Econ microeconomic important terms

Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC)

When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB MSC.

Refers to situations when people rely on a piece of information that is not necessarily relevant as a reference point when making a decision.

A type of market failure where one party in an economic transaction has access to more or better information than the other party.

Total costs per unit of output produced.

Revenue earned per unit sold; average revenue is thus equal to the price of the good.

A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents. It challenges the assumption that economic agents (consumers or firms) will always make rational choices with the aim of maximizing with respect to some objective.

Systematic deviations from rational choice decision-making.

A term introduced by Herbert Simon that suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximize with respect to some objectives (such as utility), and thus choose to satisfice. They therefore are rational only within limits.

The idea that individuals, even when they know what they want, may not be able to act in their interests. Findings of bounded self-control include evidence of procrastination

The idea that people do not always maximize self-interest but also have concern for the well- being of others as shown by volunteer work and charity contributions.

Physical capital refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. Human capital refers to the education, training, skills and experience embodied in the labor force of a country.

A Latin expression meaning “other things being equal”.

The design of environments based on the idea that the layout, sequencing, and range of choices available affect the decisions made by consumers.

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

A market with many firms acting independently where no firm has the ability to control the price.

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

Goods that are jointly consumed, for example, coffee and sugar.

Goods that are jointly consumed, for example, coffee and sugar.

Small design changes that include positive reinforcement and indirect suggestions that can influence the behavior of consumers

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.

A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.

The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.

Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.

Refers to increases in real GDP over time.

Economics is the study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants.

In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost or to allocative efficiency where marginal social costs are equal to marginal social benefits or where social surplus is maximum.

A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).

Occurs when quantity demanded at some price is greater than quantity supplied.

Occurs when quantity supplied at some price is greater than quantity demanded.

An entity such as a business that uses factors of production in order to produce and sell goods and services and earn profits. It is an important decision maker in a market economy.

An economy where the means of production are privately owned and where market forces determine the answers to the fundamental questions (what/how much, how and for whom) that all economies face.

A market structure where firms have a degree of market power as they face a negatively sloped demand curve and can thus set price.

When the information about a market or a transaction is incomplete.

Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.

The law of demand is explained by the substitution and the income effect. The income effect states that if the price of a good increases then the real income of consumers decreases and, typically, they will tend to buy less of the good—thus working in the same direction as the substitution effect.

The responsiveness of demand for a good or service to a change in income.

Taxes on expenditure to buy goods and services.

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.

Within the circular flow model these refer to spending on domestic output that does not originate from households and thus includes investment spending by firms, government expenditures and exports.

Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other.

One of the four factors of production that refers to the physical and mental contribution of workers to the production process.

One of the four factors of production that refers to the natural resources with which an economy is endowed; also referred to as “gifts of nature”.

A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus.

A short-run law of production stating that as more and more units of the variable factor (usually labor) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate or, equivalently, marginal product starts to decrease.

The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases.

A law stating that as the price of a good rises, the quantity supplied will rise over a certain period of time, ceteris paribus.

Income not spent on domestic goods and services. It includes savings, taxes and import expenditure.

Occurs when total costs of a firm are greater than total revenues. It is equal to total cost minus total revenue.

Goods that are not considered essential by consumers therefore they have a price elastic demand (PED > 1), or income elastic demand (YED > 1).

Products or goods that have been produced by workers often working with capital goods.

The extra or additional benefit enjoyed by consumers that arises from consuming one more unit of output.

the extra or additional costs of producing one more unit of output

the extra or additional revenue that arise when selling an additional unit of output

The extra or additional benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.

The extra or additional cost to society of producing an additional unit of output, including both the private cost and the external costs.

The extra or additional utility derived from consuming one more unit of a good or service.

In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.

The failure of markets to achieve allocative efficiency. Markets fail to produce the output at which marginal social benefits are equal to marginal social costs; social or community surplus (consumer surplus + producer surplus) is not maximized.

goods or service considered to be beneficial for people that are under-provided by the market and so underconsumed, mainly due to positive consumption externalities

A type of market failure involving asymmetric information where a party takes risks but does not face their full costs by changing behavior after a transaction has taken place. It is very common in insurance markets.

a good where the demand for it increases as income increases

open to personal opinion or belief

nudges are used to influence the choices made by consumers in order to improve the well-being of people and society

The next best alternative foregone when an economic decision is made.

Occurs with a horizontal demand curve signifying that any amount can be bought at a particular price. (PED is infinite.)

Occurs with a horizontal supply curve signifying that any amount can be offered at a particular price. (PES is infinite.)

Where a change in the price of a good or service leads to no change in the quantity supplied of the good or service. (PES is equal to zero.)

capable of being falsified/ right and wrong answer

A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

A measure of the responsiveness of the quantity supplied of a good or service to a change in its price.

Where a change in the price of a good or service leads to a proportionately larger change in the quantity supplied of the good or service in the same direction. (PES is greater than one.)

Prices imposed by an authority, set above or below the equilibrium market price.

The forecasts or views that consumers or firms hold about future price movements that play a role in determining demand.

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction. (PED is less than one.)

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity supplied of the good or service in the same direction. (PES is less than one.)

The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.

Raw materials that are produced in the primary sector. Examples include agricultural products, metals and minerals.

Anything derived from the factor of production land. Includes agricultural products, metals and minerals.

The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive.

A curve showing the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.

A possible objective of firms that involves producing the level of output where profits are greatest: where total revenue minus total cost is greatest or where marginal revenue equals marginal cost.

The quantity of a good or service demanded at a particular price over a given time period, ceteris paribus.

The quantity of a good or service supplied at a particular price over a given time period, ceteris paribus.

when consumers make choices based on the following assumptions consistent tastes and preferences, perfect information, maximize utility

Occurs when firms try to maximize profit. This is an assumption in standard microeconomic theory.

Rules of thumb are mental shortcuts (heuristics) for decision-making to help people make a quick, satisfactory, but often not perfect, decision to a complex choice.

A business or firm objective to achieve a satisfactory outcome with respect to one or several objectives, rather than to pursue any one objective at the possible expense of others by optimizing (maximizing), for example, profit, revenue or growth. It is essentially a mix of the words “satisfy” and “suffice”.

A proposition stating that the supply of goods creates its own demand.

Arises when the quantity demanded of a good or services is more than the quantity supplied at some particular price.

A company whose main objective is to have a social impact rather than to make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and innovative fashion and uses its profits primarily to achieve social objectives.

This occurs where there is allocative efficiency, or where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. Alternatively, it occurs where the marginal cost of producing a good (including any external costs) is equal to the price that is charged to consumers (P

An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers.

Goods that can be used in place of each other, as they satisfy a similar need.

When the price of a product falls relative to other product prices, consumers purchase more of the product as it is now relatively less expensive. This forms part of an explanation of the law of demand.

Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.

A curve showing the relationship between the price of a good or service and the quantity supplied, ceteris paribus. It is normally upward sloping.

The amount of revenue received by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Payments made by the government to vulnerable groups in a society, including older people, low income people, unemployed and many more. The objective is to transfer money from taxpayers to those who cannot work, to prevent them from falling into poverty.

Occurs when a change in the price of a good or service leads to an equal and opposite proportional change in the quantity demanded of the good or service (PED