Microeconomics and Intro

Question 1

Scarcity

Answer 1

Resources and factors of production are finite while human wants and needs are finite. There are not enough resources to produce everything that is necessary to satisfy human beings’ needs and wants completely.

Question 2

Choice

Answer 2

An act of selecting between two or more possibilities; choice is necessary when scarcity requires decisions about how to use resources to meet needs and wants

Question 3

Efficiency

Answer 3

Improved resource use; producing the same good with fewer resources

Question 4

Equity

Answer 4

The concept of fairness or evenness

Question 5

Economic well-being

Answer 5

Multidimensional concept: quality of life, with material, relational and subjective dimensions

Question 6

Sustainability

Answer 6

The ability of the present generation to meet its needs without compromising the ability of future generations to meet their own needs

Question 7

Change

Answer 7

The process or act of becoming different

Question 8

Interdependence

Answer 8

When two or more individuals are mutually reliant on one another to survive or thrive

Question 9

Intervention

Answer 9

When the government intervenes in the market to solve market failure

Question 10

Resources/factors of production

Answer 10

All the inputs used to produce goods and services (machines, workers, space, materials)

Question 11

Land

Answer 11

Land itself, everything that is under and above the land and everything that is found in and under the sea. Natural resources - eg minerals, oil reserves, natural gas, forests, rivers and lakes.

Question 12

Labour

Answer 12

The human factor needed for production - physical and mental effort that people contribute to the production of goods and services.

Question 13

Capital

Answer 13

Physical capital stock used to produce goods and services - manufactured resources (eg machines, factories, roads and tools), capital goods and investment goods

Question 14

Entrepreneurship

Answer 14

Entrepreneur carries out the following tasks: starting up a business, employing and organising FOPs, risk taking
A special human skill - ability to develop new businesses by organising the 3 other factors of production to produce goods and services

Question 15

Opportunity cost

Answer 15

The next best alternative that is given up when an economic division is made

Question 16

PPC

Answer 16

Production possibility curve - a model that illustrates all the maximum possible combinations of producing 2 goods in an imaginary economy, using the resources and technology available to the economy at that point in time.

Question 17

Free market economy

Answer 17

A rationing system where all economic decisions are taken by consumers and producers through the price mechanism without government intervention, and resources are privately owned by people and firms.

Question 18

Centralised economy

Answer 18

A rationing system where all economic decisions are taken at the centre by the government. There is no private property; all resources are owned by the state. Also called ‘centrally planned economy’.

Question 19

Utility

Answer 19

A measure of satisfaction of usefulness a consumer received when they consume a product

Question 20

Primary commodities

Answer 20

A commodity is a primary good, and is an important input to production. Oil, iron ore and timber are all examples of commodities.

Question 21

Manufactured goods

Answer 21

Human-made goods that have been produced from raw materials transformed through a production process.

Question 22

Microeconomics

Answer 22

The area of economics that studies the behaviour of individual economic agents, such as households, firms, industries and the government, and how they make economic decisions

Question 23

Demand

Answer 23

The quantity of a good or service that consumers are willing and able to purchase at various prices during a specific time period, ceteris paribus.

Question 24

Complements

Answer 24

Goods that are usually consumed together (joint demand), such that one good has little use without the other (eg tennis ball and racket)

Question 25

Substitutes

Answer 25

Goods that have very similar characteristics and uses to consumers so that they switch between them easily

Question 26

Supply

Answer 26

The quantity of goods and services that producers are willing and able to offer at various prices during a given time period, ceteris paribus.

Question 27

Joint supply

Answer 27

When two or more goods are derived from the same product, so it isn’t feasible to produce more of one without producing more of the other. Typically a ‘main’ product and a by-product.

Question 28

By-product

Answer 28

A secondary product made during the production of something else

Question 29

Price gouging

Answer 29

Charging an abnormally high price for a good/service, usually to take advantage of extreme changes in demand that occur in exceptional situations (eg demand for food after natural disaster)

Question 30

Dumping

Answer 30

When a firm exports their goods at a price below production cost or below price charged in the home market, often to get rid of surplus supply or gain foothold in a new market

Question 31

Competitive supply

Answer 31

When the production of two goods use similar resources and processes. Producing more of one product means producing less of the other.

