Economics - Microeconomics

SL econ

Microeconomics

The study of the behaviour (supply and demand) of individual markets

Scarcity

Scarcity exists due to a limited amount of resources but unlimited needs and wants.

Opportunity Cost

The next best alternative forgone or given up.

factors of production

The land, labour, capital and management (entrepreneurship) that are used in production

land

All raw materials that are used in the prodcuction of goods and services

labour

The work done by humans that is used in the production of goods and services.

capital

the factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment.

management/entrepreneurship

The factor of production that brings together the other three factors of production with the aim of making profit. Entrepreneurship tends to involve risk-taking.

Choice

Choice need to be made to allocate scare resources.

market

A place where buyers and sellers of a product come together to make an exchange, or a trade. A market does not need to be a physical place; e.g. A stock market or foregn exchange market, where the product is traded via computers

demand

The quantity of a product that consumers are willing and able to buy at a given price

demand curve

A curve, or line showing the relationship between the price of a productand quantity demanded over a range of prices

law of demand

As the price of a product increases, the quantity demanded decreases, ceteris paribus

ceteris paribus

A latin expression meaning "let all other things remain equal" used by economists to develop economic theories or models.

normal good

A good whose demand rises as income rises. A normal good has positive income elasticity

inferior good

a good whose demand falls as income rises. An inferior good has negative income elasticity.

substitute good

Goods which can be used in place of each other e.g. Adidas running shoes and Nike running shoes. Substitute goods have positive cross price elasticity.

complementary good

Goods are used in combination with each other e.g. Digital cameras and memory cards. Complementary goods have negative cross price elasticity.

supply

the amount of a good or service that producers are willing and able to supply at a given price

law of supply

As the price of a product increases, the quantity supplies increases ceteris paribus

supply curve

A curve, or line, showing the relationship between the price of a product and the quantity supplied over a range of prices.

joint supply

Goods which are produced together, or where the production of one good involves the production of another product e.g. Meat and leather (a by-product)

market equilibrium

The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply

excess demand

Occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied

excess supply

Occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded

resource allocation

A primary focus of the study of economics is to examine the way that scarce factors of production (land, labour and capital) are used (allocated) to meet unlimited demand

signalling function of price

Prices give signal to both producers and consumers. A rising price gives a signal to producers that they should increase their quantity supplied, and signals to consumers that they should decrease the quantity demanded and vice versa.

incentive function of price

Prices give producers the incentive to either increase or decrease the quantity that they supply. A rising price gives produers the incentive to increase the quantity supplied, as the higher price may allow them to earn higher revenues.

Rationaing function

Price serves to ration scarce resources when a market experiences a surplus or shortage.

consumer surplus

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

producer surplus

The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive.

allocative efficiency

Occurs where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society.In different words, 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)

price elasticity of demand

A measure of the responsiveness of the quantity of a good demanded to a change in its price. PED = %△in Qd/%△in price. PED = P△Q/Q△P

primary commodities

Raw materials

manufactured goods

Goos that have been processed by workers

cross price elasticity of demand

A measure of the responsiveness of the quantity of one good demanded in response to a change in the price of a related good. XED = %△ in Qd of Good A/%△ in price of Good B

income elasticity of demand

A measure of the responsiveness of demand for a good to a change in consumers' income. YED = %△ in D/%△ in Y

price elasticity of supply

A measure of the responsiveness of the quantity of a good supplied to a change in its price. PES = %△in Qs/%△in price. PES = P△Q/Q△P

indirect taxes

Taxes placed upon the expenditure on a good or service. E.g. Value-added tax, or goods and services tax

ad valorem taxes

An indirect tax where a given percentage is added to the price of a good or service

specific taxes

An indirect tax where a fixed amount is added to the price of a good or service

incidence of tax

The amount of an indirect tax paid by consumers of a good or proucers of a good

subsidy

The amount of money given to producers of a product by the government. A subsidy increases the supply of the good by effectively lowering the firms' costs of production.

price ceiling (maximum price)

A maximum price set by the government or other authority above which the product may not be sold in order to support the consumers of the product. Examples of maximum prices include thoses set on essential food products or rent.

price floor (minimum prices)

A minimum price set by the government or other authority below which the product may not be sold in order to support the producers of a product. Examples of minimum prices include those set on agricultutral products and wages in a labour market

market failure

Occurs when the production of a good does not take place at the socially efficient level of output (allocative efficiency where MSC=MSB)

marginal private cost

The extra (private) cost to the producer of producing an additional unit of output.

marginal social cost

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs

marginal private benefit

The extra benefit/utility to the consumer of consuming an additional unit of output.

marginal social benefit

The extra benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

negative externality of production

The external costs to third party that occur when a product is produced

negative externality of consumption

The external costs to third party that occur when a product is consumed.

positive externality of production

The external benefits to a third party that occur when a product is produced.

positive externality of consumption

The external benefits to a third party that occur when a product is consumed.

public good

A product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy.

