Micro Review

Question 1

Demand

Answer 1

Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period

Question 2

Market Demand

Answer 2

Market demand is the total quantity demanded by all consumers which can be achieved by adding all of the individual demand at the same/other prices

Question 3

Law of Diminishing Marginal Utility

Answer 3

The law of diminishing marginal utility refers to the decrease in additional satisfaction that consumer gets from consuming additional units of a good per period. Thus individuals are willing to pay less to buy more units of a good per period of time

Question 4

Normal Goods

Answer 4

A good where the demand for it increases as income increases

Question 5

Inferior Goods

Answer 5

Lower quality goods for which higher quality substitutes exist, if income rises demand for the lower quality good decreases

Question 6

Supply

Answer 6

Supply is the quantity of a good or service that producers are both willing or able to sell at a given price in a given time period.

Question 7

Market Supply

Answer 7

Market supply is the sum of the all the individual producers supply at a given price in a given period of time

Question 8

Factors of Production and its costs

Answer 8

Land - Rent
Labour - Wages
Capital - Interest
Enterprise - Profits

Question 9

Market equilibrium

Answer 9

Occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price. Since there is no excess demand or excess supply

Question 10

Consumer Surplus

Answer 10

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay

Question 11

Producer surplus

Answer 11

The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive

Question 12

Allocative efficiency

Answer 12

achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. MSB = MSC

Question 13

Rational Consumer Choice

Answer 13

occurs when consumers make choices based on the following assumptions : they have consistent tastes and preferences, they have perfect information and they arrange their purchases so as to maximise their utility

Question 14

Utility Maximization

Answer 14

The goal of the rational consumer to maximise utility while satisfying the budget constraint

Question 15

Bias - Rules of Thumb

Answer 15

Decision Making short cuts which enables individuals to make quick decisions

Question 16

Bias - Anchoring

Answer 16

Takes place when people rely on a piece of info that is not necessarily relevant as a reference point when making a decision

Question 17

Bias - Framing

Answer 17

refers to how options and opportunities are presented to people, which can significantly influence their choices .

Question 18

Bias - Availability

Answer 18

relates info that is most recently available and on which people place most importance

Question 19

Elasticity

Answer 19

a measure of the responsiveness of an economic variable to a change in another economic variable

Question 20

PED

Answer 20

A measure of the responsiveness of the quantity demanded of a good or service to a change in ifs price

Question 21

PES

Answer 21

A measure of the responsiveness of the quantity demanded of a good or service to change in its price

Question 22

Why is PED important for governments

Answer 22

it helps governments interested in increasing their tax revenues to decide on which goods to impose an indirect tax on

it allows gov to estimate the size of the necessary tax required to decrease consumption of demerit goods such as cigs or alc.

Question 23

Why is PED important for firms

Answer 23

it allows them to predict the direction of change of their revenues given a price change

It helps them to determine the extent to which they can shift an indirect tax on to the consumer

Question 24

YED

Answer 24

Income elasticity of demand is the responsiveness of demand to changes in income

Question 25

Reasons for gov intervention in markets

Answer 25

earn gov revenue support firms support households on low incomes influence level of production influence the level of consumption correct market failure promote equity

Question 26

Main forms of gov intervention

Answer 26

price controls - ceilings (maximum prices & floors (minimum prices) indirect taxes and subsidies direct provision of services command and control regulation & legislation consumer nudges

Question 27

PEP + trick

Answer 27

The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or a service is produced, therefore they do not pay for the benefits they receive

Question 28

PEC

Answer 28

the beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or a service is consumed, therefore they do not pay for the benefits they receive

Question 29

Welfare loss

Answer 29

A loss of a part of social surplus that occurs when there is a market failure so that MSB is not equal to MPB

Question 30

NEP + trick

Answer 30

Negative effects suffered by a third party whose interest are not considered when a good or a service is consumed, so the third party are therefore not compensated

Question 31

NEC

Answer 31

Negative effects suffered by a third party whose interests are not considered so when a good or a service is consumed, so the third party are therefore not compensated

Question 32

Demerit goods

Answer 32

Goods or services that not only harm the individuals who consume these but also society at large + overconsumed due to NEC e.g - tobacco, alcohol, drugs

Question 33

Merit goods

Answer 33

Goods or services considered to be beneficial for people that are under provided by the market and so underconsumed due to PEC e.g - education, healthcare, public transport

Question 34

Common pool resources

Answer 34

A diverse group of natural resources that are non excludable but their use is rivalrous, for example fisheries & forests

Question 35

Tragedy of the commons

Answer 35

A situation with common pool resources where individual users acting independently according to their own self interest, go against the common good of all users by depleting or spoiling that resource

Question 36

Tradable permits

Answer 36

Permits to pollute, issued by a governing body, that sets a maximum amount of pollution allowable. These permits may be traded (bought or sold) in a market for such permits

Question 37

Carbon tax

Answer 37

Taxes levied on carbon content of fuel. They are a type of pigouvian tax

Question 38

Collective self governance

Answer 38

In the case of a common pool resources such as a fisher, users solve the problem of overuse by devising rules concerning the obligations of the users, monitoring use of the resource, penalties of abuse and conflict resolution

Question 39

Public goods

Answer 39

goods or services that have the characteristics of non-rivalry and non excludability, for example flood barriers.m

Question 40

Non - rivalrous

Answer 40

A characteristic of some goods such that their consumption by one individual does not reduce the ability others to consume them. Characteristic of public goods e.g public safety, street lights

Question 41

Non - excludable

Answer 41

Characteristic of a good, service a resource where it is impossible to prevent people from using it e.g - public roads, national defence, clean air

Question 42

Free rider problem

Answer 42

arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it e.g lighthouse

Question 43

Asymmetric information

Answer 43

A type of market failure where one party in an economic transaction has access to more or better information than the other party

Question 44

Adverse selection

Answer 44

A type of market failure involving asymmetric information where the party with incomplete information is induced to withdraw from market.

Question 45

Moral Hazard

Answer 45

A type of market failure involving asymmetric information where a party takes risks but does not face their full costs by changing behaviour after a transaction has taken place. It is very common in insurance markets

Question 46

Responses to asymmetrical information

Answer 46

government responses : legislation, regulation, provision of information private responses : signalling and screening

Question 47

Perfect Competition

Answer 47

A market structure where there is a very large number of small firms, producing identical products with no barriers to entry or exit, and perfect information. All the firms are thus price takers

Question 48

Monopoly

Answer 48

A market structure where there is only one firm in the industry, so the firm is the industry. There are high barriers to entr

Question 49

Oligopoly

Answer 49

A market structure where there are a few large firms that dominate the market with high barriers to entry

Question 50

Marginal Benfits/ Cost

Answer 50

the extra or additional benefits/costs caused by consuming / producing one more unit of output

Question 51

Abnormal Profit

Answer 51

arises when AR > AC (greater than the minimum required by a firm to remain in a line of business)

Question 52

Normal Profit

Answer 52

The minimum return that must be received by a business in order to stay in business. it is earned when TR = TC or when AR/P = AC