Important Terms & Definitions – H2 Economics (Microeconomics)

Vocabulary flashcards summarizing key microeconomics terms and definitions from the lecture notes.

Scarcity

Situation where limited resources cannot satisfy unlimited human wants.

Opportunity Cost

Value of the next best alternative forgone when a choice is made.

Production Possibility Curve (PPC)

Graph showing the maximum attainable combinations of goods and services that can be produced with available resources and technology.

Law of Increasing Opportunity Cost

As production of one good rises, ever-larger amounts of another good must be sacrificed.

Comparative Advantage

Ability to produce a good or service at a lower opportunity cost than others.

Law of Comparative Advantage

Countries gain from trade by specializing in goods in which they have a comparative advantage.

Law of Demand

Inverse relationship between a good’s price and the quantity demanded, ceteris paribus.

Law of Supply

Direct relationship between a good’s price and the quantity supplied, ceteris paribus.

Price Elasticity of Demand (PED)

Responsiveness of quantity demanded to a change in the good’s own price, ceteris paribus.

Income Elasticity of Demand (YED)

Responsiveness of demand to a change in consumers’ income, ceteris paribus.

Cross Elasticity of Demand (XED)

Responsiveness of demand for one product to a change in the price of another product, ceteris paribus.

Price Elasticity of Supply (PES)

Responsiveness of quantity supplied to a change in the good’s own price, ceteris paribus.

Consumer Surplus (CS)

Difference between what consumers are willing to pay and what they actually pay.

Producer Surplus (PS)

Difference between the price producers receive and the minimum they are willing to accept.

Deadweight Loss

Loss of total welfare that is not gained by any member of society.

Tax Incidence

Distribution of a tax burden between consumers and producers.

Subsidies

Per-unit payments to producers that lower the cost of producing a good.

Price Floor (Minimum Price)

Legally imposed minimum price set above market equilibrium.

Price Ceiling (Maximum Price)

Legally imposed maximum price set below market equilibrium.

Black Market

Illegal market where price controls are ignored and goods sell at unregulated prices.

Fixed Factor

Input whose quantity cannot be varied in the short run.

Variable Factor

Input whose quantity can be changed within the relevant time period.

Short Run

Production period in which at least one factor of production is fixed.

Long Run

Production period long enough for all factors of production to be variable.

Law of Diminishing Marginal Returns (LDMR)

Adding more of a variable factor to a fixed factor eventually lowers marginal product.

Marginal Cost

Additional cost of producing one more unit of output.

Economies of Scale

Decrease in unit costs as scale of production increases.

Diseconomies of Scale

Increase in unit costs as scale of production increases.

Minimum Efficient Scale (MES)

Lowest output level at which long-run average cost is minimized.

Internal Expansion

Firm growth by increasing its own productive capacity to gain internal economies of scale.

Horizontal Integration

Merger of firms at the same stage of production.

Vertical Integration

Merger of firms at different stages of production.

Conglomerate Integration

Merger of firms in unrelated industries.

Perfect Competition

Market with many buyers and sellers offering a homogeneous product.

Monopoly

Market with a single seller of a product without close substitutes.

Price Taker

Firm that accepts the market price and cannot influence it.

Price Setter

Firm with power to influence the market price of its product.

Productive Efficiency

Production at the lowest possible cost (on the LRAC curve).

Allocative Efficiency

Output level where price equals marginal cost, maximizing social welfare.

Natural Monopoly

Industry where one firm supplies the market at lower average cost than multiple firms due to substantial economies of scale.

Predatory Pricing

Selling below cost to drive rivals out of the market.

Cartel

Agreement among firms to restrict competition, often by fixing prices or output.

X-inefficiency

Cost inefficiency arising when lack of competition makes a firm complacent.

Price Discrimination

Charging different prices for the same product not justified by cost differences.

1st Degree Price Discrimination

Charging each consumer the maximum price they are willing to pay for every unit.

2nd Degree Price Discrimination

Charging one price for an initial block of units and a lower price for subsequent units.

3rd Degree Price Discrimination

Charging different prices to different market segments for the same product.

Oligopoly

Market dominated by a few large firms with significant market share.

Monopolistic Competition

Market with many small firms selling differentiated products.

Price Rigidity

Tendency for market prices to remain stable over long periods.

Mutual Interdependence

Each firm’s actions affect—and are affected by—rival firms’ decisions.

Product Innovation

Improving products to differentiate them in consumers’ eyes.

Process Innovation

Reducing average costs by streamlining production processes.

Brand Proliferation

Offering many brands to saturate a market and deter entry.

Market Segmentation

Dividing a market into niches with products tailored to differing needs.

Kinked Demand Curve Theory

Oligopoly model explaining price rigidity; rivals match price cuts but not price rises.

Price Wars

Successive rounds of price cutting aimed at undercutting competitors.

Collusive Oligopoly

Oligopoly in which firms coordinate actions tacitly or explicitly.

Cartel Theory

Formal collusion where sellers fix prices through controlling supply.

Price Leadership Theory

Firms follow the price changes of a recognized leader to avoid price wars.

Dominant Firm Price Leadership

Industry follows the price set by the largest firm.

Barometric Firm Price Leadership

Industry follows the firm most sensitive to market conditions.

Contestable Market Theory

With free entry and exit, firms behave competitively regardless of the number present.

Differentiated Product

Product slightly different from but a close substitute for rivals’ products.

Product Development

Creating or improving goods/services to gain a competitive edge.

Excess Capacity Theorem

Firms in monopolistic competition under-utilize resources, producing below socially efficient output.

Profit Satisficing

Making enough profit to satisfy shareholders rather than maximizing profit.

Managerial Theories

Views that managers pursue their own utility instead of profit maximization.

Revenue Maximization

Objective of maximizing sales revenue rather than profits.

Growth Maximization

Objective of maximizing the firm’s growth rate.

Organizational Slack

Production at costs above minimum average cost due to weak competition.

Nationalization

Transfer of industry ownership and control to the state.

Privatization

Returning state-owned enterprises to private ownership and control.

Social Efficiency / Pareto Optimality

Situation where no one can be made better off without making someone else worse off.

External Benefits

Positive spillover effects of production or consumption on third parties.

External Costs

Negative spillover effects of production or consumption on third parties.