Microeconomics Vocab Flashcards
Actual Growth
Occurs when real output (real GDP) increases
through time and is a result of greater or better
use of existing resources. In the PPC model it
can be illustrated by a movement from a point
inside a PPC to another point in the northeast
direction.
Allocative inefficiency
When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB MSC.
Allocative inefficiency
Allocative inefficiency When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB MSC.
Anti-monopoly regulation
Laws and regulations that are intended to
restrict anti-competitive behaviour of firms that
are abusing their market power.
Carbon emission taxes
Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.
Common pool resources
A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.
Common pool resources
A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.
Competitive market equilibrium
Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.
Complements
Goods that are jointly consumed, for example, coffee and sugar.
Consumer surplus
The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.
Demand
The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.
Demerit goods
Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.
Efficiency
In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost or to allocative efficiency where marginal social costs are equal to marginal social benefits or where social surplus is maximum.
Elastic demand
Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service in the opposite direction. (PED is greater than one.)
Elastic supply
Where a change in the price of a good or service leads to a proportionately larger change in the quantity supplied of the good or service in the same direction. (PES is greater than one.)
Elasticity
A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).
Excess demand
Occurs when quantity demanded at some price is greater than quantity supplied.
Excess supply
Occurs when quantity supplied at some price is greater than quantity demanded.
Excludable
A characteristic that most goods have that refers to the ability of producers to charge a price and thus exclude whoever is not willing or able to pay for it from enjoying it.
Externalities
External costs or benefits to third parties when a good or service is produced or consumed. An externality arises when an economic activity imposes costs or creates benefits on third parties for which they are not compensated or do not pay for respectively.
Free market economy
An economy where the means of production are privately owned and where market forces determine the answers to the fundamental questions (what/how much, how and for whom) that all economies face.
Free rider problem
Arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it.
Income elasticity of demand
The responsiveness of demand for a good or service to a change in income.
Inelastic demand
Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction. (PED is less than one.)
Inelastic supply
Where a change in the price of a good or service leads to a proportionately smaller change in the quantity supplied of the good or service in the same direction. (PES is less than one.)
Inferior goods
The responsiveness of demand for a good or service to a change in income.
Joint supply
Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other.
Law of demand
A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus.
Law of supply
A law stating that as the price of a good rises, the quantity supplied will rise over a certain period of time, ceteris paribus.
Luxury goods
Goods that are not considered essential by consumers therefore they have a price elastic demand (PED > 1), or income elastic demand (YED > 1).
Marginal private benefit
The extra or additional cost to the individual of consuming an additional unit of output.
Marginal Private costs
The extra or additional cost to the firm of producing an additional unit of output.
Marginal social benefit
The extra or additional benefit to society of consuming an additional unit of output, including both the private benefits and the external benefits.
Marginal Social costs
The extra or additional cost to society of producing an additional unit of output, including both the private cost and the external costs.
Marginal utility
The extra or additional utility derived from consuming one more unit of a good or service.
Market
Any arrangement where buyers and sellers interact to carry out an economic transaction.
Market equilibrium
In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.
Market failure
The failure of markets to achieve allocative efficiency. Markets fail to produce the output at which marginal social benefits are equal to marginal social costs; social or community surplus (consumer surplus + producer surplus) is not maximized.
Maximum price
A price set by a government or other authority that is below the market equilibrium price of a good or service, also known as a price ceiling.
Merit goods
Goods or services considered to be beneficial for people that are under-provided by the market and so under-consumed, mainly due to positive consumption externalities.
Minimum price
A price set by a government or other authority above the market equilibrium price of a good or service, also known as a price floor.
Minimum wage
A type of price floor where the wage rate or the price of labour is set above the market equilibrium wage rate.
Moral Hazard
A type of market failure involving asymmetric information where a party takes risks but does not face their full costs by changing behavior after a transaction has taken place. It is very common in insurance markets.
Negative externality of consumption
Negative effects suffered by a third party whose interests are not considered when a good or service is consumed, so the third party are therefore not compensated.
Negative externality of production
Negative effects suffered by a third party whose interests are not considered when a good or service is produced, so the third party are therefore not compensated.
Non excludable
A characteristic of a good, service or resource where it is impossible to prevent a person, or persons, from using it.
Non rivalrous
A characteristic of some goods such that their consumption by one individual does not reduce the ability of others to consume them. It is a characteristic of public goods.
Normal goods
A good where the demand for it increases as income increases.
Opportunity costs
The next best alternative foregone when an economic decision is made.
Perfectly elastic demand
Occurs with a horizontal demand curve signifying that any amount can be bought at a particular price. (PED is infinite.)
Perfectly inelastic supply
Where a change in the price of a good or service leads to no change in the quantity supplied of the good or service. (PES is equal to zero.)
Pigouvian taxes
An indirect tax that is imposed to eliminate the external costs of production or consumption.
Planned economy
An economy where the means of production (land and capital) are owned by the state. The state determines what/how much to produce, how to produce, and for whom to produce.
Positive externality of consumption
The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is consumed, therefore they do not pay for the benefits they receive.
Positive externality of production
The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is produced, therefore they do not pay for the benefits they receive.
Price controls
Prices imposed by an authority, set above or below the equilibrium market price.
Price elasticity of demand
A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
Price mechanism
The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.
Primary commodities
Raw materials that are produced in the primary sector. Examples include agricultural products, metals and minerals.
Producer surplus
The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive.
Property rights
The exclusive, legal, authority to own property and determine how that property is used, whether it is owned by the government or by private individuals.
Public goods
Goods or services that have the characteristics of non-rivalry and non-excludability, for example, flood barriers.
Quantity demanded
The quantity of a good or service demanded at a particular price over a given time period, ceteris paribus.
Quantity supplied
The quantity of a good or service supplied at a particular price over a given time period, ceteris paribus.
Shortages
Arises when the quantity demanded of a good or services is more than the quantity supplied at some particular price.
Signalling
In asymmetric information, the participant with more information sending a signal revealing relevant information about a transaction to the participant with less information, to reduce adverse selection.
Social/community surplus
The sum combination of consumer surplus and producer surplus.
Socially optimum output
This occurs where there is allocative efficiency, or where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. Alternatively, it occurs where the marginal cost of producing a good (including any external costs) is equal to the price that is charged to consumers (P = MC for the last unit produced).
Subsidy
An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers.
Substitutes
Goods that can be used in place of each other, as they satisfy a similar need.
Supply
Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.
Surplus
An excess of something over something else. It occurs: • when quantity supplied is greater than quantity demanded at a particular price
Sustainability
Refers to the preserving the environment so that it can continue to satisfy needs and wants into the future. Relates to the concept of “sustainable development”.§
Tradeable permits
Permits to pollute, issued by a governing body, that sets a maximum amount of pollution allowable. These permits may be traded (bought or sold) in a market for such permits.
Tragedy of commons
A situation with common pool resources, where individual users acting independently, according to their own self-interest, go against the common good of all users by depleting or spoiling that resource through their collective action.
Unit elastic demand
Occurs when a change in the price of a good or service leads to an equal and opposite
Unit elastic supply
Occurs when a change in the price of a good or service leads to an equal proportional change in the quantity supplied of the good or service (PES = 1).
Welfare loss
A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal private benefits.
