Microeconomics Flashcards

Flashcards for Microeconomics review.

Microeconomics

Examines the behaviour of individual decision-making units in the economy, using consumers and firms.

Macroeconomics

Examines the economy as a whole using aggregates to obtain a broad overall picture.

Land

All natural resources.

Labour

The physical and mental effort that people contribute to the production of goods.

Physical Capital

A man-made factor of production used to produce goods.

Entrepreneurship

Organises the other three factors of production and takes on the risks.

Human Capital

Skills, abilities, and knowledge acquired by people.

Natural Capital

Refers to an expanded meaning of the factor of production 'land'.

Financial Capital

Investments in financial instruments.

Opportunity Cost

The value of the next best alternative that must be sacrificed for a good.

Scarcity

Resources are finite whereas wants are infinite.

Economics

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

Sustainability

The environment and the economy can produce needs and wants in the future.

Free Good

A good that is not scarce and so has zero opportunity cost.

Economic Good

Any good that is scarce and has an opportunity cost bigger than zero.

Resource Allocation

Assigning resources to specific uses, chosen among many alternatives.

Economic Growth

Increase in the quantity of output produced in an economy over time.

Actual Growth

Caused by a reduction in unemployment and increases in the efficiency of production.

Market

Where buyers and sellers of goods, services, and resources carry out an exchange.

Competition

A process in which rivals compete in order to achieve some objective.

Competitive Market

Composed of large numbers of sellers and buyers acting independently, where no one individual seller has the ability to control the price of the product.

Individual Demand

Indicates the various quantities of a good the consumer is willing and able to buy at different possible prices, ceteris paribus.

Law of Demand

Negative causal relationship between the price of a good and its quantity demanded (inversely proportional), ceteris paribus.

Market Demand

Sum of all individual demands for a good.

Non-Price Determinants of Demand

Variables other than price that can influence demand and bring to a shift of the demand curve to the right or to the left.

Individual Supply

The various quantities of a good a firm is willing and able to produce and supply to the market for sale at different possible prices, ceteris paribus.

Law of Supply

Positive causal relationship between the price of a good and its quantity supplied (proportional), ceteris paribus.

Market Supply

Sum of all individual supplies for a good.

Non-Price Determinants of Supply

Variables other than price that can influence supply and bring to a shift of the supply curve to the right or to the left.

Market Equilibrium

Quantity demanded is equal to quantity supplied.

Equilibrium Price

The price at market equilibrium.

Equilibrium Quantity

The quantity at market equilibrium.

Market Disequilibrium

Excess in supply or demand which cause the price to change until the market reaches equilibrium.

Signals (Price Mechanism)

Prices communicate information to decision-makers.

Incentives (Price Mechanism)

Prices motivate decision-makers to respond to the information.

Allocative Efficiency

Producing the quantity of goods mostly wanted by society.

Marginal Benefit

The extra benefit that you get from each additional unit of something bought.

Marginal Cost

The extra cost of one more unit of output.

Consumer Surplus

The highest price consumers are willing to pay for a good minus the price actually paid.

Producer Surplus

The price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good.

Social/Community Surplus

Sum of consumer and producer surplus.

Welfare

The amount of consumer and producer surplus (when MB = MC).

Price Elasticity of Demand (PED)

A measure of the responsiveness of the quantity of a good demanded to changes in its price. (The minus sign is always dropped.)

Price Elastic (Demand)

Quantity demanded is highly responsive to a change in price.

Price Inelastic (Demand)

Quantity demanded is not very responsive to a change in price.

Total Revenue

The amount of money received by firms when they sell a good (Price * Quantity).

Income Elasticity of Demand (YED)

A measure of the responsiveness of demand to changes in income, involves demand curve shifts

Normal Good

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

Inferior Good

A good for which demand decreases as income increases (YED < 0).

Price Elasticity of Supply (PES)

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

Fixed Prices

Prices are fixed at a particular level.

Price Controls

The setting of minimum or maximum prices by the government.

Price Ceilings

Legal maximum price set below the equilibrium price, in order to make goods more affordable to people on low incomes.

Price Floors

A minimum price set below the equilibrium price, in order to provide income support to farmers or to increase the wages of low-skilled workers.

Minimum Wage

The minimum price of labour that an employer must pay.

Indirect Taxes

Are imposed on spending to buy goods and services and are paid partly by consumers, but are paid to the government by producers.

Subsidies

Refers to assistance by the government to individuals or groups of individuals.

Common Pool Resources

Resources not owned by anyone, do not have a price and are available for anyone to use without payment or any other restriction. They are rivalrous and non-excludable.

Rivalrous

Its consumption by one person reduces its availability for someone else.

Excludable

It is possible to exclude people by using the good or charging a price.

Unsustainable Production

Using resources unsustainably, depleting or degrading them.

Non-Renewable Resources

Resources that do not last indefinitely as they have a finite supply.

Renewable Resource

Resources that can last indefinitely if they are managed properly.

Externalities

Occurs when the actions of consumers or producers give rise to negative or positive side-effects on third parties, and whose interest are not considered.

Positive Externality

Benefits to third parties.

Negative Externality

Negative side-effects to third parties.

Marginal Private Cost (MPC)

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

Marginal Social Cost (MSC)

The costs to society of producing one more unit of a good.

Marginal Private Benefits (MPB)

Benefits to consumers from consuming one more unit.

Marginal Social Benefits (MSB)

Benefits to society from consuming one more unit of a good.

Negative Production Externalities

The external costs created by producers.

Carbon Tax

A tax per unit of carbon emissions of fossil fuels.

Tradable Permits

A policy involving permits to pollute issued to firms by a government or an international body.

Collective Self-Governance

An approach to manage resources undertaken by communities of resource users by themselves, as they realise that it is in their own best interests to work collectively for the preservation of resources.

Negative Consumption Externalities

The external costs created by consumers.

Demerit Goods

Goods considered to be undesirable for consumers, but are overprovided by the market.

Positive Production Externalities

Refer to external benefits created by producers.

Positive Consumption Externalities

External benefits are created by consumers.

Merit Goods

Goods that are held to be desirable for consumers, but which are under provided by the market.

Public Good

A public good is non-excludable and non-rivalrous

Free Rider Problem

When people can enjoy the use of a good without paying for it.