Micro Definitions

abnormal profit

positive economic profit, arising when total revenue is greater than total costs (implicit plus explicit)

economics

The study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants

economies of scale

Decreases in the average costs of production that occur as a firm increases its output by varying all its inputs (long run).

elasticity

In general, this is a measure of the responsiveness of a variable to changes in any of the variable's determinants.

entrepreneurship

the ability to innovate by developing new ways of doing things.

equilibrium

A state of balance such that there is no tendency to change.

equilibrium price

The price determined in a market when quantity demanded is equal to quantity supplied.

Equilibrium quantity

The quantity that is bought and sold when a market is in equilibrium.

equity

The condition of being fair or just.

excess demand

Occurs when the quantity of a good demanded is greater than the quantity of the good supplied

Excess supply

Occurs when the quantity of a good demanded is smaller than the quantity supplied

excise taxes

Taxes imposed on spending on particular goods or services.

marginal benefit

the extra or additional benefit received from consuming one more unit of a good

marginal cost

the extra or additional cost of producing one more unit of output

marginal private benefits (MPB)

the extra benefit received by consumers when they consume one more unit of a good

marginal private costs (MPC)

the extra costs to producers of producing one more unit of a good

marginal product

the extra or additional output that results from one additional unit of a variable input

marginal propensity to consume (MPC)

the fraction of additional income spent on domestically produced goods and services. Determines the size of the Keynesian multiplier.

marginal propensity to import (MPI)

the fraction of additional income spent on imports. The larger the MPI, the smaller the keynesian multiplier

marginal propensity to save (MPS)

the fraction of additional income that is saved. The larger the MPS, the smaller the keynesian multiplier

marginal propensity to tax (MPT)

the fraction of additional income that is paid as taxes. The larger the MPT, the smaller the keynesian multiplier

marginal revenue

the additional revenue arising from the sale of an additional unit of output

homogeneous product

a product that is completely standardised and not differentiated.

competitive supply

two goods compete with each other for the same resources

opportunity cost

value of the next best alternative that must be sacrificed to obtain something else

competition

many buyers and sellers acting independently, no one has the ability to influence price

complements

two or more goods that tend to be used together.

concentration ratio

A measure of how much an industry's production is concentrated among the industry's largest firms.

constant returns to scale

situation where the output of a firm changes in the same proportion as all its inputs.

overallocation of resources

too many resources are allocated to the production of a good relative to what is socially desirable - overproduction

perfect competition

large number of small firms, no control over price, homogenous goods, no barriers to entry/exit

perfectly elastic demand

PED value of infinity

perfectly elastic supply

PES value of infinity

perfectly inelastic demand

PED value of 0

perfectly inelastic supply

PES value of 0

personal income taxes

taxes paid by households/individuals on all forms of income

positive externality

externality where side-effects on third parties are positive/beneficial

positive externality of consumption

positive externality caused by consumption activities

positive externality of production

positive externality caused by production activities

price ceiling

maximum price set by the government

price competition

when a firm lowers its price to attract customers away from rival firms

price control

setting a minimum/maximum price by the government so prices are unable to adjust to equilibrium.

price discrimination

practice of charging different prices for the same product, but not justified by differences in costs of production

price elastic demand

relatively high responsiveness of demand to changes in price

price elastic supply

relatively high responsiveness of supply to changes in price

PED

measure of the responsiveness of the quantity demanded of a good to changes in price.

PES

measure of the responsiveness of the quantity supplied of a good to changes in price

price floor

minimum price set by government

price inelastic demand

low responsiveness of demand to changes in price

price inelastic supply

low responsiveness of supply to changes in price

price leadership

tacit collusion among oligopolistic firms where the dominant firm sets the price and initiates any price changes.

price taker

firm that accepts a price at which it sells its product.

