Allocative efficiency

Allocative efficiency refers to the efficiency Average total cost (ATC)

with which markets are allocating Total costs of production divided by the
resources. quantity produced (also called cost per
unit)

An Abnormal loss
Average total costs
An abnormal loss is where total revenue The amount spent on producing each unit
does not cover total cost. It is a situation of output. The average cost is calculated by
where a firm is making below normal dividing the total level of cost by the level
profits. of output.

Average costs Average variable cost (AVC)

The amount spent on producing each unit Variable costs divided by the quantity
of output. The average cost is calculated by produced.
dividing the total level of cost by the level
of output.
Barriers to entry
Anything that prevents firms from entering
Average fixed cost a market.
Total fixed cost divided by output. The
average fixed cost will decline as output
increases. Bilateral monopoly
The situation in which there is one buyer
and one seller in a market
Average fixed cost (AFC)
Fixed cost divided by the quantity
produced. Break-even point
The point at which price equals the
minimum of average total cost.
Average product of labor
The average product is the output per
worker. Budget constraint
An income limitation on a person’s
expenditure on goods and services.
Average product of labour
The quantity produced divided by the
amount of labour input. Budget line
A line showing the maximum combinations
of two goods that is possible for a
Average revenue consumer to buy, given a budget
Total revenue divided by quantity. constraint and the market prices of the
two goods.
 Elasticity
Cartel Elasticity indicates how one variable
A group of producers in the same industry responds to a change in another variable.
who coordinate pricing and production
decisions.
Elasticity of demand
The elasticity of demand indicates the
Collusion responsiveness of demand to a change in a
Agreements between firms to restrict determinate, for instance, price, price of
competition. other goods and income.

Collusive oligopoly Elasticity of supply

When several large firms in an industry act The responsiveness of supply to a given
to restrict price or output. change in price.

Demand curve Externalities

The demand curve is a graph which shows The spillover effects of production or
the amount of a good that consumers are consumption for which no payment is
willing and able to buy at various prices. made.

Diseconomies of scale Factors of production

Increases in long run costs which occur The factors of production are the resources
from an increase in the scale of that are necessary for production.
production.

Imperfect competition
Economic rent Covers market structures between perfect
A surplus paid to any factor of production competition and monopoly, i.e. an industry
over its supply price. Economic rent is the with barriers to entry and differentiated
difference between what a factor of products.
production is earning (its return) and what
it would need to be earning to keep it in its
present use. Income elasticity of demand
This measures the responsiveness of
demand to a given change in income.
Economies of scale
A reduction in long run unit costs which
arise from an increase in production. Indifference curves
Economies of scale occur when larger firms A curve which shows all the different
are able to lower their unit costs. combination of two goods where a
consumer is indifferent.
Indifference map Marginal propensity to consume
A graph that shows a whole set of The part of the last dollar of disposable
indifference curves. The further away a income that would be spent on additional
particular curve is from the origin then the consumption.
higher the level of satisfaction it
represents.
Marginal propensity to save
The part of the last dollar of disposable
Inelastic income that would be saved.
One variable is unresponsive to changes in
another.
Marginal revenue
The addition to total revenue resulting
Inferior goods from the sale of one additional unit of
Items for which an increase in income output.
results in a fall in the amount bought e.g.
bread, linoleum and coal.
Marginal revenue product
The change in total revenue that results
Labour market from employing one more unit of a factor.
This is made up of firms willing to employ
workers and labour seeking employment.
The demand for labour by firms is Marginal utility
downward sloping with respect to wage The satisfaction gained from the
(price of labour), while the supply of consumption of one extra unit of a good.
labour by households is upward sloping
with respect to wage.
Market demand
The relationship between the total
Marginal cost quantity of a good demanded and its price.
The increase in total cost consequent upon
a one unit increase in the production of a
good. Market failure
Instances of a free market being unable to
achieve an optimum allocation of
Marginal physical product resources.
The change in total product measured in
physical terms caused by a one unit
increase in a variable input. Market supply curve
The horizontal summation of all the
individual supply curves.
Marginal product of labor
The addition to output made by each extra
worker. Microeconomics
The study of the individual parts of the product differentiation, often established
economy, the household and the firm, how through advertising.
prices are determined and how prices
determine the production, distribution and
use of goods and services. Monopolistic firm
A firm which is the sole buyer of a good or
service, most likely of labor in a particular
Minimum wage market.
A wage per hour below which it is illegal to
pay workers.
Monopoly
Strictly defined as a market situation in
Mixed economy which there is a single supplier of a good or
A market economy in which the service, but often used to suggest any
government plays a very large role. situation in which a firm has considerable
power over market price.

