Micro-economic Glossary of Economic Terms (SL)

Glossary term Glossary definition

Allocative efficiency 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).

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

Business tax Tax levied on the income of a business or corporation.

Capital 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 labour
force of a country.

Capital gains tax A tax on the profits realized from the sale of financial assets such
as stocks or bonds.

Carbon (emissions) Taxes levied on the carbon content of fuel. They are a type of
taxes Pigouvian tax.

Ceteris paribus A Latin expression meaning “other things being equal”.

Circular economy 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.

Collective In the case of a common pool resource, such as a fishery, users

self-governance solve the problem of overuse by devising rules concerning the
obligations of the users, the monitoring of the use of the resource,
penalties of abuse, and conflict resolution.

Common pool A diverse group of natural resources that are non-excludable, but
resources their use is rivalrous, for example, fisheries.

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

Competitive market Occurs if in a free competitive market, quantity demanded is equal

equilibrium to quantity supplied.

Competitive supply When goods that a firm is producing use the same resources in
their production process. The goods thus compete with each other
for the use of the same resources.
Complements Goods that are jointly consumed, for example, coffee and sugar.

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

Demand 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.

Demand curve A curve illustrating 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. It is normally
downward sloping.

Demerit goods 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.

Direct taxes Taxes on income, profits or wealth paid directly to the government.

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

Efficiency 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.

Elasticity 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).

Engel curve A curve showing the relationship between consumers’ income and
quantity demanded of a good. It indicates whether a good is normal
or inferior.

Entrepreneurship Refers to the ability of certain individuals to organize the other

factors of production (land, labour, capital) and their willingness to
take risks.

Equilibrium A state of balance that is self-perpetuating in the absence of any

outside disturbance.

Equity The concept or idea of fairness.

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

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

Excludable A characteristic that most goods have that refers to the ability of
producers to charge a price and thus exclude whoever is not willing
or able to pay for it from enjoying it.
Externalities External costs or benefits to third parties when a good or service is
produced or consumed. An externality arises when an economic
activity imposes costs or creates benefits on third parties for which
they are not compensated or do not pay for respectively.

Factors of production Resources used in the production of goods and services; include
land (natural resources), labour, capital and entrepreneurship.

Firm 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.

Firms Productive units that transform inputs (factors of production) into

output (goods and services), usually aiming at earning profits.

Free goods Goods such as air or sea water that are not considered scarce and
thus do not have an opportunity cost.

Free 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.

Free rider problem Arises when individuals consume a good or service without paying
for it because they cannot be excluded from enjoying it.

Households Groups of individuals in the economy who share the same living
accommodation, who pool their income and jointly decide the set of
goods and services to consume.

Human capital The education, training, skills, experience and good health
embodied in the labour force of a country.

Incentive role of prices 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.

Income A flow of earnings from using factors of production to produce

goods and services. Wages and salaries are the factor reward to
labour and interest is the flow of income for the ownership of
capital.

Income elasticity of The responsiveness of demand for a good or service to a change in

demand (YED) income.

Indirect taxes Taxes on expenditure to buy goods and services.

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

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

Labour One of the four factors of production that refers to the physical and
mental contribution of workers to the production process.
Laissez faire The view that if market forces are left alone unimpeded by
government intervention the outcome will be efficient.

Land 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”.

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

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

Long run in The period of time when all factors of production are variable.
microeconomics

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

Manufactured Products or goods that have been produced by workers often

products working with capital goods.

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

Marginal costs The extra or additional costs of producing one more unit of output.

Marginal social benefit The extra or additional benefit/utility to society of consuming an

(MSB) additional unit of output, including both the private benefit and the
external benefit.

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

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

Market Any arrangement where buyers and sellers interact to carry out an
economic transaction.

Market demand The sum of the individual demand curves for a product of all the
consumers in a market.

Market equilibrium 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.

Market failure 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.

Market mechanism The system in which the forces of demand and supply determine
the prices of products. Also known as the price mechanism.
Market power The ability of a firm (or group of firms) to raise and maintain price
above the level that would prevail under perfect competition (or P >
MC).

