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Summary Microeconomics Key Words & Definitions
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A list of 162 key terms with definitions.
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Scarcity A situation that arises due to unlimited wants and limited resourcesFactors of production Inputs into production including land, capital, labour and enterprise
Land All naturally occurring resources
Capital All man made resources
Labour All human effort used in production
Enterprise The risk-taking factor of production which combines all of the other factors of production, in the quest for profit
Microeconomics The study of economic decisions taken by individual economic agents, including households and firms
The study of the interrelationships between economic variables and economic decisions taken by the whole (aggregate)
Macroeconomics economy
Opportunity cost The value of the next best alternative forgone in making an economic decision
The process by which the production procedure is broken down into a sequence of stages, and workers are assigned to
Division of labour particular individual stages
An umbrella term to explain the process by which people, firms, regions and economies can become focussed on one area of
Specialisation production
A curve to show the maximum combination of goods and services, which can be produced in a set period of time, with a given
Production Possibility Curve set of resources
Positive economics Statements about what is (ie. about facts)
Market economy An economy where the market forces of supply and demand guide the allocation of resources
Resource allocation The way in which factors of production are used amongst their alternative uses
Productive efficiency Producing the maximum output from a given set of inputs, and so attaining the minimum average cost of production
An economy where resources are allocated partly by direction of government and partly by price signals/market forces of
Mixed economy supply and demand
Economic model A simplified representation of reality used to provide insight into economic decisions and events
Normative economics A statement involving a value judgement (ie. about what should/ought to be)
Invisible hand Adam Smith's description of how resources are allocated in a market economy
Long run economic growth The expansion in the productive capacity of an economy
(Centrally) Planned economy An economy where decisions on resource allocation are guided by the state
Sustainability The use of resources in a way that does not compromise their availability for use by future generations
A system of production in which there is private ownership of productive assets, where individuals are free to persue their own
Capitalism objectives with minimal state intervention
, An assumption made by economists, that economic agents want to get the maximum satisfaction (eg. maximum profit for firms
Maximisation and maximum utility for consumers)
The relationship between quantity demanded and price is inverse, more is always demanded at lower prices than at higher
Law of demand prices (ceteris paribus)
The relationship between quantity supplied and price is positive, more is always supplies at higher prices than at lower prices
Law of supply (ceteris paribus)
A good or service for which quantity demanded falls in response to higher incomes, and vice versa - income and demand are
Inferior good inversely related
Effective demand The quantity of a good or service that consumers are willing and able to buy at any given price, at any given time
Supply curve A graph showing the quantity supplied at different prices at a given time
Firm An organisation which brings together the factors of production, to produce output of goods and services
Joint demand Demand for goods and services which are interdependent, such that they are demanded together (eg. compliments)
Competitive market A market in which an individual firm cannot set the price of the good or service they sell due to competition from other firms
Market equilibrium The point at which quantity supplied equals quantity demanded
Composite demand Demand for goods and services which have multiple uses (eg. coffee/wood)
Substitute goods Goods which are in competitive demand (ie. consumers regard them as alternatives)
Demand for a factor of production, good or service which facilitates another demand (eg. demand for a bus ticket is derived
Derived demand from the demand to get to college)
Demand curve A graph showing the quantity demanded at different prices at a given time
Consumer surplus The difference between the price a consumer is willing and able to pay for a good/service, and the actual market price paid
Ceteris paribus "All other things being equal or held constant"
Composite supply Where the product produced by a firm serves multiple markets
A good or service for which quantity demanded increases in response to rising income, and vice versa - income and demand are
Normal good positively related
Joint supply A situation in which the firm can produce more than one product together
Competitive demand Demand for goods that are in competition with eachother (eg. substitutes)
Producer surplus The difference between the price a firm would have been willing to supply at, and the actual market price
Complement good Goods which are in joint demand
Competitive supply A situation in which the firm can use its factors of production to produce alternative products
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