Microeconomics: Theme 1

A simplified representation of reality used to provide insight into economic decisions and events

A Latin phrase meaning 'other things being equal'; it is used in economics when we focus on changes in one variable while holding other influences constant.

A statement about what is. It can be scientifically proven.

A statement that involves a value judgement about what ought to be. It is impossible to test scientifically.

A situation that arises when people have unlimited wants in the face of limited resources.

The next best alternative foregone when a decision is made.

An approach to economic decision making based upon consideration of the change which results from the addition of one more item (e.g. one more worker is added to a team)

The resources used in the production process. Land

A diagram showing a line which represents the maximum combination of goods and services which can be produced in a given period with available resources.

An expansion in the productive capacity of the economy

A measure of the economic activity carried out in an economy over a period of time.

A process whereby the production process is broken down into a sequence of stages

A set of arrangements that allows transactions between buyers and sellers to take place

An economy in which market forces are allowed to guide the allocation of resources.

An economy in which decisions on resource allocation are guided by the state.

An economy in which resources are allocated partly through price signals and partly on the basis of intervention by the state.

The study of economic decisions taken by individual economic agents

The study of the interrelationships between economic variables at an aggregate (economy-wide) level.

The quantity that consumers are willing and able to buy of a product at a given price.

A law that states that there is an inverse relationship between quantity demanded and the price of a good or service

A graph showing how much of a good will be demanded by consumers at any given price.

The concept which explains how satisfaction gained through the consumption of one additional unit of a product reduces as more units are consumed.

An increase in quantity demanded as a result of a reduction in price

A fall in quantity demanded as a result of an increase in price.

The size of the potential market for a product

A good where quantity demanded increases in response to an increase in consumer income

A good where quantity demanded decreases in response to an increase in consumer income

Two goods which perform a similar function. They are said to be in competitive demand and as the price of one rises

Two goods which are often bought or used together. They are said to be in joint demand and as the price of one rises

A measure of the responsiveness of one variable to a change in another

A measure of the responsiveness of quantity demanded to a change in the market price.

A change in one variable causes a more than proportional change in the other variable. E.g. an increase in price of 5% causes quantity demanded to fall by 10%.

A change in one variable causes a less than proportional change in the other variable. E.g an increase in price of 5% causes quantity demanded to fall by 1%

A change in one variable causes a proportional change in the other variable. E.g. an increase in price of 5% causes quantity demanded to fall by 5%.

The amount made by firms selling product. It is calculated by multiplying the price of each unit by the amount sold.

A measure of the responsiveness of quantity demanded to a change in income of consumers

A good which demonstrates a normal

A good which demonstrates a normal

A measure of the responsiveness of quantity demanded of one good to a change in the price of another.

The difference between the price that a consumer actually pays (the market price) and the amount that they would be willing to pay.

The amount of a good or service that firms are willing and able to sell at a given price.

An organization that brings together the factors of production in order to produce output.

A market in which individual firms cannot influence the price of the product being sold because of competition from other firms.

A graph showing the quantity supplied at any given price

The costs incurred by a business as a result of their operations. Examples would be rent

A tax applied to a product by increasing the costs of production of firms which produce it.

Money provided by government to reduce the costs of production of a product

The output produced per unit of input. It is normally expressed in the form of output per worker.

An agreement between firms in a market on price and output with the aim of increasing profits.

An increase in quantity supplied as a result of higher prices and an increased profit incentive.

A decrease in the quantity supplied as a result of lower prices and a reduced profit incentive.

A measure of the responsiveness of quantity supplied to changes in the market price.

The difference between the price a firm actually receives for a product (the market price) and the amount that the firm would be willing to accept.

The price at which the quantity demanded and the quantity supplied are equal and the market clears

Examines the before and after effect on equilibrium of a change in the external conditions affecting a market

A situation where the quantity supplied is greater than the quantity demanded as a result of the price being above the equilibrium price.

A situation where the quantity demanded is greater that the quantity supplied as a result of the price being below the equilibrium price.

A situation where the price is not at the equilibrium level and there is a shortage or surplus.

The method by which a market will move towards the equilibrium price.

The process by which changes in demand are communicated to firms by the price consumers are willing to pay.

The process by which changes in price cause a change in the quantity being supplied.

The cost of producing one additional unit of output.

A situation where society is producing an appropriate bundle of goods and services to meet consumer preferences.

An agreement between firms in a market on price and output with the intention of maximising their joint profits

A tax levied on expenditure on goods or services

A tax charged directly to an individual based on a component of income

The way in which the burden of paying a sales tax is divided between buyers and sellers

A grant given by the government to producers to encourage production of a good or service

An indirect tax as a percentage of the price