VOCAB - 2. Microeconomics

Competitive market

market composed of many independent buyers and sellers, none of whom has market power

Demand

various quantities of a good that consumers are willing and able to purchase at various possible prices during a particular time period, ceteris paribus

Law of demand

there is a negative relationship between price and quantity demanded during a particular time period, ceteris paribus

Market demand

sum of all individual demands for a good or service

Non-price determinants of demand

variables (other than price) that influences demand at all prices

Income effect

as price falls, real income increases, causing the consumer to buy more of the good

Substitution effect

there is a negative relationship between price and quantity demanded because as price falls, consumers substitute other products with the now less expensive good

Law of diminishing marginal utility

as the consumption of a good increases, the extra utility the consumer receives decreases with each additional unit consumed; therefore consumers will buy more only if price falls

Marginal utility (/benefit)

additional satisfaction that a consumer gains from consuming an additional unit of a good

Utility

satisfaction that consumers gain from consuming a good or service

Nominal income

income that is not adjusted for price changes

Real income

income that is adjusted for price changes; implies the actual purchasing power of the consumer

Normal goods

goods that have a positive relationship between quantity demanded and income (YED>0)

Inferior goods

goods that have a negative relationship between quantity demanded and income (YED<0)

Substitutes

two or more goods that satisfy a similar need

Complements

two or more goods that tend to be used together

Supply

various quantities of a good that producers are willing and able to produce at various possible prices during a particular time period, ceteris paribus

Law of supply

there is a positive relationship between price and quantity supplied during a particular time period, ceteris paribus

Market supply

sum of all individual firms' supplies for a good or service

Non-price determinants of supply

variables (other than price) that influences supply at all prices

Law of diminishing marginal returns

as additional units of a variable input are added to one or more fixed inputs, the marginal product at first increases but eventually decreases

Marginal returns (/product)

additional output from having an additional unit of variable input

Short-run

a time period during which at least one input is fixed and cannot be changed

Long-run

a time period during which all inputs can be changed

Law of increasing marginal costs

as the quantity produced increases, the extra cost of producing one additional output increases

Marginal cost

additional cost of producing one more unit of output

Absolute advantage

ability to produce a good using fewer resources than another producer

Comparative advantage

ability to produce a good at a lower opportunity cost than another producer

Competitive supply

situation where two goods compete for the same resources

Joint supply

production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other

Competitive market equilibrium

quantity demanded equals quantity supplied, and there is no tendency for the price to change

Shortage

excess demand

Surplus

excess supply

Price mechanism

system where prices are determined by supply and demand in competitive markets

Allocative efficiency

allocation of resources that results in producing the combination and quantity of goods and services most preferred by consumers

Consumer surplus

difference between the highest prices consumers are willing to pay for a good and the price actually paid

Producer surplus

difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good

Social surplus (welfare)

sum of consumer and producer surplus

Welfare loss (deadweight loss)

loss of a portion of social surplus when MSB ≠ MSC due to market failure

Price elasticity of demand (PED)

measurement of the responsiveness of the quantity demanded to price changes

Price elasticity of supply (PES)

measurement of the responsiveness of the quantity supplied to price changes

Income elasticity of demand (YED)

measurement of the responsiveness of the quantity demanded to changes in income

Necessities (normal good)

Goods that are necessary or essential: PED<1, 0

Luxury goods (normal good)

Goods that are not necessary or essential: PED>1, YED>1

Total revenue (TR)

total amount of money a firm receives by selling goods or services

Primary commodities

goods produced in the primary sector, arising directly from natural resources

Manufactured products

goods produced mainly by labour and capital as well as raw materials

Stakeholders

individuals or groups of individuals who are involved in a particular economic activity or affected by an economic outcome

Government Intervention

practice of government to intervene in markets, usually for the purpose of achieving particular economic or social objectives

Private Goods

goods that are rivalrous and excludable

Common Pool Resources

resources that are rivalrous yet non-excludable

Club Goods

resources that are non-rivalrous yet excludable

Public Goods

goods that are non-rivalrous and non-excludable

Merit goods

goods that are considered to be desirable for consumers and are underprovided by the market

Demerit goods

goods that are considered to be undesirable for consumers and are overprovided by the market

Price Control

setting of minimum or maximum prices by the government so that prices are unable to adjust to their equilibrium level

Price Ceiling

maximum prices set by the government below the existing free market equilibrium price

Price Floor

minimum prices set by the government above the existing free market equilibrium price (ex. minimum wage)

Indirect Taxes

taxes levied on the consumption of goods and services

Excise tax

Tax imposed on demerit goods

Subsidies

direct or indirect monetary support from the government to individuals or firms

Collective Self-Governance

solution to the Tragedy of the Commons where users take control of the resources and use them in a sustainable way

Nudge

method designed to influence consumers' choices in a predictable way, without offering financial incentives, imposing sanctions, or limiting choice

Choice architecture

design of how options are presented to consumers, with the goal of influencing their choices

Abnormal profit

firm’s total revenue is greater than its total costs

Normal profit

firm’s total revenue equals its total costs

Loss

firm’s total revenue is less than its total costs

Asymmetric Information

type of market failure: buyers and sellers do not have equal access to information

Adverse selection

type of asymmetric information where one party has more information than the other party about the product sold

Moral hazard

type of asymmetric information where one party takes risks but does not bare the full consequences

Market Power

ability of a firm to influence the price of the product in the industry

Market Share

percentage of total sales in a market that is earned by a single firm

Barriers to Entry

anything which prevents a firm from entering an industry

Perfect Competition

type of market structure; market with a large number of small firms, no control over price, homogenous product, no barriers to entry (ex. agriculture, foreign exchange market)

Monopolistic Competition

type of market structure; market with a large number of firms, some control over price, product differentiation, no barriers to entry

Oligopoly

type of market structure; market with a small number of large firms, significant control over price, high barriers to entry (ex. airlines, cement industry)

Collusion

an agreement between firms to fix prices to limit competition and maximize profit

Monopoly

type of market structure; market with a single dominant firm, significant control over price, unique produce with no substitutes, high barriers to entry (ex. telephone companies)

Economies of Scale (Natural Monopoly)

firm where the average costs of production decreases as output increases over the long run

Externality

positive or negative side-effects inflicted on unrelated 3rd parties as consequence of the actions of consumers or producers

Free Rider Problem

when public goods are enjoyed by all individuals (non-excludable) yet without anyone paying for them

Market Concentration

degree to which a market is dominated by a small number of large firms