price war

competitive price-cutting in an oligopoly trying to capture market share from rival firms

prices as incentives

ability of changes in prices to convey information to consumers and producers

prices as signals

ability of changes in prices to communicate information to consumers and producers

prisoner's dilemma

although it is in the best interests of decision makers to co-operate, when firms act self-interestedly, they can be all left worse off

private good

good that is rivalrous and excludable

privatisation

transfer of ownership from the public sector to the private sector

producer surplus

difference between the price received by firms for a good and the lowest price they are willing to accept to produce the good

product differentiation

when firms try to make their products different from those of its competitors in order to create monopoly power (physical, quality, location, service differences)

productive efficiency

when firms produce at the lowest possible cost

profit maximisation

is the goal of firms. The making of largest possible profit

progressive taxation

taxation where as income increases, tax on income increases.

proportional taxation

taxation where there is a constant tax rate

marginal social benefits (MSB)

the extra benefits to society of consuming one much unit of a good

consumer surplus

difference between the highest price consumers are willing to pay for a good and the price actually paid

consumption

spending by households on goods and services

social optimum

situation that is best from the social point of view. (allocative efficiency)

shut-down price

price at which a firm that is making losses will stop producing in the short run.

shortage

quantity demanded - quantity supplied

short run

time period during which at least 1 input is fixed and cannot be changed by the firm

scarcity

condition in which available resources (land, labour, capital, entrepreneurship) are limited and are not enough to produce everything that human beings need and want

satisficing

goal of firms to achieve satisfactory results, rather than pursue a single maximising objective such as to maximise profits or revenues; based on the argument that large modern firms have numerous objectives that may overlap or conflict forcing them to compromise and reconcile conflicts rather than pursue optimal results

rivalrous

characteristic of a good according to which its consumption by one person reduces its availability for someone else

revenue maximisation

objective of firms to produce at the level of output where its marginal revenue is equal to 0 (and total revenue is maximum) so as to maximise revenue (rather than profit, as assumed by the standard theory of the firm)

returns to scale

relationship between inputs and output (by how much output changes if all inputs change proportionately)

resource allocation

assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives

resources

factors of production used by firms as inputs in the production of process

regressive taxation

taxation where as income increase the fraction of income paid as taxes decreases; there is a decreasing tax rate

rent

payment, per unit of time, to owners of land resources who supply their land into the production process

relocation of resources

reassigning of resources to particular uses so that the allocation of resources changes and becomes a new allocation

household indebtedness

the degree to which households have debts

human capital

the skills, abilities and knowledge acquired by people, as well as good levels of health, all of which make them more productive; considered to be a kind of 'capital' because it provides a stream of future benefits by increasing the amount of output that can be produced in the future.

implicit costs

Costs of production involving sacrificed income arising from the use of self-owned resources by a firm; is a type of opportunity cost

social scientific method

method of investigation used in sciences and social sciences allowing the accumulation of scientific and social scientific knowledge; involves making a hypothesis based on observations, testing the hypothesis and rejecting or accepting the hypothesis based on empirical evidence

social surplus

sum of consumer and producer surplus; it is maximum in a competitive market with no market failures

specialisation

occurs when a firm or a country concentrates production on one or a few goods and services. In international trade theory it forms the basis for the gains from trade, arising when countries specialise according to their comparative advantage and when firms specialise in production of goods and services that offer them economies of scale. Specialisation of labour occurs when workers perform one or a few tasks and is one factor leading to economies of scale

specific tax

tax calculated as an absolute amount per unit of the good or service sold

strategic interdependence

characteristic of oligopolies, refers to the mutual interdependence of firms and their strategic behaviour in view of the expectation that what happens to the profits of one firm depends on the strategies adopted by the other firms

subsidy

an amount of money paid by the government to firms for a variety of reasons: to prevent an industry from falling, to support producers’ incomes or as a form of protection against imports. A subsidy results in a higher level of output and lower price for consumers. May also be paid to consumers as financial assistance or for income redistribution

substitute goods

two or more goods that satisfy a similar need so that one good can be used in place of another. If two goods are substitute goods an increase in the price of one leads to an increase in the demand for the other

supernormal profit

positive economic profit arising when total revenue is greater than total economic costs

supply

various quantities of a good that firms are willing and able to produce and sell at different possible prices during a particular time period, ceteris paribus

supply curve

curve showing the relationship between the quantities of a good that firms are willing and able to produce and sell during a particular time period and their respective prices, ceteris paribus

surplus

in the context of supply and demand it is the extra supply that results when quantity supplied is greater than quantity demanded; in the case of consumer and producer surplus it is the extra benefit consumers get by paying less for a good than the amount they are willing to pay or the extra benefit get by receiving a higher price for the good they are selling than the price they are willing to receive; in the case of the government budget a surplus occurs when government revenues are greater than government expenditures; in the balance of payments, a surplus in an account occurs when the credits are larger than the debits to other countries

now

third degree price discrimination

Occurs when a firm price discriminates among different consumer groups; is based on the principle that different consumer groups have different price elasticities of demand.

