Micro Key Terms

Allocative efficiency

Occurs when the available economic resources are used to produce the combination of g+s that best matches people’s tastes and preferences

Allocative function of prices

Changing relative prices allocate scarce resources away from markets exhibiting excess supply and into markets in which there is excess demand

Artificial barrier to entry

A barrier to market entry which is man made

Average cost

Total cost of production divided by output

Average revenue (AR)

Total revenue divided by output

In a single product firm AR = the price of the product

Capital good

A good which is used in the production of other g/s. Also known as a producer good

Capital productivity

Output per unit of capital

Choice

Choosing between alternatives when making a decision on how to use scarce resources

Collusion

Co-operation between firms, eg to fix prices. Some forms of collusion may be in the public interest, for example joint research and labour training schemes

Competing supply

When raw materials are used to produce one good they cannot be used to produce another good

Competitive market

A market in which the large number of buyers and sellers possess food market information and can easily enter or leave the market. A competitive market is one in which firms strive to outdo their rivals, but it does not necessarily meet all the conditions of perfect competition 

Complementary good

A good in joint demand, or a good which is demanded at the same time as the other good

Composite demand

Demand for a good which has more than one use

Concentrated market

A market continuing very few firms, in the extreme only one firm

Concentration ratio

A ratio which indicates the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output

Condition of demand

A determinant of demand, other than the good’s own price, that fixes the position of the demand curve

Conditions of supply

Determinants of supply, other than the good’s own price, that fix the position of the supply curve

Consumer good

A good which is consumed by individuals or households to satify their needs or wants

Consumer sovereignty

Through exercising their spending power, consumers collectively determine what is produced in a market. Consumer sovereignty is strongest end in a perfectly competitive market

Consumption externality

An externality (which may be positive or negative) generated in the course of consuming a g/s

Cross-elasticity of demand

Measures the extent to which the demand for a good changes in response to a change in the price of another good.

It is calculated by dividing the % change in Q demanded by the % change in the price of another good

Demand

The quantity of a g/s that consumers are willing and able to buy at given prices in a given period of time. For economists, demand is always effective demand

Demerit good

A good, such as tobacco, for which the social costs of consumption exceeds the private costs. Value judgements are involved in deciding that a good is a demerit good

Derived demand

Demand for a good which is an input into the production of another good

Diseconomy of scale

As output increases, lonf run average cost rises

Disequilibrium

A situation in a market when there is excess supply or excess demand

Distribution of income and wealth

The way in which income and wealth are divided among the population

Division of labour

(Works with specialisation) Different workers perform different tasks in the course of producing a good or service

Economic growth

The increase in the potential level of real output the economy can produce over a period of time

Economic welfare

The economic well-being of an individual, a group within society, or an economy

Economy of scale

As output increases, long run average cost falls

Effective demand

The desire for a g/s backed by an ability to pay

Elasticity

The proportionate responsiveness of a second variable to an initial proportionate change in the first variable

Entry barrier

Makes it difficult or impossible for new firms to enter a market

Equilibrium

A state of rest or balance between opposing forces

Equilibrium price

The price at which planned demand for a g/s exactly equals planned supply

Equity

Fairness or justness

Excess demand

When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price

Excess supply

When firms wish to sell more than the consumers wish to buy, with the price above equilibrium price

Exchange

To five something in return for something else received. Money is a medium of exchange

Exit barrier

Makes it difficult or impossible for firms to leave a market

External economy of scale

Cost saving resulting from the growth of the industry or market of which the firm is a part

Externality

A public good, in the case of an external benefit, or a public bad, in the case of an external cost, that is ‘dumped’ on third parties outside the market

Factors of production

Inputs into the production process - capital, enterprise, land, labour

Finite resource

A resource, such as oil, which is scarce and runs out as it is used. Also known as a non renewable resource

Fixed cost

Cost of production which, in the short run, does not change with output

Full employment

When all who are willing and able to work are employed

Fundamental economic problem

How best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare

Geographical immobility of labour

Occurs when workers find it difficult or impossible to move to jobs in other parts of the country or in other countries for reasons such as higher housing costs in locations where the jobs exist

Government failure

Occurs when gov intervention reduces economic welfare, leading to an allocation of resources that is worse than the free-market outcome

Immobility of labour

The inability of labour to move from one job to another, either for occupational reasons (e.g. need for training) or for geographical reasons (e.g. the cost of moving to another part of the country)

Imperfect competition

Any market structure lying between th extremes of perfect competition and pure monopoly

Incentive function of prices

Prices create incentives for people to alter their economic behaviour; for example, a higher price creates an incentive for firms to supply more of a g/s

