Microeconomics Glossary
4.1.1.1 Economic Methodology
ECONOMICS - the study of how people choose to use limited resources to satisfy
unlimited wants.
MICROECONOMICS - the study of the economic behaviour of individual units of an
economy (household, firm, government).
MACROECONOMICS - is the study the whole/aggregate economy (e.g. inflation,
unemployment, interest rate).
POSITIVE STATEMENT - can be tested by scientific method to see if it is true or
not.
NORMATIVE STATEMENT - cannot be tested by scientific method and includes an
opinion or value judgement, and is subjective.
ECONOMIC NEED - is something that is necessary for human survival, such as
food, clothing, warmth and shelter.
ECONOMIC WANT - is something that is desirable but not necessary for human
survival.
ECONOMIC WELFARE - the feeling of happiness of human beings after satisfying
their needs and/or wants by acquiring goods and services.
PRODUCTION - the process by which various factor inputs are transformed into
outputs.
CAPITAL - the stock of assets that are used in production.
ENTERPRISE - process of coordinating and organising the other three factors of
production in the production process. It also includes the risks associated with
this.
SCARCITY - limited goods and services produced are insufficient to satisfy all of
the human wants.
4.1.1.2. Behavioural Economics
Behavioural Economics - Assumes bounded rationality: people are limited
by cognitive biases, time, and information.
Classical Economics - Assumes perfect rationality: individuals make decisions to
maximise utility or profit.
Utility - measures the satisfaction obtained from purchasing and
consuming a product.
Total Utility - the total satisfaction from a given level of consumption.
Marginal Utility - the change in satisfaction from consuming an extra unit.
Marginal benefit – is the change in total private benefit from one extra unit
Marginal cost – is the change in total private cost from one extra unit
, Adverse selection - when the better informed party uses the asymmetric
imbalance to take advantage of another party before an exchange or agreement
has taken place.
Moral Hazard - after a deal has been made between two parties with asymmetric
information and one party changes their behaviour as a result
Anchoring - a cognitive bias where individuals rely too heavily on an initial piece
of information (the "anchor") when making decisions, even if it's irrelevant or
arbitrary.
Availability Bias - refers to the tendency of people to judge the likelihood
of an event by the ease with which examples and instances come easily
to mind.
Choice Architecture - the way choices are presented influences our
decisions.
Framing - the idea that the same information can lead to different decisions
depending on how it’s presented. People react differently to "90% success rate"
vs "10% failure rate," even though they mean the same thing. The positive or
negative ‘frame’ can change someone’s emotional response and decision-
making.
Nudge - is a gentle push that helps people make better choices without forcing
them. Nudges don’t ban any options or change financial incentives — they
simply make the better option easier or more appealing.
Default Choice - is what happens when no action is taken — the option
that is selected automatically unless the person changes it. People tend
to stick with defaults, either because it’s easier or because they trust
the system that set it.
Mandated Choice - is when a person is required to make a decision — they can’t
skip or ignore it. This is different from nudging or setting a default
4.1.1.3. Price Determination in a competitive market
DEMAND - quantity of a good or service that consumers are willing and able to
buy at a given price in a given time.
DERIVED DEMAND - demand for a factor of production used to produce another
good or service.
PRICE ELASTICITY OF DEMAND - measures responsiveness of quantity demanded
after a change in the good’s own price. If the PED is more than 1 = elastic if PED
is less than 1 than = inelastic.
INCOME ELASTICITY OF DEMAND (YED) - measures the responsiveness of
demand following a change in real income.
CROSS ELASTICITY OF DEMAND (XED) - measures responsiveness of demand for
good X following a change in the price of good Y (a related good).
PRICE ELASTICITY OF SUPPLY (PES) - measures the relationship between change
in quantity supplied and a change in market price.
4.1.1.1 Economic Methodology
ECONOMICS - the study of how people choose to use limited resources to satisfy
unlimited wants.
MICROECONOMICS - the study of the economic behaviour of individual units of an
economy (household, firm, government).
MACROECONOMICS - is the study the whole/aggregate economy (e.g. inflation,
unemployment, interest rate).
POSITIVE STATEMENT - can be tested by scientific method to see if it is true or
not.
NORMATIVE STATEMENT - cannot be tested by scientific method and includes an
opinion or value judgement, and is subjective.
ECONOMIC NEED - is something that is necessary for human survival, such as
food, clothing, warmth and shelter.
ECONOMIC WANT - is something that is desirable but not necessary for human
survival.
ECONOMIC WELFARE - the feeling of happiness of human beings after satisfying
their needs and/or wants by acquiring goods and services.
PRODUCTION - the process by which various factor inputs are transformed into
outputs.
CAPITAL - the stock of assets that are used in production.
ENTERPRISE - process of coordinating and organising the other three factors of
production in the production process. It also includes the risks associated with
this.
SCARCITY - limited goods and services produced are insufficient to satisfy all of
the human wants.
4.1.1.2. Behavioural Economics
Behavioural Economics - Assumes bounded rationality: people are limited
by cognitive biases, time, and information.
Classical Economics - Assumes perfect rationality: individuals make decisions to
maximise utility or profit.
Utility - measures the satisfaction obtained from purchasing and
consuming a product.
Total Utility - the total satisfaction from a given level of consumption.
Marginal Utility - the change in satisfaction from consuming an extra unit.
Marginal benefit – is the change in total private benefit from one extra unit
Marginal cost – is the change in total private cost from one extra unit
, Adverse selection - when the better informed party uses the asymmetric
imbalance to take advantage of another party before an exchange or agreement
has taken place.
Moral Hazard - after a deal has been made between two parties with asymmetric
information and one party changes their behaviour as a result
Anchoring - a cognitive bias where individuals rely too heavily on an initial piece
of information (the "anchor") when making decisions, even if it's irrelevant or
arbitrary.
Availability Bias - refers to the tendency of people to judge the likelihood
of an event by the ease with which examples and instances come easily
to mind.
Choice Architecture - the way choices are presented influences our
decisions.
Framing - the idea that the same information can lead to different decisions
depending on how it’s presented. People react differently to "90% success rate"
vs "10% failure rate," even though they mean the same thing. The positive or
negative ‘frame’ can change someone’s emotional response and decision-
making.
Nudge - is a gentle push that helps people make better choices without forcing
them. Nudges don’t ban any options or change financial incentives — they
simply make the better option easier or more appealing.
Default Choice - is what happens when no action is taken — the option
that is selected automatically unless the person changes it. People tend
to stick with defaults, either because it’s easier or because they trust
the system that set it.
Mandated Choice - is when a person is required to make a decision — they can’t
skip or ignore it. This is different from nudging or setting a default
4.1.1.3. Price Determination in a competitive market
DEMAND - quantity of a good or service that consumers are willing and able to
buy at a given price in a given time.
DERIVED DEMAND - demand for a factor of production used to produce another
good or service.
PRICE ELASTICITY OF DEMAND - measures responsiveness of quantity demanded
after a change in the good’s own price. If the PED is more than 1 = elastic if PED
is less than 1 than = inelastic.
INCOME ELASTICITY OF DEMAND (YED) - measures the responsiveness of
demand following a change in real income.
CROSS ELASTICITY OF DEMAND (XED) - measures responsiveness of demand for
good X following a change in the price of good Y (a related good).
PRICE ELASTICITY OF SUPPLY (PES) - measures the relationship between change
in quantity supplied and a change in market price.
