Definitions - Micro Economics

Question 1

competitive market

Answer 1

a market composed of many buyers and sellers acting independently, none of whom has any ability to influence the price of the product

Question 2

demand

Answer 2

indicates the various quantities of a good (or service) the consumer is willing and able to pay at different possible prices during a particular time period, ceteris paribus

Question 3

law of demand

Answer 3

there is a negative relationship between the price of a good and its quantity over a time period, ceteris paribus. As the price of a product increases the quantity demanded will decrease.

Question 4

market (demand / supply)

Answer 4

is the sum of all the individual demand / supply for a good

Question 5

law of diminishing marginal utility

Answer 5

as consumption of a good increases, marginal utility (extra utility a consumer receives, decreases with each additional unit consumed. This underlies the law of demand as it shows that a consumer is will be willing to buy an additional unit of a good only if it’s price falls.

Question 6

Supply

Answer 6

Indicates the various quantities of a good (or service) a firm is willing and able to produce and supply to the market for sale at different possible prices, during a particular period, coterie paribus

Question 7

Law of supply

Answer 7

There is a positive relationship between the quantity of a good supplied and its price over a particular time period, criteria paribus

Question 8

Short term

Answer 8

Time period where at least one input is fixed and can not be changed by the firm, in quantity and quality. E.g. building size, machinery

Question 9

Law of diminishing marginal returns

Answer 9

Depicts that as more and more units of variable input are added to fixed input, the marginal product at first increases, but there becomes a point where is begins to decrease

Question 10

Substitution effect in demand assumptions

Answer 10

If the price of a good decreases the consumer substitutes (buys more) of the now less expensive good

Question 11

Income effect in demand assumptions

Answer 11

Fall in price means the consumers real income (purchasing power) has increased

Question 12

relationship between marginal costs and diminishing marginal returns

Answer 12

when marginal product increases, marginal costs decreases. when marginal product is maximum, marginal cost is minimum.

Question 13

competitive market equilibrium

Answer 13

quantity demanded equals the quantity supplied, there is no tendency for price to change. If there is price disequilibrium , there is excess demand or excess supply, the forces of demand and supply cause the price to change until the market equals equilibrium

Question 14

price mechanism

Answer 14

the system where prices are determined by demand and supply in competitive markets resulting from the free interaction of buys and sellers. theses interactions determine the allocation of resources.

Question 15

incentive functions

Answer 15

prices motivate decision makers to respond to the information

Question 16

signalling functions

Answer 16

prices communicate information to decision makers

Question 17

price rationing

Answer 17

whether or not a consumer will get a good is determined by the price of that good. people who are willing and able to pay for it will get it

Question 18

allocative efficiency

Answer 18

producing the quantity of goods mostly wanted by society. allocative efficiency is achieved when the economy allocates its resources so that the society gets the most benefits from consumption. It is illustrated as the intersection between supply and demand - the point of equilibrium - where marginal cost of supply (MC) = marginal benefit of consumers (MB)

Question 19

consumer surplus

Answer 19

highest price consumers are willing to pay for a goof minus the price they are actually paid

Question 20

producer surplus

Answer 20

the price received received by firms for selling their good minus the lowest price they are willing to accept fo the good