Microeconomic Definitions

Question 1

Market Economy

Answer 1

Market forces are allowed to guide the allocation within a society

Question 2

Centrally Planned Economy

Answer 2

The government guides resources allocation within a society

Question 3

GDP

Answer 3

The value of all final goods and services produced in a country in a year

Question 4

Opportunity Cost

Answer 4

The value of the next-best alternative forgone

Question 5

Loss Leader

Answer 5

A product sold at a price below its market cost to stimulate other sales of more profitable goods or services

Question 6

Market Failure

Answer 6

A situation in which the free market mechanism does not lead to and optimal allocation of resources

Question 7

Information Failure

Answer 7

A type of market failure where economic agents lack sufficient information to make fully informed decisions

Question 8

Asymmetric Information

Answer 8

A situation in which some participants in a market have better information about market conditions than others

Question 9

Adverse Selection

Answer 9

A situation where one party in a transaction has more information than the other, leading to the selection of a “bad” or undesirable outcome for the less informed party

Question 10

Moral Hazard

Answer 10

A situation where one party takes on more risk than they otherwise would because another party will bear the consequences of that risk

Question 11

Ceteris Paribus

Answer 11

“All other things being equal” - The effect of one economic variable on another, provided all other variables remain the same

Question 12

Ex Ante and Ex Post

Answer 12

“Before the event” and “After the event”

Question 13

Merit Good

Answer 13

A good that brings unanticipated benefits to consumers, such that society believes it will be underconsumed in a free market

Question 14

Demerit Good

Answer 14

A good that brings less benefit to consumers that they expect, such that too much will be consumed by individuals in a free market

Question 15

Private Good

Answer 15

A good that, once consumed by one person, cannot be consumed by somebody else - such a good has excludability and is rivalrous

Question 16

Non-Excludability

Answer 16

A situation in which it is not possible to provide a product to one person without allowing others to consume it as well

Question 17

Non-Rivalry

Answer 17

A situation in which one person’s consumption of a good does not prevent others from consuming it as well

Question 18

Non-Rejectability

Answer 18

A situation in which an individual cannot avoid consuming a good

Question 19

Public Good

Answer 19

A good that is non-exclusive, non-rivalrous, and non-rejectable

Question 20

Free-Rider Problem

Answer 20

When an individual cannot be excluded from consuming a good, and so has no incentive to pay for its provision

Question 21

Zero Marginal Cost

Answer 21

The cost of providing the good to an extra consumer is zero

Question 22

Quasi-Public Good

Answer 22

A good that has some, but not all, the characteristics of public goods

Question 23

Indirect Tax

Answer 23

A tax levied on expenditure on goods or services

Question 24

Direct Tax

Answer 24

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

Question 25

Polluter Pays Principle

Answer 25

An argument that a firm causing pollution should be charged the full external cost that it inflicts on society

Question 26

Hypothecation Taxation

Answer 26

Spending tax revenue in the same area in which the revenue was generated

Question 27

Price Control

Answer 27

A legal maximum or minimum price

Question 28

Merger

Answer 28

Two or more firms joining to form a new firm

Question 29

Cartel

Answer 29

An agreement between firms on price and/or output with the intention of maximising their joint profits

Question 30

Buffer Stock

Answer 30

A scheme intended to stabilise the price of a commodity by buying excess supply in periods when supply is high, and selling when supply is low

Question 31

Prohibition

Answer 31

An attempt to prevent the consumption of a demerit good by declaring it illegal

Question 32

Information Provision

Answer 32

Is when the government educates the public to help consumers make better choices

Question 33

Contracting Out

Answer 33

A situation in which the public sector places activities in the hands of a private firm and pays for the provision

Question 34

Competitive Tendering

Answer 34

A process by which the public sector calls for private firms to bid for a contract for provision of a good or service

Question 35

Public-Private Partnership

Answer 35

An arrangement by which a government service or private business venture is funded and operated through a partnership of government and private sector

Question 36

Private Finance Initiative ( PFI, later PF2 )

Answer 36

A funding arrangement under which the private sector designs, builds, finances and operates an asset and associated services for the public sector in return for an annual payment linked to its performance in delivering the service

Question 37

Economic Goods

Answer 37

Goods that are scarce

Question 38

Free Goods

Answer 38

Goods such as the Earth's atmosphere that are not normally regarded as being scarce

Question 39

Capital Goods

Answer 39

Goods used as part of the production process, such as machinery or factory buildings

Question 40

Consumer Goods

Answer 40

Goods produced for present use ( consumption )

Question 41

Division Of Labour

Answer 41

A process whereby the production is broken down into a sequence of stages, and workers are assigned to particular stages

Question 41

Joint Demand

Answer 41

Demand for goods which are interdependent, such that they are demanded together

Question 42

Composite Demand

Answer 42

Demand for a good that has multiple uses

Question 43

Competitive Demand

Answer 43

Demand for goods that are in competition with each other

Question 44

Normal Good

Answer 44

One where the quantity demanded increases in response to an increase in consumer incomes

Question 45

Inferior Good

Answer 45

One where the quantity demanded decreases in response to an increase in consumer incomes

Question 46

Factors of demand curve

Answer 46

Tastes and fashion Consumers' real incomes Price of substitute goods Price of complementary goods change

Question 47

Factors of supply curve

Answer 47

Costs of production Technology Productivity of factors of production Indirect taxes or subsidies Price of other, related goods Number of suppliers Firms' expectations about future prices

Question 48

Consumer surplus

Answer 48

Value that consumers gain from consuming a good or service and above the price paid

Question 49

Producer surplus

Answer 49

Difference between the price received by firms for a good or service and the price at which they would have been prepared to supply that good or service

Question 50

Marginal Principle

Answer 50

Idea that economic agents may take decisions by considering the effect of small changes from the existing

Question 51

Utility

Answer 51

Satisfaction received from consuming a good or service

Question 52

Marginal Utility

Answer 52

Additional utility gained from consuming an extra unit of a good or service

Question 53

Government Failure

Answer 53

Misallocation of resources arising from government intervention that causes a less efficient of resources and imposes a welfare loss on society

Question 54

Commodity

Answer 54

Good that is uniform in quality between the companies producing and selling ( one unit is the same as another ). Often traded in bulk such as raw materials or semi-processed goods.

Question 55

Regulatory Capture ( competition policy )

Answer 55

A situation where a government agency, meant to regulate an industry, becomes unduly influenced by, or even controlled by, the very industry it's supposed to regulate