sustainability

maintaining the ability of the environment and the economy to continue to produce and satisfy needs and wants into the future; depends crucially on the preservation of the environment over time

total costs

the sum of fixed and variable costs

tacit collusion

cooperation that is implicit between cooperating oligopolistic firms without a formal agreement with the objective s to coordinate prices and avoid competitive price-cutting, limit competition, reduce uncertainties and increase profits

tax incidence

the burden of a tax or those who are the ultimate payers of the tax

total product

the total quantity of output produced by a firm.

total revenue

the amount of money received by firms when they sell a good (or service). It is equal to price times quantity

tradable permits

Permits that can be issued to firms by a government or an international body; and that can be traded (bought and sold) in a market. The objective being to limit the total amount of pollutants emitted by firms.

underallocation of resources

occurs when too few resources are allocated to the production of a good relative to what is socially most desirable, resulting in its underproduction.

unit elastic demand

refers to a price elasticity of demand value of one

unit elastic supply

refers to a price elasticity of supply value of one

quintiles

division of a population into 5 equal groups with respect to the distribution of a variable, such as income (for example, the lowest income quintile refers to 20% of the population with the lowest income)

variable costs

costs that arise from the use of variable inputs, and that cary or change as output increases or decreases. e.g wages

wage

a payment, per unit of time, to those who provide labour

marginal social costs (MSC)

the extra costs to society of producing one more unit of a good

marginal tax rate

the tax rate paid on additional income; refers to the tax rate that applies to the highest tax bracket of an individual's personal income

market

any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange

market demand

refers to the sum of all individual consumer demands for a good or service

ad valorem taxes

taxes calculated as a fixed percentage of the price of a good or service; the amount of tax increases as the price of the good or service increases.

market equilibrium

occurs where quantity demanded is equal to quantity supplied, and there is no tendency for the price or quantity to change

market failure

occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society. Market failure results in allocative efficiency, where too much or too little of goods or services are produced and consumed from the point of view of what is socially most desirable

now

market power

refers to the control that a seller may have over the price of a product it sells

market structure

the characteristics of a market organisation that determine the behaviour of firms within an industry

market supply

refers to the sum of all individual firm supplies of a good or service

welfare

in general, refers to the well-being of a population

welfare loss

refers to loss of a portion of social surplus that arises when marginal social benefits are not equal to the marginal social costs, due to market failure

allocative efficiency

an allocation of resources that results in producing a combination and quantity of goods and services mostly preferred by consumers. it is achieved when the economy allocates its resources so that no one can become better off in terms of increasing their benefit from consumption without someone else becoming worse off.

asymmetric information

a type of market failure where buyers and sellers do not have equal access to information, usually resulting in an underallocation of resources to the production of goods and services.

average costs

costs per unit of output. calculated by dividing total cost by the number of units of output produced.

average fixed costs

fixed costs per unit of output. calculated by dividing fixed cost by the number of units of output produced.

average product

the total quantity of output of a firm per unit of variable input.

average revenue

revenue per unit of output sold. calculated by dividing total revenue by the number of units of output produced.

average total costs

total cost per unit of output. calculated by dividing total costs by the number of units of output.

maximum price

a legal price set by the government, which is below the market equilibrium price; this does not allow the price to rise to its equilibrium level determined by a free market

average variable costs

variable cost per unit of output. calculated by dividing variable cost by the number of units of output.

merit goods

goods that are held to be desirable for consumers, but which are under provided by the market.

