Microeconomics AS & A-level definitions

Ad valorem tax

An indirect tax where the value of the tax is dependent on the value of the good.

Asymmetric information

Where one party has more information than the other, leading to market failure.

Capital

One of the four factors of production; goods which can be used in the production process.

Capital goods

Goods produced in order to aid production of consumer goods in the future.

Ceteris paribus

All other things remaining the same.

Command economy

All factors of production are allocated by the state, so they decide what, how, and for whom to produce goods.

Complementary goods

Negative XED, if good B becomes more expensive, demand for good A fails.

Composite demand

Increase in demand for one good causes a fall in supply for another- 2 goods that require the same input.

Consumer goods

Goods bought and demanded by households and individuals.

Consumer surplus

The difference between the price the consumer is willing to pay and the price they actually pay.

Cross elasticity of demand (XED)

The responsiveness of demand for one good (A) to a change in price of another good (B).

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.

Derived demand

when the demand for one product is determined by the demand for another product (cars and metal).

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.

Division of labour

The process of breaking up a task or job into interconnected sub-tasks, increasing efficiency.

Economic problem

The problem of scarcity; wants are unlimited but resources are finite so choices have to be made.

Efficiency

When resources are allocated optimally, so every consumer benefits and waste is minimised.

Enterprise

One of the four factors of production; the willingness and ability to take risks and combine the three other factors of production.

Equilibrium price/quantity

Where demand equals supply so there are no more market forces bringing about change to price or quantity demanded.

Excess demand

When the price is set too low so demand is greater than supply.

Excess supply

When price is set too high so supply is greater than demand.

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.

Externalities

The cost or benefit a third party receives from an economics transaction outside of the market mechanism.

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.

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.

Government failure

When government intervention leads to a net welfare loss in society.

Habitual behaviour

A cause of irrational behaviour; when consumers are in the habit of making certain decisions.

Incidence of tax

The tax burden on the taxpayer.

Income elasticity of demand (YED)

The responsiveness of demand to a change in income.

Indirect tax

Taxes on expenditure which increase production costs and lead to a fall in supply.

Inferior goods

YED

Information gap

When an economic agent lacks the information needed to make a rational, informed decision.

Information provision

When the government intervenes to provide information to correct market failure.

Joint demand

When demand for a good increases, demand for the complementary good increases (fish and chips).

Labour

One of the four factors of production; human capital.

Land

One of the four factors of production; natural resources such as oil, coal, wheat, physical space.

Luxury goods

YED\>1; an increase in incomes causes an even bigger increase in demand.

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.

Market forces

Forces in free markets which act to reduce prices when there's excess supply and increase them when there's excess demand.

Maximum price

A ceiling price which a firm can't charge above.

Minimum price

A floor price which a firm can't charge below.

Mixed economy

Both the free market mechanism and the government allocate resources.

Model

A hypothesis which can be proven or tested by evidence; it tends to be mathematical whilst a theory is in words.

Negative externalities of production

Where the social costs of producing a good are greater than the private costs of producing the good.

Non-excludable

A characteristic of public goods; someone can't be prevented from using the good.

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.

Non-rivalry

A characteristic of public goods; one person's use of the good doesn't prevent someone else from using it.

Normal goods

YED\>0; demand increases as income increase.

Normative statement

Subjective statements based on value judgements and opinions; can't be proven or disproven.

Opportunity cost

The benefit forgone of the next best alternative.

Perfectly price inelastic good

PED/PES\=0; quantity demanded/supplied doesn't change when price changes.

Perfectly price inelastic good

PED/PES\=0; quantity demanded/supplied falls to 0 when price changes.

Positive externalities of consumption

Where the social benefits of consuming a good are larger than the private benefits of consuming that good.

Positive statement

Objective statements which can be tested with factual evidence to be proven or disproven.

Price elasticity of demand (PED)

The responsiveness of demand to a change in price.

Price elasticity of supply (PES)

The responsiveness of supply to a change in price.

Price mechanism

The system of resource allocation based on the free market movement of prices, determined by the demand and supply curves.

Private cost/benefit

The cost/benefit to the individual participating in the economic activity.

Private goods

Goods that are rivalry and excludable.

Producer surplus

The difference between the price the producer is willing to charge and the price they actually charge.

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.

Public goods

Goods that are non-excludable and non-rivalry.

Rationality

Decision-making that lead to economics agents maximising their utility.

Regulation

Laws to address market failure and promote competition between firms.

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.

Relatively price inelastic good

When PED/PES

Renewable resources

Resources which can be replenished, so the stock of resources can be maintained over a period of time.

Scarcity

The shortage of resources in relation to the quantity of human wants.

Social cost/benefit

The cost/benefit to society as a whole due to the economic activity.

Social optimum position

Where social costs equal social benefits; the amount which should be produced/consumed in order to maximise social welfare.

Social science

The study of societies and human behaviour.

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.

Specific tax

A tax imposed on a good where the value of the tax is dependent on the quantity that is bought.

State provision of goods

Through taxation, the government provides public goods or merit goods which are underprovided in the free market.

Subsidy

Government payments to a producer to lower their costs of production and encourage them to produce more.

Substitutes

Positive XED; if good B becomes more expensive, demand for good A rises.

Supply

The ability and willingness to provide a particular good/service at a given price at a given moment in time.

Symmetric information

Where buyers and sellers both have access to the same information.

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.

Unitary price elastic good

When PED/PES\=1; a change in price lead to a change in output by the same proportion.

Utility

The satisfaction derived from consuming a good.

Weakness at computation

A cause of irrational behaviour; when consumers are bad at making calculations, estimating probabilities and working out future benefits/costs.

Allocative efficiency

When resources are allocated to the best interests of society, when there is max social welfare and max utility P\=MC.

Asymmetric information

When one party has more information than the other, leading to market failure and causing problems for regulators.

Average cost/average total cost (AC/ATC)

The cost of production per unit: total costs / quantity produced.

Average revenue (AR)

The price each unit is sold for: TR / quantity sold.

Bilateral monopoly

When there is only one buyer and one seller in the market.

Cartels

A formal collusive agreement where firms enter into an agreement to mutually set prices.

Collusion

Occurs when firms agree to work together, setting a price or producing fixed quantity.

Competition policy

Government action to increase competition in markets.

Competitive tendering

When the government contracts out the provision of a good or service and invites firms to bid for the contract.

Conglomerate integration

The merger of firms with no common connection.

Constant returns to scale

Output increases by the same proportion that the inputs increase by.

Contestable market

When there is the threat of new entrants into the market, forcing firms to be efficient.

Decreasing returns to scale

An increase in inputs by a certain proportion will lead to output increasing by a smaller proportion.

Demergers

A single business is broken down into two or more businesses to operate on their own, to be sold or to be dissolved.

Deregulation

The removal of legal barriers to allow private enterprises to compete in a previously protected market.

Derived demand

The demand for one good is linked to the demand for a related good.

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.

Diseconomies of scale

The disadvantage that arise in large businesses that reduce efficiency and cause average costs to rise.