Microeconomics

Price Ceiling Definition

Price Ceiling Definition

A price ceiling is the maximum amount a producer can sell their good or service for. This is usually mandated by government in order to ensure consumers can afford the relevant goods and services. Examples include, food, rent, and energy products which may become unaffordable to consumers.

Price Floor Definition

Price Floor Definition

A price floor is a minimum price set on goods and services usually determined by the government. This makes it illegal for any company or individual to sell its goods or services below the set minimum price.

The Law of Supply Definition

Law of Supply Definition

The law of supply simply refers to the relationship between prices and supply. As prices increase, so too does supply. If prices fall, then supply will also fall. However, it is important to note that this only applies ceteris paribus.

Third Degree Price Discrimination Definition

Third Degree Price Discrimination

Third degree price discrimination is where a firm charges the consumer a different price based on which consumer group they are in. For example, cinema’s charge different prices to adults, seniors, and youths – whilst taxi drivers often charge a higher rate during peak hours.

Second Degree Price Discrimination Definition

Second Degree Price Discrimination

Second degree price discrimination is where a firm sells at different prices based on quantity. This may include offers such as buy two, get one free, or 20 percent off when you buy six.

Substitution Effect Definition

Substitution Effect Definition

The substitution effect occurs when consumers switch to substitute goods as prices rise. For example, if the price of chicken increases, then consumers may start to switch to substitute goods such as beef or pork.

Incentives Definition

Incentives Definition

In economics, incentives are what encourages an individual to act in a certain way. In other words, how consumers and businesses respond to market signals such as prices and financial benefits.

Explicit and Implicit Costs Definition

Explicit and Implicit Costs Definition

An explicit cost is the clearly stated costs that a business incurs. For example, employee wages, inputs, utility bills, and rent, among others. These are the costs which are stated on the businesses balance sheet.

By contrast, implicit costs are those which occur, but are not seen. In other words, these are the costs that are not directly linked to an expenditure. For example, a factory may close down for the day in order for its machines to be serviced.

Natural Monopoly Definition

Natural Monopoly Definition

A natural monopoly is a type of monopoly that occurs due to high fixed costs and a need to achieve extreme economies of scale. In other words, it is only economically viable for one business to serve the market.