Microeconomics upto government interventions

allocative efficiency

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers. The condition for allocative efficiency is given by MSB = MSC (marginal social benefit = marginal social cost) or P = MC (price is equal to marginal cost); alternatively it is when social surplus is maximum.

allocative inefficiency

The absence of allocative efficiency; when MSB ≠ MSC (or P ≠ MC).

anchoring

Part of behavioural economics, involves the use of irrelevant information to make decisions, which often occurs due to its being the first piece of information that the consumer happens to come across

asymmetric information

A type of market failure where buyers and sellers do not have equal access to information, usually resulting in an underallocation of resources to the production of goods and services, as parties to a transaction with less access to information try to protect themselves against the consequences of the information asymmetry.

availability

A term from behavioural economics, refers to use of information that is most recently available, which people tend to rely on more heavily, though there is no reason that this information is any more reliable than previously available information.

behavioural economics

A relatively new branch of economics strongly influenced mainly by psychology, but also by sociology and neuroscience based on the idea that human behaviour is far more complex than the assumptions of rational consumer choice.

biases

A terms from behavioural economics, it is a term from psychology that refers to systematic errors in thinking or evaluating; examples include rules of thumb, anchoring, framing, availability.

bounded rationality

Part of behavioural economics, it is the idea that consumers are rational only within limits, as consumer rationality is limited by consumers’ insufficient information, the costliness of obtaining information, and the limitations of the human mind to process large amounts of information

bounded self-control

Part of behavioural economics, it is the idea that people in reality exercise self-control only within limits, lacking the self-control required of them to make rational decisions

bounded selfishness

Part of behavioural economics, it is the idea that people are selfish only within limits; the assumption of self-interested behaviour of the rational consumer cannot explain the numerous accounts of selfless behaviour.

capital

One of the factors of production, which itself has been produced (it does not occur naturally), also known as ‘physical capital’, including machinery, tools, equipment, buildings, etc. Other types of capital include ‘human capital’, or the skills, abilities, knowledge and levels of good health acquired by people; ‘natural capital’, or everything that traditionally has been included in the factor of production ‘land’; and ‘financial capital’, or purchases of financial instruments such as stocks and bonds.

ceteris paribus

A Latin expression meaning ‘other things being equal’; all other variables other than those under investigation are assumed to be constant or unchanging.

change

One of the key concepts of this course; change is important in economics in the study of both economic theory as well as in real world events. One of the key concepts of this course

choice

One of the key concepts of this course; economics is a study of choices, or selecting among alternatives, due to the scarcity of resources. One of the key concepts of this course

choice architecture

A term in behavioural economics, it is the design of particular ways or environments in which people make choices, based on the idea that consumers make decisions in a particular context and that choices of decision-makers are influenced by how options are presented to them.

circular economy

The idea that goods should be produced in such a way that they can be repaired rather than thrown out; they would be made out of biological materials so that once discarded they can go back to the biosphere and prevent pollution of the planet.

circular flow of income

A flow of income in an economy where the value of output produced is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output (see circular flow of income model).

circular flow of income model

A model showing the flow of resources from consumers (households) to firms, and the flow of products from firms to consumers, as well as money flows consisting of consumers’ income arising from the sale of their resources and firms’ revenues arising from the sale of their products.

classical economics

Economic ideas of the nineteenth century; a main feature was the idea that markets working on their own according to the principles of supply and demand could solve all major economic problems, including unemployment and recession, and allocate resources efficiently.

common pool resources

Resources that are not owned by anyone, do not have a price, and are available for anyone to use without payment (for example, lakes, rivers, fish in the open seas, open grazing land, the ozone layer and many more); their depletion or degradation leads to environmental unsustainability.

consumer confidence

A measure of the degree of optimism of consumers about their future income and the future of the economy; it is measured on the basis of surveys of consumers. Is an important determinant of the consumption component of aggregate demand.

Community surplus/Social surplus

Consumer nudge/nudge

consumer surplus

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by consumers up to quantity purchased.

costs of production

Payments by firms to obtain and use factors of production in their production process.

default choice

A term in behavioural economics; it is a choice that is made by default, which means doing the option that results when one does not do anything.

demand

Indicates the various quantities of a good that consumers (or a consumer) are willing and able to buy at different possible prices during a particular time period at a particular place, ceteris paribus (all other things being equal).

demand curve

A curve showing the relationship between the price of a good and the quantity of the good demanded, ceteris paribus (all other things equal); see demand.

economics

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

efficiency

One of the key concepts of this course; involves making the best possible use of scarce resources to avoid waste; may refer to producing at the lowest possible cost, or producing what consumers mostly want (see allocative efficiency).