Income elasticity of demand

Measures the extent to which the demand for a good changes in respons to a change in income; it is calculated by dividing the % change in quantity demand by the % change in income

Inequity

Unfairness or unjustness

Inferior good

A good for which demand decreases as incomes rises and demand increases as income falls

Information problem

Occurs when people make wrong decisions because they don’t possess or ignore relevant information. Very often they are myopic (short sighted) about the future

Informative advertising

Provides consumers and producers with useful information about goods or services

Innovation

Converts the results of invention into marketable products or services

Internal economy of scale

Cost of saving resulting from the growth of the firm itself

Invention

Creates new ideas for products or processes

Joint supply

When one good is produced, another good is also produced from the same raw materials

Labour productivity

Output per worker

Limit pricing

Reducing the price of a good to just above average cost to deter the entry of new firms into the market. Prices are set at levels which are likely to make it unprofitable for potential entrants who might consider coming into the market

Long run

The time period in which no factors of production are fixed and in which all the factors of production can be varied

Long-run average cost

Long run total cost divided by the output

Long-run production

Occurs when a firm changes the scale of all the factors of production

Market demand

The quantity of a g/s that all the consumers in a market are willing and able to buy at different market prices

Market disequilibrium

Exists at any price other than the equilibrium price. When the market is in disequilibrium, wither excess demand or excess supply exists in the market

Market equilibrium

When planned demand equals planned supply in the market

MArket failure

When the market mechanism leads to a misallocation of resources in the economy, either completely failing to provide a g/s or providing the wrong quantity

Market share maximisation

Occurs when a firm maximises its percentage share of the market in which it sells its products

Market structure

The organisation of a market in terms of the number of firms in the market and the ways in which they behave

Market supply

The quantity of a good or service that all firms plan to sell at any given prices in a given period of time

Merit good

A good, such as healthcare, which when consumed leads to benefits which other people enjoy, or a good for which the long term benefit of consumption exceeds the short term benefit enjoyed by the person consuming the merit good. Value judgements are involved in deciding that a good is a merit good

Missing market

A situation in which there is no market because the functions of prices have broken down

Monopoly power

The power of a firm to act as price maker rather than as a price taker

Natural barrier to entry

A barrier to market entry which is not man-made

Natural monopoly

The term has two meanings, first when a country or firm has complete control of a natural resource, and second when there is only room in a market for one firm benefiting from economies of scale to the full

Need

Something that is necessary for human survival, eg food, clothing, warmth or shelter

Negative externality

Same as an external cost, occurs when the consumption or production of a good causes costs to a third party, where the social cost is greater than the private cost

Normal good

A good for which demand increases as income rises and demand decreases as income falls

Normative statement

A statement that includes a value judgement and cannot be refuted just by looking at the evidence

Occupational immobility of labour

Occurs when workers find it difficult or impossible tom move between jobs because they lack or cannot develop the skills required for the new jobs

Oligopoly

A market dominated by few firms

Opportunity cost

The next best alternative given up when making a choice

Patent

A strategic or man made barrier to market entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good, unless the firm grants royalties for other firms to produce the good

Perfect competition

A market which displays the six conditions of:

* a large number of buyers and sellers
* perfect market information
* the ability to buy and sell as much as is desired at the ruling marker price


* the inability of an individual buyer or seller to influence the market price
* a uniform or homogenous product
* no barrier to entry or exit in the long run

Persuasive advertising

Attempts to persuade potential customers that a g/s possesses desirable characteristics that make it worth buying

Positive externality

Same as external benefit, occurs when the consumption or production of a good causes a benefit to a third party where the social benefit is greater than the private benefit

Positive statement

A statement of fact that can be scientifically tested to see if it is correct or incorrect

Predatory pricing

Temporarily reducing the price of a good to below average cost to drive smaller firms or new market entrants out of the market

Price ceiling

A price above which it is illegal to trade. Price ceilings, or maximum legal prices, can distort markets by creating excess demand

Price competition

Reducing the price of a good or service to gain sales by making it more attractive for consumers

Price Elasticity of Demand

Measures the extent to which the demand for a good changes in the response to a change in the price of that good

Price elasticity of supply

Measures the extent to which the supply of a good changes in response to a change in the price of a good

Price floor

A price below which it is illegal to trade. Price floors, or minimum legal prices, can destroy markets by creating excess supply

Price maker

A firm possessing the power to set the price within the market

Price take

A firm which passively accepts the riling market price set by market conditions outside its control

Private good

A good, such as an orange, that is excludable and rival