All Micro Economics Definitions

Economics

Study of how society organises scarce productive resources to satisfy ppl’s unlimited wants

Social Science

Studies Human Behaviour

Economic Agents

Households, firms, government

Ceteris Paribus

The assumption that everything else remains constant

Positive economic statement

Objective statement that can be verified as T/F by using the scientific approach. They as value-free

E.g. An rise in NMW will cause u/e

Normative Economic Statement

Subjective statements that cannot be proven T/F. They are value judgements

E.g. Lowering income tax from 25% to 20% is fair

Economic Problem

Limited resources and unlimited wants meaning decisions have to be made

Scarcity

Finite resources and infinite wants

Needs

Goods necessary for survival (limited)

E.g. water

Wants

Not essential for survival but make life more comfortable (infinite)

E.g. Sports car

Factors of Production

Resources used in the production process

Land, Labour, Capital, Enterprise

Land

All natural resources in the production process

Labour

All workers involved in the production of G+Ss. Involves all human efforts (mental and physical)

Capital

Any man-made aid to production

Enterprise

Person who organises production, identifies projects and undertakes the risk of the activity

Renewable Resources

Rate of Consumption < Rate of Replenishment

Non- renewable resources

Rate of Consumption > Rate of Replenishment

Opportunity Cost

The cost of the next best alternative foregone when a choice is made

Economic Goods

Goods created from resources that are in limited S. They carry a P that reflects their scarcity

Free Goods

Gs w/ unlimited S so consumption by one does not limit consumption by another. They carry a zero-price + no oppo cost in C

Production Possibility Frontier

PPF

Shows max potential output of 2 G+Ss that an econ can achieve when all resources fully and efficiently used (given lvl of tech available)

Trade-off

Capital Goods

Used to produce other G+Ss to incr the future capacity of the econ

Consumer Goods

Directly provides utility to the consumer + are for present use

Productive efficiency

When econ produ G+Ss at lowest possible cost, given existing tech+resources

Specialisation

When an individ, firm, region or country concentrates on the produc of a limited range of G+Ss

Division of Labour

Dividing the production process into a no. of tasks + assigning each worker a specific task

Double Coincidence of Wants

Where both parties want the G/S the other party offers

Medium of Exchange

Store of Value

Measure of Value

Means of Deferred Payment

Free Market Economy

No government intervention, has a price mechanism, privately owned firms

Mixed Economy

Have some resources owned and allocated by private firms yet others govt

Command Economy

Centrally Planned Economy

All FofP except labour is owned by state and labour is directed by the state

Market

Where consumers and producers come into contact with one another to exch. G+Ss. A P is agreed for the exch. to take place

Rational Decision Making

Consumers allocate their inc. to max their utility from the G+Ss they purchase

Firms use their resources to max profits from the G+Ss they produce

Total Utility

Represents the satisfaction gained by a consu as a result of their overall C of a G

e.g. eating a whole bar of chocolate

Marginal Utility

Represents a change in the satisfaction resulting from the c of an extra unit of the G

Demand

The Q of G/Ss consumers are willing and able to purchase at a given P over given period of t

Effective Demand

Consumer willing to buy a G/S, and has the purchasing power to do so

Latent Demand

Consumer willing to buy a G/S, but lacks purchasing power to afford the product

Income Effect

As P decr, consumer has more income left that enables them to buy more goods

Substitution Effect

As P decr, consumers switch to cheaper product away from expensive substitutes, so incr D

Derived D

Joint D

Composite D

Competitive D

Arises due to D for another product

D for goods that are interdependent (Ded together)

D for a good with multiple uses

D for Gs in competition with one another

Diminishing Marginal Utility

As Q consu incr, marginal utility derived from each extra unit decr.

Total utility maximised when MU=0

PED

Measures the responsiveness of demand to a change in P

PED =

%changeQD

---

%changeP

XED

Measures the responsiveness of QD of one G to a change in P of another G

XED =

%changeQD of Good A

---

%changeP of Good B

YED

measures the responsiveness of QD to a change in real inc

YED =

%changeQD

---

%change Real Inc.

