ad valorem tax
An indirect tax where a given percentage is added to the price of a good or service.
allocative efficiency
Occurs where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. In different words, it occurs where the marginal cost of producing a good (including any external costs) is equal to the price that i
barriers to entry
Obstacles that prevent a new firm from entering a market, such as economies of scale, product differentiation, and legal protection.
break-even price
The price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.
cartel
A formal agreement among firms in a collusive oligopoly.
ceteris paribus
A latin expression meaning 'let all other things remain equal' used by economists to develop economic theories or models.
collusive oligopoly
Where a few firms in an oligopoly act together to avoid competition by resorting to agreements to fix prices or output.
common access resources
Resources which have properties similar to public goods in that it is very difficult or impossible to prevent people from using or consuming the resource. Therefore, they are vulnerable to overuse and/or degradation.
complementary good
Goods used in combination with each other, e.g. digital cameras and memory cards. They have negative cross-price elasticity.
constant returns to scale
A given percentage increase in the quantity of all factors of production results in an equal percentage change in output and thus no change in long-run average costs
consumer surplus
The additional benefit or utility received by consumers by paying a price that is lower than they are willing to pay.
corporate social responsbility
An approach taken by firms where they attempt to produce responsibly or ethically towards the community and environment, demonstrating a positive impact on society.
cross price elasticity of demand
A measure of the responsiveness of the quantity of one good demanded in response to a change in the price of a related good. XED = %D in Qd of Good A/%D in price of Good B
demerit goods
Products that are considered to be harmful for people that would be over-provided or over-consumed in a purely free market economy. Are generally considered to be products whose consumption creates negative externalities.
decreasing returns to scale
A given percentage increase in the quantity of all factors of production results in a smaller percentage increase in output and thus an increase in long-run average costs (diseconomies of scale).
demand
The quantity of a product that consumers are willing and able to buy at a given price in a given time period.
demand schedule
A chart or table showing the quantity of a product demanded at each price. A demand schedule, or a demand function, is used to draw a demand curve.
diseconomies of scale
An increase in average costs in the long run.
economic costs
The total opportunity costs of production to a firm, including the opportunity cost of entrepreneurship.
economic profit
Earned when a firm's revenues are greater than its total opportunity costs (its economic costs).
economies of scale
A fall in average costs in the long run.
excess demand
Occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.
excess supply
Occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.
fixed costs
Costs that do not vary with the level of output.
game theory
A method of analysing the way that the 'players' in an interdependent relationship (such as oligopoly) make strategic decisions.
homogeneous products
Completely identical products, as produced in perfect competition.
incentive function
Prices give producers the motivation either to increase or decrease the quantity they supply. A rising price gives producers the motive to increase the quantity supplied, as the higher price may allow them to earn higher revenues.
incidence of tax
The amount of an indirect tax paid by consumers of a good or producers of a good.
income elasticity of demand
A measure of the responsiveness of demand for a good to a change in consumers' income (= %D in QD/%D in Y)
indirect taxes
Taxes placed upon the expenditure on a good or service, e.g. value added tax, or goods and services tax.
inferior good
A good whose demand falls as income rises. It has negative income elasticity.
increasing returns to scale
A given percentage increase in the quantity of all factors of production results in a greater percentage increase in output and thus a fall in long-run average costs (economies of scale).
joint supply
Goods which are produced together, or where the production of one good involves the production of another product, e.g. meat and leather (a by-product).
law of demand
As the price of a product increases, the quantity demanded decreases, ceteris paribus.
diminishing marginal returns
In the short run, as increasing units of a variable factor are added to a fixed factor, the addition to total output (MP) will eventually fall.
law of supply
As the price of a product increases, the quantity supplied increases, ceteris paribus.
linear demand function
An equation in the form Qd = a - bP which shows the relationship between the price and the quantity of a product demanded.
linear supply function
An equation in the form Qs = c + dP which shows the relationship between the price and the quantity of a product supplied.
long run
In terms of the theory of the firm, the period of time in which all factors are variable.
marginal private benefit
The extra benefit or utility to the consumer of consuming an additional unit of output.
marginal private cost
The extra (private) cost to the producer of producing an additional unit of output.
marginal social benefit
The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.
marginal social cost
The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.
market
A place where buyers and sellers of a product come together to make an exchange, or a trade.
market equilibrium
The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply.
market failure
Occurs when the production of a good does not take place at the socially efficient level of output (allocative efficiency where MSC = MSB).
