DEFINITIONS

MICROECONOMICS

Social Science – A branch of science that studies society as a whole, and also the relationships of
the individuals within said society

Hypothesis – An idea or proposed explanation, based on limited evidence, that is then tested
through study and experimentation

Theory – An explanation or model based on observation, experimentation and reasoning, having

been tested and confirmed as a general principle

Positive Statements – Statements that do not have to be correct, but must be able to be
scientifically tested, and proved or disproved e.g. the UK’s annual GDP growth rate was 2% in
January 2016

Normative Statements – Statements that are based on value judgements, and so cannot be
proved or disproved e.g. the government should provide basic education to all citizens

Economics – The study of how to most effectively allocate scarce resources

Microeconomics – The study of individual economic agents and their decision making

Scarcity – A situation where there are insufficient resources to meet people’s unlimited wants;
when people would like to consume more products than the economy is capable of producing
with its limited resources

Goods – Tangible products that can be touched and measured e.g. cars, food, washing
machines

Services – Intangible products that cannot be touched or measured e.g. banking, insurance,
healthcare

Utility – The total satisfaction received from consuming a good or service

Needs – Goods or services that are required to maintain existence / life e.g. food, water, shelter

Wants – Goods or services that we desire but are not necessary for maintaining existence / life
e.g. cars, watches, TVs

Renewable Resources – Natural resources of economic value that can be replaced or

replenished at a rate equivalent to that of their consumption e.g. wood, solar energy, wind
energy

Non-Renewable / Finite Resources – Natural resources of economic value that cannot be readily
replaced by natural means at a rate equivalent to that of their consumption e.g. oil, natural gas,
coal

Fundamental Economic Problem – How best to allocate scarce resources among their
alternative uses, so as to maximise human happiness, welfare and utility

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 DEFINITIONS
MICROECONOMICS

Opportunity Cost – The potential value of the next best alternative, which is forgone when a
choice is made

Choice – Choosing between two or more options when making a decision on how best to use or
allocate scarce resources

Economic Agents – Decision makers that have effects on the economy of a country by buying,
producing, selling, investing, taxing etc…

Household – A group of consumers that buy goods and services. They also supply their labour to
firms to produce goods and services, in order to earn the income needed to purchase goods and
services

Firm – An organisation that uses factors of production alongside each other in order to produce
output. They produce goods and services demanded by consumers

Government – A governing body / organisation that undertakes expenditure (spending) and

impacts the economy via taxation and the regulation of markets

Production – A process, or sequence of processes, that convert factor inputs into output of
goods or services

Factors of Production – The available resource inputs used in the production process of goods
and services

Factors of Production (CELL) – Capital + Entrepreneurship + Labour + Land

Capital – Man-made aids for production; goods used to make other goods e.g. MERC –
Machines + Equipment + Robots + Computers

Entrepreneurship – The willingness of an entrepreneur to take risks and organise production

Labour – The human resource that is available in an economy; the quantity and quality of
human resources

Land – The natural resource that is available in an economy; the quantity and quality of natural
resources e.g. oil, coal, rivers, the land itself etc…

Consumer Goods – Goods bought and used by individuals or households, as a means of

satisfying their needs or wants e.g. food, TVs, cars, watches etc…

Model – A simplified representation of reality used to create hypotheses (or theories) about
economic decisions and events

Production Possibility Curve (PPC) – A curve showing the maximum quantities of different
combinations of goods and/or services that can be produced in a set time period, given available
resources are fully and efficiently employed

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 DEFINITIONS
MICROECONOMICS

Specialisation – The focusing by a worker or workers, firm, region or whole economy on the
production of a narrow range of products

Division of Labour – A process whereby the production process is broken down into a series of
stages, and workers are designated to particular stages

Productivity – Output of a good or service, per factor of production, per period of time

Trade – The action of buying and selling goods and services

Exchange – The act of giving something in return for receiving something else

Money – The circulating medium of exchange as defined by a government

Barter System – A system that relies on the exchange of goods and services for other goods and
services, without the use of money e.g. a potato farmer trading a sack of potatoes for a cut of
beef

