Micro economics

Scarcity

Infinite human wants exceeding finite resources.

Factors of Production

Inputs used to produce goods and services: Land, Labour, Capital, and Enterprise.

Opportunity Cost

The value of the next best alternative foregone when a choice is made.

PPF (Production Possibility Frontier)

A curve showing the maximum output combinations of two goods an economy can produce when all resources are fully used.

Capital Goods

Goods used to produce other goods and services in the future (e.g., machinery).

Consumer Goods

Goods directly consumed by individuals to satisfy current needs.

Specialisation

When individuals, firms, or regions concentrate on producing a specific range of goods or services.

Division of Labour

Specialisation where a production process is split into separate, narrow tasks performed by individual workers.

Functions of Money

The four roles of money: Medium of exchange, unit of account, store of value, and standard of deferred payment.

Free Market Economy

Resource allocation driven entirely by supply and demand without government intervention.

Planned Economy

Resource allocation completely planned and controlled by the state.

Mixed Economy

Resource allocation driven by both market forces and state intervention.

Positive Statement

An objective statement based on facts that can be empirically tested.

Normative Statement

A subjective statement based on value judgments that cannot be tested.

PPF Diagram Explanation

Illustrates opportunity cost, productive efficiency, and economic growth using maximum output choices between two goods.

Utility

The satisfaction derived from consuming a good or service.

Total Utility

The cumulative satisfaction gained from consuming a given quantity of a good.

Marginal Utility

The extra satisfaction gained from consuming one additional unit of a good.

Diminishing Marginal Utility

As more units of a good are consumed, the extra utility gained from each extra unit declines.

Rational Economic Man

The assumption that economic agents act logically to maximize utility or profit using perfect information.

Bounded Rationality

The theory that consumer rationality is limited by incomplete information, time constraints, and cognitive limits.

Bounded Self-Control

When individuals lack the willpower to make decisions aligned with their long-term interests.

Cognitive Bias

Systematic errors in human thinking that lead to irrational decision-making.

Anchoring

Over-relying on the first piece of information received when making a decision.

Heuristics/Rules of thumb

Practical mental shortcuts or "rules of thumb" used to make fast decisions. e.g Higher price=better

Nudge Theory

Designing environments to steer human behavior predictably without banning choices or changing prices.

Choice Architecture

The framing or design of the environment in which decisions are made.

Asymmetric Information

When one party in a transaction holds more or better information than the other.

Symmetric Information

When buyers and sellers have access to the exact same, complete information.

Moral Hazard

Taking greater risks because the financial burden of failure is passed onto someone else.

Adverse Selection

When asymmetric information causes bad-quality options to drive good-quality options out of a market.

Demand

The quantity of a good consumers are willing and able to buy at a given price over a given time.

Law of Demand

As price falls, quantity demanded increases (inverse relationship).

Derived Demand

Demand for a factor of production created as a result of demand for the final good it makes.

Composite Demand

Demand for a good that has multiple different uses (e.g., milk for cheese or liquid consumption).

Joint Demand

Demand for complementary goods that are used together (e.g., printers and ink).

Supply

The quantity of a good producers are willing and able to sell at a given price over a given time.

Law of Supply

As price rises, quantity supplied increases (direct relationship).

Joint Supply

When producing one good automatically leads to the supply of another good (e.g., beef and leather).

Equilibrium Price

The market-clearing price where quantity demanded equals quantity supplied.

Price Mechanism

The allocation of resources via prices through three functions: Signalling, Incentive, and Rationing.

Consumer Surplus

The difference between what a consumer is willing to pay and what they actually pay.

Producer Surplus

The difference between the minimum price a producer would accept and what they actually receive.

PED (Price Elasticity of Demand)

The responsiveness of quantity demanded to a change in price.

YED (Income Elasticity of Demand)

The responsiveness of demand to a change in consumer income.

Normal Good

A good where demand increases as income increases (YED > 0).

Inferior Good

A good where demand falls as income increases (YED < 0).

XED (Cross Elasticity of Demand)

The responsiveness of demand for Good A to a change in price of Good B.

Substitutes

Goods in competitive demand that replace each other (XED > 0).

Complements

Goods in joint demand consumed together (XED < 0).

PES (Price Elasticity of Supply)

The responsiveness of quantity supplied to a change in price.

Demand and Supply Diagram Explanation

Shows how market forces establish equilibrium price and quantity, and how shortages or surpluses clear.

Consumer and Producer Surplus Diagram Explanation

Highlights total economic welfare by shading the benefits gained by consumers and producers at market price.

