Important Terms & Definitions | H2 Economics I MPORTANT T ERMS &D EFINITIONS [E CONOMICS]
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 (PPC) Shows all different maximum attainable combinations of goods & rvices produced when all available resources are ud efficiently at given state of technology
Law of Increasing Opportunity Cost As more of a good is produced, more of another good has to be sacrificed in production
Comparative Advantage When one can perform an activity at a lower opportunity cost than
bing翻译anyone el
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 Inver 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
美丽英文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 (YED) Degree of responsiveness of demand to a change in income of 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
早饭的英文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 llers ignore government’s price restrictions & ll
illegally at whatever price equates illegal demand & supply
3.Cost Theory & Size of Firms
Fixed Factor Factor of production who quantity cannot be changed in short run to
change output
Variable Factor Factor of production who quantity can be changed within time period to
change output
Short Run Production period in which there is / are fixed factor(s) Long Run Production period in whi
ch there are no fixed factors
Law of Diminishing Marginal Returns (LDMR) As more units of a variable factor are added to an unchanging fixed factor, the marginal product generated by adding the variable factor will eventually decrea
Marginal Cost Additional cost from additional output
Economies of Scale Unit costs decrea as scale of production increas
Diconomies of Scale Unit costs increa as scale of production increas
Minimum Efficient Scale
(MES)
Occurs at where LRAC curve stops falling / lowest point of LRAC curve Internal Expansion Expanding productive capacity to enjoy internal EOS
Horizontal Integration Merger of two firms at same stage of production
beta什么意思
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 llers of a homogeneous good
Monopoly Market of only one ller of a product without substitutes (abnce 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 becau of cost differences
1st Degree Price Discrimination Monopolist lls each unit to consumers at maximum price they are willing to pay
2nd Degree Price Discrimination Monopolist ts uniform price per unit for specific quantity of good and lower price per unit for subquent units
3rd Degree Price Discrimination Monopolist charges different prices for the same commodity in different 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
rvices
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
Product Innovation Differentiation of product in consumer’s viewpoint through improvements to
product
Process Innovation Reducing AC without sacrificing profits through streamlining process Brand Proliferation Firms produce many brands to saturate market, leaving no gaps for rivals Market Segmentation Segmenting market into sub-markets / market niches with different needs
catered through product innovation
Kinked Demand Curve Theory Explains price rigidity; TR falls when prices ri / fall as rivals will match price
decreas but not price increas
Price Wars Ud to eliminate new competitors, when a firm lowers its price, other firms
start lowering prices and keep undercutting competitors price
Collusive Oligopoly When there are tacit / explicit agreements among firms on operations Cartel Theory Formal arrangement by llers to fix prices through manipulating supply to
the market
Price Leadership Theory Oligopolists agree to t same price as price leader in industry, allowing price
闸板adjustments without price wars
Dominant Firm Price
Leadership
Others in industry follow largest producer in industry in price changes
Barometric Firm Price Leadership Others in industry follow price changes of producer most nsitive to market conditions
Contestable Market Theory In a market of free entry & exit, number of firms in industry unimportant
since firms always behave as if competition is very strong (no matter number
of firms)
wupload
Differentiated Product Product that is slightly different from and yet clo substitute to product of
other firms in industry
Product Development Production of good with potentially high demand and different from
products of rival firms or provision / improvement of rvice to better / differ
from rivals
Excess Capacity Theorem Firms inefficient in using society’s & own resources, thus not producing at
socially ideal output
海词
6.Alternative Theories of the Firm
Profit Satisficing Where managers of firm make enough profit to satisfy shareholder demands
instead of profit maximizing
Managerial Theories Managers, with discretionary power and freedom to run the firm, maximize
their own utility instead of profit
Revenue Maximization Firms aim to maximize sales revenue instead of profits
Growth Maximization Firms aim to maximize growth instead of profits
Organizational Slack Tendency of firms in non-competitive markets to produce at higher than AC
(X-Inefficiency)
Nationalization Industry put under ownership and control of the state
Privatization Returning state-owned corporations to private ctors, involving transfer of
asts from public to private ctor
7.Market Failure & Government Intervention
Private Marginal Benefit (PMB) of good Value the consumer places on last unit of good produced, equal to price and thus reprented by demand
Private Marginal Cost (PMC) of good OC of resources ud up in making additional unit of good, reprented by supply
Social Marginal Benefit
(SMB)
Sum of PMB and External Benefit to reprent marginal benefit on society Social Marginal Cost (SMC) Sum of SMC and External Cost to reprent marginal cost on society Underproduction When in the production of the good, SMB > SMC (production can be
incread to socially optimum output)
Overproduction When in the production of the good, SMC > SMB (production can be
decread to socially optimum output)
Market Failure Free markets, operating without government intervention, fail to deliver
socially efficient allocation of resources to produce good & rvices
Public Good Good / rvice with characteristic of non-excludability and non-rivalry Positive Externalities Benefits from production or consumption experienced by society but not by
producers or consumers themlves
Negative Externalities Costs from production or consumption experienced by society but not by
producers or consumers themlves
Merit Goods Goods or rvices deemed socially desirable by government and en as
underproduced and thus underconsumed
Demerit Goods Goods or rvices deemed socially undesirable by government and en as
overproduced and overconsumed
Geographical Immobility Where barriers to people moving from one region to another thus
disallowing resources to respond to incentives to produce more goods &
rvices demandedanimate
Occupational Immobility Mismatch of skills as labour is not transferable across industries as
converge
demanded, leading to waste of resources
Government Failure Allocative efficiency is reduced following government intervention aimed to
correct market failure
Important Terms & Definitions | H2 Economics
Macroeconomics
1.National Income Accounting
National income Total value of an economy’s final output of goods & rvices in a year
(NNP at Factor cost)
Houholds Basic consumers of finished products & owners of factors of production Firms Basic producers of finished products & buyers of factor rvices
Gross Domestic Product (GDP) Total market value of all final goods & rvices newly produced within
country
Gross National Product (GNP) Total market value of all final goods & rvices newly produced by
productive factors of country’s citizens (GDP + NPIA)
GDP/GNP per capita GDP / GNP divided by population
Net Property Income from Abroad (NPIA) Difference between property income from abroad & factor income paid abroad
Market price Value of output at shop level / price purchars pay for goods & rvices
sold
Factor cost What factors of production received for goods & rvices produced GDP at Factor cost (GDP at market price – Indirect tax + Subsidies)
bjc
Capital depreciation Loss in value of physical asts due to wear & tear
Net National Product (NNP) (GNP – Depreciation)
Real GNP Level of output in terms of physical quantities without price changes
(Nominal GNP⁄GNP deflator)
Nominal GNP Value of output measured at current prices
Purchasing Power Parity (PPP) How much goods & rvices can be bought by a unit of currency at
home compared with purchasing power of other countries’ currency
2.National Income Determination
