Economics Unit 1: Micro Definitions

Definitions for all they key terms you need to know for the Micro exam.

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Excise duties
Excise duties are indirect taxes levied on our spending on goods and services such as cigarettes, fuel and alcohol. There are also duties on air travel, car insurance.
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Ability to pay
The idea that taxes should be levied on a person according to how well that person can shoulder the burden / afford to pay
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Ad valorem tax
An indirect tax based on a percentage of the sales price of a good or service. An increase in an ad valorem tax causes an inward shift in the supply curve
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Air passenger duty
A per passenger charge on air travel from UK airports. The level of duty varies depending on the class of travel (with economy class having a smaller charge) and the distance travelled.
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Alcohol duties
Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content.
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Allocative efficiency
Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production.
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Asking price
The price at which a security, commodity or currency is offered for sale on the market - generally the lowest price the seller will accept.
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Asymmetric information
Occurs when somebody knows more than somebody else in the market. Such asymmetric information can make it difficult for the two people to do business together. A situation in which some agents have more information than others and this affects the ou
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Average cost
Average or unit cost (AC) is the total cost divided by the number of units of the commodity produced.
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Average fixed cost
Fixed costs are costs of production which are constant whatever the level of output. Average fixed costs are total fixed costs divided by the number of units of output, that is, fixed cost per unit of output
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Barriers to entry
Factors which make it difficult or expensive for new firms to enter a market in order to compete with existing suppliers. Examples of barriers to entry include the effect of patents; brand loyalty among consumers; the high costs of buying capital equ
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The practice of exchanging one good or service for another, without using money
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Basic economic problem
The basic problem is that there are infinite wants but finite (non-renewable) resources with which to satisfy them
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Black market
An illegal market in which the market price is higher than a legally imposed price ceiling. Black markets can develop where there is excess demand (or a shortage) for a commodity
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Any factor that causes production to be delayed or stopped – this may reduce the price elasticity of supply of a product
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A distinctive product offering which is created by the use of a logo, symbol, name, design, packaging or combination thereof. The key in designing and building a brand is to differentiate it from competitors.
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Buffer stock
Buffer stock schemes seek to stabilize the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low.
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The purchase by one organisation of large quantities of a product or raw material, which often results in a lower price because of their market power and because it is cheaper to deal with one customer and the deliveries can be on a larger scale.
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Buyer’s market
A market that favours buyers because supply is plentiful relative to demand and therefore prices are relatively low. The opposite of a seller's market.
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Capacity utilisation
The extent to which a business is making full use of existing factor resources
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Efforts to develop human skills or infrastructures within a community or organisation
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Capital goods
Producer or capital goods such as plant (factories) and machinery and equipment are useful not in themselves but for the goods and services they can help produce in the future. Distinguished from "financial capital", meaning funds which are available
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A production technique which uses a high proportion of capital to labour
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Capitalist economy
An economic system organised along capitalist lines uses market-determined prices to guide our choices about the production and distribution of goods. One key role for the state is to maintain the rule of law and protect private property.
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Carbon credits
An allowance to a business to generate a specific level of emissions – may be traded in a carbon market
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Ceteris paribus
To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus - all other influencing factors are held constant.
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Command economy
An economic system where all resources are allocated by the government, with no markets (eg ex-Soviet bloc, North Korea).
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Competition policy
Government policy directed at encouraging competition in the private sector: e.g. the investigation of takeovers or restrictive practices
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Competitive market
A market where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are few barriers to the entry of new firms
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Two complements are said to be in joint demand. Examples include: fish and chips, DVD players and DVDs, iron ore and steel,
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Consumer surplus
A measure of the welfare that people gain from the consumption of goods and services, or a measure of the benefits they derive from the exchange of goods. Consumer surplus is the difference between the total amount that consumers are willing and able
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The act of using goods and services to satisfy wants. This will normally involve purchasing the goods and services
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Costs faced by a business when producing a good or service for a market. Every business faces costs - these must be recouped if a business is to make a profit from its activities. In the short run a firm will have fixed and variable costs of producti
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Cross price elasticity of demand
Responsiveness of demand for good X following a change in the price of good Y (a related good). With cross price elasticity we make an important distinction between substitute products and complementary goods and services.
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Cyclical demand
Demand that change in a regular way over time depending on the part of the trade cycle that a country is in or the time of year.
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Deadweight loss
The loss in producer and consumer surplus due to an inefficient level of production perhaps resulting from market failure or government failure
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Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
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Demand curve
A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price falls.
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De-merit goods
The consumption of de-merit goods can lead to negative externalities which causes a fall in social welfare. Consumers may be unaware of the negative externalities that these goods create - they have imperfect information.
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Derived demand
The demand for a product X might be strongly linked to the demand for a related product Y - giving rise to the idea of a derived demand.
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Disposable income
Income that remains after direct taxes and government charges has been paid.
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Division of labour