Resource Allocation – The way in which a society’s factors of production are used amongst their
alternative uses in the production of goods and services

Utility Maximisation – The aim of trying to achieve the highest level of satisfaction possible

Profit Maximisation – The aim of trying to achieve the highest level of profit possible

Demand – The quantity of a good or service that consumers are willing and able to purchase at
given prices in a given time period

Market Demand – The quantity of a good or service that all consumers in a market are willing
and able to purchase at given prices in a given time period

Ceteris Paribus – A Latin phrase that means ‘other things being equal’

Law of Demand – A law that states that, ceteris paribus, there is an inverse relationship
between the quantity demanded and price of a product

Notional Demand – The desire or want for a product

Effective Demand – The willingness and ability to buy a product

Demand Curve – A graph that shows how much of a product will be demanded at any given
price

Demand Schedule – The collection of data that is used to draw a demand curve for a product

Market – A place in which there are a set of arrangements allowing transactions to take place
between buyers and sellers

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 DEFINITIONS
MICROECONOMICS
Sub-Market – A recognised or distinguishable geographic, economic or specialised subdivision of
a market, also known as a market segment

Composite Demand – Demand for a good that has various uses e.g. water (drinking, washing
etc…)

Veblen / Snob Good – A good for which the quantity demanded increases as the price increases,
because of its exclusive nature and allure as a status symbol e.g. designer, luxury items with a
strong brand identity such as a Rolex watch

Elasticity – A measure of a variable’s sensitivity relative to a change in another variable

Price Elasticity of Demand (PED) – A measure of the responsiveness of quantity demanded

relative to a change in the price of a good or service
% 𝑐𝑐ℎ𝑎𝑎𝑛𝑛𝑛𝑛𝑛𝑛 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
Price Elasticity of Demand (PED) Formula(s) – OR
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
×
𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

Price Inelastic Demand – Where the percentage change in the quantity demanded of a product
is insensitive to a change in the price of the product (0 <|PED|< 1) e.g. if the price of Starbucks
coffee increased, there would be a fall in the amount of units (of coffee) they sold, but it
would likely be a very small one due to the brand loyalty and addiction many of us have to
companies like Starbucks and their products

Price Elastic Demand – Where the percentage change in the quantity demanded of a product is
sensitive to a change in the price of the product (|PED| > 1) e.g. if the price of Walkers crisps
increased, you may feel inclined to buy a lot less as there are a lot of other substitutes in the
form of other crisp packet brands and also in the form of other snacks (e.g. peanuts, biscuits)

Price Unitary Elastic Demand – Where the percentage change in the quantity demanded of a
product is equal to a change in the price of the product (|PED|= 1)
𝑁𝑁𝑁𝑁𝑁𝑁 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹−𝑂𝑂𝑂𝑂𝑂𝑂 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹
Percentage Change Formula – × 100
𝑂𝑂𝑂𝑂𝑂𝑂 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹

Total Revenue (TR) – The total amount of money received for goods sold or services provided
over a certain time period

Total Revenue (TR) Formula – 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 × 𝑄𝑄𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢

Income Elasticity of Demand (YED) – A measure of the responsiveness of quantity demanded

relative to a change in income
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑
Income Elasticity of Demand (YED) Formula –
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖

Income Inelastic Demand – Goods for which a change in income produces a less than
proportionate change in quantity demanded (|YED|< 1)

Income Elastic Demand – Goods for which a change in income produces a greater than
proportionate change in quantity demanded (|YED| > 1)

Income Unitary Elastic Demand – Goods for which a change in income produces a proportionate
change in quantity demanded (|YED| = 1)

Normal Good – A good where the quantity demanded increases when income rises (YED > 0)

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 DEFINITIONS
MICROECONOMICS
Superior (Luxury) Good – A good where the quantity demanded increases by a proportionately
greater amount than a rise in income (YED > 1) e.g. iPhones (you are likely to buy a lot more if
your income rises)

