Microeconomics

Abnormal profit (economic profit, supernormal profit)(HL)

Abnormal profit (economic profit, supernormal profit)(HL)

when a firm's revenue is greater than the total costs of production, including opportunity costs

Accounting costs (explicit costs) (HL)

the costs of the resources (land, labour, capital, enterprise) used to produce a good or service.

Actual output

the amount of goods and services an economy really produces, which is likely to be under the potential output since some resources are not used to maximum efficiency

Ad valorem tax

a tax that is a percentage of the price of the good; VAT is an example

Allocate

to distribute, to make decisions about who gets what

Allocative efficiency (HL)

the level of output where marginal cost is equal to average revenue or price. The firm sells the last unit it produces at the amount that it cost it to make it.

Asymmetrical (imperfect) information (HL)

a situation where one party in a transaction has more or better information than the other; can cause transactions or entire markets to fail

Average cost (HL)

the average (total) cost of production per unit. It is calculated by dividing the total cost by output (TC/Q)

Average fixed cost (HL)

total fixed costs (that do not vary with output) divided by the output (FC/Q)

Average product (HL)

the output that is produced, on average, by each unit of the variable factor. (AP = TP/V)

Average revenue (HL)

total revenue received divided by the number of units sold (TR/Q). Usually, price is equal to average revenue (P=AR)

Average variable cost (HL)

a firm's variable costs (labor, electricity, etc.) divided by the quantity (Q) of output produced (AVC=VC/Q)

Barriers to entry (HL)

obstacles that may prevent potential newcomers from entering a market

Black market

illegal trade in a good or service

Brand loyalty (HL)

a consumer's willingness to continue using a particular brand of a good or service

Break-even price (HL)

the price where average revenue (price) is equal to average total costs (AR(P)=TC); below this price, the firm will shut down in the long run

Cap-and-trade system

a market-based approach used to control pollution by giving firms economic incentives to reduce pollution emissions

Capital

financial capital refers to the financial resources available for use in a business; physical capital refers to man-made resources (like factories) used to produce goods; human capital refers to the abilities, knowledge, and creativity of human beings

Cartel (HL)

a formal agreement among firms on prices, output, or some other factor

Ceteris paribus

a Latin expression meaning "let all other things remain equal" used by economists to develop economic theories or models

Collusive oligopoly (HL)

where a few firms in an oligopoly agree to fix prices or output to avoid competition; together firms act like a monopoly

Commodities

(primary products) agricultural products or raw materials used to produce other goods

Common access resources (common pool resources, common property resources)

resources widely available for anyone to use without paying for them; similar to public goods, so they may be over-used.

Complementary goods (complements)

goods which are used together, such as DVD players and DVD discs. Complementary goods have negative cross elasticity of demand

Concentration ratio (HL)

a ratio that indicates the relative size of firms in relation to their industry as a whole; low concentration ratio indicates greater competition

Constant returns to scale (HL)

where a given percentage increase in the quantity of all factors of production results in an equal percentage change in output and thus no change in long run average costs

Consumer

a person who buys goods and services

Consumer surplus

the additional benefit / utility received by consumers by paying a price that is lower than they are willing to pay.

Corporate social responsibility (CSR) (HL)

where a firm attempts to produce responsibly/ethically towards the community and environment - an alternative goal of firms (as opposed to or in addition to profit maximization)

Deadweight burden (loss)

the costs to society created by market inefficiency

Decreasing returns to scale (HL)

where a given percentage increase in the quantity of all factors of production results in a smaller percentage increase in output and thus an increase in long run average costs (diseconomies of scale)

Demand

the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period

Demand curve

a graphical representation of the law of demand. (Usually) a downward sloping curve (or line) illustrating the inverse relationship between price and quantity demanded

Demand schedule

a chart/table showing the quantity of a product demanded at each price; used to draw a demand curve

Demerit goods

are goods or services that are bad for people and have negative externalities for third parties; they are over-provided and over-consumed by the market (cigarettes and alcohol)

Direct tax

a tax that is taken directly from the income of individuals or firms

Diseconomies of scale (HL)

any increase in long-run average costs that resulting from a firm increasing its output

Division of labour (HL)

specialisation of people who perform specific tasks and roles; can result in increased productive efficiency

Economic costs (HL)

the total opportunity costs of production to a firm

Economic goods

a product or service that can command a price when sold.

Economic problem

needs and wants are unlimited, but resources are limited, so choices have to be made about what to produce, how to produce, and for whom to produce and each choice carries an opportunity cost

Economics

the study of how scarce resources are allocated by individuals, firms and governments

Economies of scale (HL)

any fall in long-run average costs that come about as a result of a firm increasing its output

Elastic demand (income)

where a change in the income of consumers will cause a proportionally larger change in quantity demanded. YED > 1 or YED < -1

Elastic demand (price)

where a change in the price of a good or service will cause a proportionately larger change in quantity demanded. |PED| >1

Entrepreneurship

the act of organizing the other factors of production (land, labour, capital) in order to produce a good or service

Equilibrium price (market clearing price)

it occurs where quantity demanded is equal to quantity supplied

Excess demand (shortage)

occurs when the price of a good is lower than the equilibrium price, so that the quantity demanded is greater than the quantity supplied; prices will tend to rise

Excess supply (surplus)

occurs when the price of a good is higher than the equilibrium price, so that the quantity supplied is greater than the quantity demanded; prices will tend to fall

Excludable

when a good is produced, it is possible to exclude people from using it who do not pay for it; a characteristic of private goods

Explicit costs (accounting costs) (HL)

the costs of the resources (land, labour, capital, enterprise) used to produce a good or service.

