Microeconomics Yr 13 Key Terms

Command Economy

All factors of production are allocated by the state, so they decide what, how and for whom to produce goods

Ad Valorem tax

An indirect tax imposed on a good where the value of the tax is dependent on the value of the good, e.g. VAT

Asymmetric information

Where one party has more information than the other, leading to market failure

Capital

One of the four factors of production; goods that can be used in the production process

Capital goods

Goods produced in order to aid production of consumer goods in the future

Complementary goods

Negative XED; if price of good A rises, demand for good B falls in proportion

Consumer goods

Goods bought and demanded by households and individuals

Consumer surplus

Difference between the price the consumer is willing to pay and the price they actually pay

Cross Elasticity of Demand (XED)

Responsiveness of demand for one good to a change in the price of another (%change in P of good A/ %change in D for good B)

Demand

The quantity of a good or service that consumers are willing and able to buy at a given price at a given point in time

Diminishing Marginal Utility

The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downwards sloping

Division of Labour

When labour becomes specialised during the production process; workers do a specific task in cooperation with other workers/ tasks, like an assembly line

Economic Problem

Scarcity; infinite needs and desires but finite resources, so choices have to be made

Efficiency

When resources are allocated optimally, so every consumer benefits and waste is minimised

Enterprise

One of four factors of production; willingness to take risks/ innovate

Equilibrium price/ quantity

Where demand equals supply so there are no more market forces bringing about change to price or quantity sold

Excess demand

When demand outweighs supply as prices are set too low

Excess supply

Supply outweighs demand as prices are set too high

Externalities

The cost/ benefit of an economic transaction to a third party outside of the market mechanism

External cost/ benefit

The cost/ benefit to a third party not involved in the economic activity; the difference between social cost/ benefit and private cost/ benefit

Free market

Market mechanism allocates resources so consumers and producers make rational decisions about what is produced, how to produce it and for whom; no government intervention in the free market

Free rider principle

People who do not pay for a public good still benefit from it, so the private sector (profit motivated) will under-provide the good

Government Failure

When government intervention leads to a net welfare loss in society

Habitual behaviour

A cause of irrational behaviour; when consumers are in the habit of making certain decisions

Incidence of tax

The tax burden on the taxpayer

Income elasticity of demand (YED)

The responsiveness of demand to a change in income (%change in Y/ %change in D)

Indirect tax

Taxes levied on goods and services which increase production and leads to a fall in supply, although this is often partially, or fully, passed onto consumers

Inferior goods

YED<0 (elastic); goods which see a fall in demand as income increases

Information gaps

When an economic agent lacks the information needed to make a rational, informed decision

Labour

One of the four factors of production; human capital

Land

One of the four factors of production; natural resources such as oil, coal, wheat and physical space

Luxury goods

YED>1 (inelastic); an increase in income causes an even bigger increase in demand

Market failure (2)

When the free market fails to allocate resources to the best interest of society, so there is an inefficient allocation of scarce resources

Market forces

Forces in free markets which act to reduce prices where there is excess supply and increase them when there is excess demand

Minimum price

A floor price which a firm cannot charge below. Often leads to producer surplus, placers above equilibrium

Mixed economy

Both the free market mechanisms and the government allocate resources

Model

A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words

Negative externalities of production

Where marginal social costs outweigh marginal private costs when producing a good

Non-excludability

Characteristic of public goods; someone cannot be prevented from using the good

Non-renewable resources

Resources with a finite supply - cannot be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed

Non-rivalry

Another characteristic of public goods; one person’s use of the good doesn’t prevent someone else from using it

Normal goods

YED>0 (inelastic); demand increases as income increases (necessities, e.g diapers, medicine, etc.)