The specialization of labour in specific tasks, intended to increase productivity
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Economic efficiency
Economic efficiency is about making the best use of our scarce resources among competing ends so that economic and social welfare is maximised over time
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Economic growth
An increase in the productive potential of the country – shown by an outward shift of the production possibility frontier. Economic growth is measured in two main ways — as an increase in real GDP or as an increase in potential GDP
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Elasticity of supply
Price elasticity of supply measures the relationship between change in quantity supplied and a change in price.
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Equilibrium means ‘at rest’ or ‘a state of balance’ - i.e. a situation where there is no tendency for change. The concept is used in both microeconomics (e.g. equilibrium prices in a market) and also in macroeconomics (e.g. equilibrium national incom
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Excess demand
The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price
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Excess supply
When supply is greater than demand and there are unsold goods in the market. Surpluses put downward pressure on the market price.
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External cost
External costs are those costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and then estimating a monetary value for air and noise pollution is a difficult exercise - but one that is increasingly important
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Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.
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Finite resources
There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. By producing more for an ever-increasing population, we amay destroy the natural resources of the planet.
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Free market
System of buying and selling that is not under the control of the government, and where people can buy and sell freely, or an economy where free markets exist, and most companies and property are not owned by the state
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Geographical immobility
People may also experience geographical immobility – meaning that there are barriers to them moving from one area to another to find work
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Gini Coefficient
The Gini coefficient measures the extent to which the distribution of income (or, in some cases, consumption expenditures) among individuals or households within an economy deviates from a perfectly equal distribution. The coefficient ranges from 0 -
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Government failure
Policies that cause a deeper market failure. Government failure may range from the trivial, when intervention is merely ineffective, to cases where intervention produces new and more serious problems that did not exist before
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Government spending
Government spending is by central and local government on goods and services.
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Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.
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Income elasticity of demand
Measures the relationship between a change in quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income
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Indirect tax
An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax.
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Inferior good
When demand for a product falls as real incomes increases
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Joint supply
Joint supply describes a situation where an increase or decrease in the supply of one good leads to an increase or decrease in supply of another by-product. For example an expansion in the volume of beef production will lead to a rising market supply
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Marginal cost
Marginal cost is defined as the change in total costs resulting from increasing output by one unit. Marginal costs relate to variable costs only
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Market failure
Market failure exists when the competitive outcome of markets is not efficient from the point of view of the economy as a whole. This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity d
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Maximum price
A legally-imposed maximum price in a market that suppliers cannot exceed - in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price
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Merit good
A merit good is a product that society values and judges that everyone should have regardless of whether an individual wants them. In this sense, the government (or state) is acting paternally in providing merit goods and services
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Minimum price
A legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. A good example of this is minimum wage legislation currently in force in the UK
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Mixed economy
Where resources are partly allocated by the market and partly by the government
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Negative externality
Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This causes social costs to exceed private costs
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Opportunity cost
The cost of any choice in terms of the next best alternative foregone
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Positive externalities
Positive externalities exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training or the positive benefits from health care and medical research.
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Price elasticity of demand
Price elasticity of demand measures the responsiveness of demand for a product following a change in its own price.
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Price elasticity of supply
Price elasticity of supply measures the relationship between change in quantity supplied and a change in price.
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Price mechanism
The means by which decisions of consumers and businesses interact to determine the allocation of resources between different goods and services.
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Producer surplus
The difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price.
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Production possibility frontier
A boundary that shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently
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Purchasing power
A measure of money's value in terms of what it can buy. Purchasing power tends to change over time, mainly because of inflation.
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Spare capacity
Where a firm or economy can produce more with existing resources. When there is plenty of spare capacity, elasticity of supply tends to be high
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Speculation is the activity of buying a good or service in anticipation of a change in the price/market value e.g. currency or stock-market speculation
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Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.
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Time lags
Time lags occur in production, particularly in agriculture, when decisions about the quantity to be produced are made well ahead of the actual sale. Demand and the price may change in the interval, creating a problem for the producer.
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Other cards in this set

Card 2


The idea that taxes should be levied on a person according to how well that person can shoulder the burden / afford to pay


Ability to pay

Card 3


An indirect tax based on a percentage of the sales price of a good or service. An increase in an ad valorem tax causes an inward shift in the supply curve


Preview of the back of card 3

Card 4


A per passenger charge on air travel from UK airports. The level of duty varies depending on the class of travel (with economy class having a smaller charge) and the distance travelled.


Preview of the back of card 4

Card 5


Excise duties on alcohol are a form of indirect tax and are chargeable on beer, wine and spirits according to their volume and/or alcoholic content.


Preview of the back of card 5
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