Micro Definitions

5. Production Possibilities Frontier

A graph that shows the output that the economy can produce any combination on or inside the frontier
6. Property Rights

Ability of an individual to own and exercise control over scarce resources
7. Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer (reflects the relative opportunity cost)
8. Absolute Advantage

The ability to produce a good using fewer inputs than another producer
9. Law of Demand

Other things equal, When the price of a good rises, the quantity demanded of the good falls. When the price falls, the quantity demanded rises.
10. Law of Supply

Other things equal, when the price of a good rises, the quantity supplied of the good also rises. When the price falls, the quantity supplied falls as well.
11. Substitute Good

An increase in the price of one leads to an increase in the demand for the other. Positive cross-price elasticity.
12. Complement Good

An increase in the price of one leads to a decrease in the demand for the other. Negative cross-price elasticity.
13. Normal Good

Other things constant, an increase in income leads to an increase in demand
14. Inferior Good

Other things constant, an increase in income leads to a decrease in demand
15. Tax Incidence

the way in which the burden of a tax is distributed between different parties, such as consumers and producers. It shows who ultimately pays the tax, regardless of who is legally responsible for paying it to the government.
16. Price Ceiling

A legal maximum on the price at which a good can be sold.
17. Price Floor

A legal minimum on the price at which a good can be sold.
18. Market Failure

Situation in which the market left on its own fails to allocate resources efficiently (externalities, market power)
19. Price Elasticity of Demand

How much the quantity demanded of a good responds to a change in the price of that good. Percentage change in quantity demanded divided by the percentage change in price.
20. Price Elasticity of Supply

measures how responsive the quantity supplied of a good or service is to a change in its price. If the supply is elastic, a small change in price leads to a large change in the quantity supplied. If the supply is inelastic, the quantity supplied changes only slightly in response to price changes.

21. Income Elasticity of Demand

How much the quantity demanded of a good responds to a change in consumers income. % change in quantity demanded divided by % change in income.
22. Cross Price Elasticity

How much the quantity demanded of one good responds to a change in the price of another good. % change in quantity demanded of the first good divided by the % change in price of second good.
23. Perfectly Elastic

Demand and supply is extremely sensitive to price changes.
24. Perfectly Inelastic

Quantity demanded or supplied does not change regardless of price changes.
25. Unit Elastic
Supply and demand of a good changes proportionally to the change in price.