Question 32

Economies of scale

Answer 32

A firm’s ability to produce with lower average costs when they grow in size

Question 33

Equilibrium

Answer 33

A state at which the quantity demanded equals the quantity supplied, set at the equilibrium price, which results from the interaction between consumers and producers in markets where there are no surpluses or shortages and the market has cleared The point where supply curve crosses demand curve

Question 34

Disequilibrium

Answer 34

A state where quantity demanded does not exactly equal quantity supplied, due to changes in the external environment (non-price determinants)

Question 35

Non-price determinants

Answer 35

All factors affecting demand/supply other than the price, causing the entire curve to shift

Question 36

Shortage

Answer 36

Excess demand: when the quantity demanded is greater than the quantity supplied; occurs when the price in the market is below the equilibrium price

Question 37

Surplus

Answer 37

Excess supply: when the quantity demanded is less than the quantity supplied; occurs when the price in the market is above the equilibrium price

Question 38

Price mechanism

Answer 38

The way in which changes in price affect quantity demanded and quantity supplied, thus determining how scarce resources are allocated in an economy

Question 39

Signal/signalling

Answer 39

A function of the price mechanism - info to consumers and producers about what should be consumed and produced (eg the price the good is sold at)

Question 40

Incentives

Answer 40

Where motivation is provided to consumers and producers to reallocate resources in a market (eg due to rise/fall in prices)

Question 41

Rationing

Answer 41

The controlled distribution of resources, to determine who can buy certain goods in a market (eg those who can pay, first come first served, etc)

Question 42

Community surplus

Answer 42

The sum of consumer and producer surplus - total benefit gained by society when the market is at equilibrium

Question 43

Producer surplus

Answer 43

The difference between the lowest price producers are willing and able to offer the good at and the actual price they receive for it. It is the extra benefit that producers receive from selling an amount of output at a higher price than the one at which they were prepared to sell it/ Triangle above supply curve, below equilibrium price

Question 44

Consumer surplus

Answer 44

The difference between the highest price consumers are willing and able to pay for a good and the actual price they pay; extra benefit they receive for paying lower than what they were prepared to Triangle below demand curve, above equilibrium price

Question 45

Productive efficiency

Answer 45

Producing goods by using the fewest possible resources (lowest possible cost of production)

Question 46

Allocative efficiency

Answer 46

Producing the optimal combination of goods from society’s point of view; when resources are allocated in such a way that no one can be better off without making someone else worse off Benefits to society are maximised

Question 47

Allocative inefficiency

Answer 47

A situation in which community surplus is not maximised

Question 48

Elasticity of demand

Answer 48

A measure of the responsiveness of the quantity demanded of a good/service to changes in one of the factors that determines it

Question 49

Price elasticity of demand (PED)

Answer 49

A measure of how much the quantity demanded of a good changes when there is a change in its own price %ΔQd/%ΔP

Question 50

Income elasticity of demand (YED)

Answer 50

A measure of how much the quantity demanded of a good will change in response to a change in consumers’ income %ΔQ/%ΔY Can be both positive/negative - normal/inferior goods

Question 51

Normal good

Answer 51

Goods whose demand increases as people’s incomes increase

Question 52

Inferior good

Answer 52

Goods whose demand increases as people’s incomes decrease

Question 53

Price elasticity of supply

Answer 53

A measure of how much the quantity supplied of a good changes when there is a change in its own price %ΔQs/%ΔP

Question 54

Relatively elastic

Answer 54

When the change in price/income leads to a very responsive change in quantity demanded/supplied

Question 55

Relatively inelastic

Answer 55

When a change in price of a good leads to a proportionally smaller change in quantity demanded/supplied

Question 56

Perfectly elastic

Answer 56

A situation where the percentage change in price would lead to an infinite change in quantity demanded/supplied (horizontal)

Question 57

Perfectly inelastic

Answer 57

When the quantity demanded/supplied is not responsive at all to changes in price (vertical line)

Question 58

Unitary elasticity

Answer 58

A situation where the percentage change in price leads to an equal change in quantity supplied/demanded

Question 59

Luxury good

Answer 59

A good or service whose quantity demanded changes a lot in response to a price change because consumers consider it non-essential

Question 60

Necessity

Answer 60

A good or service whose quantity demanded doesn’t change much in response to a price change because consumers consider it essential

Question 61

Government intervention

Answer 61

When the government interferes with the market forces that allocate resources in the economy

Question 62

Price controls

Answer 62

A form of government intervention - price floors and ceilings - that dictate the price at which a good can be sold in the market

Question 63

Price ceiling

Answer 63

A maximum price set by the government that is set below the equilibrium price to prevent producers from selling their product above it

Question 64

Price floor

Answer 64

A minimum price set by the government that are set above the equilibrium price to prevent producers from selling their product below it

