MicroEcons definitions

things to remember for microeconomics

ceteris paribus assumption

assuming all other factors remain unchanged

rationality

economic agents make decisions to maximise self interest by weighing the marginal benefit and marginal cost of any activity

positive statement

an objective statement that can be tested to check accuracy

Normative statement

A statement that contains value judgement and cannot be proved or disproved by looking at evidence

Factors of production

Resources that are used in the production of goods and services, categorised by CELL

CELL

Capital, Entrepreneurship, Labour and Land

Land

a factor of production that encompasses all the natural resources available

Labour

human beings as factors of production

Capital

Man-made goods used to produce other goods or services over a period of time

Entrepreneurship

Factors of production that takes overall responsibility for the decision-,aking process in the firm so that the other factors of productioncan be combined to produce a good or service

Scarcity

a situation where human wants are unlimited but the resources available to satisfy these wants are limited

Opportunity cost

the value of the next best alternative that has to be foregone in order to satisfy a particular want

PPC short form

Production possibility curve

Production possibility curve

shows all combinations of two goods that a country can produce 1. within a given time period, 2. with all its resources fully and efficiently utilised, 3. given a state of technology

Productive efficiency

a situation where goods and services are produced at the lowest average cost of production

Allocative efficiency

a situation where resources are allocated to produce a combination of goods and services that maximises social welfare

Demand

the quantity of a good that consumers are willing and able to purchase at every given price level, assuming ceteris paribus

Law of demand

When the price of a good rises, its quantity demanded will fall and vice versa, assuming ceteris paribus.

Law of diminishing marginal utility

beyond a certain point of consumption, as more and more units of a good or service are consumed, the additional utility a consumer derives from successive units decreases

normal good

a good whose demand rises as people’s income rises, assuming ceteris paribus

necessity

a good whose demand increases less that proportionately for a given increase in people’s income, assuming ceteris paribus

luxury good

a good whose demand increases more than proportionately for a given increase in people’s incomes, assuming ceteris paribus

inferior good

a good whose demand falls as people’s incomes rise, ceteris paribus

substitutes

goods which are considered to be alternatives of each other

Complements

goods that when consumed together, gives rise to a higher combined utility, than if the goods were consumed together

derived demand

the demand for goods which are not demanded for its own sake, but is used to facilitate the production of another

supply

the quantity of a good that producers are able and willing to sell and every price level, assuming ceteris paribus

law of supply

when the price of a good rises, its quantity supplied will rise. When its price falls, the quantity supplied will fall too, assuming ceteris paribus

joint supply

when the production of one good leads to the production of the other good

competitive supply

goods compete for the use of same inputs

Price mechanism

the process by which consumers and producers interact to determine the allocation of scarce resources between competing uses

Shortage

when the quantity demanded exceeds the quantity supplied, occurring at any price below equilibrium price

surplus

where quantity supplied exceeds quantity demanded, existing at a price above equilibrium price

perfectly competitive markets

An ideal scenario where markets, under certain conditions, function most efficiently, helping economists understand how markets ideally should work

price elasticity of demand acronym

PED

price elasticity of demand

measures the degree of responsiveness of quantity demanded of a good to a change in its price, assuming ceteris paribus

Total expenditure/Consumer expenditure

the total amount of money that consumers spend on a good or service

Total revenue/Producer revenue

Total amount of money that producers receive from the sale of a good or service

Price elasticity of supply acronym

PES

Price elasticity of supply

measures the degree of responsiveness of the quantity supplied of a good to a change in its price, assuming ceteris paribus

income elasticity of demand

measures the degree of responsiveness of the demand for a good to a change in the income of consumers, ceteris paribus

cross elasticity of demand

measures the degree of responsiveness for a good to a change in the price of another good

cross elasticity of demand acronym

XED

income elasticity of demand acronym

YED

magnitude of cross elasticity of demand between weak substitutes

0 < XED<1

magnitude of cross elasticity of demand between strong substitutes

1<X

magnitude of cross elasticity of demand between weak complements

-1<XED<0

magnitude of cross elasticity of demand between strong complements

XED< -1

allocative efficiency

the situation where resources are allocated in a way such that society’s welfare is maximised

Equity

distribution of economic welfare is fair

Income inequality

the degree to which income is distributed unequally in an economy on population

Consumer surplus

the difference between the maximum price that consumers are willing and able to sell for a given quantity and the market price

Producer surplus

the difference between the minimum price at which producers are willing and able to sell for a given quantity and the market price

Indirect taxes

Taxes imposed by the government on each unit of output produced or transacted

direct taxes

taxes imposed by the government directly on the wealth or income of either the consumer or the producer

progressive direct tax

taxes imposed on directly on wealth or income, where the higher income earners pay a larger percentage of tax than the lower income earners

Indirect subsidies

a grant given by the government to encourage the production or consumption of a good or service

Quota

a legal restriction on the quantity of goods or services that can be produced or transacted in a market. In order for a quota to be effective, it has to implemented below the equilibrium quantity.

Ban

an example of a quota where the output is set at zero

Price ceiling

the legal maximum price at which a good can be sold. To be impactful, the price needs to be set below the free market equilibrium price

Price floor

The legal minimum price on which a good can be sold. To be impactful, the price needs to be set above the free market equilibrium price

minimum wages

The minimum amount of renumeration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract.

direct provision

the situation where the government provides the good or service by either producing it or by outsourcing production to a private firm which can produce it at a lower price

transfer payments

money transferred from one person or group to another without transactions taking place. they are a form of redistributive policy which aim to transfer part of the income gains enjoyed by higher income earners to the lower-income segments of the populations

Market failure

the failure of the free market to allocate resources efficiently

productive efficiency

when goods and services are produced at the lowest average cost

Dynamic efficiency

Involves 1. improving allocative and productive efficiency over time, 2.innovation within a market and improvement in both the range of choice for consumers and also the quality of producers

Negative externalities

Spillover costs to third parties who are not directly involved in the consumption or production of the good or service itself

Positive externalities

spillover benefits to third parties who are not directly involved in the consumption or production of the good or service itself

Loss aversion

a cognitive bias, where the pain of losing is psychologically twice as powerful as the pleasure of gaining

Imperfect information

a case of information failure, where consumers/producers do not correct or complete information about the cost/benefits of consuming or producing a good

Asymmetric information

a form of imperfect information, when one party has more information than the other party in an economic transaction

adverse selection

the process by which “undesirable” members of a population of buyers or sellers are more likely to participate in a voluntary exchange. It arises from information asymmetry between the buyer and seller before the transaction has been completed

moral hazard

A situation where economic agents take greater risks than they normally would, because the costs that would result would not be borne by the economic agents themselves. It arises due to the presence of hidden actions taken by economic agents after the transaction has been completed

sunk cost fallacy

when an economic agent chooses to continue with the decision because of the resources that were heavily invested, even when it is more beneficial to abandon the decision

salience bias

the tendency to focus on things that are more apparent or obvious

public good

a good that it is non-excludable and non-rivalrous in consumption

non-excludability

the situation where it is impossible or very costly to exclude non-payers from consumption or use of a good or service once it has been provided

non-rivalrous

where the consumption or use of a good or service by one consumer does not reduce the quantity and/or quality available for the others

non-rejectability

the inability of consumers to refuse the consumption of a good once it has been produced

factor immobility

the inability of consumers to refuse the consumption of a good once it has been produced

occupational immobility

the inability of production to move from occupation or sector to another

geographical immobility

the inability or lack of willingness of factors of production to move from one geographical area to another

government failure

the situation where government intervention results in greater market inefficiencies (greater DWL) than would otherwise occur without government intervention