Unit 2: Microeconomics

• Market: any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.
• Competitive market: A market with many firms acting independently where no firm has the ability to control the price.
• Law of demand: As price increases, the willingness to purchase goods and services decreases. There is a negative/inverse relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus.
• Utility definition: is the satisfactions that consumers gain from consuming something.
• Marginal utility definition: is the extra satisfaction that consumers receive from consuming one more unit of a good.
• Individual demand: The demand of an individual consumer indicates the various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.
• normal goods: a good is a normal good when demand for it increases in response to an increase in consumer income.
• inferior goods: an inferior good is when the demand falls for it as consumer income increases
• Law of Supply: there is a positive relationship between the quantity of a good supplied over a particular time period and its price, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases (because profits will be high); as the price falls, the quantity supplied also falls, ceteris paribus (because profits will go down).
• Law of diminishing marginal returns: as more and more units of variable input (such as labour) are added to one or more fixed inputs (such as land), the marginal product of the variable input at first increases, but there comes a point when it begins to decrease.
• Individual supply: the supply of an individual firm indicates the various quantities of a good (or service) a firm is willing and able to produce and supply to the market for sale at different possible prices, during a particular time period, ceteris paribus.
• Market supply: is the sum of all individual firms’ supplies for a good.
• Subsidies: A subsidy is a payment made to the firms by the government. Subsidy is equivalent to a fall in production costs, resulting in a rightward shift in the supply curve.
• Marginal benefit: the extra benefit that you get from each additional unit of something you buy.
• Marginal cost: the extra cost of producing one more unit of output.
• ·       Excess demand: the quantity demanded is greater than the quantity supplied at the given price.
• ·       Excess supply: the quantity supplied is greater than the quantity demanded.
• ·       Market price: the quantity consumers are willing and able to buy is exactly equal to the quantity firms are willing and able to sell.
• Price mechanism: refers to the process through which prices are determined in a market economy based on the forces of supply and demand.
• Rational behaviour: a decision-making process that’s based on making choices that result in the optimal level of benefit or maximum utility through weighing up costs and benefits to maximise benefits.
• Behaviour economics: the idea that human behaviour is far more complex than consumer rationality assumes therefore, it criticises consumer rationality and the idea of utility maximisation.
• bias refers to systematic errors in thinking or evaluating.
• Bounded rationality: consumers and businesses are rational only within limits as most do not have enough information to make fully-informed judgements when making their decisions.
• Bounded self-control: When people have good intensions but don’t always carry them out.
• Bounded selfishness: people are selfish only within limits, selfishness cannot explain the numerous accounts of selfless behaviour and willingness to contribute to the public good even at the cost of reduced personal welfare.
• Imperfect information: consumers do not have full access to information to fully analyse and evaluate our choices effectively, hence, unable to maximise utility as they make choices based on faulty and incomplete information.
• Behavioural economics studies how individuals and groups of individuals make decisions using experiments, instead of relying on assumptions about human behaviour.
• Choice architecture: refers to the intentional design of how choices are presented so as to influence decision making.
• 1.     Consumer rationality: consumers make purchasing decisions based on their tastes and preferences.
• 1.     Perfect information: consumers have perfect information available to them about all their alternatives so there is no uncertainty about the goods being chosen.
• 1.     Utility maximisation: consumers maximise their utility by buying the combination of goods and services that results in the greatest amount of utility for a given amount of money spent.
• Þ    Default choice: is a choice that is made by default, which means doing the option that results when one does not do anything.
• Þ    Restricted choice: when individuals have a limited set of options to choose from.
• Þ    Mandated choice: is a choice between alternatives that is made mandatory (compulsory) by the government or other authority.
• satisficing is when firms accept a lower level of profit.
• ·      market share refers to the percentage of total sales in a market that is earned by a single firm/the percentage of a market that a firm controls.
• CSR: the idea that firms should and will take responsibility to look after a range of stakeholders, including those in the local community and the environment.
• growth maximization where firm tries to increase market share and size of the firm.
• Elasticity: is a measure of responsiveness of a variable to changes in price or any of the variable’s determinants.
• Price elasticity of demand (PED) is a measure of the responsiveness of the quantity of a good demanded to changes in its price.