microeconomics

the branch of economics that examines the behaviour of individual decision-making units, consumers and firms; is concerned with consumer and firm behaviour and how their interactions in markets determine prices in goods markets and resource markets

minimum price

a legal price set by the government which is above the market equilibrium price; this does not allow the price to fall to its equilibrium level determined by a free market

minimum wage

a minimum price of labour (the wage) set by governments in the labour market, in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services

barriers to entry

anything that can prevent a firm from entering an industry and beginning production, as a result limiting the degree of competition in the industry.

break-even point

the point of production of a firm where its total revenue is exactly equal to its total costs and it is therefore earning normal profit (or no supernormal profit).

break-even price

a price at which a firms total revenues equal its total costs. at this point the firm is earning normal profit but no supernormal profit.

cap and trade scheme

a scheme in which a government authority (of a single country or a group of countries) sets a limit or 'cap' on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits distributed to firms; firms that want to pollute more than their permits allow can but more permits in a market, while firms that want to pollute less can sell their excess permits.

capital

one of the factors of production, which itself has been produced (it does not occur naturally), also known as 'physical capital' including machinery, tools and equipment. other types of capital include 'human capital', or the skills, abilities, knowledge and levels of good health acquired by people; 'natural capital' and 'financial capital'

average tax rate

tax paid divided by total income, expressed as a percentage.

income elastic demand

relatively high responsiveness of demand to changes in income; YED (income elasticity of demand) > 1

income elasticity of demand

a measure of the responsiveness of demand to changes in income; measured by the percentage change in quantity demanded divided by the percentage change in price.

increasing returns to scale

refers to the situation where the output of a firm changes more than in proportion to a change in all its inputs; given a percentage increase in all inputs, output increases by a larger percentage.

indebtedness

refers to the level of debt, or the amount of money owed to creditors (lenders); may be on a household, firm, or country level

indirect taxes

taxes levied on spending to buy goods and services, called indirect because, whereas payment of some or all of the tax by the consumer is involved, they are paid to the government authorities by the suppliers (firms), that is, indirectly.

industrial policies

government policies designed to support the growth of the industrial sector of an economy; may include support for small and medium-sized firms or support for 'infant industries' through tax cuts, grants, low interest loans and other measures, as well as investment in human capital, research and development, or infrastructure development in support of industry

infant industry

a new domestic industry that has not had time to establish itself and achieve efficiencies in production, and may therefore be unable to compete with more 'mature' competitor firms from abroad. The presence of infant industries is considered to be one of the strongest arguments in favour of trade protection policies in developing countries.

excludable

a characteristic of goods according to which it is possible to exclude people from using the good by charging a price for it; if someone is unwilling or unable to pay the price they will be excluded from using it. most goods are excludable

explicit costs

costs of production that involve a money payment by a firm to an outsider in order to acquire a factor of production that is not owned by the firm. is a type of opportunity cost

externality

occurs when the actions of consumers or producers give rise to positive or negative side effects on other people who are not part of these actions, and whose interests are not taken into consideration.

now

monopolistic competition

large number of firms, substantial control over market price, product differentiation, no barriers to entry. examples include the shoe, clothing and restaurant industries

monopoly

one of the four market structures, with the following characteristics: a single or dominant large firm in the industry; significant control over price; produces and sells a unique product with no close substitutes; high barriers to entry into the industry. Examples include telephone, water and electricity companies in areas where they operate as a single supplier

monopoly power

occurs whenever a firm has the ability to control the price of the product it sells

fixed costs

costs that arise from the use of fixed inputs, which do not change as output increases or decreases. fixed costs arise only in the short run, or the period of time when there is at least one fixed input. examples include rental payments, property taxes and insurance premiums.

formal collusion

an agreement between firms (usually in oligopoly) to limit output or fix prices, in order to restrict competition; is likely to involve the formation of a cartel.

free entry and exit

the condition in which firms face no barriers to entering or exiting an industry, characteristic of the market structures of perfect competition and monopolistic competition.

free rider problem

occurs when people can enjoy the use of a good without paying for it, and arises from non-excludability: people cannot be excluded from using the good, because it is not possible to charge a price. is often associated with public goods, which are a type of market failure: due to the free rider problem, private firms fail to produce these goods.

