Micro Definitions

abnormal profit

Positive economic profit, arising when total revenue is greater than total costs (implicit plus explicit).

economics

The study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.

economies of scale

Decreases in the average costs of production that occur as a firm increases its output by varying all its inputs (long run).

elasticity

A measure of the responsiveness of a variable to changes in any of the variable's determinants.

entrepreneurship

The ability to innovate by developing new ways of doing things.

equilibrium

A state of balance such that there is no tendency to change.

equilibrium price

The price determined in a market when quantity demanded is equal to quantity supplied.

equilibrium quantity

The quantity that is bought and sold when a market is in equilibrium.

equity

The condition of being fair or just.

excess demand

Quantity demanded > Quantity supplied.

excess supply

quantity demanded < quantity supplied.

excise taxes

Taxes imposed on spending on particular goods or services.

marginal benefit

The extra or additional benefit received from consuming one more unit of a good.

marginal cost

The extra or additional cost of producing one more unit of output.

marginal private benefits (MPB)

The extra benefit received by consumers when they consume one more unit of a good.

marginal private costs (MPC)

The extra costs to producers of producing one more unit of a good.

marginal product

The extra or additional output that results from one additional unit of a variable input.

marginal propensity to consume (MPC)

The fraction of additional income spent on domestically produced goods and services.

marginal propensity to import (MPI)

The fraction of additional income spent on imports.

marginal propensity to save (MPS)

The fraction of additional income that is saved.

marginal propensity to tax (MPT)

The fraction of additional income that is paid as taxes.

marginal revenue

The additional revenue arising from the sale of an additional unit of output.

homogeneous product

A product that is completely standardised and not differentiated.

competitive supply

Two goods compete with each other for the same resources.

opportunity cost

Value of the next best alternative that must be sacrificed to obtain something else.

competition

Many buyers and sellers acting independently, no one has the ability to influence price.

complements

Two or more goods that tend to be used together.

concentration ratio

A measure of how much an industry's production is concentrated among the industry's largest firms.

constant returns to scale

Situation where the output of a firm changes in the same proportion as all its inputs.

overallocation of resources

Too many resources are allocated to the production of a good relative to what is socially desirable - overproduction.

perfect competition

Large number of small firms, no control over price, homogeneous goods, no barriers to entry/exit.

perfectly elastic demand

PED value of infinity.

perfectly elastic supply

PES value of infinity.

perfectly inelastic demand

PED value of 0.

perfectly inelastic supply

PES value of 0.

personal income taxes

Taxes paid by households/individuals on all forms of income.

positive externality

Externality where side-effects on third parties are positive/beneficial.

price ceiling

Maximum price set by the government.

price competition

When a firm lowers its price to attract customers away from rival firms.

price control

Setting a minimum/maximum price by the government so prices are unable to adjust to equilibrium.

price discrimination

Practice of charging different prices for the same product, not justified by differences in costs of production.

price elastic demand

Relatively high responsiveness of demand to changes in price.

price elastic supply

Relatively high responsiveness of supply to changes in price.

PED

Measure of the responsiveness of the quantity demanded of a good to changes in price.

PES

Measure of the responsiveness of the quantity supplied of a good to changes in price.

price floor

Minimum price set by government.

price inelastic demand

Low responsiveness of demand to changes in price.

price inelastic supply

Low responsiveness of supply to changes in price.

price leadership

Tacit collusion among oligopolistic firms where the dominant firm sets the price.

price taker

Firm that accepts a price at which it sells its product.

price war

Competitive price-cutting in an oligopoly trying to capture market share.

prices as incentives

Ability of changes in prices to convey information to consumers and producers.

prices as signals

Ability of changes in prices to communicate information to consumers and producers.

prisoner's dilemma

Decision makers may end up worse off if they act self-interestedly.

private good

Good that is rivalrous and excludable.

privatisation

Transfer of ownership from the public sector to the private sector.

producer surplus

Difference between the price received by firms for a good and the lowest price they are willing to accept.

product differentiation

When firms make their products different from competitors to create monopoly power.

productive efficiency

When firms produce at the lowest possible cost.

profit maximisation

The goal of firms is to make the largest possible profit.

progressive taxation

Taxation where as income increases, tax on income increases.

proportional taxation

Taxation where there is a constant tax rate.

marginal social benefits (MSB)

The extra benefits to society of consuming one more unit of a good.

consumer surplus

Difference between the highest price consumers are willing to pay and the price actually paid.

consumption

Spending by households on goods and services.

social optimum

Situation that is best from the social point of view.

shortage

Quantity demanded - quantity supplied.

short run

Time period during which at least 1 input is fixed.

scarcity

Condition in which available resources are limited.

satisficing

Goal of firms to achieve satisfactory results rather than pursue a single maximising objective.

rivalrous

Characteristic of a good wherein its consumption reduces availability for someone else.

revenue maximisation

Objective to produce at the level where marginal revenue is equal to 0.

returns to scale

Relationship between inputs and output changes.

resource allocation

Assigning available resources to specific uses.

resources

Factors of production used as inputs.

regressive taxation

Taxation where as income increases, the fraction of income paid as taxes decreases.

rent

Payment to owners of land resources who supply their land.

relocation of resources

Reassigning of resources to become a new allocation.

household indebtedness

Degree to which households have debts.

human capital

Skills, abilities, and knowledge that make people more productive.

implicit costs

Costs involving sacrificed income from using self-owned resources.

social scientific method

Method of investigation used in sciences and social sciences.

social surplus

Sum of consumer and producer surplus, maximised in a competitive market.

specialisation

Occurs when production concentrates on one or few goods.

specific tax

Tax calculated as an absolute amount per unit of goods sold.

strategic interdependence

Mutual interdependence of firms in oligopolies.

subsidy

Money paid by the government to firms to support industry and lower prices.

substitute goods

Goods that satisfy similar needs so one can be used instead of another.

supernormal profit

Positive economic profit arising when total revenue is greater than total economic costs.

supply

Various quantities of a good that firms are willing to produce at different prices.

supply curve

Curve showing quantities of a good firms are willing to produce and their prices.

surplus

Extra supply when quantity supplied is greater than quantity demanded.

third degree price discrimination

Price discrimination among different consumer groups based on different elasticities.

sustainability

Maintaining the ability to produce and satisfy needs into the future.

total costs

The sum of fixed and variable costs.

tacit collusion

Implicit cooperation between oligopolistic firms to limit competition.

tax incidence

The burden of a tax on the ultimate payers.

total product

The total quantity of output produced by a firm.

total revenue

The amount of money received by firms when they sell a good.

tradable permits

Permits that can be traded in a market to limit pollution emissions.