elastic

Refers to a high responsiveness of a variable (such as quantity demanded) to a change in another variable (such as price or income); see various elasticities.

elasticity

In general, this is a measure of the responsiveness or sensitivity of a variable to changes in any of the variable’s determinants. See specific elasticities: price elasticity of demand, income elasticity of demand, price elasticity of supply

Engel curve

A curve that shows the relationship between consumer income and demand for a product; indicates whether a good is normal or inferior

entrepreneurship

One of the factors of production, involving a special human skill that includes the ability to innovate by developing new ways of doing things, to take business risks and to seek new opportunities for opening and running a business. Entrepreneurship organises the other three factors of production (land, labour and capital) and takes on the risks of success or failure of a business.

equality

he state of being equal with respect to something; income equality means everyone receives the same income. One of the key concepts of this course

equilibrium

A state of balance such that there is no tendency to change

equilibrium price

The price determined in a market when quantity demanded is equal to quantity supplied, and there is no tendency for the price to change; it is the price that prevails when there is market equilibrium.

equilibrium quantity

The quantity that is bought and sold when a market is in equilibrium, i.e. when quantity demanded is equal to quantity supplied.

equity

One of the key concepts of this course; is the condition of being fair or just; should be contrasted with the term ‘equality’. Often used in connection with income distribution, in which case it is usually interpreted to mean income equality (though this is only one possible interpretation of equity). One of the key concepts of this course

excess demand

In the context of demand and supply, occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good; see shortage.

excess supply

In the context of demand and supply, occurs when the quantity of a good demanded is smaller than the quantity supplied, leading to a surplus; see surplus.

factors of production

All resources, or inputs (land, labour, capital, entrepreneurship) used to produce goods and services.

firm

A business involved in production of goods or services; a key decision-maker in a market economy

for whom to produce

One of the three basic economic questions; refers to the choice that must be made in response to the question of income or wealth distribution among a population

framing

A term from behavioural economics, it deals with how choices are presented to decision-makers; for example, consumers might be willing to pay a higher price for a faded pair of jeans in a boutique than for the identical pair of jeans in a discount store.

free good

Any good that is not scarce, therefore has a zero opportunity cost.

free market economy

An ‘ideal type’ of economy based on the market approach to making economic decisions; involve private sector ownership and decision-making, and price rationing; to be contrasted with a planned economy.

free trade

The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions (or barriers) between individuals or firms in different countries.

growth maximisation

One possible goal of firms, involving the objective to make the growth of the firm as high as possible

household

A consumer or group of consumers (such as a family) that buys goods and services for its own use; a key decision-maker in a market economy.

how to produce

One of the three basic economic questions; refers to the choice that must be made in response to the question of what combinations of resources and what types of technologies to use in order to produce goods and services.

human capital

The skills, abilities and knowledge acquired by people, as well as good levels of health, all of which make them more productive; considered to be a kind of ‘capital’ because it provides a stream of future benefits by increasing the amount of output that can be produced in the future.

incentive function of price/prices as incentives.

The ability of prices, and changes in prices, to convey information to consumers and producers that motivates them to respond by offering them incentives to behave in their

income

(i) the money people receive from their employment as well as other sources including interest from savings accounts and holdings of bonds, rents from property, pensions, etc; (ii) in the current account of the balance of payments, refers to inflows of all income (mainly interest and profits) earned abroad minus the same income factors that are sent abroad.

income effect

Part of an explanation of the law of demand; as price falls real income increases causing the consumer to buy more of the good (the other part is the substitution effect).

income elastic demand

Relatively high responsiveness of demand to changes in income; YED (income elasticity of demand) > 1. See income elasticity of demand.

income elasticity of demand

A measure of the responsiveness of demand to changes in income; measured by the percentage change in quantity demanded divided by the percentage change in price.

income inelastic demand

Relatively low responsiveness of demand to changes in income; YED (income elasticity of demand) < 1. See income elasticity of demand.

indirect taxes

Taxes levied on spending to buy goods and services, called indirect because, whereas payment of some or all of the tax by the consumer is involved, they are paid to the government authorities by the suppliers (firms), that is, indirectly.

inelastic

Refers to a low responsiveness of a variable (such as quantity demanded) to a change in another variable (such as price or income); see various elasticities.

inequality (unequal)

The absence of equality.

inequity (inequitable)

The absence of equity, when something is not equitable or fair.

inferior good

A good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases

interdependence

One of the key concepts of this course; refers to the idea that economic decisionmakers interact with and depend on each other; arises from the fact that no one is self-sufficient. One of the key concepts of this course

intervention

One of the key concepts of this course; typically refers to government intervention, meaning that the government becomes involved with the workings of markets.