natural capital

refers to an expanded meaning of the factor of production land, including everything that is included in land plus additional natural resources occurring naturally in the environment such as the air, biodiversity, soil quality, the ozone layer and the global climate

inferior good

a good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases.

game theory

a mathematical technique analysing the behaviour of decision-makers who are dependent on each other, and who use strategic behaviour as they try to anticipate the behaviour of their rivals. often used to analyse the behaviour of oligopolistic firms.

growth maximisation

a possible goal of firms, that differs from the goal of profit maximisation assumed by standard microeconomic theory, involving the achievement of the highest possible growth, for various reasons such as achieving economies of scale, diversifying or achieving market power.

carbon tax

a tax per unit of carbon emissions of fossil fuels, considered by many countries as a policy to deal with the problem of climate change.

cartel

a formal agreement between firms in an industry to undertake concerted actions to limit competition; it is formed in connection with collusive oligopoly. it may involve fixing the quantity to be produced by each firm, or fixing the price at which output can be sold, and other actions. the objective is to increase the monopoly power of the firms in the cartel. cartels are illegal in many countries.

ceteris paribus

a latin expression that means 'other things being equal'. another way of saying this is that all other things are assumed to be constant or unchanging. it is used in economics theories and models to isolate changes in only those variables that are being studied.

clean technology

technology that is not polluting, associated with environmental sustainability; includes solar power, wind power, hydropower, recycling, and many more.

collusion

an agreement among firms to fix prices, or divide the market between them, so as to limit competition and maximise profit; usually involves firms in oligopoly.

collusive oligopoly

refers to the type of oligopoly where firms agree to restrict output or fix the price, in order to limit competition, increase monopoly power and increase profits.

common access resources

resources that are not owned by anyone, do not have a price, and are available for anyone to use without payment (for example, lakes, rivers, fish in the open seas, open grazing land, the ozone layer and many more); their depletion or degradation leads to environmental unsustainability.

competitive market

a market composed of many buyers and sellers acting independently, none of whom has any ability to influence the price of the product (i.e. no market power).

decreasing returns to scale

Refers to the situation where the output of a firm changes less than in proportion to a change in all its inputs; given a percentage increase in all inputs, output increases by a smaller percentage

demand

Indicates the various quantities of a good that consumers are willing and able to buy at different possible prices during a particular time period

demand curve

A curve showing the relationship between to quantities of a good consumers are willing and able to buy during a particular time period, and their respective pries

demerit goods

Goods that are considered to be undesirable for consumers and are overprovided by the market. Overprovision is due to the goods having negative externalities or consumers are ignorant about the harmful effects.

direct taxes

Taxes paid directly to the government tax authorities by the taxpayer, including personal income taxes, corporate income taxes and wealth taxes

diseconomies of scale

Increases in the average costs of production that occur as a firm increases its output by carrying all its inputs. Diseconomies of scale are responsible for the upward slowing part of the long-run average total cost curve: as a firm increases its size, costs per unit of output increase

economic costs

Sum of explicit costs and implicit costs incurred by a firm for its use of resources

economic profit

A firm’s total revenue minus total economic costs. If economic profit is positive, the firm is earning supernormal (abnormal) profit; if it is zero, the firms is earning normal profit; if it is negative, the firm is making a loss

necessities

goods that are necessary or essential: they have a price inelastic demand and income inelastic demand

negative externality

a type of externality where the side-effects on third parties are negative or harmful

natural monopoly

a single firm that can produce for the entire market at a lower average cost than two or more smaller firms. This happens when the market demand for the monopolist's product is within range of falling long-run average cost, where there are economies of scale

inferior good

a good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases.

depreciation

Decrease in the value of a currency in the context of a floating exchange rate system

kinked demand curve

a model developed to explain price inflexibility of oligopolistic firms that do not collude (do not agree to collaborate in order to limit competition between them)

labour

a factor of production, which includes the physical and mental effort that people contribute to the production of goods and services

labour market flexibility

refers to the operation of market forces (supply and demand) in the labour market; to be contrasted with labour market rigidities. May be achieved by reducing or eliminating interference with market forces (for example, reducing or eliminating minimum wages and labour union activities, reducing job security etc.)

