Microeconomics AS & A-level definitions

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158 Terms

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Ad valorem tax
An indirect tax where the value of the tax is dependent on the value of the good.
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Asymmetric information
Where one party has more information than the other, leading to market failure.
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Capital
One of the four factors of production; goods which can be used in the production process.
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Capital goods
Goods produced in order to aid production of consumer goods in the future.
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Ceteris paribus
All other things remaining the same.
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Command economy
All factors of production are allocated by the state, so they decide what, how, and for whom to produce goods.
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Complementary goods
Negative XED, if good B becomes more expensive, demand for good A fails.
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Composite demand
Increase in demand for one good causes a fall in supply for another- 2 goods that require the same input.
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Consumer goods
Goods bought and demanded by households and individuals.
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Consumer surplus
The difference between the price the consumer is willing to pay and the price they actually pay.
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Cross elasticity of demand (XED)
The responsiveness of demand for one good (A) to a change in price of another good (B).
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Demand
The quantity of a good/service that consumers are able and willing to buy at a given price at a given moment in time.
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Derived demand
when the demand for one product is determined by the demand for another product (cars and metal).
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Diminishing marginal utility
The extra benefit gained from consumption of a good generally declines as extra units are consumed; explains why the demand curve is downward sloping.
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Division of labour
The process of breaking up a task or job into interconnected sub-tasks, increasing efficiency.
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Economic problem
The problem of scarcity; wants are unlimited but resources are finite so choices have to be made.
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Efficiency
When resources are allocated optimally, so every consumer benefits and waste is minimised.
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Enterprise
One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.
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Equilibrium price/quantity
Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded.
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Excess demand
When the price is set too low so demand is greater than supply.
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Excess supply
When price is set too high so supply is greater than demand.
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External cost/benefit
The cost/benefit to a third party not involved in the economic activity; the difference between social cost/benefit and private cost/benefit.
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Externalities
The cost or benefit a third party receives from an economics transaction outside of the market mechanism.
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Free market
An economy where the market mechanism allocates resource so consumers and producers make decisions about what is produced, how to produce, and for whom.
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Free rider problem
People who don't pay for a public good still receive benefits from it so the private sector will under-provide the good as they can't make a profit.
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Government failure
When government intervention leads to a net welfare loss in society.
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Habitual behaviour
A cause of irrational behaviour; when consumers are in the habit of making certain decisions.
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Incidence of tax
The tax burden on the taxpayer.
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Income elasticity of demand (YED)
The responsiveness of demand to a change in income.
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Indirect tax
Taxes on expenditure which increase production costs and lead to a fall in supply.
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Inferior goods
YED
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Information gap
When an economic agent lacks the information needed to make a rational, informed decision.
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Information provision
When the government intervenes to provide information to correct market failure.
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Joint demand
When demand for a good increases, demand for the complementary good increases (fish and chips).
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Labour
One of the four factors of production; human capital.
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Land
One of the four factors of production; natural resources such as oil, coal, wheat, physical space.
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Luxury goods
YED\>1; an increase in incomes causes an even bigger increase in demand.
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Market failure
When the free market fails to allocate resources to the best interest of society, so there's an inefficient allocation of scarce resources.
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Market forces
Forces in free markets which act to reduce prices when there's excess supply and increase them when there's excess demand.
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Maximum price
A ceiling price which a firm can't charge above.
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Minimum price
A floor price which a firm can't charge below.
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Mixed economy
Both the free market mechanism and the government allocate resources.
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Model
A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words.
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Negative externalities of production
Where the social costs of producing a good are greater than the private costs of producing the good.
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Non-excludable
A characteristic of public goods; someone can't be prevented from using the good.
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Non-renewable resources
Resources which can't be readily replenished or replaced at a level equal to consumption; the stock level decreases over time as they are consumed.
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Non-rivalry
A characteristic of public goods; one person's use of the good doesn't prevent someone else from using it.
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Normal goods
YED\>0; demand increases as income increase.
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Normative statement
Subjective statements based on value judgements and opinions; can't be proven or disproven.
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Opportunity cost
The benefit forgone of the next best alternative.
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Perfectly price inelastic good
PED/PES\=0; quantity demanded/supplied doesn't change when price changes.