Perfectly Inelastic Demand

D does not change at all with a P change

PED = 0

Unitary Elasticity D

Demand responds in the same proportion to a change in P = (-)1

Perfectly Elastic D

D will fall to 0 with a change in P

PED = infinite

Elastic D

D is very responsive to a change in P

PED > 1

Inelastic D

D is not very responsive to a change in P

PED < 1

Normal Good

Incr Inc. = incr D

0<YED<1

Inferior Good

incr inc. = decr D

YED < 1

Luxury Good

incr inc. = bigger %incr D

YED > 1

Supply

The amount of a commodity that firms are willing and able to sell at a given P range in given P of t

Firm

An organisation that brings together FofP in order to produce output

PES

Measures the responsiveness of QS to a change in P

Short-run

At least one of the FofP remains fixed

Long-run

All FofP are variable

Equilibrium

The Price where QD =QS for a G/S in a market

Excess Supply

Where QS exceeds QD for a G/S at the current market P

(Also known surplus or glut)

Excess Demand

Where QD exceeds QS for a G/S at the current market P

(Also known as shortage)

Rationing

When D>S, P incr so the G/S is rationed to only those who can afford it, allowing D to meet S

Incentive

When P incr, gives firms incentive to incr S for profits + vice versa

Signalling

Incr P tells firms D prob high = firms incr production.

Prices used to signify where + how resources allocated.

Consumer Surplus

Diff. btw how much consumers are willing + able to pay and what they actually pay

Producer Surplus

Diff btw amount producers willing + able to sell a G for vs. P actually receive

Economic Welfare

(Community surplus)

Total benefit available to society from an economic transaction or situation

Indirect Taxes

A tax imposed on expenditure. Incr costs to firms + cause S curve shift

Ad valorem taxation

A tax on the % of a product’s P

E.g. VAT

specific taxes

A flat rate tax (set amount / unit)

E.g. 50p per item

Incidence of Tax

How the burden of a tax is distrabuted btw firms + consumers

Depends of elasticity of S and D

Dead weight Loss

A cost to society created by market inefficiency whereby D and S are out of equilibrium

Subsidy

A govt grant to a produ that decr CofP so encges incr production (incr S)

Behavioural Economics

Combines elements of psychology and economics to understand why people behave the way they do

Habitual Behaviour

Frequency of our past behaviours influence our current behaviours

Inertia

Consumers, when purchasing unimportant items, will stick to the same products and product brands w/out making effort to change

Poten due to info overload

Weakness at Computation

When consumers fail to calculate the probability of effects of a purchase

E.g. eating lots of fast food

Market Failure

Occurs when market forces of S and D do not result in an efficient allocation of resources. Arises bc P Mech no take into account all costs+benefits in production+C of G/S

Externalities

Costs/benefits to 3rd parties who were not involved in the initial economic transaction

Private Costs

Costs to the individual. They are internal

External Costs

Harmful effects on a 3rd party who was not involved in the initial transaction

Social Costs

Costs (harmful effects) to society as a whole

social costs = external costs + private costs

Private Goods

Excludable, Rival and rejectable

e.g. new car

Public Goods

non-excludable, non-rival

e.g. street lighting

Non-rivalry

C by one does not limit C by another

Non-excludability

Once G is available to 1, it is impossible to exclude anyone from the C of the G

Free Rider Problem

If G = non excludable, no incentive to pay for the G

Leads to firms not S bc no profit incentive

e.g. fare dodging

Information Gaps

Occurs when consu/produ/govt have insufficient kn to make econ decisions.

Decisions don’t max utility/profit/social welfare

Symmetric Information

Consu + produ have same info abt G/Ss in the market

Asymmetric Information

Consu + produ have unequal info abt a G/S in the market

Indirect Tax

Tax imposed on expenditure. They incr costs to firms (shift S left)

Ad Valorum Tax

tax is a % of the P

Specific Tax

flat rate tax