Defintions | Oeconomica

Definitions

Definitions are extremely important for all essay response questions and is tested under the Learning Objective "Relevant economic terms are used appropriately throughout the response"

Below is a list of definitions pertaining to microeconomic topics that are frequently tested. This is not a comprehensive list and if you feel that we have left out any important definitions please do not hesitate to suggest it using the "Contact Us" form.

HL and SL

Opportunity Cost

The value of the next best alternative that must be given up or sacrificed to obtain something else

Production Possibility Curve

All combinations of the maximum amount of two goods that can be produced by an economy

Market Equilibrium

The forces of supply and demand are in balance and their is no tendency for price to change

Free Goods

Goods that are not subject to scarcity and have 0 opportunity cost

Economic goods

Goods that are subject to scarcity and have opportunity cost

Allocative efficiency

Producing the quantity of goods and services most desired by society

Consumer Surplus

Highest price consumers are willing to pay minus the price paid

Producer Surplus

Price received by firms for selling their goods minus the lowest price they are willing to accept to produce the good

Social Surplus

Sum of consumer and producer surplus

Welfare Loss

Loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal social costs

Price Elasticity of Demand

Responsiveness of the quantity of a good demanded to a change in its price

Income Elasticity of Demand

Responsiveness of the quantity demanded of a good to a change in income

Price Elasticity of Supply

Responsiveness of the quantity of a good supplied to a change in its price

Price Ceiling

A maximum price set by the government for a particular good

Price Floor

A minimum price set by the government for a particular good

Indirect Tax

Tax imposed on spending of good paid by the producer to the government but is incident on both the consumer and producer

Subsidy

Payment by the government to firms

Rivalrous goods

The consumption of the good by one person reduces the ability of another person to consume the good

Negative production externality

Negative external cost on a third party by the production of a good

Negative consumption externality

Negative external cost on a third party by the consumption of a good

Positive production externality

Positive external cost on a third party by the production of a good

Positive consumption externality

Positive external cost on a third party by the consumption of a good

Non-excludable goods

It is not possible to exclude anyone from consuming the good

Carbon Tax

Tax per unit of carbon emitted through fossil fuels

Tradeable permits

Permits allowing firms to pollute

Demerit goods

Goods that are undesirable for consumers but are over produced by the market

Merit goods

Goods that are socially desirable but are underproduced by the market

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Adverse selection

A situation in which one party in a transaction has more information about the quality of the good being produced

Moral Hazard

A situation in which one party takes risks but does not bear the full cost of the risks

Market Power

Extent to which each individual firm in the industry is able to control the price at which it sells products

Profit Maximization

Determining the level of output that firms should produce to make profit as large as possible

Normal Profit

Minimum amount of revenue a firm must receive to ensure that the business keeps running

Natural Monopoly

Firm that has economies of scale so large that it is possible for a single firm to supply the entire market

Game Theory

A mathematical technique analyzing the behavior of decision makers that are dependent on one another

Price Wars

Situation in which one firms price cut is met with a retaliatory price cut by the other firm

Collusive Oligopoly

Situation in which firms agree to collude

Cartel

A formal agreement that limits external competition

Non Collusive Oligopoly

Oligopolistic firms that do not collude in any way to fix or coordinate prices and limit competition

Concentration Ratio

An indication of the percentage of output produced by the largest firms in an industry