Necessity Good – A good where the quantity demanded increases by a proportionately smaller
amount than a rise in income (0 < YED < 1) e.g. bread (if your income rose you probably
wouldn’t spend that much more money on bread)

Inferior Good – A good where the quantity demanded decreases when income rises (YED < 0)
e.g. bus travel (if your income rises, you are more likely to spend less on bus travel and just
travel by taxi or a personal car instead)

Giffen Good – A good where the quantity demanded decreases by a proportionately greater
amount than a rise in income (YED < -1) e.g. YED = -2: income rises by 10%  quantity
demanded for good (Giffen good) falling by 20%

Substitutes – Products that can be used for a similar purpose, such that if the price of one
product rises, demand for the other product is likely to rise e.g. PS4 and Xbox One

Complements – Products that tend to be consumed jointly, such that if the price of one product
rises, demand for the other product is likely to fall e.g. PS4 and PS4 video games, or tea and
milk

Competitive Demand – Demand for products that are competing with each other

Joint Demand – Demand for products which are interdependent, such that they are jointly
demanded

Cross Elasticity of Demand (XED) – A measure of the responsiveness of quantity demanded for
one product relative to a change in the price of another product
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑𝑑 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑋𝑋
Cross Elasticity of Demand (XED) Formula –
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑌𝑌

Substitutes (XED Terminology) – Products which have a positive XED value

Complements (XED Terminology) – Products which have a negative XED value

Supply – The quantity of a good or service that firms are willing and able to sell at given prices
over a given time period

Market Supply – The quantity of a good or service that all firms are willing and able to sell at
given prices over a given time period

Law of Supply – A law that states that, ceteris paribus, there is a direct relationship between the
quantity supplied and price of a good or service

Supply Curve – A graph showing how much of a product will be supplied at any given price

Supply Schedule – The collection of data used to draw the supply curve of a product

Competitive Market – A market in which there is a large number of buyers and sellers, good
access to market information and low barriers to entry and exit

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 DEFINITIONS
MICROECONOMICS
Competitive Supply – When a firm can use its factors of production to produce more than one
type of product e.g. a firm can use land to supply food or instead divert its use of land to
producing bio-fuels

Composite Supply (Rival Supply) – When supply of a product comes from more than one
source; a product whose demand can be satisfied through various sources e.g. electricity is a
composite supply as it can be made from gas, nuclear power, wind turbines, hydroelectric
turbines etc… All these sources contribute to make up the supply of electricity, and thus the
demand for electricity can be satisfied through the supply of gas, nuclear power etc... There is
competition between them and so the most economical source is used first (and used the
most), but in the end the rest are combined to co-operate and contribute to the supply of said
product

Joint Supply – When a firm can produce more than one type of product with roughly the same
factors of production e.g. the supply of beef and leather are linked because both of them are
made using cows

Price Elasticity of Supply (PES) – A measure of the responsiveness of quantity supplied relative
to a change in the price of a good or service
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞𝑞 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠
Price Elasticity of Supply (PES) Formula –
% 𝑐𝑐ℎ𝑎𝑎𝑎𝑎𝑎𝑎𝑎𝑎 𝑖𝑖𝑖𝑖 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝

Price Inelastic Supply – Where the percentage change in the quantity supplied of a product is
insensitive to a change in the price of the product (0 < PES < 1) e.g. if the price of a commodity,
such as oil, increases, an oil company will be slow to increase supply as it takes a long time to
drill oil out from the ground

Price Elastic Supply – Where the percentage change in the quantity supplied of a product is
sensitive to a change in the price of the product (PES > 1) e.g. if a car factory is operating at 60%
of full capacity, then the car company could easily increase the quantity supplied of cars if
there was an increase in price, and so would likely do so, very quickly, and to a great extent,
relative to the size of the increase in price

Price Unitary Elastic Supply – Where the percentage change in the quantity supplied of a
product is equal to a change in the price of the product (PES = 1)

Free Market Mechanism – The mechanism by which the market forces of demand and supply
determine prices and the economic decisions made by consumers and firms