Monetary base
The same as "high-powered money": cash Monopsony
in commercial banks, plus cash in A situation in which there is a single buyer
circulation and deposits of the commercial of a particular good or service in a given
bank at the central bank. market.

Monetary policy Movement along the curve

The use of the central bank's power to A situation in which a change in the
control the domestic money supply to variable on one axis causes a change in the
influence the supply of credit, interest variable on the other axis, but maintains
rates and ultimately the level of real the position of the curve.
economic activity.

Multiplier effect
Money The tendency for a change in aggregate
Anything generally acceptable in exchange. spending to cause a more than
Money serves a number of functions: it is a proportionate change in the level of real
medium of exchange, it is used as a unit of national income.
account, and it can be used as a store of
value.
Natural monopoly
A single firm in an industry in which
Monopolistic competition average total cost is declining over the
A market situation in which one or more entire range of production and the
firms may be capable of influencing the minimum efficient scale is larger than the
price of the product. It is characterized by size of the market.
Natural rate of unemployment Normal profits
The rate of unemployment that would The amount of accounting profits when
exist when the economy is operating at full economic profits are equal to zero The
capacity. It would be equal to the amount amount of accounting profits when
of frictional unemployment in the system. economic profits are equal to zero .

Negative externality Normative economics

The situation in which costs spill over onto Economic analysis that makes
someone not involved in producing or recommendations about economic policy.
consuming the good.

Oligopoly
Negative slope An industry characterized by few firms
A slope of a curve that is less than zero, selling the same product with limited entry
representing a negative or inverse of other firms.
relationship between two variables.

Opportunity cost
Negatively related The value of the next-best forgone
A situation in which an increase in one alternative that was not chosen because
variable is associated with a decrease in something else was chosen.
another variable (also called inversely
related).
Pareto efficiency
A situation in which it is not possible to
Net exports make someone better off without making
The value of goods and services sold someone else worse off.
abroad minus the value of goods and
services bought from the rest of the world
– that is, exports minus imports. Payroll tax
A tax on wages and salaries paid by
employers.
Non-tariff barrier
Any government action other than a tariff
that reduces imports, such as a quota or a Perfect competition
standard. A market in which there are many buyers
and sellers of products that are
homogeneous. Buyers and sellers have full
Normal good information about prices, and are price-
A good for which demand increases when takers.
income rises and decreases when income
falls.
Perfectly elastic demand
Demand for which the price elasticity is The situation in which benefits spill over
infinite, indicating an infinite response to a onto someone not involved in producing or
change in the price and therefore a consuming the good.
horizontal demand curve.

Positive slope
Perfectly elastic supply A slope of a curve that is greater than zero,
Supply for which the price elasticity is representing a positive or direct
infinite, indicating an infinite response of relationship between two variables.
quantity supplied to a change in price and
thereby a horizontal supply curve.
Positively related
A situation in which an increase in one
Perfectly inelastic demand variable is associated with an increase in
Demand for which the price elasticity is another variable (also called directly
zero, indicating no response to a change in related).
price and therefore a vertical demand
curve.
Present discounted value
The value in the present of future
Perfectly inelastic supply payments.
Supply for which the price elasticity is zero,
indicating no response of quantity supplied
to a change in price and thereby a vertical Price
supply curve. The amount of money or other goods that
one must pay to obtain a particular good.

Physical capital
The factories, improvements to cultivated Price ceiling
land, machinery and other tools, A government price control that sets the
equipment and structures used to produce maximum allowable price for a good.
goods and services.

Price control
Positive economics A government law or regulation that sets
Economic analysis that explains what or limits the price to be charged for a
happens in the economy and why, without particular good.
making recommendations about economic
policy.
Price discrimination
A situation in which different groups of
Positive externality consumers are charged different prices for
the same good.
Price elasticity of demand The process of changing a government
The percentage change in the quantity enterprise into a privately owned
demanded of a good divided by the enterprise.
percentage change in the price of that
good.
Producer surplus
The difference between the price received
Price elasticity of supply by a firm for an additional item sold and
The percentage change in quantity the marginal cost of the item’s production.
supplied divided by the percentage change
in price.
Product differentiation
The effort by firms to produce goods that
Price floor are slightly different from other types of
A government price control that sets the good.
minimum allowable price for a good.