Factor market

a market where resources are bought and sold, such as labour market, capital market, commodities markets

Factors of production (resources)

the resources needed to produce goods and services; land, labour, capital, enterprise

Finite

limited

First-degree price discrimination (HL)

where each consumer pays exactly the price that he/she is prepared to pay

Fixed costs (HL)

costs of production that do not change with the level of output

Fixed factor of production (HL)

a resource (input) that does not vary with the level of output

Free goods

a good that is not scarce; there is no opportunity cost with its consumption

Game theory (HL)

a method of analyzing the way that the actors in an interdependent relationship (such as oligopoly) make decisions by taking into account possible reactions of competitors

Goods

a tangible, physical product that can be used to satisfy some desire or need

Growth maximization (HL)

the goal of maximizing output by a firm; a possible alternative goal to profit maximization

Hoarding

the practice of buying up and holding resources so that they can be sold to customers for profit.

Homogeneous products (HL)

goods that have the same characteristics and are not able to be distinguished by consumers (wheat)

Imperfect (asymmetrical) information (HL)

a situation where one party in a transaction has more or better information than the other; can cause transactions or entire markets to fail

Implicit costs (opportunity costs)(HL)

costs that cannot be easily accounted, such as opportunity costs

Incentive function of price

a rising price gives producers the incentive to increase the quantity supplied, as the higher price may result in higher revenues

Incidence (burden) of tax (HL)

refers to the amount of tax paid by the producer or the consumer. If the demand for a good is inelastic, the greater incidence of the tax falls on the consumer. If the demand for a good is elastic, the greater incidence of the tax falls on the producer

Income

the flow of cash or cash-equivalents received from work (wage or salary), capital (interest), land (rent), or enterprise (profit)

Income elasticity of demand (YED)

is a measure of responsiveness of demand for a good to a change in income

Increasing returns to scale (HL)

a given percentage increase in the quantity of all factors of production results in a greater percentage increase in output and thus a fall in long run average costs (economies of scale)

Indirect tax (specific & ad valorem tax)

a tax on expenditure by consumers; can be a specific (set amount) or ad valorem (percentage) tax

Inelastic demand (price)

a situation where a change in price of a good or service will cause a proportionately smaller change in quantity demanded |PED| < 1

Inelastic demand (income)

a situation where a change in the income of consumers will cause a proportionally smaller change in quantity demanded -1 < YED < 1

Inferior goods

have a negative income elasticity of demand. As income rises demand for the good decreases

Infinite

without limit

Infrastructure

the essential facilities and structures needed for economic activity to take place (roads, telecommunications, railways, etc.)

Interdependence (HL)

a situation where the decisions of one firm in a market will have an impact on other firms; firms have to consider possible reactions of others when making decisions

Inventory (stock)

the amount of a good a firm has that has not yet been sold

Investment

business spending on capital goods

Joint supply

goods which are produced together, or where the production of one good involves the production of another product, such as meat and leather (a by-product)

Kinked-demand curve (HL)

a graph showing the interdependence of firms in a non-collusive oligopoly; shows the risks for a firm of raising or lowering the price of its product and explains the price-rigidity often seen in oligopolies

Labour

human beings who work for wages / salary; one of the four basic resources used for producing goods and services

Land

natural resources; one of the four basic resources used for producing goods and services

Law of demand

as the price of a good or service rises, the quantity demanded declines, ceteris paribus

Law of diminishing marginal returns (HL)

as extra units of variable factor are applied to a fixed factor, the output from each additional unit of the variable factor will eventually decline

Law of supply

as the price of a good rises, the quantity supplied increases, ceteris paribus

Linear demand function (HL)

an equation in the form Qd = a - bP which shows the relationship between the price and the quantity demanded of a product

Linear supply function (HL)

an equation in the form Qs = c + dP which shows the relationship between the price and the quantity of a product supplied

Long run (HL)

the period of time in which all factors of production are variable

Long run average cost curve (HL)

a graph showing long run average costs; the LRAC is U-shaped due to economies and diseconomies of scale

Manufactured goods

goods that have been processed by workers

Marginal cost (HL)

the cost of producing one more unit of output

Marginal private benefit

the extra benefit / utility to the consumer of consuming one more unit of output

Marginal private cost

the extra (private) cost to the producer of producing one more unit of output

Marginal product (HL)

the extra output that is produced by using an extra unit of a variable factor. (MP = △TP/△V)

Marginal revenue (HL)

the extra revenue gained from selling one more unit of a good or service

Marginal social benefit

the extra benefit / utility to society of consuming one more unit of output, including both the private benefit and the external benefits

Marginal social cost

the extra cost to society of producing one more unit of output, including both the private cost and the external costs

Marginal utility

the extra utility gained from consuming one more unit of a good or service

Market

where buyers (consumers) and sellers (producers) come together to establish an equilibrium price and quantity for a good or service; it does not need to be an actual place.