Equilibrium – A condition of stability or balance between opposing forces

Disequilibrium – A condition of instability or imbalance between opposing forces

Market Equilibrium / Clearing Price – A situation that occurs in a market when the price is such
that the quantity that consumers are willing to buy is equal to the quantity that firms are willing
to supply

Market Disequilibrium – When internal or external forces prevent market equilibrium from
being reached, such that the market is in a position where demand and supply are not equal

Surplus – An excess of supply (quantity supplied) over demand (quantity demanded)

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 DEFINITIONS
MICROECONOMICS
Shortage – An excess of demand (quantity demanded) over supply (quantity supplied)

Derived Demand – Demand for a factor of production or good which derives not from the factor
or good itself, but from the product(s) it can produce; demand for one item depending on
demand for another e.g. labour is not wanted for its own sake, but for the level of output it
can produce and what that output can be sold for

Unemployment – Occurs when someone of working age is out of work and actively seeking
work

Comparative Static Analysis – Examines the effect on equilibrium of a change in the external
factors affecting a market

Price – The sum of money that is paid for a given quantity of a particular product

Signalling Function of Prices – To provide buyers and sellers with information, so as to allow
them to plan and coordinate their economic activities e.g. a difference in the price of PS4s
relative to Xbox Ones provides buyers with information as to which console they potentially
ought to buy, after they have taken into account other factors, such as substitutability and
preference, into account

Incentive Function of Prices – To generate incentives for economic agents, so as to alter their
economic behaviour e.g. an increase in the price of a product incentivises producers to
increase supply, as higher prices increase the possibility of said producers making higher
returns

Rationing Function of Prices – To discourage demand and conserve resources e.g. a fall in the
supply of a product will result in a temporary shortage whereby demand outstrips supply. The
free market mechanism (which uses prices), however, will ultimately lead to a higher price
which serves to ration the limited supply to those who most want the product

Allocative Function of Prices – To determine which scarce resources will be used to produce
particular products, and also to determine the level of income people have

Short Run – The time period when at least one factor of production, usually capital, is fixed in
quantity e.g. a firm does not have time to sell off its existing building, end a renting contract,
extend an existing building or acquire a new building in the short run

Long Run – The time period when the quantities of all factors of production are variable

Production – A process, or sequence of processes, that convert factor inputs into output

Short Run Production – When a firm adds variable factors of production to a fixed stock of
factors of production e.g. adding workers to a fixed stock of capital

Long Run Production – When a firm changes the quantity of all of the factors of production e.g.
increasing both the amount of workers employed and the amount of factories they can work
in

Productivity – Output of a good or service, per factor of production, per period of time

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 DEFINITIONS
MICROECONOMICS
Labour Productivity – Output per worker, per period of time

Capital Productivity – Output per unit of capital, per period of time

Productivity Gap – The difference in labour productivity between two or more countries e.g.
between the UK and other developed economies

Productive Efficiency – Attained when a firm produces at minimum average total cost (ATC),
choosing a suitable combination of inputs and producing the maximum possible output from
those inputs; where production takes place using the least amount of scarce resources

Allocative Efficiency – When resources are used to produce the goods and services that
consumers want and in such a way that consumer satisfaction (or utility or welfare) is maximised

Economic Efficiency – A situation in which both allocative efficiency and productive efficiency
have been achieved; a situation in which society is producing the mixture of products that
consumers desire at minimum cost

Pareto Optimum – When no reallocation of resources can make one individual better off
without making some other individual worse off

Total Cost (TC) – The summation of all costs that are incurred in producing a given level of
output

Total Cost (TC) Formula – 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭𝑭 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪 + 𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪

Average Total Cost (ATC) – Total cost divided by the quantity produced
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪
Average Total Cost (ATC) Formula –
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶

Total Fixed Cost (TFC) – The sum of costs incurred by a firm that do not fluctuate with the level
of output in the short run e.g. cost of overheads (e.g. lighting in a store)

Average Fixed Cost (AFC) – Total fixed costs dived by the quantity produced
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑭𝑭𝑭𝑭𝒙𝒙𝒙𝒙𝒙𝒙 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪
Average Fixed Cost (AFC) Formula –
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶

