MicroEconomics UCLouvain CH1-4

A set of vocabulary flashcards covering microeconomic and macroeconomic foundational definitions, demand theory, and market dynamics.

Homo economicus

Rational Agent

Positive analysis

Attempts to describe the world how it is

Normative analysis

Tries to prescribe how the world should be

Pareto improvement

When the welfare of one individual increases without negatively affecting someone else’s

Pareto efficient

Social outcome where it is impossible to increase one individual’s welfare without negatively affecting someone else’s

Wealth

Encompasses all the goods and financial resources owned by a household that are available for future consumption

Non-factor inputs

Inputs that disappear completely in the production process

Gross investment

Replacement investment + net investment

Net investment

Capacity expansion

Gross value added

Value of output – Value of non-factor inputs

Net value added

Gross value added – depreciation of capital goods

Market economy

Economy where consumption and production decisions are determined by individual decisions of households and firms

Limitations of GDP Per capita

Blind to distribution, does not correlate with happiness, and includes objectionable activities

GDP per capita determinants

Output per hour worked, number of hours per employed person, unemployment, activity rate, working age population

Productivity

Output produced per hour worked

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer

Ideal market qualities

Buyers and sellers have no market power; goods and services are private goods and services with no externalities; buyers and sellers have the same info about the goods and services

Perfect competition

Market structure where a number of small firms sell identical products and everyone is a price taker

Consumer Reservation price

Maximum price consumer is willing to pay

Consumer surplus

Reservation price – price that is actually paid

Marginal Willingness to Pay

Reservation price for additional unit

General Demand Function

Quantity demanded of a good as a function of all market prices and total consumer income

Partial Demand Function

Quantity demanded of a good as function of its own price while holding other prices and income constant

Invisible hand

The invisible market forces that seek to balance supply and demand through price

Comparative statics

Comparing the original and new market equilibrium

PED

$$\frac{\text{\%change in } Q_d}{\text{\%change in } P}$$

Substitution effect

When the price of a good increases, consumers become more interested in buying other goods for the same need (substitutes)

Income effect

When the price of a good increases, the purchasing power of income decreases

Ordinary goods or services

Goods or services for which there is a negative relationship between price and demand

Giffen goods

Goods for which an increase in price leads to an increase in demand

Snob goods

Goods that consumers find more attractive the higher their price

Engel curve

Represents the relationship between quantity demanded and consumer income $y$

Normal good

Good with positive income elasticity, where quantity demanded increases as income increases

Inferior good

Good with negative income elasticity, where quantity demanded decreases as income increases

Budget share

Expenditure on the considered good divided by total income

Cross-price elasticity

Percentage change in the quantity demanded of one good to a percentage change in the price of another good ($p_z$)

Complements

Goods that are consumed together; their cross-price elasticity is negative

Substitutes

Goods that satisfy strongly related needs and can be used instead of each other; their cross-price elasticity is positive

Independent goods

Goods that are independent in consumer preferences and have a cross-price elasticity close to zero