Unit 2 Econ Vocab

Allocative efficiency

Achieved when just the right amount of goods and services are produced from society's point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).

Allocative inefficiency

When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB MSC.

Capital Physical capital

means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country.

Human capital

the education, training, skills and experience embodied in the labour force of a country.

Ceteris paribus

A Latin expression meaning "other things being equal".

Circular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society- wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

Collective self- governance

In the case of a common pool resource, such as a fishery, users solve the problem of overuse by devising rules concerning the obligations of the users, the monitoring of the use of the resource, penalties of abuse, and conflict resolution.

Common pool resources

A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.

Competitive market

A market with many firms acting independently where no firm has the ability to control the price.

Competitive market equilibrium

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

Complements Goods

goods that are jointly consumed, for example, coffee and sugar.

Consumer surplus

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.

Demand

The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.

Demand curve

A curve illustrating the relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus. It is normally downward sloping.

Demerit goods

Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.

Direct taxes

Taxes on income, profits or wealth paid directly to the government.

Economics

Economics is the study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants.

Efficiency

In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost or to allocative efficiency where marginal social costs are equal to marginal social benefits or where social surplus is maximum.

Elasticity

A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).

Entrepreneurship

Refers to the ability of certain individuals to organize the other factors of production (land, labour, capital) and their willingness to take risks.

Equilibrium

A state of balance that is self-perpetuating in the absence of any outside disturbance.

Equity

The concept or idea of fairness.

Excess demand

Occurs when quantity demanded at some price is greater than quantity supplied.

Excess supply

Occurs when quantity supplied at some price is greater than quantity demanded.

Excludable

A characteristic that most goods have that refers to the ability of producers to charge a price and thus exclude whoever is not willing or able to pay for it from enjoying it.

Externalities

External costs or benefits to third parties when a good or service is produced or consumed. An externality arises when an economic activity imposes costs or creates benefits on third parties for which they are not compensated or do not pay for respectively.

Factors of production

Resources used in the production of goods and services; include land (natural resources), labour, capital and entrepreneurship.

Firm

An entity such as a business that uses factors of production in order to produce and sell goods and services and earn profits. It is an important decision maker in a market economy.

Free goods

Goods such as air or sea water that are not considered scarce and thus do not have an opportunity cost.

Free market economy

An economy where the means of production are privately owned and where market forces determine the answers to the fundamental questions (what/how much, how and for whom) that all economies face.

Human capital

the education, training, skills, experience and good health embodied in the labour force of a country.

Incentive role of prices

Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.

Income

A flow of earnings from using factors of production to produce goods and services. Wages and salaries are the factor reward to labour and interest is the flow of income for the ownership of capital.

Income elasticity of demand (YED)

The responsiveness of demand for a good or service to a change in income.

Indirect taxes

Taxes on expenditure to buy goods and services.

Inferior goods

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.

Joint supply

Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other.

Labour

One of the four factors of production that refers to the physical and mental contribution of workers to the production process.

Laissez faire

The view that if market forces are left alone unimpeded by government intervention the outcome will be efficient.

Land

One of the four factors of production that refers to the natural resources with which an economy is endowed; also referred to as "gifts of nature".

Law of demand

A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus.

Law of supply

A law stating that as the price of a good rises, the quantity supplied will rise over a certain period of time, ceteris paribus.

Luxury goods

Goods that are not considered essential by consumers therefore they have a price elastic demand (PED > 1), or income elastic demand (YED > 1).

Marginal benefit

The extra or additional benefit enjoyed by consumers that arises from consuming one more unit of output.

Marginal costs

The extra or additional costs of producing one more unit of output.

Marginal social benefit (MSB)

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

Marginal social cost (MSC)

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

Marginal utility

The extra or additional utility derived from consuming one more unit of a good or service.

Market

Any arrangement where buyers and sellers interact to carry out an economic transaction.

Market demand

The sum of the individual demand curves for a product of all the consumers in a market.

Market equilibrium

In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.

Market failure

The failure of markets to achieve allocative efficiency. Markets fail to produce the output at which marginal social benefits are equal to marginal social costs; social or community surplus (consumer surplus + producer surplus) is not maximized.

Market share

The percentage of total sales in a market accounted for by one firm.

Market supply

The horizontal sum of the individual supply curves for a product of all the producers in a market.

Maximum price

A price set by a government or other authority that is below the market equilibrium price of a good or service, also known as a price ceiling.