labour

A factor of production, which includes the physical and mental effort that people contribute to the production of goods and services.

land

A factor of production which includes all natural resources: land and agricultural land, as well as everything that is under or above the land, such as minerals, oil reserves, underground water, forests, rivers and lakes. Natural resources are also called ‘gifts of nature’ or ‘natural capital’.

law of demand

A law stating that there is a negative relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good demanded falls (and vice versa)

law of diminishing marginal utility

A law stating that as consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed, therefore consumers will buy more only if price falls; this underlies the law of demand.

law of supply

A law stating that there is a positive relationship between the price of a good and quantity of the good supplied, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases (and vice versa).

leakages

In the circular flow of income model, refers to the withdrawal from the income flow of funds corresponding to savings, taxes or imports.

logic

A method of reasoning which involves making a series of statements each of which is true if the preceding statement is true.

luxury goods

Goods that are not necessary or essential; they have a price elastic demand (PED>1) and income elastic demand (YED>1). To be contrasted with necessities

mandated choice

A term from behavioural economics, it is a choice between alternatives that is made mandatory (compulsory) by the government or other authority; required choice.

manufactured products

goods produced by labour usually working together with capital as well as raw materials, such as for example cars, computers and televisions.

margin/marginal

Means extra or additional; is used in a number of contexts in economics, including marginal utility, marginal benefit, marginal cost, marginal product, marginal revenue, marginal tax rate.

marginal benefit

The extra or additional benefit received from consuming one more unit of a good.

marginal cost

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

marginal social benefits (MSB)

The extra or additional benefits to society of consuming one more unit of a good; are equal to marginal private benefits (MPB) when there are no consumption externalities

marginal social costs (MSC)

The extra or additional costs to society of producing one more unit of a good; are equal to marginal private costs (MPC) when there are no production externalities.

marginal utility (MU)

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

market

Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange

market demand

Refers to the sum of all individual consumer demands for a good or service.

market equilibrium

Occurs where quantity demanded is equal to quantity supplied, and there is no tendency for the price or quantity to change.

market failure

Occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society. Market failure results in allocative inefficiency, where too much or too little of goods or services are produced and consumed from the point of view of what is socially most desirable.

market share

Refers to the percentage of total sales in a market that is earned by a single firm; it may be a goal of some firms to maximise market share, or to make it as large as possible.

market supply

Refers to the sum of all individual firm supplies of a good or service.

maximum price/price ceiling

A maximum price set by the government for a particular good, meaning that the price that can be legally charged by the sellers of the good cannot be higher than the legal maximum price. Results in a shortage of the product.

merit goods

Goods that are held to be desirable for consumers, but which are underprovided by the market. Reasons for underprovision are usually that the goods have positive consumption externalities; in addition, consumers with low incomes may be unable afford them (and so do not demand them), or there is consumer ignorance about the benefits of the goods.

microeconomics

The branch of economics that examines the behaviour of individual decisionmaking units, consumers and firms; is concerned with consumer and firm behaviour and how their interactions in markets determine prices in goods markets and resource markets

Minimum price/price floor

A minimum price set by the government for a particular good, meaning that the price that can be legally charged by the sellers of the good cannot be lower than the legal minimum price. Results in a surplus of the product

minimum wage

A minimum price of labour (the ‘wage’) set by governments in the labour market, in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services. It is a type of price floor.

model

A simplified representation of something in the real world, showing only the important aspects of the real world being investigated, ignoring unnecessary details.

necessities

Goods that are necessary or essential: they have a price inelastic demand (PED<1) and income inelastic demand (YED<1). To be contrasted with luxuries

price determinants of demand/non-price determinants of demand

The variables (other than price) that can influence demand, and that determine the position of a demand curve; a change in any determinant of demand causes a shift of the demand curve

price determinants of supply/non-price determinants of supply

The variables (other than price) that can influence supply, and that determine the position of a supply curve; a change in any determinant of supply causes a shift of the supply curve.

normative economics

The body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be. Normative statements cannot be true or false; they cannot be refuted, they can only be assessed relative to beliefs and value judgements. Normative economics forms the basis of economic policies; to be contrasted with positive economics.

nudge

Part of behavioural economics, it is a method designed to influence consumers’ choices in a predictable way, without offering financial incentives or imposing sanctions, and without limiting choice.

opportunity

A set of circumstances making it possible for someone to do something.

opportunity cost

The value of the next best alternative that must be given up or sacrificed in order to obtain something else