between the price a producer is willing to accept and what it is actually paid
Change in supply
occurs when a change in a non-price influence leads to an increase or decrease in the willingness of a producer to supply a product
price
the amount of money that is paid for a given amount of a particular good or service
equilibrium price
the price where demand and supply are equal
clearing price
same as equilibrium price
equilibrium quantity
the quantity that is demanded and supplied at the equilibrium price
disequlibrium
any position in the market where demand and supply are not equal
surplus
an excess of supply over demand
shortage
an excess of demand over supply
elasticity
the extent to which buyers and sellers respond to a change in market conditions
price elasticity of demand
the responsiveness of the quantity demanded to a change in the price of the product
price elastic
where the percentage change in the quantity demanded is sensitive to a change in price
price inelastic
where the percentage change in the quantity demanded is insensitive to a change in price
income elasticity of demand
the responsiveness of demand to a change in income
normal goods (in terms of elasticity)
goods with positive income elasticity of demand
income inelastic
goods for which a change in income produces a less than proportionate change in demand
income elastic
goods for which a change in income produces a greater proportionate change in demand
inferior goods
goods for which an increase in income leads to a fall in demand
cross elasticity of demand
the responsiveness of demand for one product in relation to a change in the price of another product
price elasticity of supply
the responsiveness of the quantity supplied to a change in the price of the product
efficiency
where the best use of resources is made for the benefit of consumers
alocative efficiency
where consumer satisfaction is maximised
market faliure
where the free market mechanism fails to achieve economic efficiency
Productive efficiency
where production takes place using the least amount of scarce resources
economic efficiency
where both allocative and productive efficiency are achieved
inefficiency
any situation where economic efficiency is not achieved
free market mechanism
the system by which the market forces of demand and supply determine prices and the decisions made by consumers and firms
information faliure
a lack of information resulting in consumers and producers making decisions that do not maximise welfare
asymmetric information
information not equally shared between two parties
externality
an effect whereby those not directly involved in taking a decision are affected by the actions of others
third party
those not directly involved in making a decision
private costs
the costs incurred by those taking a particular action
private benefits
the benefits directly accruing to those taking a particular action
external costs
the costs that are the consequence of externalities to third parties
external benefits
the benefits that accrue as a consequence of externalitites to third parties
social costs
the total costs of a particular action
social benefits
the total benefits of a particular action
negative externality
this exists where the social cost of an activity is greater than the private cost
postitive externality
this exists where the social benefit of an activity exceeds the private benefit
merit goods
these have more private benefits than their consumers actually realise
demerit goods
their consumption is more harmful than is actually realised
public goods
goods that are collectively cosumed and have the characteristics of non-excludability and non-rivalry
non-excludabilitiy
situation existing where individual consumers cannot be excluded from consumption
free rider
someone who directly benefits from the consumption of a public good but who does not contribute towards its provisision
non-rivalry
situation existing where consumption by one person does not affect the consumption of all others
quasi public goods
goods having some but not all of the characteristics of a public good
direct tax
one that taxes the income of people and firms and that cannot be avoided
indirect tax
a tax levied on goods and services
polluter pays principle
any measure such as a green tax whereby the polluter pays explicitly for the pollution caused
subsidy
a payment, usually from the government, to encourage production or consumption
tradable permit
a permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter
