Unit 2: Microeconomics Flashcards
Allocative efficiency
Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).
Allocative inefficiency
When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB ≠ MSC.
Capital
Physical capital refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. Human capital refers to the education, training, skills and experience embodied in the labour force of a country.
Carbon (emissions) taxes
Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.
Collective self-governance
In the case of a common pool resource, such as a fishery, users solve the problem of overuse by devising rules concerning the obligations of the users, the monitoring of the use of the resource, penalties of abuse, and conflict resolution.
Common pool resources
A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.
Competitive market
A market with many firms acting independently where no firm has the ability to control the price.
Competitive supply
When goods that a firm is producing use the same resources in their production process. The goods thus compete with each other for the use of the same resources.
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.
Demand curve
A curve illustrating 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. It is normally downward sloping.
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.
Deregulation
Policies that reduce or eliminate regulations related to the operation of firms so that production costs decrease - resulting in increased competition and higher levels of output.
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).
Engel curve
A curve showing the relationship between consumers’ income and quantity demanded of a good. It indicates whether a good is normal or inferior.
Equilibrium
A state of balance that is self-perpetuating in the absence of any outside disturbance.
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 rider problem
Arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it.
Incentive role of prices
Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.
Income elasticity of demand (YED)
The responsiveness of demand for a good or service to a change in income.
Indirect taxes
Taxes on expenditure to buy goods and services.
Inferior goods
Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.
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.
Long run (microeconomics)
The period of time when all factors of production are variable.
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).
Manufactured products
Products or goods that have been produced by workers often working with capital goods.
Marginal benefit
The extra or additional benefit enjoyed by consumers that arises from consuming one more unit of output.
Marginal costs
The extra or additional costs of producing one more unit of output.
Market
Any arrangement where buyers and sellers interact to carry out an economic transaction.
Market demand
The sum of the individual demand curves for a product of all the consumers in a market.
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. A competitive market equilibrium occurs if in a free competitive market.
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.
Market mechanism
The system in which the forces of demand and supply determine the prices of products. Also known as the price mechanism.
Market power
The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition (or P > MC).
Market share
The percentage of total sales in a market accounted for by one firm.
Market supply
The horizontal sum of the individual supply curves for a product of all the producers in a market.
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.
Necessity
The degree to which a good is necessary or essential.
- If the increase in demand for a necessity good is less than proportional to the rise in income; then the necessity good is income elastic.
- If the change in quantity demanded for a necessity good is less than proportional to a change in price; then the necessity good is price inelastic.
Negative externalities 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 externalities 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.
Perfectly elastic demand
Occurs with a horizontal demand curve signifying that any amount can be bought at a particular price. (PED is infinite.)
Perfectly elastic supply
Occurs with a horizontal supply curve signifying that any amount can be offered at a particular price. (PES is infinite.)
Perfectly inelastic demand
Where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED is equal to zero.)
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.
Positive externalities 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 externalities 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 ceiling
Maximum price: A price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.
Price competition
Competition between firms that is based on price, for example, a firm that wants to increase its sales at the expense of other firms will lower its price.
Price controls
Prices imposed by an authority, set above or below the equilibrium market price.
(Price) 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.)
Price elasticity of demand
(PED) A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
Price elasticity of supply
(PES) A measure of the responsiveness of the quantity supplied of a good or service to a change in its price.
Price expectations
The forecasts or views that consumers or firms hold about future price movements that play a role in determining demand.
Price floor
Minimum price: A price imposed by an authority and set above the market price. Prices cannot fall below this price.
(Price) 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.)
(Price) 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.)
Price mechanism
The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.
Privatization
The sale of public assets to the private sector. May be a type of supply-side policy.
Producer surplus
The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive.
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.
Revenues
Payments received by firms when they sell their output.
Rivalrous
Goods and services are considered to be rivalrous when the consumption by one person, or group of people, reduces the amount available for others.
Shortage
Arises when the quantity demanded of a good or services is more than the quantity supplied at some particular price.
Short run (microeconomics)
The period of time when at least one factor of production is fixed.
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.
Social enterprise
A company whose main objective is to have a social impact rather than to make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve social objectives.
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).
Subsidies
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.
Substitution effect
When the price of a product falls relative to other product prices, consumers purchase more of the product as it is now relatively less expensive. This forms part of an explanation of the law of demand.
Supply
Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.
Supply curve
A curve showing the relationship between the price of a good or service and the quantity supplied, ceteris paribus. It is normally upward sloping.
Surplus
An excess of something over something else. It occurs:
• when quantity supplied is greater than quantity demanded at a particular price
• when tax revenues are greater than government spending (budget surplus)
• on an account when credits are greater than debits in the balance of payments.
Tradable 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.
Unitary elastic demand
Occurs when a change in the price of a good or service leads to an equal and opposite proportional change in the quantity demanded of the good or service (PED = 1).
Unitary 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.
Marginal social benefit (MSB)
The extra or additional benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.
Marginal social cost (MSC)
The extra or additional cost to society of producing an additional unit of output, including both the private cost and the external costs.
Income effect
The law of demand is explained by the substitution and the income effect. The income effect states that if the price of a good increases then the real income of consumers decreases and, typically, they will tend to buy less of the good—thus working in the same direction as the substitution effect.
