Microeconomic Definitions

Edexcel A lvl

Economics

the study of how society manages its scarce productive resources in order to satisfy people's unlimited wants

Social science

A subject area that studies human behaviour. However, experiments to test these models and theories are difficult to carry out as so many factors influence decision making by economic agents

Economic agents

Any person/group of people who has an influence on the economy by producing, buying or selling.

Ceteris Paribus

An assumption made in economics that all other things remain equal when analysing the relationship between two variables

Positive economic statements

Objective statements that can be proved or disproved. They include what was it will be and these statements can be verified by reference to data or a scientific approach. Value free statement

Normative economic statements

Value judgements and are therefore subjective. They relate to what should or ought to be; bad or good; fair and unfair.

Economic problem

All economies face the problem of scarce resources and infinite wants

Scarcity

Limited quantities of resources to meet unlimited wants

Needs

Goods that are necessary for survival, which are limited. Eg. Water, food and shelter.

Wants

Goods that are not essential for survival but make our lives more comfortable and are infinite. Eg. Car, TV.

Factors of production

Recourses that are used to make new goods and services. Include land, labour, capital and enterprise.

Land

All natural resources including non renewable and renewable resources used in production.

Labour

People within working age within an economy, however not all will be economically active. The productivity of labour is highly influenced by education and training.

Capital

All man-made aids to production

Entrepreneur

The person who manages all the other factors of production and often risk their own money to set up a new venture

Renewable resources

Those that can be replenished, so the stock level of the resources can be maintained over a period of time. Assuming the rate of consumption of the resource is less than the rate of replenishment.

Non renewable resources

Those that cannot be renewed. The stock level decreases overtime as it is consumed.

Opportunity cost

The next best alternative given up when a choice is made.

Economic goods

Goods which are scarce that carries a price that reflects their scarcity

Free goods

Have a zero price which consuming involves no opportunity cost

Production possibility frontier

Represent the maximum output of any combination of two types of products that an economy can produce with its current resources and technology.

Trade-off

The sacrifice of the production of one good when making a decision to make more of another good. This is often illustrated by a movement along the production possibility curve.

Capital goods

Capital goods is used to produce other goods or services eg factory, machinery, robotics and tools. It is wanted not for its own sake but for the consumer goods and services it can provide.

Consumer goods

A consumer good directly provide utility to consumers. Eg smartphones, clothes, fast food and cars. A consumer good is wanted for the satisfaction it gives.

Specialisation

Where an individual, firm, region or country concentrates on the production of a limited range of goods and services.

Division of labour

Dividing the production process into a number of tasks and assigning each worker a specific task.

Bartering

A system of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money.

Double coincidence of wants

In order to make an exchange in a barter system a consumer would have to find someone who wants what they have and someone who has what they want.

Medium of exchange

One of the functions of money that fulfils the role of being acceptable to both buyers and sellers, removing the need for bartering and allowing people to specialise.

Store of value

Money can be saved as wealth so it can spent later.

Measure of value

Money provides a unit of account by pricing of goods/services eg in £s. This allows comparison between the relative value of products.

Means of deferred payment

This enables borrowing and lending. Someone can borrow money in order to buy a product now and pay for it later.

Free market economy

An economy where all resources are privately owned and allocated via the price mechanism. There is minimal government intervention.

Mixed economy

An economy where some resources are owned and allocated by the private sector and some by the public sector.

Command economy

An economy there is public ownership of resources and these are allocated by the government.

Market

Where consumers and producers come into contact with one another to exchange goods and services.

Rational decision making

Consumers allocate their income to maximise their utility from the goods and services they purchase. Firms use their resources to maximise profits from the goods and services they produce.

Utility

The amount of satisfaction obtained from consuming a good or service.

Demand

The amount of a good or service demanded at each price over a given period of time.

Demand curve

Shows the quantity of a good or service that would be bought over a range of different price levels in a given period of time.

Total utility

The amount of satisfaction a person derives from the total amount of a product consumed.

Marginal utility

The satisfaction obtained from consuming one extra unit of a good or service.

Diminishing marginal utility

As successive units of a good or service are consumed, the utility gained from each extra unit will fall.

Price elasticity of demand

Measures the responsiveness of quantity demanded to a change in price.

Income elasticity of demand

Measures the responsiveness of quantity demanded to a change in income.

Cross elasticity of demand

Measures the responsiveness of quantity demanded of Product A to a change in price in Product B.

Perfectly inelastic demand

Demand remains unchanged in response to the other variable (eg price change).

Inelastic demand

Demand changes by a smaller percentage than the change in the other variable.

Unitary elasticity

Demand changes by the same percentage as the change in the other variable.

Elastic demand

Demand changes by a greater percentage than the change in the other variable.

