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Economic Terms

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Medium of Exchange

An item that buyers will exchange with a seller when they want to purchase goods or services to avoid the inefficiencies of a barter trade system. This is one of the three main functions of money alongside a unit of account and store of value, to ensure an efficient and successful monetary system.

Below is an illustration of how the invention of a monetary system facilitates a medium of exchange for money (which has no intrinsic value) for goods of perceived equal value. In all advanced economies money is universally accepted as an acceptable means of payment and therefore transactions like this one below occur millions of time during the day.


A term that involves two companies combining their business operations to go forward as one company and under one name. This is often done in order for the companies to benefit from economies of scale and increase their market power and share against more dominant firms. For example the merging of Safeways and Morrisons created the fourth biggest supermarket in the UK.

Merit good

A good that is under-provided and under-consumed by the market e.g. education, health and museums. 

The market failure in these types of goods is caused by a divergence between the marginal private benefit and the marginal social benefit curves. This is because when individuals consume merit goods it releases positive consumption externalities which society benefits from and values but the private individual does not. Therefore, because the individuals are unaware of the higher social benefit, the MPB curve always lies below the MSB curve and this leads to the good being under-consumed in the market e.g. the long run benefits to the economy and economic growth of individuals pursuing higher education. 

A merit good is normally under-provided and under-consumed because of three factors:

  • Imperfect Information
  • Presence of Positive consumption externalities
  • Poor decision making - takes into account short-run costs but ignores long-run benefits

However, evaluating whether a good is classed as a merit or demerit good depends on the subjective value of the individual i.e. not all individuals value a cultural trip to a museum. 

Below is a diagram to show an example of a market for a merit good:

The degree of market failure in this market is highlighted by the dead weight loss triangle - this measures the external benefit that the market has not exploited because of the under consumption.  

Therefore to eliminate this market failure and to provide the market with the socially optimum level of output, the government must intervene to correct the difference between the MPB and MSB curves. Governments will try to increase the supply of the good, which in turn will increase the consumption of the good. The level of government intervention will depend crucially on the size of the external benefit foregone as a result of the market failure. For extremely important merit goods such as health care and education, the government is likely to introduce subsidies to ensure that these types of goods are free at the point of consumption. The impact of the subsidy will be to reduce the costs of production for the market providers of the good and this will shift the MPC curve outwards (The size of the MPC curve shift will depend on the value of the subsidy imposed on the market). If the subsidy is applied correctly to the market this means the socially optimal level of output will be produced and the market failure will be eliminated. This is shown in the diagram below:

But, just because the government intervenes in the market, this does not guarantee that the market failure will be eliminated. Potentially intervention by the government could worsen the market failure and this creates government failure. Also the success of applying the subsidy on the market depends on the ability to calculate the value of the positive consumption externality for this good and this is very difficult to quantitatively calculate for governments. 

The rule of thumb is that as the size of the dead weight loss triangle increases, the level of government intervention will increase as governments will be more confident of improving the current market outcome. 

It is important to not assume that all merit goods are public goods despite the level of government provision in these types of markets. This is because many merit goods have a finite supply and as a result all these goods can be provided for by the private sector at a price. For instance, health care in most countries is charged for.

Micro economics

Considers the behaviour of consumers and firms in determining the quantities bought and sold of specific goods and services.

Micro Prudential Regulation

Regulation that focuses on the stability and consistency of individual banks, including the individual risks related to each of their balance sheets.



Is the supply of loans, savings, and other basic financial services to the poor.

Microfinance Institution (MFI)

These are the financial institutions that provide and facilitate basic financial services to the poor in developing and emerging economies. There are three varities of MFI: Credit Unions, Commerical Banks, Governmental Organisations.

Milton Friedman

Is a famous American economist who initiated Monetarism in the 1960s as an alternative to Keynesian economics. His views gained ascendancy during the 1970’s and 80’s and have heavily influenced monetary policy and fiscal policy in many countries

Minimum Efficient Scale (MES)

Is the output level at which any economies of scale have been fully exploited and the LRAC curve is at the lowest point.

Below is an example of how a firm can achieve the MES. One important point to note is that the larger the level of output that needs to be produced to reach the MES the less contestable the market is. This is because it is extremely difficult for new entrants to produce at such a large scale at the embryonic stage of their development. Often if the MES is so far along the LRAC curve this means that the market is a natural monopoly.

Minimum Price

The lowest price that it is legal to trade at and will only be binding if it is set higher than the market equilibrium price. The price floor creates excess supply in the market and as a result of that, it is usually used in conjunction with other policies if the purpose of the price floor is to protect suppliers.

Below is an example of a minimum price implaced in a market by the government to prevent a good from being sold at an excessively low price. In this instance this good cannot be sold below the minimum price in the market as this is strictly prohibited.

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