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Microeconomics

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• The study of the behaviour of individual markets

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Macroeconomics

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• The study of how the economy as a whole works

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Ceteris paribus

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• An assumption that all other variables remain constant when a single variable is being altered in an economic model

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Positive economics

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• Matters of economics that can be proven right or wrong by looking at facts

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Normative economics

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• Matters of economics that are based on opinion Incapable of being proven right or wrong. Eg. Economic growth in Botswana should have been higher in 2009

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Scarcity

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• The existence of the limited availability of economic resources relative to society's unlimited demand for goods and services

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Land

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• Physical factor of production Consists of natural (gas) Renewable/non renewable

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Labour

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• Human factor of production Physical and mental contribution of existing workforce

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Capital

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• Factor of production that is made by humans Occurs as a result of investment

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Entrepreneurship

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• Factor of production involving Organisation of other factors of production Risk taking

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Free goods

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• Goods that are unlimited in supply No opportunity cost Has market price 0 Sea water/air

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Economic good

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• Good or service that is relatively scarce Has a market price Opportunity cost involved when consumed

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Utility

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• The satisfaction gained from consuming a good or service

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Production possibilities curve (PPC)

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A curve that shows: Maximum combination of goods and services that can be produced in a time period If all factors of production are used fully and efficiently

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Actual output

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• Production of goods and services in an economy achieved in a given time period

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Potential output

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• Level of output that can be achieved if all available factors of productions were employed

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Actual growth

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• Occurs when previously unemployed factors of production are employed Shown by a movement between from a point within a PPC to a point closer to the PPC

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Potential growth

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• Occurs when the quantity or quality of production within an economy is increased Represented by outward shift of PPC

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Economic growth

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• The growth of real output in an economy over time Usually measured by GDP

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Economic development

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• Broad concept which includes Improvement in standards of living Reduction of poverty Increased freedom and economic choice etc.

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Sustainable development

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• Economic development that can satisfy the needs of the present without compromising the ability of future generations to meet their needs

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Free market economy (market economy)

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• An economy where there is minimal government intervention Means of production are privately held by individuals and firms Demand and supply determine what, how and for whom in production

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Planned economy (command economy)

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• Means of production are owned by the state State determines what, how and for whom in production

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Transition economy

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• An economy that is moving from a centrally planned economic system to a more market-oriented economic system

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Market

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Where buyers and sellers establish an equilibrium price and quantity for a good or service

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Demand

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The willingness and ability to purchase a good or service at a given price level

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Law of demand

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As the price of a good rises, demand decreases ceteris paribus

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Demand curve

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A graphical representation for the law of demand Shows inverse relationship between price and quantity demanded

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Supply

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The willingness and ability of the producer to produce a quantity good or service at a given price level

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Law of supply

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As price rises, quantity supplied increases

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Supply curve

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Graphical representation for the law of supply Shows direct relationship between price and quantity supplied

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Equilibrium price

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Market clearing price Where demand is equal to supply

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Maximum price (ceiling price)

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Set by the government above which the market price is not allowed to surpass Aims to protect consumers from high prices

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Minimum price (floor price)

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Price set by government below which market price is not allowed to fall Aims to protect producers

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Buffer stock scheme

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Maximum and minimum price to stabilise markets

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Price elasticity of demand (PED)

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Measures the responsiveness of quantity demanded when there is a price change

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Elastic demand

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Change in quantity demanded is relatively larger than change in price

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Inelastic demand

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The change in price of a good or service will cause a proportionally smaller change in quantity demanded

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Cross elasticity of demand (XED)

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The measure of responsiveness of the demand for a good or service to a change in the price of a related good

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Substitute goods

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Goods that can be used instead of each other

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Complement good

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Goods which are used together

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Income elasticity of demand (YED)

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The measure of responsiveness of demand when consumer income changes

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Normal good

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Positive income elasticity of demand As income rises, demand rises

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Inferior good

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As income rises, demand decreases

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Price elasticity of supply

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The measure of quantity supplied of a good or service when there is a change in its price

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Indirect tax

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An expenditure tax on a good or service Shown by an upward shift in supply curve

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Specific tax

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Parallel shift

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Ad valorem tax

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Divergent shift

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Incident (of tax)

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The amount of tax paid by the producer or consumer

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Fixed costs

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• Costs of production that do not change with the level of output

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Variable costs

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• Costs of production that vary with the level of output

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Total costs

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• Total costs of producing at a certain level of output Fixed costs + variable costs

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Average cost

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•The average cost of production per unit •Total cost/quantity produced

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Marginal cost

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•The additional cost of production an additional unit of output

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Short run

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•The period of time where at least one factor of production is fixed (production stage)

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Law of diminishing average returns

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•States that as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish

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Law of diminishing marginal returns

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•States that as extra units of a variable factor are applied to a fixed factor, the output from each addition unit of the variable factor will eventually diminish

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Long run

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•Period of time in which all factors of production are variable

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Economies of scale

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•Are any fall in the long-run (average) costs that occur as a result of a firm increasing its scale of production

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Diseconomies of scale

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•Any increase in the long-run unit costs that come about as a result of a firm increasing its scale of production

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Total revenue

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•The total revenue gained by a firm from a particular level of output

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Average revenue

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•Revenue received dived by number of units sold

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Marginal revenue

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•The extra revenue gained from selling an additional unit of a good or service

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Normal profits

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•Amount of revenue needed to cover the total costs of production, including the opportunity costs

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Abnormal profits

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•Any level of profits that is greater than that require to ensure that a firm will continue to supply its good or service (greater than total costs of production and opportunity costs)

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Profit-maximising level output

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•Level of output where marginal revenue is equal to marginal cost

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Shut-down price

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•Price where average revenue is equal to variable cost •Below this price the firm should shut down in the short run

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Break-even price

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•The price where average revenue is equal to average total cost •Below this price the firm will shut down in the long run

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Allocative efficiency

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•Level of output where marginal cost is equal to average revenue or pricefirm sells the last unit it produces at the amount that it costs it to make it

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Productive efficiency

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•Exists when production is achieved at lowest cost per unit of output •Where average total cost is at its lowest value

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Perfect competition

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•Very large number of firms •Producing identical products •No individual firm is able to affect market supply curve and thus market price •Firms are price takers •No barriers to entry •Firms have perfect knowledge of the market

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Monopolistic competition

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•Many buyers and sellers producing differentiated products •No barriers to entry or exit

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Oligopoly

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•Small number of large firms that dominate the market

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Monopoly

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•Only one firm in the industry, the firm is the industry

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Barriers to entry

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•Any obstacles that may be in the way of potential newcomers to a market •Eg. Economies of scale, product differentiation, legal protection

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Price discrimination

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•Occurs when a producer charges a different price to different customers for an identical good or service

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