Microeconomics

Key terms.

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Allocative efficiency

This is achieved in an economy when it is not possible to make anyone better off without making someone worse off, or you cannot produce more of one good without making less of another.

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Buffer stock

An intervention system that aims to limit the fluctuations of the price of a commodity.

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Complete market failure

Where the free market fails to provide a product at all, i.e. the case of public goods.

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Composite demand

A good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the available supply for the other purpose, typically leading to higher prices, e.g. milk used in butter and cheese.

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Demand

The amount that consumers are willing and able to buy at each given price level.

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Demerit good

A good that would be over-consumed in a free market, as it brings less overall benefit to consumers than they realise.

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Derived demand

When the demand for one good or service comes from the demand for another good or service. The demand for cars stimulates the demand for steel, therefore the demand for steel is derived demand.

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Diseconomies of scale

Where an increase in the scale of production leads to increases in average total costs to firms.

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Division of labour

Breaking the production process down into a sequence of tasks, with workers assigned to particular tasks.

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Economic goods

Goods that are scarce and therefore have an opportunity cost.

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Economic welfare

Refers to the benefit or satisfaction an individual or society gets from the allocation of resources. We can attempt to measure the welfare of individuals but really we want to understand the overall effects on society as a whole. This will include how well off people feel, how much they have but also might consider other factors such as their environment and standard of living - their physical well-being, although this is hard to define.

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Economies of scale

Where an increase in the scale of production leads to reductions in average total cost for firms.

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Excess demand

When demand is greater than supply at a given price.

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Excess supply

When supply at a particular price is greater than demand, this should signal to producers to lower prices.

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Externalities

Costs or benefits that spill over to third parties external to a market transaction.

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Free goods

Goods that have no opportunity cost, for example air.

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Free-rider problem

Where some consumers benefit from other consumers purchasing a good, particularly in the case of public goods.

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Government failure

When government intervention to correct market failure does not improve the allocation of resources or leads to a worsening of the situation. The costs of government intervention may therefore exceed the benefits.

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Income elasticity of demand

The proportion to which demand changes when there is a change in income.

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Inferior goods

Goods or services that will see demand fall when income rises.

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Economies of scale

Where an increase in the scale of production leads to reductions in average total cost for firms.

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Joint supply

When the production of one good also results in the production of another.

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Excess demand

When demand is greater than supply at a given price.

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Law of unintended consequences

When the actions of consumers, producers and governments have effects that are unanticipated.

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Excess supply

When supply at a particular price is greater than demand, this should signal to producers to lower prices.

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Marginal...

External benefit - The spillover benefit to third parties of an economic transaction.

External cost - The spillover cost to third parties of an economic transaction.

Private benefit - The benefit to an individual or firm of an economic transacion.

Private cost - The cost to an individual or firm of an economic transacion.

Social benefit - the full benefit to society of an economic transaction.

Social cost - the full cost to society of an economic transaction.

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Externalities

Costs or benefits that spill over to third parties external to a market transaction.

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Market-clearing price

The price at which all goods are supplied will be demanded.

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Free goods

Goods that have no opportunity cost, for example air.

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Market failure

Where the market fails to produce what consumers require at the lowest possible cost.

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Free-rider problem

Where some consumers benefit from other consumers purchasing a good, particularly in the case of public goods.

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Merit good

A good that would be under-consumed in a free market.

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Government failure

When government intervention to correct market failure does not improve the allocation of resources or leads to a worsening of the situation. The costs of government intervention may therefore exceed the benefits.

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Monopoly

A market structure dominated by a single seller of a good.

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Income elasticity of demand

The proportion to which demand changes when there is a change in income.

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Inferior goods

Goods or services that will see demand fall when income rises.

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Joint supply

When the production of one good also results in the production of another.

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Law of unintended consequences

When the actions of consumers, producers and governments have effects that are unanticipated.

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Marginal...

External benefit - The spillover benefit to third parties of an economic transaction.

External cost - The spillover cost to third parties of an economic transaction.

Private benefit - The benefit to an individual or firm of an economic transacion.

Private cost - The cost to an individual or firm of an economic transacion.

Social benefit - the full benefit to society of an economic transaction.

Social cost - the full cost to society of an economic transaction.

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Market-clearing price

The price at which all goods are supplied will be demanded.

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Market failure

Where the market fails to produce what consumers require at the lowest possible cost.

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Merit good

A good that would be under-consumed in a free market.

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Monopoly

A market structure dominated by a single seller of a good.

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