Microeconomics Glossary

Ad valorem tax: A tax charged as a percentage of the price of a good, for example Value Added Tax (VAT). Many luxury goods and services are subject to a VAT of 17.5% in the UK. Examples include sweets, biscuits and restaurant meals. Asymmetric information: Consumers and producers have imperfect and unequal market information on a good or service. Buffer stock: A stockpile of a commodity which an agency adds to or subtracts from, to reduce price fluctuations and stabilise producer incomes in a market. Capital: Man-made resources used to produce goods and services, e.g. machines, tools, factories, offices, housing, airports, seaports and roads. Carbon offsetting: A scheme which enables consumers or producers to offset their carbon emissions by paying for the removal of the same amount of carbon emissions from elsewhere. Cartel: A producer cartel is where firms in the same industry agree to restrict competition in order to jointly increase profits. Usually firms agree to fix prices, for example, OPEC in the oil market. Centrally planned economy (command economy): An economy where the government makes the decision on what, how and for whom to produce. The government has control of resources and economic decision-making is centralised. There is no role for the price mechanism. Complementary goods: These are goods which tend to be consumed together. A fall in price of one good will cause an increase in the demand for the other good, for example, tennis rackets and tennis balls. Complementary goods have a negative cross elasticity of demand between them. Consumer surplus: The extra amount of money consumers are prepared to pay for a good or service above what they actually pay. It is the excess utility or satisfaction one obtains from consuming a good or service above the price paid. Cross (price) elasticity of demand: The responsiveness in demand for a good or service due to a change in the price of another good or service. Demand: The quantity of a good or service purchased at a given price over a given time period. Demand is different form just wanting a good or service. It is a want backed up by the ability to pay, which is also known as effective demand. Demand curve: The quantity of a good or service that would be demanded over a range of different price levels and in a given time period.

Derived demand (labour): The demand for labour is derived from the demand for what if produces. For example, the demand for bricklayers is derived from the demand for new housing. Division of labour: The specialisation of labour into different tasks in the production of a good or service. Direct tax: A tax levied directly on an individual or organisation. Direct taxes are generally paid on incomes, for example personal income tax and corporation tax (on company profits). Economics: The allocation of scarce resources to provide for unlimited human wants. Excess demand: The quantity demanded of a good exceeds the quantity supplied at the current price. There is a shortage of the good in the market which puts pressure on its price to rise. Excess supply: The quantity supplied of a good exceeds the quantity demanded at the current price. There is a surplus of the good in the market which puts pressure on its price to fall. Externalities: Costs or benefits which are external to an exchange. They are third party effects ignored by the price mechanism. External benefits: Benefits which are external to an exchange. They are positive third party effects which the price mechanism fails to take into account. External benefits are the divergence between social benefits and private benefits of an economic activity. External costs: Costs which are external to an exchange. They are negative third party effects which the price mechanism fails to take into account. External costs are the divergence between social costs and private costs of an economic activity. Free market economy: An economy where decisions on what, how and for whom to produce are left to the operation of the price mechanism. Resources are privately owned and economic decision-making is decentralised among many individual consumers and producers. There is minimum government intervention. Frictional unemployment: Unemployment due to labour being in between jobs. The economy is dynamic with many jobs being created and lost every day. It takes time for labour to search for work and fill job vacancies. Good: A consumer good is the result of a productive activity which directly yields satisfaction or utility to the individual, for example, sweets, clothing and television. A capital good is a man made good used to produce consumer goods and services, for example, machinery or a factory.

Government failure: Government intervention in a market leads to a net welfare loss. It is where government intervention causes an inefficient allocation of resources. Hidden market: An unofficial market in which the product is sold for a price different to the market price, for example, tobacco and alcohol smuggled into the country to evade tax payments. Immobility of labour: The geographical and occupational barriers which restrict the ability of labour to move from one job to another. Geographical immobility refers to barriers to the movement of labour between areas; occupational immobility refers to barriers to labour changing occupations. Income elasticity of demand: The responsiveness in demand for a good or service due to a change in real income. Indirect tax: A tax levied on the purchase of goods and services. It represents a tax on expenditure. There are two types of indirect tax: specific and ad valorem taxes. Inferior good: A good which has a negative income elasticity of demand. As income rises, demand for a good falls; as income falls, demand for a good rises. Examples may include spam, supermarket own value brands and public transport. Investment: The addition to the capital stock of an economy, for example, new machinery, offices and factories. Labour: Human effort used to produce goods and services. The supply of labour refers to the quantity and quality of hours offered for work per time period. Long run: This is where all factor inputs are variable, making it easier for a firm to raise production. Supply will tend to be relatively more price elastic. Market: This is where buyers and sellers come into contact for the purpose of exchange. There are different types of markets; a product market is where goods and services are exchanged for money and a labour market is where labour time is exchanged for wages. Market equilibrium: This is where the quantity demand equals the quantity supply of a good or service. An equilibrium price is determined from this position. There is a state of balance in the market. Market failure: The price mechanism causes an inefficient allocation of resources. It is when the forces of demand and supply lead to a net welfare loss in society. Market optimum (private equilibrium): The level of output or price where marginal private cost equals marginal private benefit (MPC=MPB). Minimum price: A legally imposed price floor, below which the market price of a good or service cannot fall.