Total Variable Cost (TVC) – The sum of costs incurred by a firm that fluctuate with the level of
output in the short run e.g. cost of ice cream and popcorn, or the cost of hiring films. If more
people go to the cinema (i.e. if output rises) then these costs will likely rise too

Average Variable Cost (AVC) – Total variable costs dived by the quantity produced
𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽𝑽 𝑪𝑪𝑪𝑪𝑪𝑪𝑪𝑪
Average Variable Cost (AVC) Formula –
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶

Economies of Scale (EoS) – A reduction in a firm’s long run average costs resulting from an
increase in the scale of production

Minimum Efficient Scale (MES) – The lowest level of output at which full advantage can be
taken of economies of scale

Internal Economies of Scale – Economies of scale occurring within a firm as a result of its growth

External Economies of Scale – Economies of scale occurring due to the growth of the industry in
which a firm is operating

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 DEFINITIONS
MICROECONOMICS
Diseconomies of Scale (DoS) – An increase in a firm’s long run average costs resulting from an
increase in the scale of production

Internal Diseconomies of Scale – Diseconomies of scale occurring within a firm as a result of its
growth

External Diseconomies of Scale – Diseconomies of scale occurring due to the growth of the
industry in which a firm is operating

Total Revenue (TR) – The total amount of money received for goods sold or services provided
over a certain time period

Total Revenue (TR) Formula – 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃 × 𝑄𝑄𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢

𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻𝑻 𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹𝑹
Average Revenue (AR) Formula –
𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶𝑶

Profit Formula – 𝑇𝑇𝑇𝑇 (𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅) − 𝑇𝑇𝑇𝑇 (𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶)

Profit Maximisation – The aim of trying to achieve the highest level of profit possible; when the
difference between a firm’s total revenue and total costs is at its greatest

Sales / Revenue Maximisation – The aim of trying to achieve the highest level of total revenue
possible; when the sale of an extra unit of output yields no extra revenue

Growth Maximisation – The aim of trying to achieve the highest and fastest level of growth
possible

Market Share Maximisation – The aim of trying to achieve the highest level of market share
possible

Profit Satisficing – Aiming for a satisfactory level of profit rather than the highest level of profit
possible

Survival – The aim of simply trying to remain in a market

Minimum Profit Constraint – The minimum level of profit needed to keep shareholders /
owners content

Market Structure – The coordination of a market in terms of the number of firms in the market
and their behaviour

Price Taker – A firm that cannot change the market price by changing output, and so must
passively accept the ruling market price set by market conditions outside of its control

Incumbent Firms – Firms already in a market

Barriers To Entry – Obstacles to new firms entering a market e.g. patents, ownership of
resources, brand loyalty, economies of scale (of incumbent firms) etc…

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 DEFINITIONS
MICROECONOMICS
Barriers To Exit – Obstacles to incumbent firms leaving a market e.g. sunk costs (such as
advertising) which cannot be recovered if the firm leaves the market, supplier contracts that
obligate a producer (legally) to stay in a market for some period of time etc…

Perfect Competition – A market that displays the six following characteristics:

• A large number of buyers and sellers

• Buyers can buy, and producers can sell, as much as they want to at the ruling market
price
• A homogenous (identical) product / perfect substitutes
• No barriers to entry and exit, in the long run
• Perfect market information
• The firms are price takers

Consumer Sovereignty – When consumers can collectively determine what is produced in a

market by utilising their spending power

Pure Monopoly – When there is only a single firm in the market

Imperfect Competition – Any market structure that falls between the extremes of perfect
competition and pure monopoly

Price Maker – A firm that can change the market price by changing output

Monopoly Power – The ability of a firm to act as a price maker rather than as a price taker

Natural / Innocent Barriers To Entry – Barriers to entry which are not man-made e.g.
economies of scale

Artificial / Strategic Barriers To Entry – Barriers to entry which are man-made e.g. patents,
predatory pricing, limit pricing etc…

Patent – A set of exclusive rights granted by a sovereign state to an inventor or assignee for a
limited period of time