Merit goods

Goods or services considered to be beneficial for people that are under-provided by the market and so under-consumed, mainly due to positive consumption externalities.

Microeconomics

The study of the behaviour of individual consumers, firms, and markets and the determination of market prices and quantities of goods, services, and factors of production.

Minimum wage

A type of price floor where the wage rate or the price of labour is set above the market equilibrium wage rate.

Mixed economy

An economy that has elements of a planned economy and elements of a free market economy. In reality, all economies are mixed. What is different is the degree of the mix from country to country.

Natural monopoly

A monopoly that can produce enough output to cover the entire needs of a market while still experiencing economies of scale. Its average costs will therefore be lower than those of two or more firms in the market.

Necessity

The degree to which a good is necessary or essential. If the increase in demand for a necessity good is less than proportional to the rise in income; then the necessity good is income elastic. If the change in quantity demanded for a necessity good is less than proportional to a change in price; then the necessity good is price inelastic.

Negative externalities of consumption

Negative effects suffered by a third party whose interests are not considered when a good or service is consumed, so the third party are therefore not compensated.

Negative externalities of production

Negative effects suffered by a third party whose interests are not considered when a good or service is produced, so the third party are therefore not compensated.

Non-excludable

A characteristic of a good, service or resource where it is impossible to prevent a person, or persons, from using it.

Non-rivalrous

A characteristic of some goods such that their consumption by one individual does not reduce the ability of others to consume them. It is a characteristic of public goods.

Normal goods

A good where the demand for it increases as income increases.

Normal profit

The minimum return that must be received by a firm in order to stay in business. A firm earns normal profit when total revenue is equal to total cost, or when average revenue or price is equal to average cost.

Normative economics

Deals with areas of the subject that are open to personal opinion and belief, thus not subject to refutation.

Opportunity cost

The next best alternative foregone when an economic decision is made.

Perfectly elastic demand / supply

Occurs with a horizontal demand curve signifying that any amount can be bought at a particular price. (PED is infinite.)

Perfectly inelastic demand / supply

Where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED is equal to zero.)

Planned economy

An economy where the means of production (land and capital) are owned by the state. The state determines what/how much to produce, how to produce, and for whom to produce.

Positive externalities of consumption

The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is consumed, therefore they do not pay for the benefits they receive.

Positive externalities of production

The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is produced, therefore they do not pay for the benefits they receive.

Price ceiling (maximum price)

A price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Price controls

Prices imposed by an authority, set above or below the equilibrium market price.

(Price) elastic demand

Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service in the opposite direction. (PED is greater than one.)

Price elasticity of demand (PED)

A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

Price elasticity of supply (PES)

A measure of the responsiveness of the quantity supplied of a good or service to a change in its price.

(Price) elastic supply

Where a change in the price of a good or service leads to a proportionately larger change in the quantity supplied of the good or service in the same direction. (PES is greater than one.)

Price expectations

The forecasts or views that consumers or firms hold about future price movements that play a role in determining demand.

Price floor

(minimum A price imposed by an authority and set above the market price) Prices cannot fall below this price.

(Price) inelastic demand

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction. (PED is less than one.)

(Price) inelastic supply

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity supplied of the good or service in the same direction. (PES is less than one.)

Price mechanism

The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.

Producer surplus

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

Production possibilities curve (PPC)

A curve showing the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

Public goods

Goods or services that have the characteristics of non-rivalry and non-excludability, for example, flood barriers.

Quantity demanded

The quantity of a good or service demanded at a particular price over a given time period, ceteris paribus.

Quantity supplied

The quantity of a good or service supplied at a particular price over a given time period, ceteris paribus.

Rationing

A method used to divide or apportion goods and services or resources among the various interested parties.

Resource allocation

Apportioning available resources or factors of production to particular uses for production purposes.

Revenues

Payments received by firms when they sell their output.

Rivalrous

Goods and services are considered to be rivalrous when the consumption by one person, or group of people, reduces the amount available for others.

Scarcity

The limited availability of economic resources relative to society's unlimited needs and wants of goods and services.

Shortage

Arises when the quantity demanded of a good or services is more than the quantity supplied at some particular price.

Social/community surplus

The sum combination of consumer surplus and producer surplus.

Subsidies

An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers.

Substitutes

Goods that can be used in place of each other, as they satisfy a similar need.

Supply

Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.