Microeconomics

Allocative efficiency

The level of output where marginal cost is equal to average revenue. The firm sells the last unit it produces at the amount that it cost to make it. The socially optimum level of output.

Allocative inefficiency

This occurs where the marginal social cost of producing a good is not equal to the marginal social benefit of the good to society.

Common Access resources

Natural resources over which there is no established price ownership, they are non-excludable but rivalrous.

Competitive supply

This exists where products are produced by the same factors of production, and so compete for these resources for their production.

Complements

Goods are used in combination with each other.

Consumer Surplus

The additional benefit received by consumers by paying a price that is lower than they are willing to pay.

Demand

The willingness and ability of consumers to purchase a quantity of a good or service.

Demand curve:

This shows the relationship between the price of a good or service and the quantity demanded. It is normally downward sloping.

Demerit goods

Goods or services considered to be harmful to people that would be over-provided by the market and so over-consumed.

Elasticity

A measure of the responsiveness of something to a change in one of its determinants.

Equilibrium

where the quantity demanded equals the quantity supplied at a specific price

Excess demand (Shortage)

This occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.

Excess supply (surplus)

This occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.

Externalities

External costs or benefits to a third party, when a good or service is produced or consumed.

Factors of production

The four resources that allow an economy to produce its output: land, labour, capital and entrepreneurship.

Free rider problem:

Free rider problem: This occurs when people who benefit from consuming resources, goods, or services do not have to pay for them, which results in overconsumption.

Income effect

Income effect: When a decrease in the price of a good or service means that consumers experience an increase in real income, usually allowing them to purchase more of the product.

Income elasticity of demand (YED)

A measure of the responsiveness of the demand for a good or service to a change in income.

Indirect Taxes

Indirect taxes: These are taxes on expenditure. They are added to the selling price of a good or service.

Inferior goods

Inferior goods: A good where the demand for it decreases as income increases and more superior goods are purchased.

Law of demand

Law of demand: As the price of a good falls, the quantity demanded will normally increase.

Law of Supply

Law of supply: As the price of a good rises, the quantity supplied will normally rise.

Market

Market: A market is where buyers and sellers come together to carry out an economic transaction.

Market equilibrium

Market equilibrium: The point where the quantity of a product demanded is equal to the quantity of a product supplied.

Market failure

The failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.

Market mechanism

Market mechanism: This is the system in which the forces of demand and supply determine the prices of products.

Market Power

Market power: The ability of a firm to raise and maintain price above the level that would prevail under perfect competition.

Market Supply

Market power: The ability of a firm to raise and maintain price above the level that would prevail under perfect competition.

Merit Goods

Merit goods: Goods or services considered to be beneficial for people that would be under-provided by the market and so under-consumed.

Negative externalities of consumption

Negative externalities of consumption: The negative effects that are suffered by a third party when a good or service is consumed.

Negative externalities of production

Negative externalities of production: The negative effects that are suffered by a third party when a good or service is produced.

Opportunity cost

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

Perfect competition

A market structure where there are a very large number of small firms, producing identical products, with no barriers to entry or exit.

Price ceiling

Price ceiling (maximum price): A price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Price controls

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

PED

Price elasticity of demand (PED): A measure of the responsiveness of the quantity demanded of a good or service when there is a change in its price.

PES

Price elasticity of supply (PES): A measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price.

Price Floor

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

Producer surplus

Producer surplus: The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive.

PPC

Production possibility curve (PPC): A curve showing the maximum combinations of goods or services that can be produced by an economy in a given time period.

Profit maximisation

Profit maximisation: Producing at the level of output where profits are greatest: where marginal revenue equals marginal cost.

Public goods

Public goods: Goods or services which would not be provided at all by the market. They have the characteristics of non-rivalry and non-excludability.

Quantity Demanded

Quantity demanded: The willingness and ability to purchase a quantity of a good or service at a certain price over a given time period.

Quantity supplied

The willingness and ability to produce a quantity of a good or service at a given price over a given time period.

Subsidies

Subsidies: Financial support paid by governments to firms.

Substitutes

Goods which can be used in place of each other

Substitution effect

Substitution effect: When the price of a product falls relative to others, there is an incentive to purchase more of it.

Supply

Supply: The willingness and ability of producers to produce a quantity of a good or service.

Supply curve

Supply curve: This shows the relationship between the price of a good or service and the quantity supplied. It is normally upward sloping.

Welfare loss

Welfare loss: A loss of economic efficiency that can occur when equilibrium is not allocatively efficient.

GDP

Gross domestic product (GDP): The total money value of all final goods and services produced in an economy in a given time period.

Real GDP

Real GDP: The total money value of all final goods and services produced in an economy in a given time period, adjusted for inflation.

GDP per capita

GDP per capita: GDP divided by the population of the country.

Circular flow of income

⭐️⭐️ Circular flow of income: A simplified model of the economy that shows the flow of money through the economy.

Injections

Investment, government expenditure and export revenue that add to the circular flow of income.

Leakages

⭐️⭐️ Leakages: Savings, taxes and import expenditure that withdraw from the circular flow of income.

COnsumption

⭐️ Consumption (C): Spending by households on goods and services.

Investment

⭐️ Investment (I): Expenditure by firms on capital goods.

Government spending

⭐️ Government spending (G): Spending by the government on goods and services.

Net exports

Export revenue minus import expenditure

Business cycle

fluctuations in economic activity over time

Scarcity

⭐️⭐️ Scarcity: This is the limited availability of economic resources relative to society’s unlimited demand for goods and services.

Opportunity cost

⭐️⭐️ Opportunity cost: The next best alternative foregone when an economic decision is made.

Factors of production

⭐️⭐️ Factors of production: The four resources that allow an economy to produce its output: land, labour, capital and entrepreneurship.

PPC

⭐️⭐️ Production possibility 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 resources are used fully and efficiently and the state of technology is fixed.

Economic growth

⭐️ Economic growth: The growth of the real value of output in an economy over time.