Question 65

Black market

Answer 65

Can be a consequence of price ceilings and floors when there are people who are willing and able to pay higher prices that the legally set maximum price, or willing and able to sell at a lower price than the legally set minimum price

Question 66

Tax

Answer 66

Payments that have to be made to the government which is then uses to provide public and merit goods to society

Question 67

Indirect tax (excise tax)

Answer 67

Taxes that are not charged directly on people’s incomes or wealth, but are instead paid indirectly by consumers when they purchase a good (taxes are included in the price of the good) Taxes that aim to discourage the consumption of particular goods (demerit)

Question 68

Specific tax

Answer 68

An indirect tax that is a fixed amount imposed on a good or service per unit sold

Question 69

Percentage/ad valorem tax

Answer 69

An indirect tax that is a fixed percentage changed on the selling price of the good. The amount of tax increases as the price of the good or service increases

Question 70

Subsidy

Answer 70

Per-unit payments that are used to lower production costs and increase the output of the market, granted by the government to a firm/industry

Question 71

Regulation

Answer 71

A regulatory body that exists to monitor or regular an industry

Question 72

Legislation

Answer 72

The laws set out by legislative bodies

Question 73

Market failure

Answer 73

When there is an inefficient allocation of resources resulting from the presence of externalities, MSB ≠ MSC

Question 74

Welfare/deadweight loss

Answer 74

The loss of community surplus that is the result of government intervention or market failure

Question 75

Negative externality of consumption

Answer 75

When the consumption of a good or service generates a negative effect on a third party or society, which has not been factored into the calculation when deciding to consume that good

Question 76

Positive externality of consumption

Answer 76

When the consumption of a good or service generates a positive effect on a third party or society, which has not been factored into the costs of consumption

Question 77

Negative externality of production

Answer 77

When the production of a good or service generates a negative effect on a third party or on society as a whole, which has not been factored into the costs of producing the good

Question 78

Positive externality of production

Answer 78

When the production of a good or service generates a positive effect on a third party or on society as a whole, which has not been factored into the costs of producing the good

Question 79

Marginal social cost

Answer 79

The extra cost to society of producing one more unit of output (both private and external costs)

Question 80

Marginal social benefit

Answer 80

The extra benefit/utility to society of consuming one more unit of output (both private and external benefits)

Question 81

Marginal private cost

Answer 81

The extra cost to a firm of producing one more unit of output (private costs)

Question 82

Marginal private benefit

Answer 82

The extra benefit/utility to an individual of consuming one more unit of output (private benefits)

Question 83

Pigouvian tax

Answer 83

Indirect taxes used to reduce the consumption of a demerit good, to resolve negative externalities

Question 84

Merit good

Answer 84

Goods that are beneficial to the individual and society as a whole, and are usually under-provided in a free market

Question 85

Demerit good

Answer 85

Goods that have negative effects when consumed and cause negative externalities of consumption

Question 86

Carbon tax

Answer 86

A method of reducing the level of CO2 emitted from burning fossil fuels; the level of tax varies according to the amount of carbon each fuel contains (fuel w/ more carbon are taxed at higher rates)

Question 87

Emissions trading/ cap and trade schemes

Answer 87

Imposing of a cap/limit on total amount of CO2 that producers can release into the atmosphere; permits are distributed to producers, which can be bought and sold in the market

Question 88

Common pool resources

Answer 88

Rivalrous but non-excludable (eg fish in the sea)

Question 89

Private good

Answer 89

Goods and services that are rivalrous and excludable

Question 90

Public good

Answer 90

Goods that are necessary and beneficial for society, but are both non-excludable and non-rivalrous, and are thus not provided by the free market. All public gods are merit goods. Non-excludable: no individual can be excluded from consuming it (ie can’t make them pay) Non-rivalrous: one individual’s consumption doesn’t prevent/limit another consumer from consuming it at the same time

Question 91

Free rider problem

Answer 91

When a non-excludable good will not be produced by the free market because no one is willing to pay for it, and they think someone else will pay for it

Question 92

Quasi-public good

Answer 92

Goods that only exhibit one of the two characteristics of public goods, either non-rivalry or non-excludability, but not both (club goods and common pool resources)

Question 93

Club good

Answer 93

Excludable but non-rivalrous (eg movie theatre, toll highway, netflix subscription)

Question 94

Exclusive

Answer 94

The condition that occurs when someone can be prevented from consuming a good or service

Question 95

Rivalrous

Answer 95

The condition that occurs when someone consuming a good or service prevents someone else from consuming the good or service at the same time