Minimum wage: A legally imposed wage floor, below which the market wage cannot fall in a labour market. Mixed economy: An economy where decisions on what, how and for whom to produce are made partly by the private sector and partly by the government. Most developed economies are mixed economies. National minimum wage: A legally imposed wage floor across all labour markets in the UK. Normal good: A good which has a positive income elasticity of demand. As income rises, so will demand for the good rise; as income falls, so will demand for the good fall. Most goods are normal goods. Normative economics: This is economics concerned with value-judgements and cannot be tested as true or false. It is a non-scientific approach to the discipline. Opportunity cost: The value of the next best alternative foregone. Positive economics: This is economics based on facts and is value-free. Positive economic statements can be tested as true or false. It is a scientific approach to the discipline. Price: The exchange value of a good or service. Price elasticity of demand: The responsiveness of demand for a good or service due to a change in its price. Price elasticity of supply: The responsiveness of supply for a good or service due to a change in its price. Price mechanism: The process in which changes in demand or supply cause price to change, leading to a new equilibrium position in the market. Private Benefits: Benefits which are internal to an exchange. These are benefits or utility the consumer obtains from a good or service. Economists assume private benefits can be measured by the price consumers are prepared to pay for a good or service. Private benefits may also refer to the revenue a firm obtains from selling a good or service. Note: marginal private benefit refers to the private benefit from one extra unit of output. Private Costs: Costs which are internal to an exchange. These are costs the firm or consumer directly pays for. Private costs include wages and rent for producers and the market price for consumers. Note: marginal private cost refers to the private cost from one extra unit of output.

Private Good: A good which possesses the characteristics of rivalry and excludability in consumption. Private goods are the opposite of public goods. Producer surplus: The extra amount of money paid to producers above what they are willing to accept to supply a good or service. It is the extra earnings obtained by a producer above the minimum required to supply the good or service. Production possibility frontier: The maximum potential level of output for two goods or services that an economy can achieve when all its resources are fully and efficiently employed, given the level of technology available. Property right: The provision of rights over the ownership of resources; to what uses they can be put to, and what rights others have over them. An extension of property rights has been applied to the seas, rivers, mountains and air in certain areas. Public good: A good which possesses the characteristics of non-excludability and nonrivalry. Non-excludability means that once a good has been produced for the benefit of one person, it is impossible to stop others from benefiting. Non-rivalry means that as more people consume a good and enjoy its benefits, it does not reduce the amount available for others. In effect, it is non-diminishable. Examples include national defence and street lighting. Quasi-public good: A good which possess the characteristics of public goods (nonexcludability and non-rivalry in consumption) but not all of the time, for example, road space and air travel space. Renewable energy certificates: Certificates awarded to power generation firms who produce electricity from renewable sources. Resources: Factors of production or inputs used in the production of goods and services. They include labour, capital, land and enterprise. Resources can be classified into: (i) Renewable resources: Resources which can be renewed as long as they are managed properly, for example, labour, timber, fish and energy from wind, solar and tidal power. (ii) Non-renewable resources are finite in supply and cannot be increased, for example, coal, oil, iron ore and bauxite. Note that it may be possible to recycle non-renewable resources.

(ii)

Scarcity: Insufficient resources are available to provide for everyones material wants. It occurs in all economies since resources are finite compared to human material wants. Service: The outcome of a productive activity which yields satisfaction or utility to consumers. Services are often consumed as they are produced, for example, a telephone call or medical treatment from a doctor.

Short run: This is where at least one factor input is fixed in quantity, which makes it difficult for a firm to raise production by significant amounts. Supply tends to be relatively price inelastic. Social Benefit: The total benefit to society of an economic activity. It is the addition of private benefit and external benefit. Social cost: The total cost to society of an economic activity. It is the addition of private cost and external cost. Social optimum (social equilibrium): The level of output or price where marginal social cost equals marginal social benefit (MSC=MSB). Specialisation: The concentration of resources on particular tasks or the production of a limited range of goods. Specific tax: A tax charged as a fixed amount per unit of a good, for example each litre of wine or a packet of cigarettes. It is a type of indirect tax. An excise tax is a good example. Subsidy: A grant usually provided by the government, to encourage suppliers to increase production of a good or service, leading to a fall in its price. Examples include bus and train services. Substitute goods: Goods which are alternatives for each other. A fall in price of one good will cause a decrease in demand for the other good, for example, tea and coffee. Substitute goods have a positive cross elasticity of demand between them. Supply: The quantity of a good or service that firms are willing to sell at a given price and over a given period of time. Supply curve: The quantity of a good or service that firms are willing to supply over a range of different price levels and in a given time period. Specialisation: n individual, a firm, a region or a country concentrates on the production of a limited range of goods and services. The outcome is to increase total production of goods and services. Structural unemployment: Unemployment caused by the immobility of labour. There is a mismatch between the skills or location of job seekers and job providers. Structural unemployment often reflects a long term decline in a particular industry leading to long term unemployment. Symmetric information: Consumers and producers have perfect and equal market information on a good or service. Tax: A compulsory charge made by the government, on goods, services, incomes or capital. The purpose is to raise funds to pay for government spending programmes.

Total revenue: Total revenue refers to the total payments a firm receives from selling a given quantity of goods or services. It is the price per unit of good multiplied by the quantity sold. Tradable pollution permits: A government allowance (cap) on the amount of pollution firms may emit. They are tradable since firms may buy and sell pollution permits. Welfare gain: (triangle of welfare gain). The excess of social benefits over social costs for a given level of output. A welfare gain can be achieved by increasing output and price of a particular good or service. Welfare loss: (triangle of welfare loss). The excess of social costs over social benefits for a given level of output. A welfare loss can be eliminated by decreasing output and increasing price of a particular good or service.