Short Run

Time period where at least one factor of production is fixed.

Long Run

Time period where all factors of production are variable.

Fixed Costs (FC)

Costs that do not change as output changes in the short run.

Variable Costs (VC)

Costs that change directly with the level of output.

Total Cost (TC)

Total Fixed Costs plus Total Variable Costs.

Average Total Cost (ATC)

Total cost per unit of output (TC / Q).

Marginal Cost (MC)

The addition to total cost resulting from producing one extra unit.

Total Revenue (TR)

Price multiplied by Quantity sold.

Average Revenue (AR)

Revenue per unit sold (TR / Q = Price).

Marginal Revenue (MR)

The extra revenue generated from selling one additional unit.

Law of Diminishing Returns

Adding extra variable inputs to fixed factors eventually causes the output per extra worker to decline.

Economies of Scale

Reductions in long-run average costs (LRAC) as output expands.

Diseconomies of Scale

Increases in long-run average costs (LRAC) as a firm grows too large. 3C’s: coordination, communication, control

Minimum Efficient Scale (MES)

The lowest output level where a firm minimizes its long-run average costs.

Normal Profit

The minimum profit required to keep a firm operating in its current industry (TR = TC).

Supernormal Profit

Profit earned above normal profit (TR > TC).

Subnormal Profit

Profit below normal profit, resulting in an economic loss (TR < TC).

Profit Maximisation

The output level where Marginal Cost equals Marginal Revenue (MC = MR).

Revenue Maximisation

The output level where Marginal Revenue equals zero (MR = 0).

Sales Maximisation

The highest output level achievable without making a loss (AC = AR).

Creative Destruction

Innovations continuously destroying existing market structures and creating new ones.

Short-Run Cost Curves Diagram Explanation

Demonstrates how MC, ATC, AVC, and AFC behave due to diminishing returns, showing MC intersecting average curves at their lowest points.

LRAC Envelope Curve Diagram Explanation

Shows long-run unit costs across different firm scales, identifying internal economies of scale, diseconomies of scale, and the Minimum Efficient Scale.

Price Maker Revenue Curves Diagram Explanation

Illustrates downward-sloping AR and MR curves alongside Total Revenue to show the link between elasticity, revenue, and profit points.

Perfect Competition

A market structure with infinite buyers/sellers, homogeneous products, perfect information, and zero barriers to entry/exit.

Monopoly

A market structure dominated by a single seller holding 100% (or 25%+ legal) market share.

Monopolistic Competition

A market with many buyers/sellers, low barriers, and differentiated products.

Oligopoly

A market structure dominated by a few large, interdependent firms.

Concentration Ratio

The percentage of market share held by the top N firms in an industry.

Interdependence

Actions taken by one firm directly impact and trigger reactions from rival firms.

Collusion

Agreements between firms to restrict competition, fix prices, or limit output.

Overt Collusion

Formal, explicit agreements between firms to fix prices or output (e.g., cartels).

Tacit Collusion

Informal cooperation between firms without explicit communication (e.g., price leadership).

Game Theory

Mathematical modeling of strategic interactions between interdependent agents.

Prisoner’s Dilemma

A game theory model showing why rational firms might fail to cooperate, even when it is in their best interest.

Nash Equilibrium

An outcome in game theory where no participant has an incentive to change their strategy unilaterally.

Price Discrimination

Charging different prices to different consumers for the exact same product for reasons not related to cost.

Contestability

The ease with which firms can enter and exit an industry with zero sunk costs.

Sunk Costs

Costs that cannot be recovered upon exiting an industry.

Hit-and-Run Competition

New firms enter a contestable market for short-term supernormal profits and exit before incumbents react.

Allocative Efficiency

Occurs when resources are allocated to produce what consumers desire most (Price = Marginal Cost).

Productive Efficiency

Production occurs at the lowest point on the average cost curve (MC = ATC).

Dynamic Efficiency

Long-run efficiency improvements resulting from R&D, innovation, and technological change.

X-Inefficiency

Wasteful production costs caused by a lack of competitive pressure in a market.

Perfect Competition Diagram Explanation

Compares market supply/demand with horizontal firm demand, demonstrating short-run supernormal profits competing down to long-run normal profit.

Monopoly Diagram Explanation

Highlights how a profit-maximizing price maker sets output where MC = MR to gain long-run supernormal profits.

Natural Monopoly Diagram Explanation

Displays continuously falling LRAC and LRMC curves to prove why one firm serves the entire market at lower unit costs than multiple competing firms.