merit good

Products that are considered to be beneficial for people that would be under-provided/under-consumed in a purely free market economy. Merit goods are generally considered to be products whose consumption create positive externalities of consumption.

de-merit goods

Products that are considered to be harmful for people that would be over-provided/over-consumed in a purely free market economy. De-merit goods are generally considered to be products whose consumption creates negative externalities.

common access resources

Also known as common pool resources, or common property resources, these are resources which have properties similar to public goods in that it is very difficult or impossible to prevent people from using/consuming the resource. Therefore, they are vulnerable to over-use and/or degradation.

sustainability

In economic terms, sustainability is linked to the concept of sustainable development, which is development that meets the needs of present generations without compromising the ability of future generations to meet their needs. Sustainability implies an ability to sustain the worlds' resources over time.

short run

In terms of the theory of the firm, the period of time in which at least one factor of production (usually capital) is fixed.

long run

In terms of the theory of the firm, the period of time in which all factors are variable.

total, average and marginal product

Total product is the total output of a firm at a given level of input. Average product is the output that is produced, on average, by each unit of the variable factor. (AP = TP/V). Marginal product is the extra output that is produced by using an extra unit of a variable factor. (MP = △TP/△V)

law of diminishing marginal returns

In the short run, as increasing units of a variable factor are added to a fixed factor, the addition to total output (MP) will eventually fall.

economic costs

The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.

fixed costs

costs that do not vary with the level of output.

variable costs

Costs that vary directly with the level of output.

total, average and marginal cost

Total costs include the complete cost of producing a level of output. Average costs are costs per unit of output (AC = TP/Q). Marginal cost is the addition to total cost of producing one extra unit of output (MC = △TC/△Q)

economies of scale

A fall in average costs in the long run

diseconomies of scale

An increases in average costs in the long run

inreasing returns to scale

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)

decreasing returns to scale

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)

constant returns to scale

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

short run average cost curve (SRAC)

A graphical representation of short run average costs. The SRAC is u-shaped due to the law of diminishing marginal returns

long run average cost curve

A graphical representation of long run average costs. The LRAC is u-shaped due to economies and diseconomies of scale

revenue

The income received by a firm from selling its product.

total, average and marginal revenue

Total revenue is the price of a product multiplied by the quantity sold. (TR = PxQ) Average revenue is the revenue that a firm receives per unit sold. (AR = TR/Q) Marginal revenue is the extra revenue that a firm gains when it sells one more unit of a product. (MR = △TR/△Q)

zero economic profit (normal profit)

Normal profit is earned when revenue is equal to the total opportunity costs to the firm. A firm earning normal profit (or zero economic profit) has no incentive to leave the industry.

economic profit (abnormal/supernormal profit)

Economic profit (abnormal or supernormal profits) is earned when a firm's revenues are greater than its total opportunity costs (its economic costs).

profit maximisation

Often assumed to be the primary goal of firms. This is where the difference between total revenue and total revenue is at the maximum or where marginal cost is equal to marginal revenue. (MC=MR)

revenue maximisation

An alternative goal of firms (as opposed to profit maximisation). This occurs when marginal revenue is equal to zero (MR=0)

satisficing

An alternative goal of firms (as opposed to profit maximisation) . This occurs when enterpreneurs endeavour to cover their opportunity costs, but do not push themselves significantly further, even though they might be able to earn higher profits. It is essentially a mix of the words 'satisfy' and 'suffice'.

corporate social responsibility

An approach taken by firms where they attempt to produce responsibly/ethically towards the community and environment, demonstrating a positive impact on society.

homogeneous products

Completely identical products, as produced in perfect competition

perfect competition

A market structure characterised by a large number of firms, producing homogeneous products, each of which is too small to influence the market. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

price taker

In perfect competition, each firm is a price-taker, taking the equilibrium price set in the market.

shut down price

The price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run.

break even price

The price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.

monopoly

A market structure where there is only one firm, or a dominant firm, in the industry. There are high barriers to entry.

barriers to entry

Obstacles that prevent a new firm from entering a market, such as economies of scale, product differentiation, and legal protection.

natural monopoly

A situation where there are only enough economies of scale available in a market to support one firm, such that it is natural that the industry be dominated by one firm only.

monopolistic competition

A market structure charaterised by a large number of small firms, producing differentiated products, with no barriers to entry or exit.

product differentiation

A strategy employed by producers where they attempt to make their products different from those of their competitors, e.g. differences in quality, performance, design, styling, or packaging. It is a form of non-price competition.

oligopoly

A market structure characterised by a small number of large firms dominating the industry due to high barriers to entry. There are many different theories of oligopoly.

game theory

A method of analysing the way that the 'players' in an interdependent relationship (such as oligopoly) make strategic decisions.

Collusive oligopoly

Where a few firms in an oligopoly act together to avoid competition by resorting to agreements to fix prices or output.

non-collusive oligopoly

Where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.

cartel

A formal agreement among firms in a collusive oligopoly.

price discrimination

The act of charging different consumers of an identical product different prices. This might be based on e.g. time of purchase, age of consumer, quantity of purchase or time of consumption.