Definitions

Question 1

Ceteris paribus

Answer 1

The assumption that all other factors are held constant

Question 2

Utility

Answer 2

The satisfaction gained by consumption of a good

Question 3

Indifference curves

Answer 3

The curves formed by bundles of goods with the same utility

Question 4

Marginal rate of substitution (MRS)

Answer 4

The rate at which a consumer would trade one good for another

Question 5

Diminishing marginal rate of substitution

Answer 5

When a consumer has more of good A than good B, they are less willing to exchange good B for good A

Question 6

Firm

Answer 6

An organisation that turns inputs (labour, capital and materials) into outputs

Question 7

Labour (L)

Answer 7

Hours worked by employees

Question 8

Capital (K)

Answer 8

Long lived inputs such as land and buildings

Question 9

Production function

Answer 9

The various ways that a firm can turn inputs into outputs.
q = f(L,K)
K is fixed in short run

Question 10

Output (q)

Answer 10

Goods and services

Question 11

Marginal product of labour (MPL)

Answer 11

The additional output produced by adding one additional unit of labour holding all other factors constant

Question 12

Average product of labour

Answer 12

The ratio of output provided to amount of labour

Question 13

Law of diminishing marginal returns

Answer 13

States that if firms keeps increasing an input whilst keeping all other inputs constant, the increases in output will become smaller and smaller.

Question 14

Isoquant

Answer 14

The combinations of input to achieve a certain level of output

Question 15

Marginal rate of technical substitution

Answer 15

The rate at which a firm can replace one input with another while keeping output constant.

Question 16

Returns to scale

Answer 16

How output changes when all inputs are proportionally changed

Question 17

Opportunity cost

Answer 17

The value lost by taking an alternative choice

Question 18

Fixed costs

Answer 18

Costs that do not vary with different levels of output (capital)

Question 19

Variable costs

Answer 19

Costs that vary with increased output (material and labour)

Question 20

Marginal costs

Answer 20

The change in total costs by producing an additional unit of output

Question 21

Average total costs

Answer 21

Cost per unit of output

Question 22

Isocost

Answer 22

The combinations of input that have the same cost

Question 23

Marginal revenue

Answer 23

The change in revenue by producing one more unit of output

Question 24

Perfect competition

Answer 24

When both consumers and firms are price takers and there is free entry to the market

Question 25

Welfare

Answer 25

Consumer surplus + producer surplus

Question 26

Producer surplus

Answer 26

The difference between the amount a good sells for and the minimum amount that a producer would be willing to sell it for

Question 27

Consumer surplus

Answer 27

The difference between the maximum a consumer would be willing to buy for and the amount the good sells for

Question 28

Deadweight loss

Answer 28

The change in welfare caused by a change in pricing

Question 29

Ad valorem tax

Answer 29

Percentage of the value of the good that is taxed

Question 30

Statutory incidence

Answer 30

Who is legally responsible for paying the tax

Question 31

Economic incidence

Answer 31

Who bears the burden of the tax

Question 32

Perfectly elastic supply

Answer 32

When the supply curve is horizontal

Question 33

Price discrimination

Answer 33

Charging different consumers different prices

Question 34

First degree price discrimination

Answer 34

Each consumer pays the maximum they are willing to pay

Question 35

Second degree price discrimination

Answer 35

Price varies depending on quantity bought

Question 36

Third degree price discrimination

Answer 36

Different groups of people pay differing prices

Question 37

Interior solutions

Answer 37

When the optimal bundle lies in the middle of the budget constraint

Question 38

Corner solutions

Answer 38

When the optimal bundle is on the ‘corner’ (the consumer consumes only one good)

Question 39

Budget constraint

Answer 39

All possible combinations of goods that a consumer can purchase given income and prices of goods

Question 40

Optimal point (in regards to budget constraint)

Answer 40

The tangent of an indifference curve to a budget constraint

Question 41

Normal goods

Answer 41

Quantity demanded increased with increased income

Question 42

Inferior goods

Answer 42

Demand decreases as income increases

Question 43

Engel curve

Answer 43

Shows the relationship between quantity demanded and level of income