Chapter 7

Question 1

Utility

Answer 1

The satisfaction received from consumption

Question 2

Marginal utility

Answer 2

The utility derived from the consumption of on more unit of the good or service

Question 3

Diminishing marginal utility

Answer 3

The fall in marginal utility as consumption increases

Question 4

Equimarginal principle

Answer 4

Consumers maximise their utility where there marginal valuation for each product consumed is the same

Question 5

Budget line

Answer 5

The combinations of two products obtainable with given income and prices

Question 6

Substitution effect

Answer 6

Where following a price change, a consumer will substitute the cheaper product for the one that is now relatively expensive

Question 7

Income effect

Answer 7

Where following a price change, a consumer has higher real income and will purchase more of this product

Question 8

Indifference curve

Answer 8

This shows the different combinations of two goods that give a consumer equal satisfaction

Question 9

The slope of the indifference curve is important- it represents the extent to which the consumer is willing to substitute one good for another.

Question 10

Marginal rate of substitution

Answer 10

The rate at which a consumer is willing to substitute one good for another

Question 11

Production function

Answer 11

This shows the maximum possible output from a given set of factors inputs

Question 12

Diminishing returns

Answer 12

Where the output from an additional unit of input leads to a fall in the marginal product

Question 13

Marginal product

Answer 13

The change in output arising from the use of one more init of a fatcor of production

Question 14

Profit maximisation

Answer 14

The assumed objective of a firm where the difference total revenue and total cost is at a maximum

Question 15

Increasing returns to scale

Answer 15

Where output increases at a proportionately faster rate than the increase in factor inputs

Question 16

Decreasing returns to scale

Answer 16

Where factor inputs increase at a proportionately faster rate than the increase in output

Question 17

economies of scale

Answer 17

The benefits gained from falling long-run average costs as the scale of output increases

Question 18

Diseconomies of scale

Answer 18

where long-run average costs increase as the scale of output increases

Question 19

types of economies of scale ( 6 )

Answer 19

Purchasing 
marketing 
managerial 
technological 
financial 
risk-bearing

Question 20

External economies of scale

Answer 20

Cost savings accruing to all firms in an industry as the scale increases

Question 21

minimum efficient scale

Answer 21

Lowest level of output at which are minimised

Question 22

Profits

Answer 22

The difference between total revenue and total costs

Question 23

Normal profit

Answer 23

A cost of production that is just sufficient for a firm to keep operating in a particular industry

Question 24

Abnormal profits

Answer 24

That which is earned above normal profit

Question 25

Types of firms (6)

Answer 25

Sole Traders
Partnerships 
cooperatives
private or public limited companies 
state-owned firms 
multinationals

Question 26

Small and medium enterprises SMEs

Answer 26

Firms with fewer than 250 employees; small firms have less than 50

Question 27

Multinational corporations MNCs

Question 28

Market Structure

Answer 28

The way in which a market is organised in terms of the number of firms and the barriers to the entry of new firms

Question 29

Barriers to entry

Answer 29

Any restrictions that prevent new firms from entering ann industry

Question 30

4 models of market structure

Answer 30

Perfect competition 
Monopoly 
monopolistic competition 
oligopoly 
((((imperfect competition))))

Question 31

Perfect competition

Answer 31

Theoretical extreme

An ideal market structure that has many buyers and sellers, identical or homogenous products, no barriers to entry

Question 32

Perfect competition characteristics ( 4 )

Answer 32

Homogeneous
Many buyers and sellers
Free entry and exit
Perfect information

Question 32

Perfect competition characteristics ( 4 )

Answer 32

Homogeneous
Many buyers and sellers
Free entry and exit
Perfect information

Question 33

Monopolistic competition characteristics

Answer 33

Large number of buyers and sellers
Products differentiated
Little to no barriers to entry and exit

Question 34

oligopoly characteristics

Answer 34

Dominated by few large firms
product is differentiated or identital
Firms are independetn
Barriers to entry and exit

Question 35

oligopoly characteristics

Answer 35

Dominated by few large firms
product is differentiated or identital
Firms are independetn
Barriers to entry and exit

Question 36

Principal agent problem

Answer 36

Is an asymmetric information problem that stems from a divorce between ownership and control that is found in many businesses and other organisations