microeconomics

Question 1

price elasticity of demand

(+ pes, yed)

Answer 1

the proportional responsiveness of quantity demanded to a change in price

Question 2

market failure

Answer 2

any situation where allocation of resources by a freemarket is not efficient (necessitates gov intervention)
- socially optimal equilibrium is not reached by free market

Question 3

externality

Answer 3

marginal external costs/benefit imposed on 3rd parties from an economic activity the 3rd parties do not pay or get compensated for

Question 4

marginal social benefit

Answer 4

benefit (or utility) derived from the use of a good / service, including benefits to consumers & rest of society

Question 5

marginal private benefit

Answer 5

benefit dervied only by consumers

Question 6

marginal social cost

Answer 6

all costs from the production of resources, including costs to producers & rest of society

Question 7

marginal private cost

Answer 7

cost derived only by producer

Question 8

pereto optimal

Answer 8

point when you can’t make anyone else better off without making someone worse off (when MSC = MSB)

Question 9

common good / common access resource / common pool resource (+ rwe)

Answer 9

rivalrous, non-excludable.
eg, fish, seafood

Question 10

collective / club good (+ rwe)

Answer 10

non-rivalrous, excludable
eg. movie theatre

Question 11

public good (+ rwe)

Answer 11

non-rivalrous, non-excludable
eg. national defense

Question 12

merit & demerit good (+ rwe)

Answer 12

merit - good which would be underconsumed/produced by free market economy
-> considered good for society (consumption causes positive externalities)
eg. healthcare, vaccines

demerit - vice versa
eg. drugs, alcohol

Question 13

welfare / social loss

Answer 13

decrease in consumer and/or producer surplus as a result of either more/less than the socially optimal level of output being produced/consumed

Question 14

**sustainable development

Answer 14

growth that meets the needs of the current generation without compromising ability of future gnerations to meet their needs

Question 15

free rider problem

Answer 15

individuals benefit from a shared resource or public good without contributing to its cost, leading to under-provision or degradation

Question 16

capital stuffing

Answer 16

in order to increase production, produer puts resources into improving capital (rather than other factors of production)

Question 17

*short termism

Answer 17

concentration on immediate profit at expense of long term security

Question 18

incentive

Answer 18

–a cost or benefit
–that motivates a decision or action by consumers/households
–or businesses/firms or other participants in an economy.

Question 19

utility

Answer 19

–the total satisfaction, pleasure, enjoyment, benefit (etc.) received from consuming a good or service
–not precisely measurable for each individual — subjective (i.e. demand curves c/b seen as marginal social utility/benefit and supply as the marginal social cost—here ‘utility’ is aggregated)
–utility is the ‘theory of value’ used in market economies (i.e. c/b contrasted with the ‘labour theory of value’)

Question 20

consumption

Answer 20

–aka consumer expenditure
– spending by households on durable and non-durable goods & services (i.e. related to D-curve)
–takes place over a period of time.
–driven by the wants and needs of households, seeking to maximize utility; some goods and services are used in a long-term (i.e. a dishwasher, car, etc.) and some are used over short-term

Question 21

production

Answer 21

–is the process that transforms scarce resources into useful goods and services
– as a ‘process’ there are related issues:
i.e. production externalities, production efficiency, production possibilities

Question 22

capital

Answer 22

–produced means of production
–i.e. tools, machinery, physical plant (factories, buildings), equipment
–‘things produced’ that are used to then make other things (i.e. financial capital )

Question 23

normal goods

Answer 23

– goods for which demand increases when consumer incomes increase
(i.e. incomes increase so rational consumers will optimize their utility and consume more of a normal good; a marginal increase proportional to income in some way)
–overwhelmingly, most goods and services are ‘normal’

Question 24

inferior goods

Answer 24

– goods for which demand decreases when consumer incomes increase
– hypothetical (to an extent*) category that includes goods like ‘hamburger’ (more steak), noodles (more pasta) and potatoes (more French fries etc.)

Question 25

luxury goods

Answer 25

goods with a high income elasticity of demand (YED); YED is greater than one -- a good for which demand increases more (proportionally) as income rises, and is contrasted with necessities ( demand increases proportionally less than income). --‘luxury goods’ are also used as synonyms for ‘superior goods’ (i.e. high quality watches, cars, food/drink etc.)

