Summary Microeconomics Definitions

Microeconomics Definitions Microeconomics - The study of the behaviour (supply and demand) of individual markets Scarcity - A situation in which unlimited wants exceed the limited resources available to fulfill those wants Factors of production - All the economic resources (input) necessary to produce a society's goods and services, such as land, labour, capital and entrepreneurship Ceteris paribus - All things being equal - one of the assumptions used in many economic models, where an individual factor is changed while all others are held constant Opportunity cost - Cost of the next best alternative use of money, time, or resources when one choice is made rather than another Economic good - A good or service that is limited in supply, therefore it is scarce and has an opportunity cost Free good - Commodities that have no price and no opportunity cost eg. fresh air and sunshine Public sector - The part of the economy where goods and services are provided by the government, i.e. public hospitals, roads, schools, parks and gardens. Private sector - The part of the economy that is characterized by private ownership of the means of production by profit seeking individuals Production possiblity curve - A graph that shows the different rates of production of two goods that an individual or group can efficiently produce with limited productive and fully employed resources within a specified time with Free market economy - An economy where all economic decisions are taken by individual households and firms, with no government intervention Mixed economy - An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion Sustainable development or Sustainability - Development that meets the needs of the present without compromising the ability of future generations to meet their own needs Economic growth - A steady growth in the productive capacity of the economy (and so a growth of national income), therefore growth in GDP Economic development - The improvement of living standards by economic growth. Common market - A customs union with common policies on product regulation, and free movement of goods, services, capital and labour Price mechanism - The process by which prices rise or fall as a result of changes in demand and supply. Signals and incentives are given to producers and consumers to produce more or less or consume more or less Demand - The quantity which buyers are willing to and able to purchase of a particular good or service at a given price over a given period of time, ceteris paribus Law of demand - As the price of a product increases, the quantity demanded decreases, ceteris paribus Normal goods - A good for which demand rises as income rises, positive income elasticity Inferior goods - A good whose demand falls as income rises, negative income elasticity Complementary good - Goods used in combination with each other, negative cross-price elasticity Substitute good - Goods which can be sued in place of each ohter, positive cross-price elasticity Giffen good - A type of inferior good for which an increase in the price raises the quantity demanded, as a result of a positive income effect larger than the normal negative substition effect Veblen good - Goods are bought as a display of wealth for ostentatious reasons - so if price rises, people will buy more of them and buy less when they are cheaper. Supply - The amount of a good or service that producers are willing and able to supply at a given price in a given time period Law of supply - As the price of a product increases, the quantity supplied increases, ceteris paribus Supply curve - A curve or line showing the relationship between the price of a product and the quantity supplied over a range of prices Productive efficiency - Achieved when firms produce the maximum amount of output for a given amount of inputs, at the lowest possible average cost curve Allocative efficiency - Best allocation of resources from society's point of view is at competitive market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is maximized (marginal benefit = marginal cost) Consumer surplus - The additional benefit or utility received by consumers by paying a price that is lower than they are willing to pay Producer surplus - The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive Elasticity - A measure of the responsiveness of quantity demanded or quantity supplied to a change in