Perfectly elastic demand

Demand is infinite at one price but none will be bought if there is a change in the other variable.

Normal good

A good where demand increases as income increases eg books.

Luxury goods

normal goods but demand increases by a greater percentage as income rises eg designer bags.

Inferior good

A good where demand decreases as income increases eg value pasta.

Substitute goods

A good that is in competition with another good and may see demand increase if the price of a rival good increases. XED is positive for substitute goods. Eg Sky and Virgin Media

Complementary goods

A good that is bought alongside another good and may see demand increase if the price of the complementary good decreases. XED is negative for complementary goods. Eg consoles and computer games.

Indirect taxation

A tax imposed on expenditure that increases businesses costs and reduces supply (supply shifts left).

Subsidies

A payment from the government to a producer, often given per unit produced. This reduces businesses costs and increases supply (supply shifts right).

Total revenue

The total amount of money a firm gains through sale of their goods. TR = Price x Quantity.

Supply

The amount of a good or service supplied at each price over a certain period of time.

Supply curve

Shows the quantity of a good or service that would be supplied at a range of different price levels in a given period of time.

Elasticity of supply

Measures the responsiveness of quantity supplied to a change in price.

Short run

Period of time when at least one factor of production is fixed, therefore supply is likely to be inelastic.

Long run

Period of time when all factors of production are variable, therefore supply is likely to be more elastic.

Equilibrium

Is determined by the interaction of the supply and demand curves. The equilibrium price and quantity will not change unless there is a change in the conditions of demand/and or supply.

Excess supply

Quantity supplied is greater than quantity demanded at the existing price.

Excess Demand

Quantity demanded is greater than quantity supplied at the existing price.

Rationing

The market forces of demand and supply ensure that the amount demanded is exactly the same as the amount supplied

Incentive

A higher price motivates firms to supply more of a good to gain more profit

Signalling

A change in price provides a message to consumers and producers to change their behaviour

Consumer surplus

The difference between how much consumers are willing to pay and what they actually pay for a product.

Producer surplus

The difference between the cost of supply and the price received by the producer for the product.

Indirect taxes

Taxes imposed on expenditure which has the effect of increasing costs and shifting supply left.

Ad valorem taxation

Taxes imposed as a percentage of the price of the product or service.

Specific taxes

Taxes imposed as a set amount per unit of the product/service.

Incidence of tax

Relates to how the burden of a tax is distributed between different groups ie producers and consumers.

Subsidy

A grant from the government which has the effect of reducing costs of production and shifting supply right.

Behavioural economics

A method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making.

Habitual behaviour

The frequency of past behaviour influences consumers' current behaviour.

Inertia

Consumers may not make an active effort to change their behaviour for many reasons eg too much choice/complex information.

Weakness at computation

Consumers, when thinking about a decision, show weakness as they may be more influenced by recent events, unable to calculate probability and may be influenced when buying (eg by marketing of firms).

Market failure

Market failure occurs when the market forces of supply and demand do not result in an efficient allocation of resources. It arises because the price mechanism does not take into account all the costs and/or benefits in the production and consumption of the product or service.

Externalities

Externalities are costs or benefits to third parties who are not directly part of a transaction between producers and consumers.

Private costs

The costs to the first party who is either the producer or consumer of the good or service.

External costs

The costs to the third party who is neither the producer nor seller. It is the cost in excess of private costs. They are negative spillover effects from the production or consumption which the market fails to take into account.

Social costs

Social costs are simply the sum of private costs and external costs:

Social costs = private costs + external costs.

Private benefits

The benefits to the first party who is either the producer or consumer of the good or service.

External benefits

The benefits to the third party who is neither the producer nor seller. It is the benefit in excess of private benefits. They are positive spillover effects from the production or consumption which the market fails to take into account.

Social benefits

Social benefits are simply the sum of private benefits and external benefits:

Social benefits = private benefits + external benefits.

Private goods

Goods that have rivalry and excludability in their consumption.

Public goods

Goods that have non-rivalry and non-excludability in their consumption.

Non-rivalry

One person's consumption of the good does not affect the amount of the good left for others to consume.

Non-excludability

Once the good is provided for one person, it is available to everyone as it is impossible to exclude anyone from using it.

Free rider problem

Once a product is provided it is impossible to prevent people from using it, and, therefore, impossible to charge for it.

Information gaps

Where consumers, producers or the government have insufficient knowledge to make rational economic decisions.

Symmetric information

Is where both parties in a transaction (consumer and producer) have the same information.

Asymmetric information

Is where one party in a transaction has more or superior information compared to another.

Indirect tax

An indirect tax is a tax imposed on expenditure. It is a tax placed on a product and increases costs to firms.