Microeconomics Definitions

Demand

Demand

The amount of good/service that consumers are willing and able to purchase at a given price in a given period of time

Law of Demand

there is an inverse relationship between price and quantity demanded, ceteris paribus

Market Demand

the combination of all the individual demand for a good/service

Supply

The amount of a good/service that producers are willing and able to supply at a given price at a given time period

Law of Supply

price and quantity supplied have a positive relationship, ceteris paribus

Producer subsidy

an amount of money paid to the firm by the government for each unit produced

Joint Supply

Occurs when the supply of 2 goods stem from the same source (beef and leather)

Market

a place that brings producers and consumers together to exchange goods and services

consumer sovereignty

the economic power exerted by the consumers in a market

Equilibrium

in a market occurs when demand = supply

Disequilibrium

in the market occurs whenever there is excess demand/ supply in a market, demand =/= supply

The Price Mechanism

the interaction of demand and supply in a free market. this interaction determines prices which are means by which scarce resources are allocated between competing goods and service.

Consumer surplus

the difference between the amount the consumer is willing to pay for a product and the price they paid (between the demand curve and price to equilibrium line)

producer surplus

the difference between the amount the producer is willing to sell a product for and the price they actually sell it at (between the supply cure and the price to equilibrium line)

allocative efficiency

Occurs at an output level where marginal utility (marginal benefit MB) is equal to marginal cost MC; Resources are allocated so consumers and producers receive maximum possible benefit, no excess demand or supply. (Pareto efficiency, no one can be made better off without making someone else worse off)

Productive efficiency

occurs at an output level where average costs are minimized, there is no wastage of scarce resources and a high level factor productivity

Price Elasticity of Demand

shows how responsive the change in quantity demanded is a change in price

Total Revenue Rule

In order to maximize revenue firms should increase the price of products that are price inelastic and decrease the price of products that are price elastic

Price discrimination

charging different customers different prices for the same product due to different PEDs

Merit goods

goods/service that are beneficial to society but free market does not produce enough of.

Demerit Goods

goods/service that detrimental to society and free market produces too much of it

Income elasticity of demand

how responsive the change in quantity demanded is to a change in income

Price Elasticity of Supply

how responsive the change in quantity demanded is to a change in price

Privatization

the act of transferring an asset from public to private ownership and control

expropriation

taking possession of private property

Progressive tax system

a system that applies higher levels of income tax to higher levels of income

welfare benefits

money paid by the government to people who are ill, poor, or unemployed

Indirect Tax

tax paid on the consumption of goods/ services

specific tax

a fixed tax per unit of output

Ad Valorem Tax

a tax that is a percentage of the purchase price

Subsidies

a producer subsidy is per unit amount of money given to a firm by the government to increase production and or increase the provision of a merit good

price ceilling

a maximum price of a good/service set by the government below the existing free market equilibrium price and sellers cannot legally sell the good/service at a higher price

Price floor

a minimum price of a good/service set by the government above the existing free market equilibrium price and sellers cannot legally sell the good/service for less

Market Failure

when there is a lack of allocative efficiency from the POV of society. Market failure can occur despite the price mechanism

Externalities

externa impacts on a third party not involved in the economic transition between the producer and consumer

Marginal Private Benefit (MPB)

The additional benefit received from the consumption or production (output) of one additional unit of output

Marginal Social Benefit (MSB)

The benefit to society received from the consumption or production (output) of one additional unit of output. It is the sum of the private benefits plus the external benefits

Marginal Private Cost

The additional cost incurred through the consumption or production (output) of one additional unit of output

Marginal Social Cost

The cost to society incurred through the consumption or production of one additional unit of output. It is the sum of the private costs plus the external costs

Socially Optimum Output

The socially optimum output occurs at the level of output where the marginal social benefit (MSB) = marginal social cost (MSC)

Entrepreneurship

the ability to innovate by developing new methods, organizes the 3 other factors of production

Capital

man made factor of production, something that was itself produced eg. machinery; Resources that can produce a future stream of benefits

Labour

human input, the physical and mental effort contributed by people to the production of goods and services

Free good

any good that is not scarce and therefor has no opportunity cost

economic good

a good that is scarce and therefor has an opportunity cost of its consumption