Micro-Economics key terms/definitions

consumer surplus

When a consumer pays less for a good than they were prepared to.

producer surplus

When producers receive more for a good than they were prepared to accept.

Demerit good

A good or service that has greater social costs than private costs. (External costs will be positive)

Merit good

A good or service which provides greater social benefits than private benefits.

Derived demand

The demand for a good or factor of production due to its use in making another good or service.

Joint supply

When the production of one good automatically produces another good as a byproduct from the same raw material/production.

Joint/complementary demand

When two or more goods are demanded together in order to satisfy a single want or need

Elastic demand

PED>1: Quantity demanded changes proportionally more than the change in price

Inelastic demand

PED<1: Quantity demanded changes proportionally less than the change in price

Income elasticity of demand

The responsiveness of demand relative to change in income

Normal good

0<YED<1: Demand will rise for normal goods when incomes rise.

Inferior good

YED<0: Demand will fall for inferior goods when income rises

Luxury goods

YED>1: Demand rises as income rises

Cross price elasticity of demand

The responsiveness of demand for one good following a change in the price of another.

Substitutes

Goods

Complementary goods

Goods with a negative XED

Utility

The satisfaction gained from consuming a good or service

Total utility

The total satisfaction derived from consumption

Marginal utility

The additional satisfaction gained from consuming one more unit

Diminishing marginal utility

As consumption increases, the additional satisfaction from each extra unit falls.

Rational consumer

A consumer who looks to maximise their utility given their budget constraint

Marginal cost

The additional cost of producing one more unit

Productive efficiency

Production at the lowest possible cost

Market failure

When the free market fails to allocate resources efficiently.

Allocative efficiency

When the price of a good is equal to the price consumers are happy to pay for it.

Dynamic efficiency

Efficiency achieved through innovation and investment over time.

Pareto efficiency

A situation where nobody can be made better off without making someone else worse off.

Externality

A spillover effect affecting third parties not directly involved in production or consumption.

Negative externality

A harmful effect on third parties

Positive externality

A negative effect on third parties

Net social costs

Private costs + External costs

Net social benefit

Private benefit + External benefit

Divergence

When private/social costs/benefits differ

Informational failure

Consumers or producers possess imperfect information.

Asymmetric information

When buyers have more information than sellers and vice versa.

Moral Hazard

Risk-taking behaviour arising because individuals do not bear full consequences.

Adverse selection

When information asymmetry causes undesirable market outcomes.

Public good

A good that is non-excludible and cannot be prevented from consuming

Quasi-public good

A good which appears to have the characteristics of a public good, but doesn't fully exhibit them

Indirect tax

A tax imposed on spending or production that can be transferred to consumers via price increase

Direct tax

A tax imposed directly on income that cannot be transferred

Specific tax

A fixed tax per unit of output

Ad Valorem tax

A percentage tax on price

Subsidy

Government payment to reduce costs of production for a business

Government failure

When intervention worsens resource allocation

Market distortions

Any factor that prevents prices from accurately reflecting the true costs and benefits of production and consumption.

Welfare loss

The loss of economic welfare from allocative inefficiency

Dead-weight welfare loss

The value of lost transactions that would have benefited consumers and producers but do not occur due to market distortions.

Resource Misallocation

When scarce resources are not directed towards their most valued use in society.

Product differentiation

The process of making a product appear distinct from competitors' products.

Contestability

How easily firms can enter and leave the market

Marginal social cost

The full cost to society of producing one additional unit of a good.

Marginal social benefit

The full benefit to society from consuming one additional unit of a good.

Marginal private cost

The cost directly incurred by producers when producing one extra unit.

Marginal private benefit

The benefit received directly by consumers from consuming one additional unit of a good or service.