unit 2

Question 1

AP=

Answer 1

output/input

Question 2

diminishing AP of labour

Answer 2

as more labour is used in given production process, AP of L decreasing

Question 3

if production function is upward-sloping straight line then what does this mean for AP

Answer 3

it is constant

Question 4

demography

Answer 4

how the population is determined

Question 5

incentives

Answer 5

economic reward or punishment which influences benefits/costs of alternative courses of action

Question 6

relative prices

Answer 6

price of good or service compared to another

Question 7

economic rent

Answer 7

payment or other benefit received above and beyond what the individual would have wanted in next best alternative
=benefit from option taken- benefit from next best option

Question 8

innovation rent

Answer 8

extra profit from a smart new invention

Question 9

reservation option

Answer 9

a person’s next best alternative among all other options in a particular transaction

Question 10

isocost line

Answer 10

a line that represents all combinations that cost a given total amount

Question 11

slope of isocost line=

Answer 11

price ratio

Question 12

creative destruction

Answer 12

process in which someone comes into the market with new/better technologies and pushes other firms out of the market who haven’t adopted these

Question 13

production function

Answer 13

relationship between amount of output produced and amount of inputs used to produce it

Question 14

entrepreneur

Answer 14

person who creates or is an early adopter of new technologies, organisational forms and other opportunities

Question 15

process of industrial revolution to wages rising

Answer 15

IR led to displaced workers which kept BP of worker low thus kept wages from rising. there were more and better capital goods for each worker employed so APofL increased. this combined with low wages meant firms were making higher profits. they then could expand factories so demand for labour increased. therefore bargaining power of workers rose and so wages rose.

Question 16

trade balance

Answer 16

X-M

Question 17

trade surplus

Answer 17

x>M

Question 18

trade deficit

Answer 18

X

Question 19

recession

Answer 19

2 successive quarters of negative growth- output is below the country’s potential

Question 20

flow

Answer 20

quantity measured by unit of time such as annual income

Question 21

model

Answer 21

simple description of the relationships in question

Question 22

subsistence level

Answer 22

the level of living standards such that the population will not grow or decline

Question 23

what does a good model have

Answer 23

clarity, accuracy, it improves communication and it is useful

Question 24

an outcome that is dominated

Answer 24

when there is a win-win alternative

Question 25

cost to a firm (using labour and energy)=

Answer 25

wage x labour + price of energy x quantity

Question 26

what does it mean if isocost line becomes steep, to price of energy and labour if labour is on x axis

Answer 26

it means wages are rising relative to energy

Question 27

why don’t innovation rents last

Answer 27

because firms see that entrepreneurs are making economic rents so will eventually adopt the new technology reducing their costs and increasing their profits

Question 28

what are the 2 influences on wages

Answer 28

1- the range of possible ranges depends on total output

2-the share going workers is determined by their bargaining power

Question 29

market price

Answer 29

the price at which products are actually sold - depends on supply and demand

Question 30

what happens when a market is overstocked and prices are less than the cost of production

Answer 30

landlords will withdraw their land, employers their stock and workers their labour rather than suffer continued losses in this line of production. so quantity supplied will fall and market prices will be bid up again to the natural price at which the market is cleared

Question 31

why doe market wage rates differ?

Answer 31

1-some professions are easier or more respectable than others
2) some are more difficult or expensive to learn so the time and effort spent in learning them has to be received through the price of the work done
3- seasonal work
4- wages are higher in trades which require trust eg lawyers and doctors
5- earnings reflect the probability of success in any profession- lawyers are well paid because very few of those who choose to go into law actually succeed in doing it.