Production function
Price leader A relationship that shows the quantity of
The price-setting firm in a collusive output for any given amount of input.
industry where other firms follow the
leader.
Production possibilities
Alternative combinations of production of
Price-maker various goods that is possible, given the
A firm that has the power to set its price, economy’s resources.
rather than taking the price set by the
market.
Production possibilities curve
A curve showing the maximum
Price-taker combinations of production of two goods
Any firm that takes the market price as that are possible, given the economy’s
given. This firm cannot affect the market resources and level of technology.
price because the market is competitive.

Profit maximization
Principle of diminishing marginal utility An assumption that firms try to achieve
The proposition that the satisfaction the highest possible level of profits – total
derived from consuming an additional unit revenue minus total costs – given their
of a good or service declines as additional production function.
units are acquired.

Profits
Privatization
Total revenue received from selling the
product minus the total costs of producing Scarcity
the product. The situation in which the quantity of
resources is insufficient to meet all wants.

Quantity demanded
The amount of a good that people want to Shift of the curve
buy at a given price. A change in the position of a curve usually
caused by a change in a variable not
represented on either axis.
Quantity supplied
The amount of a good that firms are willing
to sell at a given price. Short run
The period of time during which it is not
possible to change all inputs to production.
Quota Only some inputs, such as labour, can be
An upper limit on the quantity of a good changed.
that may be imported or sold.

Shortage
Rate of return The situation in which quantity demanded
The return on an asset stated as a is greater than quantity supplied.
percentage of the price of the asset.

Shutdown point
Real wage The point at which price equals the
The wage or price of labour adjusted for minimum of average variable cost.
inflation. In contrast, the nominal wage
has not been adjusted for inflation.
Slope
It refers to a curve and is defined as the
Relatively elastic change in the variable on the vertical axis
A situation in which the elasticity of one divided by the change in the variable on
good is greater than the elasticity of the horizontal axis.
another good.

Specialization
Revenue tariff The situation in which a resource, such as
An import tax whose main purpose is to labour, concentrates and develops
provide revenue to the government. efficiency at a particular task.

Sales tax Specific tariff

A tax on sales of a broad group of goods. A tax on inputs that is proportional to the
number of units or items imported.
Specific tax Tangency point
A tax that is proportional to the number of The only point in common for two curves,
items sold. showing the point where the two curves
just touch.

Substitute
A good that has many of the same Tariff
characteristics of, and can be used in place A tax on imports.
of, another good.

Tax incidence
Substitution effect The allocation of the burden of the tax
The amount by which quantity demanded between buyer and seller.
falls when the price rises, exclusive of the
income effect.
Tax revenue
A tax rate times the amount subject to tax.
Supply
A relationship between price and quantity
supplied. Taxable income
An individual’s income minus deductions.

Supply curve
A graph of supply showing the upward- Terms of trade
sloping relationship between price and Quantity of imported goods a country can
quantity supplied. obtain in exchange for a unit of exported
goods.

Supply schedule
A tabular presentation of supply showing Total costs
the price and quantity supplied of a The sum of variable costs and fixed costs.
particular good, all else being equal.

Total revenue
Surplus The price per unit times the quantity the
The situation in which quantity supplied is firm sells.
greater than quantity demanded.

Transfer payment
Tacit collusion A grant of funds from the government to
Implicit or unstated cooperation of firms to an individual.
make mutually beneficial pricing or
production decisions.
Unit elastic demand
Demand for which price elasticity equals 1.

Unit-free measure
A measure that does not depend on a unit
of measurement.

Utility
A numerical indicator of a person’s
preferences in which higher levels of utility
indicate a greater preference.

Utility maximization
An assumption that people try to achieve
the highest level of utility given their
budget constraint.

Variable costs
Costs of production that vary with the
quantity of production.

Voluntary export restriction (VER)

A country’s self-imposed government
restriction on exports to a particular
country.

Wage
The price of labour defined over a period
of time worked.

World Trade Organization (WTO)

An international organisation that can
mediate trade disputes.