Consumer sovereignty is the theory that consumer preferences determine the production of goods and services. This means consumers can use their spending power as ‘votes’ for goods. In return, producers will respond to those preferences and produce those goods.
An indirect tax is a tax applied on the manufacture or sale of goods and services. There are two types of indirect taxes – ad valorem tax and specific tax.
The concept of “returns to scale” describes the rate of increase in production relative to the associated increase in the factors of production in the long run. In other words, it describes how effectively and efficiently—in other words, profitably—a particular company or business is producing its goods or services.
Externalities are a form of market failure. Externalities are defined as the spillover effects of the consumption or production of a good that is not reflected in the price of the good.
Price Elasticity of Demand (PED) is defined as the responsiveness of quantity demanded to a change in price. The demand for a product can be elastic or inelastic, depending on the rate of change in the demand with respect to the change in the price.
When there are economies of scope, the long-run marginal and average costs for a given actor (whether a firm or, on a larger scale, an economy) lessen with the production of complementary goods/services.
A deadweight loss is a cost to society as a whole that is generated by an economically inefficient allocation of resources within the market. Deadweight loss can also be referred to as “excess burden.”
Allocative efficiency is the level of output where the price of a good or service is equal to the marginal cost (MC) of production. Allocative efficiency is achieved when goods and/or services are distributed optimally in response to consumer demands (that is, wants and needs), and when the marginal cost and marginal utility of goods and services are equal.
Price discrimination is a kind of selling strategy that involves a firm selling a good or service to different buyers at two or more different prices, for reasons not necessarily associated with cost. Price discrimination results in greater revenue for the firm.
Moral hazard is a set of circumstances in which one individual or entity has the ability to take a risk because another individual or entity we’ll have to deal with any negative outcomes. Moral hazard specifically refers to the risk that exists when two parties lack equal knowledge of actions taken following an existing agreement.
Most of us are well-acquainted with the idea of a monopoly: when there is only one firm prevailing in a particular industry. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a specific market.
A price ceiling (in other words, a maximum price) is put into effect when the government believes the price is too high and sets a maximum price that producers can charge; this price must lie below the equilibrium price in order for the price ceiling to have an effect.
The marginal cost of production is an economic concept that describes the increase in total production cost when producing one more unit of a good. It is highly useful to decision-making in that it allows firms to understand what level of production will allow them to have economies of scale.
Consumer Surplus is the area under the demand curve (see the graph below) that represents the difference between what a consumer is willing and able to pay for a product, and what the consumer actually ends up paying.
Total revenue is the amount of money that a company earns by selling its goods and/or services during a period of time (e.g. a day or a week).
In the field of economics, marginal analysis entails the examination of the final or next unit of cost or of consumption. It involves a cost-benefit analysis of business decisions—that is, understanding whether a particular decision provides enough benefits to be worth the cost of that decision.
The concept of utility measures the satisfaction consumers derive from the consumption of goods and services. Marginal utility is specifically the utility that consumers derive from the consumption of additional units of goods and services.
A price floor or a minimum price is a regulatory tool used by the government. More specifically, it is defined as an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. For a price floor to be effective, the minimum price has to be higher than the equilibrium price.
In the field of economics, the term “average variable cost” describes the variable cost for each unit. Variable costs are those that vary with changes in output. Examples of variable costs, otherwise known as direct costs, include some forms of labor costs, raw materials, fuel, etc.
The equimarginal principle is an important idea in the economic subfield of managerial economics. It is otherwise known as the “equal marginal principle” or the “principle of maximum satisfaction.” The equimarginal principle states that consumers choose combinations of various goods in order to achieve maximum total utility.
Subsidies are defined as a form of support given to producers of a product that helps to reduce the cost of production. This has the intended effect of increasing the production and consumption of that product. Goods that governments want to increase the use of are subsidized; these include important services and institutions like education and healthcare, among others.
The producer surplus is the area under the supply curve (see the graph below) that represents the difference between what a producer is willing and able to accept for selling a product, on the one hand, and what the producer can actually sell it for, on the other hand.
Supply is quite a straightforward concept, understood by non-economists and economists alike. The term “supply” refers to the amount of a good or service that a firm is willing and able to offer for sale for a given period of time.
Externalities are defined as those spillover effects of the consumption or production of a good that is not reflected in the price of the good. More specifically, negative externalities are the costs or harmful consequences experienced by a third party when an economic transaction takes place (i.e. when a good is either produced or consumed).
Whether positive or negative, externalities are the effects of a good’s consumption or production on third parties; these effects are not accounted for in the price of said goods. Externalities are otherwise known as “spill-over effects.”
Income Elasticity of Demand (YED) is defined as the responsiveness of demand when a consumer’s income changes. It is defined as the ratio of the change in quantity demanded over the change in income.
Cross Price Elasticity of Demand (XED) measures the responsiveness of demand for one good to the change in the price of another good. It is the ratio of the percentage change in quantity demanded of Good X to the percentage change in the price of Good Y.
The determinants of demand are factors that cause fluctuations in the economic demand for a product or a service. A shift in the demand curve occurs when the curve moves from D to D₁, which can lead to a change in the quantity demanded and the price. There are six determinants of demand.
When consumers’ income limits their consumption behaviors, this is known as a budget constraint. In other words, it’s all of the many combinations of goods/services that consumers are able to purchase in light of their particular income as well as the current prices of these particular goods/services.
The term Derived Demand refers to the demand for a good or service that itself arises out of the demand for a related or intermediate good or service. Thus the dependent demand often has a notable effect on the market price of the derived good.
The Substitution Effect is the effect of a change in the relative prices of goods on consumption patterns. It is the economic idea that as either prices rise or income decreases, consumers substitute cheaper alternatives for more expensive goods
The wealth effect is the economic phenomenon in which individuals spend more when stock prices increase and, as a result, equity portfolios are increasing in value. They do so because their sense of the reliability of their wealth is increasing. Thus, increases in consumer spending are directly correlated to increases in the value of stock portfolios.
Regulatory capture is a failure of normal government functions in which regulatory agencies become subservient to the industries they are meant to be monitoring and regulating.
Costs can be divided quite simply into two basic categories: variable costs and fixed costs. Variable costs are those that vary with production levels.
A cornucopian is a futurist who believes that continued progress and provision of material items for mankind can be met by similarly continued advances in technology.
A monopsony is a situation of the market wherein only one buyer exists in a particular area, typically along with many sellers. These sellers end up competing for the buyer’s purchases by lowering their prices.