Concentrated Market – A market that contains a very small amount of firms or, in extreme
cases, only one firm

Market Concentration Ratio – The percentage share of the market owned by a given number of
leading firms e.g. if the market share of Tesco is 29.4%, the market share of ASDA is 17.9%, the
market share of Sainsbury’s is 16.9%, and the market share of Morrisons is 11.7%, then the 3-
firm market concentration ratio would simply be 29.4% + 17.9% + 16.9% = 64.2%. We only add
up the market shares of Tesco, ASDA and Sainsbury’s for the 3-firm market concentration
ratio, because you always add up the biggest market shares first, hence why Morrison’s
market share was not included

Informative Advertising – Advertising that provides consumers with useful information about a
product

Persuasive Advertising – Advertising that aims to persuade potential customers that a product
has desirable characteristics that make it worth buying

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 DEFINITIONS
MICROECONOMICS
Saturation Advertising – Advertising that crowds the market with both information and
persuasion about a firm’s product, typically with the intent of acting as a barrier to entry

Product Differentiation – Making a product distinct from other products through product
design, production technique, or the functionality of the product

Producer Sovereignty – When producers in a market determine what is produced and the prices
at which they will be sold

Natural Monopoly – A market where long run average costs are lowest when output is
produced by a single firm, due to the fact that full advantage of economies of scale can only be
attained by a single firm e.g. utility industries (water, gas, electricity) etc…

Government-Created Monopoly – A forced form of market domination whereby an

administration, agency or firm is permitted to be the only provider of a certain product since any
competition with their product is legally prohibited

Invention – The creation of new ideas for products or production techniques

Innovation – The conversion of the results of invention into products that are marketable

Price Competition – When a firm reduces the price of their product in order to gain sales by
making it more affordable for consumers

Special Offer Pricing – When a firm introduces a temporary lower price on one or more of the
products they are selling

Limit Pricing – When a firm reduces the price of a product to just above, or at, minimum average
cost, with the intention of deterring the entry of new firms

Predatory Pricing – When a firm temporarily reduces the price of their product to below
minimum average cost, with the intention of driving other firms out of the market

Market Failure – When the free market mechanism results in resource misallocation, thus
causing allocative inefficiency e.g. when there is a divergence between private and social costs,
or private and social benefits

Resource Misallocation – When resources are allocated in a way which does not maximise the
economic welfare of economic agents

Externality – A cost or benefit that is an external by-product of a market transaction, and is thus
not reflected in the market price

Consumption Externality – An externality that impacts the consumption side of a market, and
may be either positive or negative

Production Externality – An externality that impacts the production side of a market, and may
be either positive or negative

Private Costs – Costs incurred by an economic agent as part of its production or other economic
activities e.g. the costs incurred by a firm to produce a product

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 DEFINITIONS
MICROECONOMICS
External Costs – Costs that are imposed on a third party due to an economic agent’s production
or other economic activities e.g. toxic fumes affecting local citizens, due to production in a
nearby factory

Private Benefits – Benefits experienced by an economic agent as part of its production or other
economic activities e.g. the utility (satisfaction) a consumer gains from consuming a product

External Benefits – Benefits accrued by a third party due to an economic agent’s production or
other economic activities e.g. someone getting a vaccine benefits those around them, as those
around them are now less likely to catch the specific disease from them

Social Costs – Private Costs + External Costs

Social Benefits – Private Benefits + External Benefits

Negative Externality – This occurs when the social cost of an activity is greater than the private
cost i.e. when there is an external cost NOTE – These

Positive Externality – This occurs when the social benefit of an activity is greater than the
private benefit i.e. when there is an external benefit

Private Good – A good that must be purchased to be consumed, and whose consumption by one
person prevents another person from consuming it; such a good has excludability, is rivalrous
(diminishable) and can be rejected e.g. a store owner can exclude you from buying a chocolate
bar by not allowing you to have it if you aren’t willing to pay a certain price for it. It is rivalrous
(diminishable) in the sense that if you consume a chocolate bar, this affects the amount of the
good (chocolate bars) available for others (if there was 10 units in the store, now there is only
9 units available for others, and now nobody else can consume that specific chocolate bar that
you ate). It is rejectable in the sense that you can choose not to consume it