merit good
Products that are considered to be beneficial for people that would be under-provided or under-consumed in a purely free market economy. Generally considered to be products whose consumption create positive externalities.
microeconomics
The study of the behaviour (supply and demand) of individual markets.
monopolistic competition
A market structure charaterized by a large number of small firms, producing differentiated products, with no barriers to entry or exit.
monopoly
A market structure where there is only one firm, or a dominant firm, in the industry. There are high barriers to entry.
natural monopoly
A situation where there are only enough economies of scale available in a market to support one firm, such that it is natural that the industry be dominated by one firm only.
negative consumption externality
The external costs to a third party that occur when a product is consumed.
negative production externality
The external costs to third party that occur when a product is produced.
normal good
A good whose demand rises as income rises. It has positive income elasticity.
oligopoly
A market structure characterised by a small number of large firms dominating the industry due to high barriers to entry.
perfect competition
A market structure characterised by a large number of firms, producing homogeneous products, each of which is too small to influence the market. The firms are price takers because of this. There are no barriers to entry or exit and all the firms have perf
positive consumption externality
The external benefits to a third party that occur when a product is consumed.
positive production externality
The external benefits to a third party that occur when a product is produced.
price ceiling
A maximum price set by the government or other authority above which the product may not be sold in order to support the consumers of the product.
price discrimination
The act of charging different consumers of an identical product different prices, e.g. based on time of purchase, age of consumer, quantity of purchase or time of consumption.
price elasticity of demand
A measure of the responsiveness of the quantity of a good demanded to a change in its price ( = %D in Qd/%D in price).
price elasticity of supply
A measure of the responsiveness of the quantity of a good supplied to a change in its price ( = %Din Qs/%D in price).
price floor
A minimum price set by the government or other authority below which the product may not be sold in order to support the producers of a product.
price taker
In perfect competition, each firm is a ----- -----, taking the equilibrium price set in the market.
producer surplus
The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive.
product differentiation
A strategy employed by producers where they attempt to make their products different from those of their competitors, e.g. differences in quality, performance, design, styling or packaging. It is a form of non-price competition.
profit maximisation
Often assumed to be the primary goal of firms. This is where the difference between total revenue and total costs is at the maximum or where marginal cost is equal to marginal revenue (MC = MR).
public good
A product which is non-rivalrous and non-excludable and so would not be provided at all in a purely free market economy.
resource allocation
A primary focus of the study of economics is to examine the way that scarce factors of production (land, labour and capital) are used to meet unlimited demand.
revenue maximisation
An alternative goal of firms (as opposed to profit maximization). This occurs when marginal revenue is equal to zero (MR = 0).
revenue
The income received by a firm from selling its product.
satisficing
An alternative goal of firms (as opposed to profit maximisation) . This occurs when entrepreneurs endeavour to cover their opportunity costs, but do not push themselves significantly further, even though they might be able to earn higher profits.
short run
In terms of the theory of the firm, the period of time in which at least one factor of production (usually capital) is fixed.
shut-down price
The price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run.
signalling function
A rising price gives a prompt to producers that they should increase their quantity supplied and alerts to consumers that they should decrease the quantity demanded, and vice versa.
specific taxes
An indirect tax where a fixed amount is added to the price of a good or service.
subsidy
The amount of money given to producers of a product by the government. It increases the supply of the good by effectively lowering the firms' costs of production.
substitute goods
Goods which can be used in place of each other, e.g. Adidas running shoes and Nike running shoes. They have positive cross-price elasticity.
supply
The amount of a good or service that producers are willing and able to produce at a given price in a given time period.
sustainability
In economic terms, the development that meets the needs of present generations without compromising the ability of future generations to meet their needs.
total costs
The complete cost of producing a level of output.
average costs
Costs per unit of output ( = TP/Q)
marginal costs
The addition to total cost of producing one extra unit of output ( = DTC/DQ)
total product
The total output of a firm at a given level of input.
average product
The output that is produced by each unit of the variable factor ( = TP/V).
marginal product
The extra output that is produced by using an extra unit of a variable factor ( = DTP/DV).
total revenue
The price of a product multiplied by the quantity sold ( = PxQ).
average revenue
The revenue that a firm receives per unit sold ( = TR/Q).
marginal revenue
The extra revenue that a firm gains when it sells one more unit of a product ( = DTR/DQ).
variable costs
Costs that vary directly with the level of output.
normal profit
Earned when revenue is equal to the total opportunity costs to the firm. There is no incentive to leave the industry.
asymmetric information
Where one economic agent has access to more information than the other involved in the economic transaction.