Microeconomics Glossary

Allocative efficiency

Allocative efficiency

When the price of a good is equal to the price that consumers are happy to pay for it. This will happen when all resources are allocated efficiently.

Assymetric information

When buyers have more information than sellers (or the opposite) in a market

Average cost

The cost of production per unit of output

Average revenue

The revenue per unit sold

Barriers to entry/exit

Any potential difficulties that make it hard for a firm to enter/leave a market

Black market

Economic activity that occurs without taxation and government regulation (also called the informal market)

Circular flow of income

Flow of national output, income and expenditure between households and firms

national output = national income = national expenditure

Cross elasticity of demand (XED)

A measure of how the quantity demanded of one good/service responds to a change in the price of another good/service.

Demerit good

A good or service which has greater social costs when consumed than private costs. These tend to be overconsumed.

Deregulation

Removing rules imposed by government that can restrict the level of competition in a market

Derived demand

The demand for a good or factor of production due to its use in making another good or providing a service

Diseconomies of scale

A firm is experiencing this when the average cost of production is rising as output rises.

Economies of scale

A firm is experiencing this when the average cost of production is falling as output rises.

Externalities

The external costs or benefits to a third party that is not involved in the making, buying/selling and consumption of a specific good/service.

Fixed costs

Costs which do not vary with the level of output of a firm in the short run.

Free market

A market where there is no government intervention. Competition between different suppliers affects supply and demand, and as a result determines prices

Free rider problem

Once a public good is provided it’s impossible to stop someone from benefiting from it, even if they haven’t paid towards it

Government failure

When government intervention into a market causes a misallocation of resources

Income elasticity of demand (YED)

A measure of how the demand for a good/service responds to a change in real income.

Labour immobility

When labour cannot easily move around to find jobs (geographical immobility) or easily switch between different occupations (occupational immobility)

Long run

A time period in which all the factors of production are variable, so a firm can expand its capacity

Market failure

Where the price mechanism fails to allocate resources efficiently

Merit good

A good/service which provides greater social benefits when consumed than private benefits. They tend to be underconsumed.

Monopoly

A pure monopoly is a market with only one supplier. Some markets are referred to as a monopoly is there is more than one supplier, but one supplier dominates the market.

Monopoly power

The ability of a firm to be a ‘price maker’ and influence the price of a particular good in a market

Natural Monopoly

An industry where economies of scale are so great that the lowest long run average cost can only be achieved if the market is made up of a single provider.

Opportunity cost

The benefit that is given up in order to do something else - the cost of the choice made

Perfect information

When buyers and sellers have full knowledge of prices, costs, benefits and availability of products.

Price elasticity of demand (PED)

A measure of how the quantity demanded of a good/service responds to a change in its price

Price elasticity of supply (PES)

A measure of how the quantity supplied of a good/service responds to a change in its price.

Price maker

A firm that has some power to control the price it sells at

Price mechanism

When changes in the demand or supply of a good/service leads to changes in its price and the quantity bought/sold

Price taker

A firm that has no power to control the price it sells at - it has to accept the market price

Privatisation

When a firm or a whole industry changes from being run by the public sector to the private sector

Production possibility frontier (PPF)

A curve which shows the maximum possible outputs of two goods or services using a fixed amount of inputs

Productive efficiency

When products are produced at a level of output where the average cost is lowest

Productivity

The average output produced per unit of a factor of production

Profit

A firm’s total revenue minus its total costs

Progressive taxation

A tax system where an individual’s tax rises (as a % of their income) as their income rises

Proportional taxation

A tax system where everyone pays the same proportion of tax regardless of their income level

Public good

A good which people can’t be stopped from consuming, even if they have not paid for it. The consumption of it doesn’t prevent others from benefiting from it.

Quasi-public good

A good which appears to have the characteristics of a public good but doesn’t exhibit them fully

Regressive taxation

A tax system where an individual’s tax falls (as a percentage of their income) as their income rises.

Revenue

Total value of sales within a time period

Short run

A time in which at least one of a firm’s factors of production is fixed

Specialisation

People/countries only doing the things they are best or most efficient at.

Subsidy

An amount of money paid by a government to the producer of a good/service to lower the cost of production. This should increase supply, which will lower the price and increase demand for the good/service