Chapter 4

Question 1

Complete Market Demand Function

Answer 1

Tell us the quantity that consumers are willing and able to buy at all alternative market prices under all market conditions

Question 2

Ceteris Paribus

Answer 2

All other variables held constant

Question 3

Single market demand function

Answer 3

Tell us the quantity that consumers are willing and able to buy at all alternative market prices, ceteris Paribus

Question 4

Buyers reservation price

Answer 4

The last price a consumer will purchase a good

Question 5

Law of demand

Answer 5

Generally, there is an inverse or negative relationship between the quantity of (x) consumers are willing and able to buy and the price, c.p.

Question 6

Law of diminishing marginal utility

Answer 6

If we take an individual consumer and a bundle of quantities of a good, over the relevant range, marginal utility received will be positive but declining as units of consumption increase

Question 7

Utility

Answer 7

Satisfaction that a consumer receives from consuming a good

Question 8

Total utility

Answer 8

Total satisfaction received from consuming a certain quantity of a good

Question 9

Marginal utility

Answer 9

Extra utility that is brought about by the addition of one more unit of the good, the value of the marginal ________ is the same as the slope of the total ______ curve

Question 10

Income effect

Answer 10

A price increase of good (x) will decrease the relative income (purchasing power) of consumers

Question 11

Substitution effect

Answer 11

As the price of good (x) rises, consumers will purchase more of the substitute good (w)

Question 12

Veblin effect

Answer 12

(Conspicuous consumption) social status attached to the product

Question 13

Given good- 2 conditions

Answer 13

• people have to be poor and the item is the cheapest (potato famine)
• being priced out of the market for everything else

Question 14

Normal good

Answer 14

If a consumer makes more money, they would purchase more of this good

Question 15

Inferior good

Answer 15

If a consumer makes more money, they purchase less of this good

Question 16

Complete market supply function

Answer 16

Tells us the quantity of a good that producers would be willing and able to supply at Ll alternative market prices and all alternative market circumstances

Question 17

Single market supply function

Answer 17

Tells us the quantity of a good that producers would be willing and able to supply at all alternative market prices and ceteris Paribus

Question 18

Law of supply

Answer 18

Gives instruction to draw supply curve, there is a direct or positive relationship between the quantity of a good supplied and the price in short run

Question 19

Short run

Answer 19

A period of time so short that the firm cannot change all inputs by the same proportion, capital is fixed in short run

Question 20

Long run

Answer 20

A period of time in which a firm could vary all of its inputs by the same proportion

Question 21

Law of diminishing returns

Answer 21

As we add more of a variable resource to a fixed set of inputs with a fixed technology, the resulting output will increase over the relevant range, but at a decreasing rate

Question 22

Total physical product of labor

Answer 22

The total amount of a product produced during a given time period by labor

Question 23

Marginal physical product of labor

Answer 23

Extra physical product resulting from the addition of more unit of labor

Question 24

Increasing returns to scale

Answer 24

When the firm doubles inputs the resulting output more than doubles

Question 25

Constant returns to scale

Answer 25

A doubling of inputs would result in a doubling of output

Question 26

Decreasing returns to scale

Answer 26

When the firm doubles inputs the resulting output would be less than double

Question 27

Economies of scale

Answer 27

Firms reduce their average cost by increasing their volume of output

Question 28

4 functions

Answer 28

• Market price determines resource allocation
• prices give consumers and suppliers an idea of the relative value of products
• prices provide information about the future
• provide incentives to households and firms