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
HL Only
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