DEFINITIONS

Question 1

Opportunity Cost

Answer 1

The cost of the next-best alternative that has to be given up in decision making.

Question 2

Free Good

Answer 2

A good which does not have an opportunity cost because it it is not scarce. (N.B. very different from goods which are free as in without a price).

Question 3

Marginal Utility

Answer 3

The addition made to total utility a consumer receives by consuming one more unit of a certain item.

Question 4

Utility

Answer 4

The amount of satisfaction satisfaction a consumer receives from consumption of a certain item.

Question 5

Rational Consumer

Answer 5

A consumer that bases decision-making on maximising utility.

Question 6

Rational Firm

Answer 6

A firm that bases decision-making on maximising profit.

Question 7

Veblen Good

Answer 7

A luxury item whose price does not follow the usual laws of supply and demand, as an increase in price will actually cause an increase in quantity demanded.

Question 8

Consumer surplus

Answer 8

The difference between what consumers are willing to pay for a good/service, and what they actually pay.

Question 9

Producer surplus

Answer 9

The difference between what producers are willing to supply a good/service for, and what they actually supply it for.

Question 10

Cross elasticity of demand

Answer 10

A measure of the responsiveness of demand for a certain good given a change in the price of another.

Question 11

Price elasticity of demand

Answer 11

A measure of the responsiveness of demand for a certain good given a change in its price.

Question 12

Income elasticity of demand

Answer 12

A measure of the responsiveness of demand for a certain good given a change in the incomes of consumers.

Question 13

Normal good

Answer 13

A good for which demand rises as incomes rise.

Question 14

Inferior good

Answer 14

A good for which demand rises as incomes fall.

Question 15

Derived Demand

Answer 15

A good for which as demand for one

Question 16

Market failure

Answer 16

When the price mechanism fails to deliver the optimal and most efficient allocation of resources in a market such that the best level of output is reached.

Question 17

Division of labour

Answer 17

A process whereby the production procedure is broken down into a sequence of stages, and workers assigned to a particular stage.

Question 18

Economic system

Answer 18

A particular set of social instructions which deals with the production, distribution, and consumption of goods and services in a particular society. They are how societies deal with the BED.

Question 19

Free Market Economy

Answer 19

Economy where decisions on what, how, and for whom to produce are left to the operation of the price mechanism.

Question 20

Command economy

Answer 20

An economy where the government makes the decisions on how, what, and for whom to produce.

Question 21

Mixed economy

Answer 21

An economy in which decisions on what, how, and for whom to produce, are made partly by the private sector, and partly by the government.