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Important Terms & Definitions | H2 EconomicsIMPORTANT TERMS & DEFINITIONS [ECONOMICS]
Microeconomics
1. Introduction to Economics
Scarcity Situation where limited resources available unable to satisfy unlimited
human wants
Opportunity Cost (OC) Cost of any activity measured in terms of next best alternative forgone
Production Possibility Curve Shows all different maximum attainable combinations of goods &
(PPC) services produced when all available resources are used efficiently at
given state of technology
Law of Increasing Opportunity As more of a good is produced, more of another good has to be
Cost sacrificed in production
Comparative Advantage When one can perform an activity at a lower opportunity cost than
anyone else
Law of Comparative Advantage Trade can benefit countries if they specialize in goods in which they
have a comparative advantage
2. Demand & Supply
Law of Demand Inverse relationship exists between price of good and quantity
demanded of good, ceteris paribus
Law of Supply Direct relationship exists between price of good and quantity supplied
of good, ceteris paribus
Price Elasticity of Demand (PED) Degree of responsiveness of quantity demanded of good to a change in
its own price, ceteris paribus
Income Elasticity of Demand Degree of responsiveness of demand to a change in income of
(YED) consumers, ceteris paribus
Cross Elasticity of Demand (XED) Degree of responsiveness of demand for one product to a change in
price of another, ceteris paribus
Price Elasticity of Supply (PES) Degree of responsiveness of quantity supplied of good to a change in its
own price, ceteris paribus
Consumer Surplus (CS) Excess of price buyers willing and able to pay for good over actual price
paid
Producer Surplus (PS) Excess of what producer willing and able to put up for sale for a good
over actual price paid
Deadweight Loss Loss in welfare not gained by anyone in society
Tax Incidence Division of tax between consumers & producers
Subsidies Fixed amount of money given to producers for each unit sold that
lowers cost of good
Price Floor (minimum price) Legally established minimum price above market equilibrium price
Price Ceiling (maximum price) Legally established maximum price below market equilibrium price
Black Market Market where sellers ignore government’s price restrictions & sell
illegally at whatever price equates illegal demand & supply
3. Cost Theory & Size of Firms
Fixed Factor Factor of production whose quantity cannot be changed in short run to
change output
Variable Factor Factor of production whose quantity can be changed within time period to
change output
Copyright © 2008-2010. Woon Wei Seng. 1
Distributed on Erpz.net
, Important Terms & Definitions | H2 Economics
Short Run Production period in which there is / are fixed factor(s)
Long Run Production period in which there are no fixed factors
Law of Diminishing Marginal As more units of a variable factor are added to an unchanging fixed factor,
Returns (LDMR) the marginal product generated by adding the variable factor will
eventually decrease
Marginal Cost Additional cost from additional output
Economies of Scale Unit costs decrease as scale of production increases
Diseconomies of Scale Unit costs increase as scale of production increases
Minimum Efficient Scale Occurs at where LRAC curve stops falling / lowest point of LRAC curve
(MES)
Internal Expansion Expanding productive capacity to enjoy internal EOS
Horizontal Integration Merger of two firms at same stage of production
Vertical Integration Merger of two firms at different stages of production
Conglomerate Integration Combination of two firms of different industries with nothing in common
4. Perfect Competition & Monopoly
Perfect Competition Market of many buyers and sellers of a homogeneous good
Monopoly Market of only one seller of a product without substitutes (absence of
competition)
Price Taker A firm that takes the price from the market as given, without ability to
influence the price
Price Setter A firm that has the ability to influence the market price
Productive Efficiency Occurs when firm is able to produce an output at any point along LRAC curve
in long run or least cost at any given period
Allocative Efficiency Occurs at where output level when price of good equals marginal cost of
producing it
Natural Monopoly When it is cost efficient to have a single firm in the industry such that it has
lower AC (substantial EOS) over range of market demand
Predatory Pricing Selling below cost price to drive out competitors
Cartel Agreement among existing suppliers to keep out competitors
X-inefficiency Occurs when a firm becomes complacent and suffers from inefficiency due to
lack of competition
Price Discrimination Charging different prices for the same product or for different units of it
when such price differences is not because of cost differences
1st Degree Price Monopolist sells each unit to consumers at maximum price they are willing to
Discrimination pay
2nd Degree Price Monopolist sets uniform price per unit for specific quantity of good and
Discrimination lower price per unit for subsequent units
3rd Degree Price Monopolist charges different prices for the same commodity in different
Discrimination markets
5. Oligopoly & Monopolistic Competition
Oligopoly Market where few large firms have large market share
Monopolistic Competition Market where many small firms exist, each providing different products or
services
Price Rigidity Tendency for prevailing market prices to remain stable over a long time
Mutual Interdependence Each firm affects rival firms’ decisions and are also affected by rival firms’
decisions
Copyright © 2008-2010. Woon Wei Seng. 2
Distributed on Erpz.net
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