land

a factor of production which includes all natural resources; land and agricultural land, as well as everything that is under or above the land, such as minerals, oil reserves, underground water, forests, rivers and lakes. Natural resources are also called 'gifts of nature' or 'natural capital'.

law of demand

a law stating that there is a negative casual relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good demanded falls (and vice versa)

law of diminishing returns

a law that states that as more and more units of a variable input (such as labour) are added to one or more fixed inputs (such as land), the marginal product of the variable input at first increases, but there comes a point when the marginal product of the variable input begins to decrease. This relationship presupposes that the fixed input(s) remain fixed, and that the technology of production is also fixed (unchanging)

law of supply

a law stating that there is a positive casual relationship between the price of a good and quantity of the good supplied, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases (and vice versa)

long run

I) Micro: a time period in which all inputs can be changed; there are no fixed inputs.

money

anything that is acceptable as payment for goods and services; more precisely, money consists of currency and checking accounts.

long run average total costs

the lowest possible average costs that can be attained by a firm for any level of output when all the firm's inputs are variable, i.e. in the long run

long run average total cost curve

a curve that shows the lowest possible average cost that can be attained by a firm for any level of output when all of the firm's inputs are variable

negative casual relationship

a relationship between two variables in which an increase in the value of one causes a decrease in the value of the other

loss

refers to the difference between economic costs and total revenue of a firm when economic costs are greater than revenues; it is negative economic profit

luxuries

goods that are not necessary or essential; they have a price elastic demand (PED>1) and income elastic demand (YED>1). To be contrasted with necessities

negative externality of consumption

a negative externality caused by consumption activities, leading to a situation where marginal social benefits are less than than marginal private benefits (MSB<MPB)

production possibilities

all possible combinations of the maximum amounts of two goods that can be produced by an economy. This assumes fixed resources/technology, full employment and productive efficiency

rational economic decision making

the assumption that all economic decision makers act in their best self-interest, trying to maximise the satisfaction or benefit they receive from their economic decisions (for example consumers try to maximise satisfaction of consumption, firms maximise profits, workers try to secure the highest wage possible)

reallocation of resources

reassigning of resources to particular uses so that the allocation of resources changes and becomes a new allocation

social sciences

academic disciplines that study human society and social relationships concerned with discovering general principles describing how societies function an are organised

negative externality of production

a negative externality caused by production activities, leading to a situation where marginal social costs are greater than marginal private costs (MSC>MPC)

non-collusive oligopoly

a type of oligopoly where firms do not make agreements among themselves in order to fix prices or collaborate in some way.

non-excludable

a characteristic of some goods where it is not possible to exclude someone from using a good, because it is not possible to charge a price

non-price competition

occurs when firms compete with each other on the basis of methods other than price (such as product differentiation, advertising and branding). Non-price competition occurs in oligopoly and monopolistic competition.

non-price determinants of demand

the variables that can influence demand, and that determine the position of a demand curve

non-price determinants of supply

the variables that can influence supply, and that determine the position of a supply curve

non-price rationing

the apportioning or distribution of goods among interested buyers through means other than price, often necessary when there are price ceilings; may include waiting in line and underground markets

non-rivalrous

a characteristic of some goods where the consumption of the good by one person does not reduce consumption by someone else

normal good

a good the demand for which varies positively with income; this means that as income increases, demand for the good increases.

normal profit

the minimum amount of revenue that a firm must receive so that it keeps the business running; also defined as the amount of revenue needed to cover implicit costs, including entrepreneurship

normative economics

the body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be. They cannot be true or false; they can only be assessed relative to beliefs and value judgements.

oligopoly

small number of large firms in the industry; firms have significant control over price; firms are interdependent; products may be differentiated or homogeneous; there are high barriers to entry.

positive economics

the body of economics based on positive statements.

price support

minimum prices set by the government for agricultural products

primary commodity

a product that is produced in the primary sector

primary products

all products produced in the primary sector of an economy

profit

a payment, per unit of time, to owners of entrepreneurship

public good

a good that is non-rivalrous and non-excludable