Market share The percentage of total sales in a market accounted for by one
firm.

Market supply The horizontal sum of the individual supply curves for a product of
all the producers in a market.

Maximum price A price set by a government or other authority that is below the
market equilibrium price of a good or service, also known as a price
ceiling.

Merit goods Goods or services considered to be beneficial for people that are
under-provided by the market and so under-consumed, mainly due
to positive consumption externalities.

Microeconomics The study of the behaviour of individual consumers, firms, and

markets and the determination of market prices and quantities of
goods, services, and factors of production.

Minimum price A price set by a government or other authority above the market
equilibrium price of a good or service, also known as a price floor.

Minimum wage A type of price floor where the wage rate or the price of labour is
set above the market equilibrium wage rate.

Mixed economy An economy that has elements of a planned economy and

elements of a free market economy. In reality, all economies are
mixed. What is different is the degree of the mix from country to
country.

Money Anything that is generally accepted as a means of payment for

goods and services. It usually consists of currency and checking
accounts.

Moral hazard A type of market failure involving asymmetric information where a

party takes risks but does not face their full costs by changing
behaviour after a transaction has taken place. It is very common in
insurance markets.

Natural monopoly A monopoly that can produce enough output to cover the entire
needs of a market while still experiencing economies of scale. Its
average costs will therefore be lower than those of two or more
firms in the market.

Necessity The degree to which a good is necessary or essential.If the

increase in demand for a necessity good is less than proportional to
the rise in income; then the necessity good is income elastic. If the
change in quantity demanded for a necessity good is less than
proportional to a change in price; then the necessity good is price
inelastic.

Negative externalities Negative effects suffered by a third party whose interests are not
of consumption considered when a good or service is consumed, so the third party
are therefore not compensated.
Negative externalities Negative effects suffered by a third party whose interests are not
of production considered when a good or service is produced, so the third party
are therefore not compensated.

Non-excludable A characteristic of a good, service or resource where it is

impossible to prevent a person, or persons, from using it.

Non-rivalrous A characteristic of some goods such that their consumption by one

individual does not reduce the ability of others to consume them. It
is a characteristic of public goods.

Normal goods A good where the demand for it increases as income increases.

Normal profit The minimum return that must be received by a firm in order to stay
in business. A firm earns normal profit when total revenue is equal
to total cost, or when average revenue or price is equal to average
cost.

Normative economics Deals with areas of the subject that are open to personal opinion
and belief, thus not subject to refutation.

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

Perfect information Where all stakeholders in an economic transaction have access to

the same information.

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

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

Perfectly inelastic Where a change in the price of a good or service leads to no

demand change in the quantity demanded of the good or service. (PED is
equal to zero.)

Perfectly inelastic Where a change in the price of a good or service leads to no

supply change in the quantity supplied of the good or service. (PES is
equal to zero.)

Pigouvian taxes An indirect tax that is imposed to eliminate the external costs of
production or consumption.

Planned economy An economy where the means of production (land and capital) are
owned by the state. The state determines what/how much to
produce, how to produce, and for whom to produce.

Positive economics Deals with areas of the subject that are capable of being falsified,
or shown to be correct or not.

Positive externalities The beneficial effects that are enjoyed by third parties whose
of consumption interests are not accounted for when a good or service is
consumed, therefore they do not pay for the benefits they receive.

Positive externalities The beneficial effects that are enjoyed by third parties whose
of production interests are not accounted for when a good or service is produced,
 therefore they do not pay for the benefits they receive.

Price ceiling A price imposed by an authority and set below the equilibrium
(maximum price) price. Prices cannot rise above this price.

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

(Price) elastic demand Where a change in the price of a good or service leads to a
proportionately larger change in the quantity demanded of the good
or service in the opposite direction. (PED is greater than one.)

Price elasticity of A measure of the responsiveness of the quantity demanded of a

demand (PED) good or service to a change in its price.