Question 26

allocative efficiency

Answer 26

--* scare resources are allocated to production of goods/services most valued by society --point where ‘just the right amount’ is produced --normative measure; from society’s point of view (i.e. in PPC this will be on the mid-point for the curve b/c trade-offs are minimized) --cost theory: when the last unit produced has a P = marginal cost (generally MSB = MSC)

Question 27

informal markets

Answer 27

TWO of three things: ● economic activity that is not officially recorded ● economic activity that is not regulated ● economic activity that is not taxed --street vendors are a typical example of a ‘grey market’ -- criminal activity (illegally sold goods/services) are examples of ‘black markets’

Question 28

rent control

Answer 28

--a maximum price, or rent ceiling, on what landlords can demand for payment on residential housing --set above the free-market determined price for rents --return to equilib. price not allowed

Question 29

complements (complementary goods)

Answer 29

--aka ‘complementary goods’ --goods that are consumed jointly (along with other goods) --i.e. coffee + sugar, cars + gasoline

Question 30

economies of scale

Answer 30

--when the average costs decrease as the size (scale) of production in a firm increase there are EOS --each unit output costs less (opp. cost) as the number of goods produced increases

Question 31

diseconomies of scale

Answer 31

-business expands so much that the cost per unit INCREASES

Question 32

subsidy

Answer 32

--payment made by government or a central agency; per unit produced basis (typically)

Question 33

shortage

Answer 33

--what occurs when the price of a good/service is fixed below the competitive (free market) equilibrium --Q demanded exceeds Q supplied

Question 34

increasing returns to scale

Answer 34

--a technology used to produce a good/service where a 1% increase in all inputs yields a greater that 1% increase in output --increasing returns to scale leads to economies of scale --decreasing returns to scale is the opposite: the increase leads to decreased output (etc.)

Question 35

substitute goods

Answer 35

substitute goods --two goods or more that can satisfy consumer needs and wants --both/all are in competitive consumption --the cross price elasticity (XED) of the goods is positive

Question 36

necessities

Answer 36

-- day-to-day goods or services regularly used by consumers (a loose term) --goods/services with a very low income elasticity of demand (YED)

Question 37

minimum price

Answer 37

minimum price -- price floor -- price set by an authority (usually a level of government) --price is above the equilibrium price as determined by market forces --price is not permitted to fall; the aim is to protect producers -Oligopoly pricing, when collusion is involved, is also referred to as a min. price (i.e. fixed by colluding firms)

Question 38

maximum price

Answer 38

-- price ceiling -- price set by an authority (usually a level of government) --price is below the equilibrium price as determined by market forces --price is not permitted to rise, the aim is to protect consumers

Question 39

law of diminishing marginal returns

Answer 39

-a short run law of production which states that as more units of one variable factor input are added (LLCE) to a fixed factor (i.e. capital), there will be a point beyond which output will continue to rise BUT at a decreasing rate --the marginal product of the factor input (whichever of LLCE) will start to decrease

Question 40

consumer / producer surplus

Answer 40

consumer: --the difference between how much the consumer is willing and able to pay (at the most) …and what she or he actually ends up paying producer: --the difference between how much the producer/firm earns ….and what the firm requires when they offer a given amount of a good or service

Question 41

crowding out

Answer 41

--a situation where the ‘G’ spends more (government expenditure) than it receives in revenue (mainly taxation), and needs to borrow money; --this forces up interest rates, thereby reducing investment and consumption by the private sector or -- the government (public sector) uses the economy’s factors of production, thereby reducing the ability of the private sector to use those same resources.

Question 42

capital markets

Answer 42

- savings and investment financing are transferred to users of capital (i.e. businesses, governments, individuals) -examples include primary markets where new stocks and bonds are issued and secondary markets where the trade in these securities takes place

Question 43

privatization

Answer 43

--public sector assets (firms) being transferred to the private sector -- ownership of a resource and its development is handled by profit-seeking firms (i.e. gov’t sells/selling off state owned assets/enterprises)

Question 44

fixed asset & current asset

Answer 44

fixed - tangible, long-term property and equipment used by a company in its operations - such as buildings, machinery, and land curent - expected to be used or converted to cash within one year

Question 45

final & intermediate good

Answer 45

final goods are products ready for consumption by the end user - aka. consumer goods, finished good intermediate goods are used as inputs in the production of other goods

Question 46

carbon tax

Answer 46

taxes levied on carbon emissions (carbon content of fuel) to reduce external costs/protect the environment (they are Pigouvian taxes).