2.1 Microeconomics

Question 1

Demand

Answer 1

The quantity of a good/ service that consumers are willing and able to buy at any price, per period of time.

Question 2

Law of Demand

Answer 2

Inverse relationship between quantity demanded and price. As Qd falls, price rises (Vice versa)

Question 3

Income effect

Answer 3

A factor why demand curve is downward sloping. As price of a product falls, consumers real income increases so they are able to buy more at lower prices.

Question 4

Substitution effect

Answer 4

As price of a product falls, people replace high priced products wiht lower priced ones over rival/substitute ones.

Question 5

Law of diminishing Marginal Utility

Answer 5

The more you consume, the less satisfaction you get per additional unit of consumption

Question 6

Market

Answer 6

a place where buyers and sellers trade

Question 7

Market Demand

Answer 7

the sum of all individual demand of a product for all price levels

Question 8

Non-price Determinants of Demand

Answer 8

-Income
-Taste and preferences
-Future price expectations
-Number of consumers
-Price of related goods (substitutes and complements)

Question 9

Normal good

Answer 9

Products consumers tend to buy as their real income increases. (Neccessities and Luxury goods) Positive YED.

Question 10

Inferior goods

Answer 10

Producst with Negative YED. Demand fall when real income rises.

Question 11

Complementary goods

Answer 11

Products in jointly demanded. (milk and cereal)

Question 12

Substitutes

Answer 12

Products in competitive demand as they can be used in place of another (pepsi and coke)

Question 13

Movements along the demand curve

Answer 13

Caused by price changes

Question 14

Contraction in demand

Answer 14

decrease in Qd -> increase in P

Question 15

Expansion in demand

Answer 15

increase in Qd -> decrease in P

Question 16

Increase in demand

Answer 16

Shift to the right

Question 17

Decrease in demand

Answer 17

Shift to the left

Question 18

Shift

Answer 18

Occurs when there is any non-price factors that affects the demand for the product.

Question 19

Supply

Answer 19

The quantity of a good or service that firms/producers are willing and able to sell at any price level, per time period.

Question 20

Law of supply

Answer 20

Direct relationship between quantity supplied and price. As price increases, supply increases.

Question 21

Law of diminishing marginal returns

Answer 21

A firm during the short run, when employing additional variable Fop, the profit gain will be less.

Question 22

Short run

Answer 22

A period of time where at least one FoP is fixed.

Question 23

Long run

Answer 23

A period of time where no FoP are fixed.

Question 24

Marginal Cost

Answer 24

The cost of producing an additional unit of output

Question 25

Market Supply

Answer 25

Sum of all individual supply of producers at all price levels for a given product

Question 26

Non-price Determinants of supply

Answer 26

-Changes in cost of FoP
-Indirect taxes and subsidies
-Future price expectations
-Changes in technology
-Number of Firms
-Prices related to goods (joint and competitive supply)

Question 27

Joint supply

Answer 27

The supply of a proudct that resulst in the output of at least 1 by product.

Question 28

Indirect taxes

Answer 28

Government levies on expenditure, not income. This tax is payed by producers -> increasing cost of FoP

Question 29

Market Equilibrium

Answer 29

Where Qd = Qs

Question 30

Equilibrium

Answer 30

When a market is clear from shortages or surplus

Question 31

Market Disequilibrium

Answer 31

When Qd /= Qs.

Question 32

Surplus (Excess supply)

Answer 32

When P is above Pe.

Question 33

Price Mechanism

Answer 33

The forces of demand and supply in the free market in order to allocate resources, thus determining production and consumption choices.

Question 34

Signalling function

Answer 34

The forces of demand and supply signify where resources are required and where they are not, this will signal the producers to reallocate their resources to the product that requires it.

Question 35

Incentive function

Answer 35

Price changes provide the incentive (motivation) for producers and consumers to change their behaviour in order to maximizing benefits thus reallocating resources towards producing it.

Question 36

Rationing function

Answer 36

Price changes now ration scarce resources to only those who are willing and able to pay at the new price.

Question 37

Consumer Surplus (CS)

Answer 37

The benefit/gain to buyers who can purchase at a lower price than what they were willing to. The area enclosed between Pe and Demand curve.

Question 38

Producer Surplus (PS)

Answer 38

The benefit/gain to sellers who can sell at a higher price than what they were willing to. The area enclosed between Pe and Supply curve.

Question 39

Social Surplus

Answer 39

PS+CS

Question 40

Allocative efficiency

Answer 40

Socially optimal situation where resources are allocated where both producer and consumers maximize benefits.

Question 41

Market Failure

Answer 41

Any situation where price mechanism allocates scare resources in an inefficient way.

Question 42

Rational Consumer choice

Answer 42

Assume consumers always maximise benefits and producers maximise profit. Maximising Utility.

Question 43

Homo economicus

Answer 43

The selfish, rational, utility maximising people.

Question 44

Behavioural Economics

Answer 44

Study of economic decisions. Humans are not homo economicus, thus not always rational and influenced by society.

Question 45

Assumptions of Traditional economic theory

Answer 45

Consumer Rationality
Utility Maximization
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