Microeconomics Definitions

Question	Answer
Black Market	An illegal market in which the market price is higher than the legally imposed price ceiling. Black markets can develop where there is excess demand or a shortage of a commodity.
Capital Goods	Producer or capital goods such as plant and machinery equipment are not useful in themselves but for the goods and services they can help produce in the future.
Ceteris Paribus	All other factors remain constant.
Collusion	An explicit or implicit agreement between suppliers in a market to avoid competition. The central aim of this is to reduce market uncertainty and achieve a level of joint profits similar to that which might be achieved by a pure monopolist.
Command Economy	An economic system where all resources are allocated by the government, with no markets (communism).
Competition Policy	Government policy directed at encouraging competition within the private sector.
Competitive Market	A market where no single firm has a dominant position and consumers have plenty of choice when buying goods and services. There are very few if any barriers to entry for new firms.
Competitive Supply	Goods in competitive supply are alternative products a firm could make with its current available resources.
Complement Goods	Two or more complement goods are said to be in joint supply.
Composite Demand	Where goods and services have more than one use. An in the demand for one product is likely to lead to a fall in supply of the other.
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 and services.
Consumption	The act of using goods and services to satisfy needs and wants (purchasing goods and services).
Cross Elasticity of Demand	Measures the responsiveness of demand for good X following a change in the price of good Y (a related good).
Demand	The quantity of goods and services consumers are willing and able to buy at a given price in a given time period.
Demerit Goods	The consumption of demerit goods can give rise to negative externalities causing a fall in social welfare.
Derived Demand	The demand for product X might be strongly lined to the demand for a related good.
Diminishing Returns	As more of a variable factor is added to a fixed factor a firm will reach a point where it has a disproportionate quantity of labour to capital and so the marginal product of labour will fall thus raising marginal costs.
Disposable Income	Income that remains after direct taxes and government charges have been paid.
Division of Labour	The specialisation of labour in specific tasks, intended to increase productivity.
Economic Efficiency	Making use of all available resources in a way that maximises social welfare.
Economies of Scale	Reductions in long-run average costs due to an increase in the scale of production.
Effective Demand	When a consumers desire to purchase a product is backed up by the ability to pay for it.
Elastic Demand	Demand for which price elasticity is greater than 1.
Elastic Supply	Where the price elasticity of supply is greater than +1.
Elasticity of Supply	Measures the responsiveness of quantity supplied following a change in price.
Emission Tax	A charge made to firms that pollute the environment based on the quantity of pollution they emit.
External Costs	Costs faced by third parties not directly involved with the transaction, for which no appropriate compensation is paid.
Externalities	Third party effects arising from the production and consumption of goods and services for which no appropriate compensation is paid.
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. Due to an increasing population and rate of production we may eventually run out of these resources.
Fixed Costs	Costs that do not vary directly with the level of output,
Free Market Economy	A system of buying and selling that is not under the control of the government where most companies and properties are not owned by the state.
Geographical Immobility of Labour	Barriers that prevent people from moving from on area to another to find work.
Government Failure	When government intervention leads to an allocation of resources that is worse than the free market outcome.
Income Elasticity of Demand	Measures the responsiveness demand following a change in real incomes.
Indirect Tax	A tax imposed on producers by the government.
Inelastic Demand	When price elasticity of demand is less than 1.
Inelastic Supply	When price elasticity of supply is less than +1.
Inferior Goods	When demand goods and services increases ad real incomes fall.
Innovation	The commercial development of exploiting new or improved goods and services.
Invisible Hand Theory	Adam Smith describes how the invisible hand of the free market price mechanism acts through the pursuit of self-interest to allocate resources in society's best interest.
Joint Supply	An increase or decrease in the supply of one good leads to an increase or decrease in the supply of another product.
Latent Demand	When there is the willingness to purchase a good but the consumer lacks the purchasing power to be able to afford the product.
Marginal Costs	A change in total costs resulting from increasing output by of one unit of production.
Marginal Revenue	The increase in revenue resulting from an additional unit of output.
Market Equilibrium	A state of equality between demand and supply.
Market Failure	Market failure occurs whenever markets fail to deliver an efficient or equitable allocation of resources ultimately resulting in a loss of economic and social welfare.
Maximum Price	A legally imposed price ceiling in a market which suppliers cannot exceed.
Merit Goods	Goods and services that society values and the government believe everyone should have access to regardless of real income (gives rise to positive externalities).
Minimum Price	A legally imposed price floor which suppliers cannot fall under.
Mixed Economy	Where resources are partly allocated by the market and partly by the government.
Monopoly	A single seller of a product in a given market or industry.
Needs	Things that are essential for human survival.
Negative Externalities	Negative externalities occur when the production or consumption of goods and services impose external costs on third parties not directly involved with the transaction.
Normal Goods	Goods for which demand increase as real incomes increase.
Normative Statements	Statements that express a judgement or opinion.
Oligopoly	A market dominated by a few large suppliers.
Opportunity Cost	The cost of any economic decision in terms of the next best alternative forgone.
Ostentatious Consumption	The purchasing of luxurious products due to the price believing that price reflects quality.
Positive Externalities	Third party spill over effects arising from the consumption or production of goods and services.
Positive Statements	Objective statements that can be tested and rejected by referring to the available evidence.
Price Mechanism	The means by which decisions of consumers and businesses interact to determine the allocation of resources between different goods and services.
Private Benefits	The rewards to individuals, firms or consumers from consumers from consuming or producing goods and services.
Private Costs	Costs of an economic activity to individuals and firms.
Producer Surplus	The difference between what consumers are willing and able to supply a good for and what they actually receive.
Productive Efficiency	An efficient use of scarce resources to attain a high level of productivity.
Productivity	A measure of efficiency = output per unit of input.
Public Bads	A good which produces negative externalities for which nobody is excluded from.
Public Goods	Pure public goods are non rival, consumption of the good by one person does not reduce the amount available for consumption by another people.
Regressive Tax	Low income earners pay a higher proportion of their income than higher income earners.
Relative Poverty	Measures the extent to which a household's financial resources falls below an average threshold for the economy.
Social Benefits	The benefits of the production or consumption of goods and services as society as a whole.
Social Costs	The costs the production or consumption of good and services imposed on society as a whole.
Spare Capacity	Where a firm or economy can produce more with existing resources.
State Monopoly	A monopoly that is owned by the government.
Subsidy	Payments by the government to suppliers in order to reduce their costs of production.
Supply	The quantity of goods and services that producers are willing to supply onto the market at a given price in a given time period.
Variable Costs	Costs that vary directly with output.

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	Created by Aimee Vickers about 8 years ago