Microeconomics

Opportunity Cost

The next best alternative forgone when an economic decision is made

Production Possibility Curve (PPC)

A model that shows the maximum combinations of two goods an economy can produce with its available resources and technology, under the assumption that there are full employment and productive efficiency

Demand

The quantity of a good or service that consumers are willing and able to buy at different prices during a specific time period, ceteris paribus

Supply

The quantity of a good or service that firms are willing and able to produce and sell at different prices during a specific time period

Law of Demand

As price decreases, the quantity demanded increases, vice versa, ceteris paribus

Law of Supply

As the price increase, the quantity supplied increase, vice versa, ceteris paribus

Equilibrium

Quantity demanded equals quantity supplied and no further adjustments to price and quantity

Consumer Surplus

The difference between the highest price consumers are willing to pay for a good or service and the actual price

Producer Surplus

The difference between the lowest price producers are willing to provide for a good or service and the actual price

Social Surplus

Total well-being or welfare in an economy generated by a mraket. It is the sum of consumer and producer surplus

Deadweight loss

the loss of total economic efficiency (consumer and producer surplus) that occurs when the free-market equilibrium is not achieved

Price Elasticity of Demand (PED)

A measure of the responsiveness of quantity demanded when there is a price change
PED=(% change in quantity demanded)/(% change in price)

Price Elasticity of Supply

A measure of the responsiveness of quantity supplied when there is a change in price
PES=(% change in quantity supplied)/(% change in price)

Income Elasticity of Demand (YED)

A measure of the responsiveness of quantity demand for change in income
YED=(%% change in quantity demanded)/(% change in income)

Price Ceiling

A maximum price, below the equilibrium price, set by the government for a particular good or service

Price Floor

A minimum price, above the equilibrium price, set by the government for a particular good or service

Indirect Tax

Taxes levied on spending on goods and services. Partly paid by consumers and partly paid by firms.

Subsidy

Monetary and financial aid offered by government to firms or households to lower costs of production or price paid by consumers

Market Failure

Market failure refers to the failure of the market to allocate resources efficiently, when MB=MC

Externality

An externality occurs when the action of consumers or producers give rise to negative or positive side-effects to third parties whose interests are not taken into account within the price mechanism

Public Goods

A good that is both non-rivalrous and non-excludable
Non-rivalrous: when the consumption of a good by one individual does not reduce the consumption of that same good for another individual
Non-excludable: when no one can be excluded from utilising that good

Asymmetric Information

Refers to the situation where buyers and sellers don’t have the same access to information

Adverse Selection

When one of the sides has more knowledge about the quality of the product sold than the other

Moral Hazard

A situation where one party takes a risk but is not responsible for covering all the costs because they are being covered by the other party

Law of Disminishing Return

As more units of variable input are added to fixed inputs, marginal product will increase initially, but there comes a point where marginal product will decrease

Total Product (TP)

Sum of MP or AP*input

Marginal Product (MP)

Change in TP/Change in input

Average Product (AP)

TP/variable input

Explicit Costs

payment made by a firm to outsiders to acquire resources for use in production

Implicit Costs

the opportunity cost of enjoying the resources to produce the goods and services being produce

Fixed Cost (FC)

costs that do not change as the output changes

Variable Cost (VC)

costs which vary as output increases or decreases

Total Cost (TC)

FC+VC

Marginal Cost (MC)

the cost incurred by producing one more unit of product

Marginal Revenue (MR)

the revenue that is made from the sale of an additional unit of product
MR=Change in total revenue/Change in quantity

Average Revenue (AR)

TR/Q

Total Revenue (TR)

P*Q

Profit

TR-TC

Normal Profit

When a firm’s total revenue exactly covers total costs

Abnormal Profit

When a firm’s average revenue is greater than its average costs

Losses

When a firm’s revenue is less than its total costs

Market Power

The degree to which a firm in a market is able to control its output price

Perfect Competition

A market structure with a large number of small firms that have no control over output prices

Monopoly

A market structure with one single dominant firms that has substantial control over output prices