Economics HL - Microeconomics

Terms	Definitions
Supply	Refers to the quantity of a good or service that firms are willing and able to provide
Demand	The quantity of a good or service that consumers are willing and able to buy.
Price Elasticity of Demand	The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price.
Income Elasticity of Demand	measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. Formula: (%change in quantity demanded) / (%change in income) = Income elasticity
Cross Elasticity of Demand	the ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good. A positive coefficient indicates the two products are substitute goods; a negative coefficient indicates they are complementary goods.
Income Effect	the change in consumption resulting from a change in real income; the increase in income results in increase in demand
Substitution Effect	the change in quantity demanded due to change in price of a substitute good
Giffen Good	an inferior good for which the income effect outweighs the substitution effect so that the demand curve is positively sloped (higher the price, higher the demand).
Veblen Good	A luxury good where the quantity demanded rises as the price rises.
Buffer Stock	A mechanism for stabilizing agricultural prices, whereby an agricultural product is purchased and placed in storage during years of high production and released from storage and sold during years of low production.
Elasticity	a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants
Price Elasticity of Supply	a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price
Short Run	A period during which at least one of a firm's resources is fixed
Long Run	A period during which all factors of production are variable
Profit	Total revenue minus total cost
Revenue	the entire amount of income before any deductions are made
Law of Diminishing Returns	As extra units of a variable factor are added to the given quantity of a fix factor, the output from each additional unit of the variable factor will eventually distinguish.
Returns to Scale	the rate at which output increases in response to proportional increases in all inputs
Economies of Scale	Reduction of long-run average costs resulting from an expansion in the scale of a firm's operations so that more of all inputs is being used.
Perfect Competition	a market structure that is characterized by a large number of small firms, a homogeneous product,freedom of entry and exit,and equal access to information
Profit Maximization	A method of setting prices that occurs when marginal revenue equals marginal cost.
Normal Profit	the opportunity cost of the resources supplied by the firm's owners; normal profit= accounting profit - economic profit
Supernormal Profit	where total revenue exceeds total economic costs
Allocative Efficiency	when the last unit produced costs the same as the benefit recieved by consumers
Technical Efficiency	In the long-run, perfectly competitive markets ensure that each good is produced at the lowest possible cost.
Monopolistic Competition	Market situation in which a large number of sellers offer similar but slightly different products and each has some control over price
Oligopoly	a market structure that is characterized by a few large firms, non-price competition, high barriers of entry and exit, and possible collusion.
Monopoly	a market structure in which there are many buyers but only one seller
Price Discrimination	when a business sells the same product to different people at different prices
Contestable Market	a market where barriers to entry are low, firms entering the industry would face similar costs to firms that are already there
Market Failure	an imperfection in the market mechanism that prevents optimal outcomes
Game Theory	The theory that studies decision making in situations in which one player anticipates the reactions of other players to its own actions. Firms are mutually interdendent.
Merit Good	Good that is under-supplied with positive externalities.
Demerit Good	Good that is over-supplied with negative externalities.
Normal Good	Good that consumers demand more of when their incomes increase
Public Good	Good that is both nonrivalrous and non-excludable, and not provided by the market.
Externalities of Consumption	Consequences (positive/negative) upon consuming a good or service.
Externalities of Production	Consequences (positive/negative) upon producing a good or service.
Parallel Market	Black market that is considered illegal.

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Economics HL - Microeconomics

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