Micreconomics Terms and Definitions

When studying microeconomics, it is important to understand certain definitions. The following list contains some of the most frequent terms encountered in microeconomics. Many of these words can be found in everyday use and in other fields besides economics.

Economics

This can be defined as the best way to allot scarce resources. It deals with trying to satisfy unlimited wants but with limited resources.

Supply

The quantity of goods and services for sale.

Demand

How much a consumer is willing and able to buy.

Equilibrium

A state of balance between opposing forces or elements.

Surplus

The supply of a resource exceeds the demand for that resource.

Shortage

A situation where demand exceeds supply at the current price.

There are four types of resources used in economics:

Land

This includes natural resources with and also includes the rent, taxes and mortgage payments on the land.

Capital

Whether real or physical capital, it includes interest on investment principle, machinery and infrastructure.

Labor

Labor corresponds to wages, salaries and payments to workers.

Entrepreneurship

This uses the three resources above to produce a profit.

Productivity is the ratio of the output value of resources compared to the amount of resources that are input. A higher productivity usually relates to a higher standard of living.

Margin

A unit above or below the point of interest. This has to do with the number of units of one item being measured that change when a unit of something else changes. Marginal profit would be the change in profit when quantity changes by one unit.

Market Economy

This is a free economy where prices are regulated by buyers and sellers, other market forces and capitalism.

Externalities

These are side effects of production. One example would be pollution.

Inflation

This is the average increase in prices.

Deflation

This is when prices drop over time.

Normally there is a trade-off between inflation and unemployment.

Supply Demand Price         100 500 .50 200 400 .75 300 300 1.00 400 200 1.25 500 100 1.50