Microeconomics core concepts

What is a market?

A physical or non-physical setup that brings consumers (buyers) and producers (sellers) together for economic transactions.

What is the factor market?

The market for resources like land, labor, and capital.

What is the product market?

The market for goods and services.

What is demand?

The ability and willingness to purchase a quantity of a good or service at a certain price over time.

What is ineffective demand?

When there is either willingness or ability to purchase, but not both.

What is individual demand?

The demand of one person for a product.

What is market demand?

The sum of all individual demands for a product at every price.

What does the law of demand state?

There is an inverse relationship between price and quantity demanded.

What factors can cause a rise or fall in demand?

Income, price of related goods, tastes and preferences, and future expectations.

What are normal goods?

Goods for which demand increases as income increases.

What are inferior goods?

Goods for which demand increases as income decreases.

What is the effect of price changes of related goods on demand?

A change in the price of one related good can result in a change in the demand for the other.

What are complements?

Two goods that are typically purchased or used together.

What are substitutes?

Two goods that are similar; when the price of one increases, demand for the other increases.

How do tastes and preferences affect demand?

Changes in popularity, due to fashion or promotion, can shift demand curves.

How do future expectations influence demand?

Expectations of price increases or economic improvement can lead to increased current demand.

What is supply?

The quantity of a good or service producers are willing and able to offer at various prices.

What is individual supply?

The supply of one product from one firm at every price.

What is market supply?

The sum of all individual supplies of a product at every price.

What does the law of supply state?

There is a direct relationship between price and quantity supplied.

What are the six shifters of supply?

Cost of production, technology, number of firms, future expectations, price of related goods, and government intervention.

How does the cost of production affect supply?

An increase in production costs shifts the supply curve to the left, reducing supply.

How does technology affect supply?

Improvements in technology can increase supply by enhancing productivity.

How does the number of firms affect supply?

An increase in the number of firms increases market supply and shifts the supply curve right.

What is joint supply?

When two or more goods are derived from the same product.

What is competitive supply?

When the production of two goods uses similar resources, producing more of one means producing less of the other.

What is an indirect tax?

A tax paid by producers for the production or sale of goods and services.

What is a subsidy?

A monetary benefit from the government to encourage production and increase supply.

What is allocative efficiency?

Producing the optimal combination of goods so that no one can be better off without making someone else worse off.

What is consumer surplus?

The difference between the price consumers pay and the price they are willing to pay.

What is producer surplus?

The difference between the price producers are willing to accept and the market price.

What is price elasticity of demand (PED)?

A measure of how much quantity demanded changes due to a change in price.

What is price elastic demand?

When the percentage change in quantity demanded is greater than the percentage change in price.

What is price inelastic demand?

When the percentage change in quantity demanded is less than the percentage change in price.

What is unitary elastic demand?

When the percentage change in quantity demanded equals the percentage change in price.

What affects price elasticity of demand?

Substitutes, addictiveness, time period, income, and nature of the product.

What is income elasticity of demand (YED)?

A measure of how much quantity demanded changes in response to a change in income.

What are the three sectors of the economy?

Primary (extraction of natural resources), Secondary (manufacturing), Tertiary (services).

What is price elasticity of supply (PES)?

A measure of how much quantity supplied changes due to a change in its own price.

What determines price elasticity of supply?

Time period, unused capacity, ability to store stock, mobility of production factors, and costs of production.

What is value added tax (VAT)?

An indirect tax on goods and services at every stage of production where value is added.

What is a price ceiling?

A maximum price set by the government below the equilibrium price.

What are the consequences of imposing a price ceiling?

Shortages, rationing problems, parallel markets, loss of allocative efficiency.

What is a price floor?

A minimum price set by the government above the equilibrium price.

What are the consequences of implementing a price floor?

Surpluses, black markets, government disposal of surplus, inefficiency.

How can surplus be avoided?

By paying producers not to produce excess goods.

What is a specific tax?

An indirect tax that is a flat value added to the sale of a good.

What are consumer nudges?

Gentle reinforcements or suggestions used to influence consumer behavior.

What are the conditions for effective consumer nudges?

They must be easy, attractive, social, and timely.