Definitions Micro Economics

Wednesday, January 6, 2021

6:21 PM
Supply and Demand
 
price the amount of money a buyer
(a business or a consumer) has to give
up in order to acquire something
 
cost refers to the payment to factor
inputs in production
 
market a group of buyers and sellers
of a particular good or service
 
Competitive Markets
competition a situation when two or more firms are rivals for
customers. Each firm strives to gain the attention and custom of
buyers in the market
 
competitive market a market in which there are many buyers and
many sellers so that each has a negligible impact on the market price
 
Perfectly competitive markets –and others
 
Perfectly competitive market involves Homogenous goods (meaning
buyers have no preference) and Price takers –numerous buyers and
sellers each unable to influence prices
 
Other market structures are Oligopoly (A few sellers not always
aggressively competing with each other) and Imperfect or
monopolistic markets (Many sellers each offering a slightly different
product)\
 
Monopoly(one supplier –)
 
Equilibrium
 
equilibrium a situation in which the price has reached the level where
quantity supplied equals quantity demanded
equilibrium price the price that balances quantity supplied and
quantity demanded
equilibrium quantity the quantity supplied and the quantity
demanded at the equilibrium price
surplus a situation in which quantity supplied is greater than quantity
demanded
 
shortage a situation in which quantity
demanded is greater than quantity
supplied
 
 
law of supply and demand the claim that the price of any good
adjusts to bring the quantity supplied and the quantity demanded for
that good into balance
 
Elasticity
 
elasticity a measure of the responsiveness of quantity demanded or
quantity supplied to one of its determinants
 
total revenue the amount received by sellers of a good, computed as
the price of the good times the quantity sold
 
price elasticity of demand a measure of how much the quantity
demanded of a good responds to a change in the price of that good,
computed as the percentage change in quantity demanded divided by
the percentage change in price
 
income elasticity of demand a measure of how much the quantity
demanded of a good responds to a change in consumers’ income,
computed as the percentage change in quantity demanded divided by
the percentage change in income
 
Market Failure
 
 
willingness to pay a measure of how much a buyer values a good by
the amount they are prepared to pay to acquire the good
consumer surplus the amount a buyer is willing to pay for a good
minus the amount the buyer actually pays for it
 
producer surplus the amount a seller is paid minus the cost of
production
 
Market-Based Policies – Pigovian Taxes and Subsidies
pigovian tax a tax enacted to correct
the effects of a negative externality
 
subsidy a payment to buyers and sellers to supplement income or
lower costs and which thus encourages consumption or provides an
advantage to the recipien
 
Economics of Firms in Markets
 
Profit Maximization basic assumption of classical economics is that
a firm in a competitive market tries to maximize profit.
average revenue total revenue divided by the quantity sold
marginal revenue the change in total revenue from an additional unit
sold
 
break-even the level of output/sales at which total cost equals total
revenue found by dividing the fixed costs by the contribution
(selling price minus variable costs per unit)
 
Firm Behaviour And The Organization of Industry
 
total cost the market value of the inputs a firm uses in production
Profit total revenue minus total cost
 
economic profit total revenue minus total cost, including both
explicit and implicit costs
accounting profit total revenue minus total explicit cost
 
short run the period of time in which some factors of production
cannot be changed
 
long run the period of time in which all factors of production can be
altered
 
fixed costs costs that are not determined by the quantity of output
produced
 
variable costs costs that are dependent on the quantity of output
produced
 
Average and Marginal Cost
 
 
average total cost total cost divided by the quantity of output
 
average fixed cost fixed costs divided by the quantity of output
 
average variable cost variable costs divided by the quantity of
output
 
marginal cost the increase in total cost that arises from an extra
unit of production

Market Structure
 
 
monopoly a firm that is the sole seller of a product without close
substitutes
 
price discrimination the business practice of selling the same good
at different prices to different customers
 
monopolistic competition a market structure in which many firms
sell products that are similar but not identical
 
 
oligopoly competition amongst the few – a market structure in
which only a few sellers offer similar or identical products and
dominate the market
 
 
Factor markets and Government intervention
 
 
Labour markets –the demand for labour
•A firm’s demand for a factor of production like labour is derivedfrom
its decision to supply a good in another market
•Labour markets, like other markets in the economy, are governed by
the forces of supply and demand
•Marginal product of labour is the increase in the amount of output
from an additional unit of labour
•The value of the marginal product of any input is the marginal
product of that input multiplied by the market price of the output
 
 
The curve slopes downward because of diminishing marginal product
 
  
Factors causing Demand for labour curve to shift
•Output price. An increase in the price of the output item:
–Increases marginal product of labour
–In turn, increases the demand for labour at eachwage level
•Technological change –Technological advance raises the marginal
product of labour
•Supply of the other factors
 
 
Factors causing labour supply curve to shift
•Changes in tastes
•More women are in work
•Changes in alternative opportunities reflects increasing labour
mobility
•Immigration –and outward migration
 
 
Government budgets and surpluses
•Government budget deficit lowers national saving
•Supply of loanable funds decreases, so equilibrium interest rate rises
•Crowding out is the decrease in investment that results from
government borrowing