micro definitions

• Basic economic problem


  The problem of scarcity; wants are unlimited but resources are finite so choices have to be made
• Capital


  One of the four factors of production; goods which can be used in the production process
• Economic good


  Goods which have an opportunity cost and suffer from the problem of scarcity
• Free good


  Goods with no opportunity cost since there is no scarcity of the good; they are not traded
• Labour


  One of the four factors of production; human capital
• Land


  One of the four factors of production; natural resources such as oil, coal, wheat, physical space
• Needs


  Requirements necessary for an individual to live and function, such as food and shelter
• Normative statements

  Subjective statements based on value judgements and opinions; cannot be proven or disproven
• Positive statements


  Objective statements which can be tested with factual evidence to be proven or disproven
• Rationalisation


  Decision-making that leads to economic agents maximising their utility
• Scarcity


  The shortage of resources in relation to the quantity of human wants
• Wants


  Something that people desire to have, but do not necessarily need to survive
• Allocative efficiency


  When resources are allocated to the best interests of society, when there is maximum social welfare and maximum utility, P=MC
• Economic efficiency


  When resources are allocated optimally, so every consumer benefits and waste is minimised
• Incentive


  Something which motivates an individual to make a decision and behave a certain way
• Market economy


  An economy where the market mechanism allocates resources so consumers make decisions about what is produced
• Maximisation


  Consumers aim to generate the greatest utility possible, firms aim to generate the highest profits possible
• Mixed economy


  Both the free market mechanism and the government allocate resources
• Planned economy


  All factors of production are allocated by the state, so they decide what, how and for whom to produce goods
• Productive efficiency


  When resources are used to give the maximum possible output at the lowest possible cost; MC=AC
• Resource allocation


  How resources are distributed among producers and how goods and services are distributed among consumers
• Opportunity cost


  The value of the next best alternative forgone
• Production possibility curve/frontier


  Depicts the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully and efficiently employed
• Trade off


  When one thing is lost to gain something else
• Specialisation

  The production of a limited range of goods by a company/country/individual so they aren't self-sufficient and have to trade with others
• Division of labour


  When labour becomes specialised during the production process so workers carry out a specific task in co-operation with other workers
• Competitive demand


  When goods are substitutes, so buying one means you don't buy the other
• Composite supply


  When a good or service can be obtained from different sources
• Demand


  The quantity of a good/service that consumers are able and willing to buy at a given price during a given period of time
• Individual demand


  Demand of an individual or firm, measured by the quantity bought at a certain price at one point in time
• Joint demand


  When goods are bought together
• Market demand


  Sum of all individual demands in a market
• Competitive supply


  When a business could make more than one good with its resources, and producing one means they can't produce the other
• Individual supply

  Supply of a single firm
• Joint supply


  Increasing supply of one good causes an increase in the supply of a by-product
• Market supply


  Sum of all individual supplies in the market
• Supply


  The ability and willingness to provide a particular good/service at a given price at a given moment in time
• Consumer surplus


  The difference between the price the consumer is willing to pay and the price they actually pay
• Producer surplus


  The difference between the price the producer is willing to charge and the price they actually charge
• Derived demand


  The demand for one good is linked to the demand for a related good