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Perfectly price inelastic good
PED/PES\=0; quantity demanded/supplied falls to 0 when price changes.
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Positive externalities of consumption
Where the social benefits of consuming a good are larger than the private benefits of consuming that good.
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Positive statement
Objective statements which can be tested with factual evidence to be proven or disproven.
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Price elasticity of demand (PED)
The responsiveness of demand to a change in price.
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Price elasticity of supply (PES)
The responsiveness of supply to a change in price.
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Price mechanism
The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves.
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Private cost/benefit
The cost/benefit to the individual participating in the economic activity.
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Private goods
Goods that are rivalry and excludable.
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Producer surplus
The difference between the price the producer is willing to charge and the price they actually charge.
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Production possibility frontier (PPF)
Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed.
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Public goods
Goods that are non-excludable and non-rivalry.
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Rationality
Decision-making that lead to economics agents maximising their utility.
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Regulation
Laws to address market failure and promote competition between firms.
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Relatively price elastic good
When PED/PES\>1; demand/supply is relatively responsive to a change in price so a small change in price leads to a large change in quantity demanded/supplied.
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Relatively price inelastic good
When PED/PES
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Renewable resources
Resources which can be replenished, so the stock of resources can be maintained over a period of time.
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Scarcity
The shortage of resources in relation to the quantity of human wants.
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Social cost/benefit
The cost/benefit to society as a whole due to the economic activity.
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Social optimum position
Where social costs equal social benefits; the amount which should be produced/consumed in order to maximise social welfare.
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Social science
The study of societies and human behaviour.
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Specialisation
The production of a limited range of goods by a company/country/ individual so they aren't self-sufficient and have to trade with others.
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Specific tax
A tax imposed on a good where the value of the tax is dependent on the quantity that is bought.
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State provision of goods
Through taxation, the government provides public goods or merit goods which are underprovided in the free market.
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Subsidy
Government payments to a producer to lower their costs of production and encourage them to produce more.
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Substitutes
Positive XED; if good B becomes more expensive, demand for good A rises.
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Supply
The ability and willingness to provide a particular good/service at a given price at a given moment in time.
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Symmetric information
Where buyers and sellers both have access to the same information.
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Trade pollution permits
Notional units of allowed pollution that are bought and sold between firms; may create an incentive to reduce the amount they pollute.
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Unitary price elastic good
When PED/PES\=1; a change in price lead to a change in output by the same proportion.
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Utility
The satisfaction derived from consuming a good.
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Weakness at computation
A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs.
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Allocative efficiency
When resources are allocated to the best interests of society, when there is max social welfare and max utility P\=MC.
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Asymmetric information
When one party has more information than the other, leading to market failure and causing problems for regulators.
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Average cost/average total cost (AC/ATC)
The cost of production per unit: total costs / quantity produced.
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Average revenue (AR)
The price each unit is sold for: TR / quantity sold.
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Bilateral monopoly
When there is only one buyer and one seller in the market.
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Cartels
A formal collusive agreement where firms enter into an agreement to mutually set prices.
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Collusion
Occurs when firms agree to work together, setting a price or producing fixed quantity.
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Competition policy
Government action to increase competition in markets.
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Competitive tendering
When the government contracts out the provision of a good or service and invites firms to bid for the contract.
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Conglomerate integration
The merger of firms with no common connection.
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Constant returns to scale
Output increases by the same proportion that the inputs increase by.
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Contestable market
When there is the threat of new entrants into the market, forcing firms to be efficient.
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Decreasing returns to scale
An increase in inputs by a certain proportion will lead to output increasing by a smaller proportion.
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Demergers
A single business is broken down into two or more businesses to operate on their own, to be sold or to be dissolved.
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Deregulation
The removal of legal barriers to allow private enterprises to compete in a previously protected market.
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Derived demand
The demand for one good is linked to the demand for a related good.
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Diminishing marginal productivity
If a variable factor is increased when another factor is fixed, there will come a point when each extra unit of the variable factor will produce less extra output than the previous unit; after a certain point, marginal output falls.
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Diseconomies of scale
The disadvantage that arise in large businesses that reduce efficiency and cause average costs to rise.