Chapter 7

Question 1

Utility

Answer 1

The satisfaction received from consumption of goods or services.

Question 2

Total utility

Answer 2

Total satisfaction received from
consumption.

Question 3

Marginal utility

Answer 3

Utility derived from the consumption of one more unit of good or service.

Question 4

Equimarginal principle

Answer 4

Consumer maximise their utility where their marginal valuation for each product consumed is the same.

Question 5

Budget lines

Answer 5

The combinations of 2 products obtainable with given income and prices.

Question 6

Indifference curve

Answer 6

Shows the different combinations of 2 goods that give a consumer equal satisfaction.

Question 7

Marginal rate of substitution

Answer 7

The rate at which a consumer is willing to substitute one good for another.

Question 8

Income effect

Answer 8

Following a change in price, a consumer has higher real income and will purchase more of this product.

Question 9

Giffen good

Answer 9

Demand falls when price of good falls

Question 10

Economic efficiency

Answer 10

Scarce resources are used in the most efficient way to produce maximum output.

Question 11

Productive efficiency

Answer 11

Firm is producing at lowest possible cost.

Question 12

Allocative efficiency

Answer 12

Firms are producing goods and services most wanted by consumers. P=MC

Question 13

Pareto optimality

Answer 13

Not possible to make someone better off without making someone else worse off.

Question 14

Dynamic efficiency

Answer 14

A form of productive efficiency that benefits a firm over time.

Question 15

Market failure

Answer 15

A situation where free markets fail to allocate resources efficiently.

Question 16

Private costs

Answer 16

Costs that incurred by an individual who produces a good or service.

Question 17

External costs

Answer 17

Those costs incurred and paid for by third parties not involved in the action.

Question 18

Social costs

Answer 18

Private costs + external costs

Question 19

Private benefits

Answer 19

Monetary gain or other forms of benefits that an individual or producer receives from consuming or producing goods or services.

Question 20

External benefits

Answer 20

Benefits that received by third parties that are not involved in the transaction.

Question 21

Social benefits

Answer 21

Total benefits arising from a particular action.

Question 22

Externalities

Answer 22

Actions of producers or consumer give rise to side effects on third parties who are not involved in the actions.

Question 23

Negative externality

Answer 23

Production or consumption of a
good or service that result a cost to third party.

Question 24

Positive externality

Answer 24

Production or consumption of a
good or service that creates a benefit to third party.

Question 25

Asymmetric information

Answer 25

Occurs when one party in the market, usually the seller, has some information that the other party, usually the buyer, does not have.

Question 26

Adverse selection

Answer 26

Hidden characteristics, when only one party knows more about a situation than the other party.

Question 27

Moral hazard

Answer 27

Hidden actions, when one party takes actions that the other party cannot observe but which affect both of them.

Question 28

Cost-benefit analysis

Answer 28

A method that assess the desirability of a project which takes into account of all costs and benefits.

Question 29

Small and medium enterprise (SME)

Answer 29

Firms with fewer than 250 employees; small firms have fewer than 50 employees.

Question 30

Natural monopoly

Answer 30

Single supplier has substantial cost advantage such that competing producers will raise cost and create duplication which leads to inefficient use of resources.

Question 31

X-inefficiency

Answer 31

Costs are above those experienced in a competitive market.