Econ 1 Microeconomic Definitions

To help with the 5 markers at the beginning.

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Factors of Production
Society's economic resources, comprising land, labour, capital and enterprise.
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Scarcity
Economic resources are limited relative to society's desire for goods and services.
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Economic Good
A good or service whose production requires the use of scarce resources.
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Free Good
A good or service which can be enjoyed without the need to use scarce resources.
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Opportunity Cost
The opportunity cost of choosing a good or service is the benefit that would have been enjoyed from the best alternative.
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Production Possibility Curve
The maximum output of combinations of goods and services that can be produced through the full and efficient employment of society's economic resources. It represents society's full productive potential at any point in time.
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Investment
The production of additional units of capital, thereby increasing society's total economic resources. Economists talk of investment in both capital equipment and human capital, but normally the term just refers to new capital equipment.
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Specialisation
Productive activity by individuals, firms and countries focusing upon a narrow range of output. Specialisation by labour is known as 'division of labour'.
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Comparative Advantage
An economic agent enjoys a comparative advantage in a productive activity where the opportunity is relatively low.
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Market
An arrangement whereby buyers and sellers come into contact and engage in trade. There are 'Product markets' for goods and services and 'Factor markets' for factors of production.
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Demand
The quantity of a product a consumer is willing and able to buy in a period of time.
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Supply
The quantity of a product a firm is willing and able to produce in a period of time.
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Income effect of a Price change
The effect of quantity demanded of a price change causing consumer real income to change.
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Substitution effect of a Price change
The effect on the quantity demanded of a price change causing relative prices to change.
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Marginal Utility
The additional utility enjoyed when a consumer increases quantity demanded by a single unit.
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Consumer Surplus
The utility received by a consumer over and above the price that has been paid for the product. It arises where a consumer would be willing and able to pay a price higher than the market price.
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Giffen Good
A product where price and quantity demanded are positively related.
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Equilibrium Market Price
The price at which the planned demand of consumers and the planned supply of firms are equal. It represents a state of rest in the market, and consumers and firms have no incentive to change their behaviour. The market clearing price.
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Disequilibrium Market Price
A market price that gives rise to either excess demand or excess supply, with the planned demand of consumers no equal to the planned supply of firms.
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Price Mechanism
Dynamic whereby market prices rise and fall to eliminate excess demand or supply. An efficiently functioning price mechanism will move markets into equilibrium.
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Rationing function of the Price Mechanism
The process whereby a rising market price will eliminate excess demand.
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Signalling function of the Price Mechanism
The price of a product communicated information to consumers and firms about value for money/ profit opportunities.
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Incentive function of the Price Mechanism
The price of a product generates opportunities for consumers and firms to increase their utility, profit by changing demand and supply decisions/
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Substitute Goods
Two goods are substitutes if they are in Competitive Demand and a consumer considers them to be alternatives. The cross elasticity is positive.
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Complementary Goods
Two goods are complements if they are in Joint Demand and a consumer uses them in combination. The cross elasticity of demand is negative.
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Derived Demand
Where the demand in a product market gives rise to a related demand for factors of production to make the product.
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Joint Supply
Two or products are produced simultaneously, production of one automatically generates production of the other.
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Composite Demand
A factor of production is in demand from more than one product market, so the greater supply of it in making one product inevitably reduces the supply available to make the other product.
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Price Elasticity of Demand
Measures the responsiveness of demand for a product to a change in the price. Calculated by % change in QD divided by % change in price.
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Income Elasticity of Demand
Measure the responsiveness of demand for a product to a change in consumer income. Calculated by % change in QD divided by the % change in income.
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Normal Good
Products with positive income elasticity of demand, with rising income causing rising demand.
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Inferior Good
Products with negative income elasticity of demand, with rising income causing falling demand.
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Cross Elasticity of Demand
Measures the responsiveness of demand for a product to change in the price of a complementary or substitute good. Calculated by the % change in QD of good X divided by the % change in price of good Y.
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Price Elasticity of Supply
Measures the responsiveness of supply of a product to a change in its price. Calculated by the % changed in QS divided by % change in price.
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Indirect Taxation
Taxation imposed on goods and services, which raises the cost of production for firms and shifts the supply curve to the left.
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Subsidy
Money paid to firms by the government, which reduces the cost of production and shifts the supply curve to the right.
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Allocative Efficiency
Situation where markets are in equilibrium, with neither excess demand or supply, where marginal social cost equals marginal social benefit.
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Allocative Inefficiency
Situation where markets aren't at equilibrium, with excess demand or supply and marginal social cost is not equal to marginal social benefit.
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Productive Efficiency
Products are made at minimum possible average cost of production.
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Productive Inefficieny
Products not made at minimum possible average cost of production.
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Equity
A distribution of income and wealth in society that is considered to be fair.
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Market Failure
Any situation in which markets fail to achieve either efficiency or equity. Society is not making the optimal use of its scarce factors of production.
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External Cost
Spillover costs suffered by society as a whole and not taken into account by consumers and firms trading in markets.
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External Benefits
Spillover benefit enjoyed by society as a whole and not taken into account by consumers and firms trading in markets.
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Social Cost
MPC+MEC=MSC, total cost suffered by society from the production of a product
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Social Benefit
MPB+MEB=MSB, total benefit enjoyed by society from the production of a product.
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Tragedy of the Commons
External Costs cause a market to suffer from allocative inefficiency, as firms and consumers exploit natural resources which are not protected by property rights.
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Merit Good
Underconsumed in a free market
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Demerit Good
Overconsumed in a free market
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Moral Hazard
Consumers and firms encouraged by free market incentives to behave in a way that generates inefficiency and external costs.
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Consumer Irrationality
Consumers lack of information to accurately assess the personal costs and benefits arising from consumption of a product.
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Black Market
An illegal market that develops where there is excess demand for a good generated by a maximum price. The black market price will be higher than the legal maximum price.
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Buffer Stocks
Quantity of products held by government to stabilise the free market price at a target level. Fluctuations in the level of buffer stocks are designed to avoid excess demand or supply arising at the target price.
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Barriers to Entry
Factors that make it difficult for new firms to break into product markets, thereby strengthening the power of the existing firms.
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Economies of Scale
Factors that reduce the average cost of production as a firm increases its volume of production, thereby increasing productive efficiency.
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Diseconomies of Scale
Factors that increase the average cost of production as firms increase its volume of production, increasing productive inefficiency.
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Public Good
Non-rivalrous and non-excludable, leading to a missing market and allocative inefficiency.
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Non-rivalrous
Consumption by one person doesn't reduce the ability of other people to consume it, can be enjoyed simultaneously.
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Non-excludable
It is impossible to prevent free-riders consuming the good despite not having paid for it.
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Government Failure
When a government intervenes in a free market and either fails to improve efficiency/ equity or actually makes it worse.
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Positive Statements
Capable of being tested against empirical evidence declared either true or false
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Normative Statements
Essentially value judgements and incapable of being declared true or false by reference to any empirical evidence,
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Other cards in this set

Card 2

Front

Scarcity

Back

Economic resources are limited relative to society's desire for goods and services.

Card 3

Front

Economic Good

Back

Preview of the front of card 3

Card 4

Front

Free Good

Back

Preview of the front of card 4

Card 5

Front

Opportunity Cost

Back

Preview of the front of card 5
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