microeconomics definitions

competition

occurs when there is a large numbers of buyers and sellers acting independently; an individual seller has very little market power to influence the price of a product

demand

the quantity of a good or service consumers are willing and able to purchase at various prices during a specific time period, ceteris paribus

law of demand

as the price of a product decreases, the quantity demanded of it will increase

non-price determinants of demand

all factors affecting demand other than price, which cause the entire demand curve to shift

normal goods

goods whose demand increases as people's incomes increase e.g. Nike shoes

inferior goods

goods who's demand decreases as people's incomes increase e.g. Tesco everyday value range

substitutes

goods that have similar characteristics and uses to consumers

complementary goods

goods that are consumed together

supply

the quantity of a good or service producers are willing and able to offer at various prices during a specific time period, ceteris paribus

law of supply

as the price of a product increases, the quantity supplied will usually increase

non-price determinants of supply

all factors affecting supply other than price, which cause the entire supply curve to shift

joint supply

when two or more goods are derived from the same product so that it is impossible to produce more of one without producing more of the other

by-product

secondary product made during the production of something else

competitive supply

when the production of two goods uses similar resources and processes so if a supplier produces more of one good, it mens producing less of the other

indirect tax

tax imposed on a good or service, typically paid to the government by the producer and therefore considered a cost of production

subsidy

money granted by the government to a firm or industry, reducing the firm's costs of production and increasing the supply of a good/service

regulations

when governments monitor firms and industries to ensure they are abiding by relevant legislation

market equilibrium

the point where the supply curve of a good or service crosses the demand curve, at the price where the quantity demanded equals the quantity supplied

disequilibrium

a state where quantity demanded does not exactly equal quantity supplied, due to changes in the non-price determinants of demand and supply

excess supply (surplus)

when the quantity demanded of a good is less than the quantity supplied; occurs when the price in the market is above the equilibrium price

excess demand (shortage)

when the quantity demanded of a good is more than the quantity supplied; occurs when the price in the market is below the equilibrium price

price mechanism

the way in which price changes affect quantity demanded and quantity supplied, thus determining resource allocation in a market

signalling function of prices

the function of the price mechanism where information is provided to consumers and producers about what should be consumed and produced

incentive function of prices

the function of the price mechanism where motivation is provided to consumers and producers to reallocate resources in a market

rationing function of prices

the function of the price mechanism where the economic question of 'for whom' is determined

efficiency

refers to improved resource use, where a firm can produce the same good but with fewer resources

social/community surplus

the sum of the consumer surplus and producer surplus; the total benefit gained by society when the market is at equilibrium

consumer surplus

the difference between the price that consumers pay and the price they are willing to pay

price elasticity of demand (PED)

a measure of how much quantity demanded of a good or service changes in response to a price change of the same good or service

necessity goods

a good or service whose quantity demanded does not change much in response to a price change because consumers consider it to be essential

total revenue

the money earned by a firm for selling a good or service; the selling price multiplied by the total quantity sold

commodities

primary goods that are important inputs to production, such as oil, iron ore and timber

profit

the money remaining from sales revenue after subtracting the costs of production

tax incidence

the burden of tax paid by consumers or producers

income elasticity of demand (YED)

a measure of how much quantity demanded of a good or service changes in response to an income change

price elasticity of supply (PES)

a measure of how much the quantity supplied of a good changes when there is a change in its own price

demerit goods

goods that have negative effects when consumed and cause negative externalities of consumption

market failure

occurs when markets are no longer allocatively efficient, and marginal social benefit does not equal marginal social cost

parallel (black) market

a market where buying and selling transactions re unrecorded, and usually illegal

welfare loss

private goods

goods and services that are simultaneously rivalrous and excludable

public goods

goods that are both non-rivalrous and non-excludable

rivalrous

the condition that occurs when someone consuming a good or service prevents someone else from consuming the good or service

excludable

the condition that occurs when someone can be prevented from consuming a good or service

club goods

goods or services that are excludable and non-rivalrous

free-rider problem

when a non-excludable good will not be produced by the free market because no-one is willing to pay for it when they think someone else will pay for it

common pool resources

goods or services that are rivalrous but non-excludable

merit goods

goods that are beneficial to the individual and society as a whole, and are usually under-provided in a free market

economies of scale

a firm's ability to produce with lower average costs when they grow in size

profit motive

an assumption in economics that all firms are motivated solely by profit and that they aim to make as much profit as possible.

negative externalities of production

when the production of a good or service generates a negative effect on a third party or society, which has not been factored into the costs of producing the good

positive externalities of production

when the production of a good or service generates a positive effect on a third party or society, which has not be factored into the costs of producing the good

negative externalities of consumption

when the consumption of a good or service generates a negative effect on a third party which has not been factored into the decision to consume that good

positive externalities of consumption

when the consumption of a good or service generates a negative effect on a third party which has not been factored into the decision to consume that good