Microeconomics Definitions

Quantity Demanded: The amount of goods and services consumers are willing and able to purchase.

Law of Demand: States that the quantity demanded for a good or service decreases as price increases and vice versa.

The Income Effect: States that as the price of a product falls, consumers' real income increases and more will be bought.

The Substitution Effect: States that as the price of a product falls, more consumers will choose it over rivals and more will be bought.

Diminishing Marginal Utility: As more of a product is consumed, each additional unit brings declining satisfaction, and consumers are only willing to buy more at lower prices.

Market Demand Curve: The sum of all individual demand for a good or service. 

Complementary Goods: Goods or services that are jointly demanded.

Substitute Goods: Goods or services that compete against each other and are hence in competitive demand.

Movement: A change in price changes the quantity.

Shift: A change in a non-price determinant changes the quantity.

Quantity Supplied: The amount of goods and services producers are willing and able to provide.

Law of Supply: States that the quantity supplied is directly proportional to price.

Diminishing Marginal Returns: As more factors of production are utilized, each additional unit brings declining returns.

Marginal Costs: The cost of producing one additional good or service.

Market Supply Curve: The sum of all individual supply for a good or service.

Competitive Supply: The output of one good or service prevents the output of another.

Joint Supply: The output of one good or service increases the output of another.

Shortage: When there is excess demand for a good or service.

Surplus: When there is excess supply for a good or service.

Price Mechanism: The interactions between consumers and producers that allocate resources and determines prices of goods and services.

Signalling Function: Provides information to consumers and producers on where resources should be allocated.

Incentive Function: Provides motivation for consumers and producers to change their behavior to maximize profits.

Rationing Function: Ensures scarce goods and services deter consumers by raising prices.

Consumer Surplus: The gain of all consumers who can consume a product at a lower price than what they were willing and able to pay.

Producer Surplus: The gain of all producers who can produce a product at a higher price than what they were willing and able to earn.

Social Surplus: The sum of consumer and producer surplus.

Allocative Efficiency: The social optimum when resources are distributed in the most effective and beneficial way.

Market Failure: The inability of the free market to achieve allocative efficiency.

Rational Consumer Choice: The assumption that all consumers make the most rational decisions. 

Perfect Information: A situation where an economic agent has complete information about everything related to the product they're buying/selling.

Imperfect Information: A situation where an economic agent has incomplete information on the product they're buying/selling.

Bounded Rationality: The idea that consumers do not always have the capability to make perfectly rational decisions. 

Bounded Selfishness: The idea that consumers are not always completely selfish, in contrast to traditional economic theory.

Bounded Self-Control: The idea that consumers may give in to their temptations and consume products they know are not maximizing their utility.

Rule-of-Thumb: General rules consumers stick to when faced with a lack of information regarding a product.

Anchoring Bias: A cognitive bias where consumers over-rely on information they've received in the past, rather than current information.

Framing Bias: A cognitive bias where consumers decide on products based on how positively (or negatively) they are portrayed.

Availability Bias: A cognitive bias where consumers decide on products based on what information they can first remember is associated with the product.

Choice Architecture: The study of how choices can be presented in a way that influences which choice is taken.

Nudge Theory: Ways to influence consumers into choosing something, without actively restricting their choices; They are simply "nudged" into the "right" direction.

Corporate Social Responsibility: The consideration firms make on how they impact society and the environment.

Price Elasticity of Demand: A measure of how quantity demanded for a product varies based on price.

Income Elasticity of Demand: A measure of how quantity demanded for a product varies based on income.

Inferior Goods: Goods with a negative income elasticity (as incomes increase, less will be demanded)

Necessities/Normal Goods: Goods with an income elasticity between 0 and 1 (as incomes increase, more will be demanded, but less than the proportionate change).

Luxury Goods: Goods with an income elasticity of more than 1 (as incomes increase, more will be demanded, and more than the proportionate change). 