Normative statements

Subjective statements based on value judgements and opinions, cannot be proven or disproven

Opportunity cost

Value of the next best alternative forgone

Perfectly Price Elastic

PED/ PES = infinity; quantity demanded/ supplied falls to 0 when price changes

Perfectly price inelastic good

PED/ PES = 0; quantity demanded/ supplied does not change when price changes

Positive externalities of consumption

Where the social benefits of consuming a good are larger than the private benefits of consuming that good

Positive statements

Objective statements which can be tested with factual evidence to be proven or disproven

Possibility Production Frontier (PPF)

Depicts the maximum productive potential of an economy, using a combination of two goods or services

Price Elasticity of Demand

The responsiveness of demand to changes in price (%change in D/ %change in P)

Price Elasticity of Supply

The responsiveness of supply to changes in price

Price Mechanism

System of resource allocation based on the free market movements of prices, determined by the demand and supply curves

Private cost/ benefit

The cost/ benefit to the individual participating in the economic activity

Private Goods

Goods that are rivalry and excludable

Producer surplus

The difference between the price the producer is willing to charge vs the price they actually charged

Public goods

Non-excludable, non-rivalry, non-rejectable and have zero marginal cost

Rationality

Decision-making that leads to economic agents maximising their utility

Regulation

Laws to address market failure and promote competition between firms

Relatively price elastic good

PED/ PES >1; demand/ supply is relatively responsive to a change in price so a small change in price leads to a large change in the quantity demand/ supplied

Relatively price inelastic good

When PED/PES <1; demand/supply is relatively unresponsive to a change in price

Renewable resource

Resources which can be replenished, so the stock of resources can be maintained over a period of time

Social cost/ benefit

The cost/ benefit to society as a whole due to the economic activity

Social optimum position

Where social cost equals social benefits; the amount which should be produced/ consumed in order to maximise social welfare

Specialisation

The production of a limited range of goods by a company/ country/ individual so they aren’t self-sufficient and have to trade with others

Specific tax

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought

State provision

When the government provides public goods or merit goods which are under-provided in the free market

Subsidy

Government payments to a producer to lower their cost of production and encourage them to produce more

Substitutes

Positive XED; if the price of good B rises, demand for good A rises

Supply

The ability and willingness to provide particular goods/ services at a given price at a given point in time

Symmetrical information

Where buyers and sellers both have access to the same information

Tradable Pollution Permits

Licenses which allow businesses to pollute up to a certain amount (set by the gov.) The gov controls the number of licenses so it can control the level of pollution. Businesses are allowed to sell and buy the permits which means there may be incentive to reduce the amount they pollute

Unitary Price Elastic Good

PED/ PES = 1; a change in price leads to a change in output by the same proportion

Utility

The satisfaction derived from consuming a good

Weakness at computation

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out costs/ benefits

Allocative Efficiency

When resources are allocated to the best interests of society, where there is maximum social welfare and maximum utility; P = MC

Average cost/ average total cost (AC/ATC)

The cost of production per unit

Average revenue

The price each unit is sold for

Bilateral monopoly

Where there is only one buyer and one seller in the market

Cartels

A formal collusive agreement where firms enter into an agreement to mutually set prices

Collusion

Occurs when firms agree to work together, e.g. by setting a price or fixing the quantity they produce

Competition policy

Government action to increase competition in markets

Competitive tendering

When the government contracts out the provision of a good or service and invites firms to bid for the contract

Conglomerate integration

The merger of firms with no common connection

Constant returns to scale

Output increases by the same proportion that the input increases by

Contestable market

When there is the threat of new entrants into the market, forcing firms to be efficient

Decreasing returns to scale

An increase in inputs by a certain proportion will lead to output increasing by a smaller proportion

Demergers

A single business is broken into two or more businesses to operate on their own, to be sold or to be dissolved

Deregulation

The removal of legal barriers to allow private enterprise to compete in a perviously protected market

Derived demand

The demand for one good is linked to the demand for a related good

Diminishing marginal productivity

If a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal output falls

Diseconomies of scale

The disadvantages that arise in large businesses that reduce efficiency and cause average costs to rise

Divorce of ownership from control

Firms are owned by shareholders, who have little say in the day to day running of the business, and controlled by managers; this leads to the principal-agent problem

Dynamic efficiency

Efficiency in the long-run; concerned with new technology and increases in productivity which cause efficiency to increase over a period of time

Economies of scale

The advantages of large scale production that enables a large business to produce at a lower average cost than a smaller business

External economies of scale

An advantage which arises from the growth of the industry within which the firm operates, independent of the firm itself

Fixed costs

Costs which do not vary with output

For profit businesses

A business whose main aim is to make money

Game theory

Used to predict the outcome of a decision made by one firm, which has incomplete information about the other firm

Geographical mobility of labour

The ease and speed at which labour can move from one area to another

Horizontal integration

The merger of firms in the same industry at the same stage of production