Price elasticity of A measure of the responsiveness of the quantity supplied of a good

supply (PES) or service to a change in its price.

(Price) elastic supply 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.)

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

Price floor (minimum A price imposed by an authority and set above the market price.
price) Prices cannot fall below this price.

(Price) inelastic Where a change in the price of a good or service leads to a

demand proportionately smaller change in the quantity demanded of the
good or service in the opposite direction. (PED is less than one.)

(Price) inelastic supply 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.)

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

Price war Occurs when firms successively cut their prices in an effort to
match the price cuts of other firms, resulting in lower profits,
possibly losses.

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

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

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

Production A curve showing the maximum combinations of goods or services

possibilities curve that can be produced by an economy in a given time period, if all
(PPC) the resources in the economy are being used fully and efficiently
and the state of technology is fixed.
Public goods Goods or services that have the characteristics of non-rivalry and
non-excludability, for example, flood barriers.

Quantity demanded The quantity of a good or service demanded at a particular price

over a given time period, ceteris paribus.

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

Rationing A method used to divide or apportion goods and services or

resources among the various interested parties.

Refutation A method used in the natural sciences and social sciences where
any proposition must be subjected to an empirical test in order to
see if it can be disproven or refuted. If it is disproven or refuted,
then the proposition must be rejected.

Resource allocation Apportioning available resources or factors of production to

particular uses for production purposes.

Revenues Payments received by firms when they sell their output.

Rivalrous Goods and services are considered to be rivalrous when the

consumption by one person, or group of people, reduces the
amount available for others.

Say’s Law A proposition stating that the supply of goods creates its own
demand.

Scarcity The limited availability of economic resources relative to society’s

unlimited needs and wants of goods and services.

Shortage Arises when the quantity demanded of a good or services is more

than the quantity supplied at some particular price.

Short run in The period of time when at least one factor of production is fixed.
microeconomics

Social/community The sum combination of consumer surplus and producer surplus.

surplus

Socially optimum This occurs where there is allocative efficiency, or where the
output 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 = MC
for the last unit produced).

Social sciences Academic studies of human societies and how people in society
interact with each other.

Stakeholder An individual or group of individuals who have an interest, or stake,

in an economic activity or outcome.

Subsidies An amount of money paid by the government to a firm, per unit of

output, to encourage production and lower the price to consumers.
Substitutes Goods that can be used in place of each other, as they satisfy a
similar need.

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

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

Surplus An excess of something over something else. It occurs:

● when quantity supplied is greater than quantity demanded at
a particular price
● when tax revenues are greater than government spending
(budget surplus) on an account
● when credits are greater than debits in the balance of
payments.
See also “consumer surplus” and “producer surplus”.

Sustainability Refers to the preserving the environment so that it can continue to

satisfy needs and wants into the future. Relates to the concept of
“sustainable development”.

Sustainable Refers to the degree to which the current generation is able to

development meet its needs today but still conserve resources for the sake of
future generations.

Tradable permits Permits to pollute, issued by a governing body, that sets a

maximum amount of pollution allowable. These permits may be
traded (bought or sold) in a market for such permits.

Tragedy of commons A situation with common pool resources, where individual users
acting independently,according to their own self-interest, go against
the common good of all users by depleting or spoiling that resource
through their collective action.

Unitary elastic Occurs when a change in the price of a good or service leads to an
demand equal and opposite proportional change in the quantity demanded
of the good or service (PED = 1).

Unitary elastic supply Occurs when a change in the price of a good or service leads to an
equal proportional change in the quantity supplied of the good or
service (PES = 1).

Utility A measure of the satisfaction derived from consuming a good or

service.

Wage Payment received by the factor of production labour, which is a

certain amount per unit of time.

Wealth The total value of all assets owned by a person, firm, community, or
country minus what is owed to banks or other financial institutions.

Welfare loss A loss of a part of social surplus (consumer plus producer surplus)
that occurs when there is market failure so that marginal social
benefits are not equal to marginal private benefits.