Micro Economics Definitions

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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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Barter
The practice of exchanging one good or service for another, without using money
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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. Some consumers are prepared to pay higher prices in black markets.
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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 finance this
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Capital-intensive
A production technique which uses a high proportion of capital to labour
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Capitalist economy
An economic system that 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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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 (e.g. ex-Soviet bloc, North Korea)
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Consumer durable
A good such as a washing machine or a digital camera that lasts a period of time, during which the consumer can continue gaining utility from it.
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Consumer sovereignty
Exists when the economic system allows scarce resources to be allocated to producing goods and services that reflect the wishes of consumers. Sovereignty can be distorted by the effects of persuasive advertising.
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Consumption
The act of using goods and services to satisfy wants.
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Costs
Costs face by a business when producing a good or service for a market.
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Demand
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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Disposable income
Income that remains after direct taxes and government charges have been paid.
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Economic efficiency
Mking 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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Entrepreneur
An individual who seeks to supply products to a market for a rate of return (i.e. a profit). They will usually invest their own financial capital in a business and take on the risks associated with a business investment.
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Factor incomes
The rewards to factors of production. Labour receives wages and salaries, land earns rent, capital earns interest and enterprise earns profit.
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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 may 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.
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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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Health rationing
Occurs when the demand for health care services outstrips the available resources leading to waiting lists and delays for health treatment.
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Income
Represents a flow of earnings from using factors of production to generate output of goods and services. For example wages and salaries are a factor reward to labour and interest is the flow of income for the ownership of capital.
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Informal economy
Undeclared economic activity which forms the shadow economy.
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Inputs
Labour, capital and other resources used in the production of goods and services.
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Land
Natural resources available for production.
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Manufacturing
Using machines, tools and labour to make things for use or sale.
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Merit good
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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Mixed economy
Where resources are partly allocated by the market and partly by the geovernment.
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Non-renewable resources
Resources which are finite and cannot be replaced. Minerals, fossil fuels and so on are all non-renewable resources.
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Normative statements
Subjective statements - i.e. they carry value judgements. For example, the level of duty on petrol is too high and unfairly penalizes motorists.
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Opportunity cost
The cost of any choice in terms of the next best alternative foregone.
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Pareto efficiency
A situation is Pareto efficient if the only way to make one person better off is to make another person worse off.
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Planned economy
Decisions about what to produce, how much to produce and for whom are decided by central planners working for the government rather than allocated using the price mechanism.
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Positive statement
Objective statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation. For example, "A rise in consumer incomes will lead to a rise in the demand for new cars".
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Preferences
Our tastes, likes, rankings - e.g.I have a prefernce for organic foods and I prefer the Independent newspaper to the Guardian.
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Production possibility frontier/curve
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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Productive efficiency
When a business reaches the lowest point of its average cost curve implying an efficient use of scarce resources and a high level of factor productivity.
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Public bads
Include environmental damage and global warming which affects everyone - no one is excluded from the dis-benefits.
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Public goods
Pure public goods are non-rivalrous - consumption of the good by one person does not reduce the amount available for consumption by another person, and non-excludable - providing it for one persons enables everyone to enjoy it.
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Public sector
Government organisations that provide goods and services in the economy - for example through state education and the national health service.
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Rational choice
Involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs.
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Scarcity
Scarce means limited. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire.
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Specialisation
A method of production where a business or area focuses on the production of a limited scope of products or services to gain greater productive efficiency.
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Stakeholders
Groups who have an interest in the activity of businesses e.g. shareholders, managers, employees, suppliers, customers, government and local communities. Different stakeholders have different objectives.
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State provision
Government-provided goods or services - funded through tax revenue in order to provide goods which have positive externalities or are public goods.
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Tastes
The preferences of customers.
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Technical efficiency
The production of goods and services using the minimum amount of resources or number of factor inputs (land, labour and capital).
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Value judgement
A view of the rightness or wrongness of something, based on a personal view.
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Working capital
Resources used up in production such as raw materials and components.
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Factors of Production
Society's economic resources, comprising land, labour, capital and enterprise
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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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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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Comparative Advantage
An economic agent enjoys a comparative advantage in a productive activity where the opportunity cost is relatively low.
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Market
An arrangement whereby buyers and sellers come in to contact and engage in trade. There are Product Markets for goods and services, and also Factor Markets for factors of production.
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Supply
The quantity of a good or service that producers are willing and able to supply at a given price in a given time period.
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Income effect of a Price Change
The effect on 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 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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Other cards in this set

Card 2

Front

The practice of exchanging one good or service for another, without using money

Back

Barter

Card 3

Front

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. Some consumers are prepared to pay higher prices in black markets.

Back

Preview of the back of card 3

Card 4

Front

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 finance this

Back

Preview of the back of card 4

Card 5

Front

A production technique which uses a high proportion of capital to labour

Back

Preview of the back of card 5
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