AS microeconomics - definitions and notes

definitions of all key words and a summary in note form of the whole of unit 2 economics from edexcel.

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Microeconomics
Key Words
Word Definition
Microeconomics The study of the behaviour of individuals or
groups within an economy, typically within a
market context
Basic Economic Problem Resources have to be allocated between
competing uses because wants are infinite
whilst resources are scarce
Choice Economic choices involve the alternative
uses of scarce resources
Economic goods Goods which are scarce because their use
has an opportunity cost
Free Goods Goods which are unlimited in supply and
which therefore have no opportunity cost
Margin A point of possible change
Needs The minimum which is necessary for a
person to survive as a human being
Opportunity Cost The benefits foregone of the next best
alternative
Production Possibility Frontier (PPF) A curve which shows the maximum potential
level of output of one good given a level of
output for all other goods in the economy
Scarce Resources Resources which are limited in supply so that
choices have to be made about their use
Wants Desires for the consumption of goods and
services
Capital Productivity Output per unit of capital employed
Division Of Labour Specialisation by workers
Factors Of Production The inputs to the production process: land,
which is all natural resources; labour, which is
the workforce; capital, which is the stock of
manufactured resources used in the
production of goods and services;
enterprise, individuals seeking out profitable
opportunities for production and taking risks
in attempting to exploit these
Fixed Capital Economic resources such as factories and
hospitals which are used to transform
working capital into goods and services
Human Capital The value of the productive potential of an
individual or group of workers. It is made up
of the skills, talents, education and training
of an individual or group and represents the
value of future earnings and production
Labour Productivity Output per worker
1

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Microeconomics
Market Any convenient set of arrangements by
which buyers and sellers communicate to
exchange goods and services
Non-renewable Resources Raw materials, such as coal or oil, which
once exploited cannot be replaced
Non-sustainable Resources Resources which are being economically
exploited in such a way that it is being
reduced over time
Primary Sector Extractive and agricultural industries
Productivity Output per unit of input employed
Profits The reward to the owners of a business.…read more

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Microeconomics
Real Values Values adjusted for the effects of inflation
(i.e.…read more

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Microeconomics
Demand Curve The line on a price-quantity diagram which
shows the level of effective demand at any
given price
Demand Or Effective Demand The quantity purchased of a good at any
given price, given that other determinants of
demand remain unchanged
Individual Demand Curve The demand curve for a single consumer,
firm or other economic unit
Market Demand Curve The sum of all individual demand curves
Shift In The Demand Curve A movement of the whole demand curve to
the right or left of…read more

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Microeconomics
Substitute A good which can replace another to satisfy
a want
Elastic Demand Where the price elasticity of demand is
greater than 1. The responsiveness of
demand is proportionally greater than the
change in price. Demand is infinitely elastic if
price elasticity of demand is infinity
Inelastic Demand Where the price elasticity of demand is less
than 1. The responsiveness of demand is
proportionally less than the change in price.…read more

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Microeconomics
of a change in price excluding the income
effect)
Direct Tax Levied directly to an individual or
organisation. Generally paid on incomes
Indirect Tax Usually levied on the purchase of goods and
services. It represents a tax on expenditure
Specific Tax A type of indirect tax. It is charged as a fixed
amount per unit of a good. (Example: Excise
Tax)
Ad Valorem Tax Charged as a percentage of the price of a
good.…read more

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Microeconomics
Social Benefits By adding private benefits to external
benefits
we obtain social benefits
Free Rider A person or organisation which receives
benefits that others have paid for without
making any contribution themselves
Merit Good A good which is underprovided by the
market mechanism.…read more

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Microeconomics
The production possibility frontier (PPF) shows the maximum potential output of an
economy.
Production at a point inside the PPF indicates an inefficient use of resources.
Growth in the economy will shift the PPF outwards.
An economy is a social organisation through which decisions about what, how and
for whom to produce are made.
The factors of production ­ land, labour, capital and enterprise ­ are combined
together to create goods and services for consumption.…read more

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Microeconomics
In a free market economy, resources are allocated through the spending decisions of
millions of different consumers and producers.
Resource allocation occurs through the market mechanism. The market determines
what is to be produced, how it is to be produced and for whom production is to take
place.
Government must exist to supply public goods, maintain a sound currency, provide a
legal framework within which markets can operate, and prevent the creation of
monopolies in markets.…read more

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Microeconomics
A change in demand will lead to a shift in the demand curve, a movement along the
supply curve and a new equilibrium price.
A change in supply will lead to a shift in the supply curve, a movement along the
demand curve and a new equilibrium price.
Markets do not necessarily tend towards the equilibrium price.
The equilibrium price is not necessarily the price which will lead to the greatest
economic efficiency or the greatest equity.
Some goods are complements, in joint demand.…read more

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