Econ - Micro

Positive statement

How things actually work in an economy

Normative statement

How things should work in an economy

Factors of production

Capital Entrepreneurship Land Labour

Opportunity cost

Value of the next best alternative foregone when making a decision

Production possibility curve (PPC)

Represents all combinations of maximum amounts of two goods that can be produced by an economy, given full employment resources. Trade-off when there is a scarcity of resources for 2 different goods.

Demand

The quantity of products that consumers are willing and able to buy at various prices over a period of time.

Non-price determinants of demand

Taste, related goods' price, income, buyers, expectations, and special circumstances

Law of demand

Negative relationship between price and quantity demanded

Supply

The quantity of goods or services that producers are willing and able to supply at various prices over a given period of time.

Law of supply

The positive relationship between price and quantity supplied

Non-price determinants of supply

Subsidies and taxes, Technology advanced, Other related goods' price, Resources cost, Expectation of the goods (for producers), Size of the market

Surplus

Excess supply: Qs > Qd

Shortage

Excess Demand: Qs < Qd

Disequilibrium

Misallocation of resources

Consumer surplus

Difference between the maximum price that consumers are willing and able to pay and the actual price

Producer surplus

Difference between the amount of price that the producers are willing to accept and the actual price the producer receives

Price Elasticity of Demand (PED)

Responsiveness of quantity demanded to the change in price.

Determinants of PED

Substitutes, proportion of income, Luxury or necessity, Addictiveness, Time

Income Elasticity of Demand (YED)

Responsiveness of quantity demanded to the change in real income of consumers.

Inferior goods

As income rises, demand falls as consumers purchase better alternatives (YED<0)

Necessities

Satisfy basic needs, Demand does not increase as income rise (0<YED<1)

Luxuries

Satisfy wants and indulgences, Demand increases as income rises (YED>1)

Normal goods

A product for which demand increases when consumer income rises, and decreases when income falls (YED>0) necessities and luxuries

Complements

Two good that consumed together

Substitutes

Goods that can be used for the same purpose and are in competition with one another, and are therefore alternatives for each other

Price Elasticity of supply (PES)

Responsiveness of quantity supplied to the change in price.

Determinants of PES

Time, Unused capacity & inventory, Mobility of FOPs

Free market

Without any government control or intervention

Price ceiling

Legal maximum price that the government sets for a particular product when they believe the price is too high.

Price floor

The legal maximum price that the government sets for a particular product when the government believe that the price is too low

Minimum wage

Minimum wage that the employer must pay

Parallel Market (informal)

Unrecorded activity where tax and regulations is avoided

Indirect taxes

Imposed by the government on producers for the production of goods or services. To rasie Government revenue, Discourage consumptions, Redistribute income, Improve allocation of resources

Specific tax

Fixed amount of tax per unit of goods/service sold

Ad Valorem tax

Fixed percentage of tax on the price of the goods/services

Subsidy

A form of financial aid provided by the government to the producer in order to reduce production cost, increase output, and reduce price.

Direct provision of services

Government directly supplies goods or services in the best interest of society, funded by tax revenue

Command & control regulation and legislation

Laws governing certain activities or industries, aims to prevent certain socially undesirable behaviours or enforce those that are socially desirable.

Market failure

Failure of the market to allocate resources efficiently to socially optimal output, that is deemed socially desirable.

Positive externalities

External benefits imposed on third parties through economic activities. Government intervene in under-allocation markets by increasing the allocation of resources to correct market failures

Merit goods

Goods associated with positive externalities of consumption

Positive externalities of consumption

Positive spillover effects generated to third parties as a result of consuming merit goods.

Negative externalities

External costs imposed to third parties through economic activities

Demerit goods

Goods associated with negative externalities of consumption

Negative externalities of consumption

Negative spillover effects generated to the third parties during consumption activities

Collective self-governance

Voluntary communal actions that combat negative externalities

Carbon emissions

Release of carbon into the atmosphere

Carbon taxes

Imposed on producers for carbon emissions from production activities to minimise environmental pollution

Tradable permits (Cap and trade schemes)

Limits the level of pollutants to a level pre-determined by the government.

International agreements

Nations often develop international agreements to combat the negative externalities of production

Common excess resources

Rivalrous and non-excludable resources

Non-excludable

Impossible to prevent non-payers from benefiting from the resources

Rivalrous

Consumption of a resource reduces the amount available for others to use

Tragedy of the Commons

Situations where degradation, depletion or destruction of a common access resource is caused by rivalry and overconsumption

Sustainability

The ability to provide for our existing needs or wants, without sacrificing that of future generations

Public goods

Goods and services that are non-rivalrous and non-excludable

Non-rivalrous

Consumption of the good by additional consumers does not diminish the ability of others to enjoy the same good

Private goods

Both rivalrous and excludable

Quasi-public goods

Exhibits characteristics of both private and public goods

Free-rider problem

The issue arises when people who do not pay for a good or service have access to it.

Contracting out

Occurs when the government pays a specialist private producer with the expertise to produce the public good