Price Elasticity of Supply: A measure of how quantity supplied for a product varies based on price.

Price Ceiling: Government regulations that set a maximum price for a good or service.

Price Floor: Government regulations that set a minimum price for a good or service.

Indirect Tax: A payment taken indirectly from consumers by charging for their expenditure on goods and services.

Specific Tax: A fixed amount of tax on a good or service.

Ad Valorem Tax: A percentage tax on a good or service.

Government Failure: Arises when government intervention causes more social costs than benefits.

Allocative Efficiency: The social optimum when resources are distributed in the most effective and beneficial way.

Market Failure: The inability of the free market to achieve allocative efficiency.

Marginal Private Benefits: The additional value gained by households or firms when consuming/producing an extra unit of a good or service.

Marginal Private Costs: The additional expense incurred by households or firms when consuming/producing an extra unit of a good or service.

Marginal Social Benefits: The additional value gained by society when consuming/producing an extra unit of a good or service.

Marginal Social Costs: The additional expense incurred by society when consuming/producing an extra unit of a good or service.

Positive Externalities: Benefits of a good or service enjoyed by a third party not directly involved in an economic transaction.

Negative Externalities: Costs of a good or service experienced by a third party not directly involved in an economic transaction.

Merit Goods: Goods and services that create positive externalities when produced or consumed

Demerit Goods: Goods and services that create negative externalities when produced or consumed

Common Pool Resources: Non-excludable but rivalrous resources.

Indirect Tax: A payment taken indirectly from consumers by charging for their expenditure on goods and services.

Carbon Tax: A tax on greenhouse gas emissions that aim to reduce pollution.

Tradable Permits: Government-regulated tradable contracts that allow for pollution. They can be traded amongst firms to result in a more socially optimum level.

Subsidies: Financial assistance from the government to firms that lower their costs of production, in order to increase output. 

Public Goods: Goods for consumption that are non-excludable and non-rivalrous.

Free-Rider Problem: The issue that arises when people that do not pay for a good or service have access to it.

Asymmetric Information: The issue that arises when the seller has more information about the good or service than the buyer, or vice versa. 

Adverse Selection: A market situation where buyers and sellers have more information than the other, leading to the party with the most information making optimal decisions for themselves, at the cost of the other party. 

Moral Hazard: A market situation where a buyer or seller protected from risk makes optimal decisions for themselves, at the cost of the other party.

Market Structure Things:

• • Market Power: The ability of a firm to manipulate prices of a good or service.

  • Perfect Competition: A market structure with many firms holding no market power, no barriers to entry, and homogeneous products.

  • Monopolistic Competition: A market structure with many firms holding little market power, low barriers to entry, and differentiated products.

  • Oligopoly: A market structure with a few large firms holding significant market power, high barriers to entry, and differentiated products.

  • Collusive Oligopoly: A market structure where oligopolistic firms engage in practices to restrict competition by price fixing or limiting output.

  • Monopoly: A market structure with one large firm holding all market power, high barriers to entry, and no close substitute products.

  • Natural Monopoly: A market structure where only one large firm is able to operate with profit.

Profit Maximization Things:

• • Revenue: The money gained by a firm for selling their goods and services.

  • Fixed Costs: Expenses that do not change with output of a good or service.

  • Variable Costs: Expenses that change with output of a good or service.

  • Profit: The money remaining after expenses have been subtracted from revenue.

  • Marginal Revenue: The additional revenue when producing one additional unit of a good or service.

  • Marginal Cost: The additional cost when producing one additional unit of a good or service.

  • Abnormal Profit: Profit left after accounting for costs, incentivizing the entry of new firms into the market.

  • Normal Profit: When the cost of production equals the revenue of selling.

  • Profit Maximization: When a firm produces at the largest possible difference between total revenue and total costs.

Income Inequality: The issue of income being unequally distributed in a country.

Wealth Inequality: The issue of assets being unequally distributed in a country.