10 Terms to Know For Microeconomics

Production Possibility Frontier (PPF):

A production possibility frontier represents where resources can be allocated to produce certain amounts of a good in comparison to another good. It represents the choice the market has in production between two different goods, limited by the factor that certain resources are scarce.

Unemployment:

When there is surplus of labour which does not get utilised by the market. There are two manners in which to define unemployment. The first being the classic definition which states that if the price of employment increases above equilibrium there is more labour supplied but less demand. The second definition is “cyclical unemployment” where there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work.

Infrastructure:

Infrastructure is the physical structures that are required for the operation of society and enterprise; it provides the means for an economy to function.

Supply:

Supply is the total amount of a good or service available for consumption at a given price at a certain moment in time.  The basis of the law of supply which states that as the price of good or service increases, the quantity supplied also increases.

Demand:

Demand is a consumer’s desire and willingness to purchase a good or service at a given price at a certain moment in time. The basis of the law of demand which states that as the price of a good or services decreases, the quantity demanded increases.

Market Failure:

Market Failure is when there is the inefficient allocation of resources, the existence of a negative externality on either the consumption or production of a good or service, and the existence of a monopoly power.

Externality:

An effect to a third party which was not accounted for in the price of the original transaction of the good, this can be either positive or negative.

Consumer & Producer Surplus:

Consumer surplus is where a consumer was willing to pay a price above equilibrium but only had to pay the equilibrium price, and producer surplus is where a producer was willing to produce at a price below equilibrium but was able to sell their good at equilibrium price.  Represented by the graph below:

P7 - Social Surplus

Public Good:

A public good is typically provided by the government, and it is meant to be non-rivalrous and non-excludable. Meaning that anyone can have access to it, you do not directly pay for it, and one person using it does not affect your usage of it. Some examples are street lighting, beaches, benches, and air.

Indirect Tax:

An indirect tax is paid through the consumption of good or services, whereas a direct tax is on your income. Examples of indirect taxes are Value Added Tax, Sales Tax, and Excise Tax. They provide a source of government income, and are a manner in which a negative externality can be resolved.

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