Unit 1 Microeconomics Flashcards
actual growth
occurs when previously unemployed factors of production are brought to use; it is represented by a movement from a point within a PPC to a new point nearer to the PPC
actual output
production of goods and services that is achieved in an economy in a given time period
ad valorem taxes
indirect taxes as a fixed percentage of the price of the good or service
capital
factor of production that is made by humans and used to produce goods and services; it occurs as a result of investment
cartel
formal agreement between firms in an industry to undertake concerted actions to limit competition
ceteris paribus
(“all other things being equal”) assumption that there is a change in one of the variables, holding the other variables constant
competition
occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market
complementary good
goods used in combination with each other; they have a negative XED
consumer surplus
additional benefit received by consumers by paying a price that is lower than they are willing to pay
credit
borrowed money
cross elasticity of demand (XED)
measure of responsiveness of the quantity of one good demanded in response to a change in the price of a related good
demerit goods
products that are considered to be harmful for people
demand
quantity of a product that consumers are willing and able to buy at a given price in a given time period
determinants of demand
variables (other than price) that can influence demand; a change in any determinant of demand causes a shift of the demand curve
determinants of supply
variables (other than price) that can influence supply; a change in any determinant of supply causes a shift of the supply curve
direct taxes
taxes directly paid to the government, e.g. income tax
economic goods
any good or service that requires scarce resources and thus has a price
elastic demand
change in price of a good and service will cause a proportionately larger change in quantity demanded
elasticity
measure of the responsiveness of a variable to changes in any of the variable’s determinants
entrepreneurship
factor of production that brings together the other three factors of production with the aim of making profit; it involves risk-taking
equilibrium
point where the quantity demanded is equal to quantity supplied; this creates the market clearing prices, where there is no surplus or shortage
excess demand
(shortage) occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied
excess supply
(surplus) occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded
factors of production
land, labour, capital and entrepreneurship that are used in production
flat rate taxes
indirect taxes where a fixed amount is added to the price of a good or service
free good
any good that is not scarce, such as air or sea water, und thus has no price
incentive function of price
prices give producers the incentive either to increase or decrease the quantity they supply; a rising price gives the producers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues
incidence of tax
(burden of tax) amount of an indirect tax paid by consumers of a good or producers of a good
income elasticity of demand (YED)
measure of the responsiveness of demand for a good to a change in consumers’ income
indirect taxes
taxes placed upon the expenditure on a good and service, e.g. sales tax, MWSt
inelastic demand
change in price of a good and service will cause a proportionately smaller change in quantity demanded
inferior good
good whose demand falls as income rises; an inferior good has negative YED
informal market
part of an economy that lies outside the formal economy, consisting of economic activities that are unregistered and legally unregulated
labour
work done by humans that is used to produce goods and services
land
all raw materials that are used to produce goods and services
law of demand
as the price of a product increases, the quantity demanded decreases, ceteris paribus
law of supply
as the price of a product increases, the quantity supplied increases, ceteris paribus
macroeconomics
study of how the economy as a whole works
market economy
economy where individuals and firms own the resources and make the economic
decisions; prices are set by demand and supply
manufactured goods
goods that have been processed by workers
marginal private benefit
extra benefit to the consumer of consuming an additional unit of output (MPB)
marginal private cost
extra (private) cost to the producer of producing an additional unit of output (MPC)
marginal social benefit
extra benefit of consuming an additional unit of output, including both the private benefit and the external benefit (MSB)
marginal social cost
extra cost to society of producing an additional unit of output, including both the private cost and the external cost (MSC)
market
place where buyers and sellers of a product come together to make an exchange, but doesn’t need to be a physical place
market failure
occurs when the production of a good doesn’t take place at the socially efficient level of output (allocative efficiency where MSC = MSB)
merit good
products that are considered to be beneficial for people
maximum price
(price ceiling) price set by the government above which the market price is not allowed to rise in order to support the consumers of the product (essential goods, house rentals)
microeconomics
study of the behaviour (supply and demand) of individual markets
minimum price
(price floor) price set by the government below which the market price is not allowed to fall in order to support the producers of the product (minimum wages, agricultural products)
negative externality of consumption
external costs to a third party that occur when a product is consumed
negative externality of production
external costs to a third party that occur when a product is produced
normal good
good whose demand rises as income rises; a normal good has positive YED
normative economics
deals with areas that are open to personal opinion
opportunity cost
next best alternative foregone when an economic decision is made
planned economy
economy where the government owns all resources and makes all economic decisions
positive economics
deals with areas that can be proven wrong or right by looking at the facts
positive externality of consumption
external benefits to a third party that occur when a product is consumed
positive externality of production
external benefits to a third party that occur when a product is produced
potential growth
occurs when the quantity and/or quality of factors of production within an economy is increased; it is represented by an outward shift of the PPC
potential output
possible production that would be achieved in an economy if all available factor were employed
price controls
setting of minimum or maximum prices by the government so that prices are unable to adjust to their equilibrium level determined by demand and supply
price elasticity of demand (PED)
measure of the responsiveness of the quantity demanded of a good and service to a change in its price
price elasticity of supply (PES)
measure of the responsiveness of the quantity supplied of a good and service to a change in its price
price taker
in perfect competition, each firm is a price taker, taking the equilibrium price set in the market
primary products
(commodity) any product that is produced in the primary sector, which includes agriculture, forestry, fishing and extractive industries
primary sector
part of the economy that is dominated by agriculture, forestry, fishing and extractive activities such as mining
private sector
sector owned by private individuals that produce goods and services
producer surplus
additional benefit received by producers by receiving a price that is higher than the price they were willing to receive
product differentiation
strategy employed by producers where they attempt to make their products different from those of their competitors; it is a form of non-price competition
production possibility curve (PPC)
shows the maximum combinations of goods and services that can be produced
by an economy in a given time period, if all resources in the economy are being used fully and efficiently
public good
product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy
public sector
sector owned by the government that provides goods and services
rationing
method used to divide something up between interested users by making resource allocation and output/income distribution decisions
revenue
income received by a firm from selling its product
scarcity
excess of human wants over what can actually be allocated to fulfill these wants
secondary sector
part of an economy that includes manufacturing
signalling function of price
prices give signal to both producers and consumers: a rising price gives a signal to producers that they should increase their quantity supplied and signals to consumers that they should decrease the quantity demanded, and vice versa
subsidy
amount of money given to producers of a product by the government
substitute good
goods which can be used in place of each other; they have positive XED