Public Good – A good that one person can consume without reducing its availability to other
people, and from which no one can be excluded; such a good is non-exclusive, non-rivalrous (i.e.
non-diminishable) and non-rejectable e.g. the government cannot exclude you from benefiting
from the ‘consumption’ of national defence. Your consumption of national defence does not
affect the consumption of others (if I build a house next to yours, we both equally benefit
from national defence services). You cannot reject consumption of national defence because,
effectively, just being in the country means you are consuming it

Non-Excludability – A situation existing where individual consumers cannot be excluded from

consumption of a particular product

Non-Rivalrous – A situation existing where consumption by one individual does not affect the
consumption of others

Non-Rejectability – A situation existing where individual consumers cannot reject consumption

of a particular product

Pure Public Good – A good that has all of the characteristics of a public good

Quasi-Public Good – A good that has some, but not all, of the characteristics of a public good

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 DEFINITIONS
MICROECONOMICS
Free Rider – Someone who directly benefits from the consumption of a public good, but who
does not contribute towards its provision; when a person cannot be excluded from consuming a
good, and thus has no incentive to pay for its provision

Missing Market – When a market doesn’t exist because the functions of prices have broken
down

Merit Good – A good that brings unforeseen benefits to consumers, such that it is likely to be
underconsumed in a free market; a good that has more private benefits than consumers actually
realise e.g. education, health etc…

Demerit Good – A good that brings less benefit to consumers than they realise, such that it is
likely to be overconsumed in a free market; a good whose consumption is more harmful than
the consumer realises e.g. cigarettes, alcohol etc..

Information Failure – A lack of information resulting in economic agents making decisions that
do not maximise welfare

Asymmetric Information – A situation in which some economic agents in a market have better
information about market conditions than others; when information is unequally shared
between two parties

Structural Unemployment – Unemployment that occurs as a result of changes in the pattern of

economic activity. It is caused by geographical and/or occupational immobility

Geographical Immobility – Occurs when there are barriers to the mobility of factors of
production from one location to another

Occupational Immobility – Occurs when there are barriers to the mobility of factors of
production between different sectors of the economy

Distribution of Income and Wealth – The way in which income and wealth are shared out
among a population

Equity – The quality of being fair or just

Inequity – The quality of being unfair or unjust

Internalisation of Externalities – An attempt to deal with an externality by implementing an

external cost or benefit into the price system

Government Failure – A situation where government intervention to correct a market failure

creates inefficiency, does not maximise welfare and leads to a misallocation of scarce resources

Tax – A levy imposed by the government on other economic agents as a means of paying for its
activities or changing the behaviour of economic agents to that which is socially optimal

Indirect Tax – A tax levied on spending on goods or services

Specific / Per Unit Tax – A tax of a fixed amount for each unit of a good or service sold e.g. £1
per kilogram of a product sold

Ad Valorem Tax – A tax levied on a good or service, set as a percentage of the selling price e.g.
VAT (20% tax rate on products sold in the UK)

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 DEFINITIONS
MICROECONOMICS
Incidence of a Tax – The way in which the burden of paying a sales tax is shared out between
buyers and sellers

Subsidy – A sum of money given by the government to producers or consumers, in order to

encourage production or consumption of a good or service

Incidence of a Subsidy – The way in which the benefits of a subsidy are shared out between
buyers and sellers

Regulation – The imposition of rules by government, backed by the use of penalties that are
intended to change the behaviour of other economic agents to that which is socially optimal

Prohibition – An attempt to prevent the consumption of a demerit good by declaring it illegal

Price Ceiling – A price above which it is illegal for trade, of a particular product, to take place

Price Floor – A price below which it is illegal for trade, of a particular product, to take place

Minimum Wage – A system designed to protect the low paid by setting a minimum wage rate
that employers are obliged to offer to workers

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