econ micro definitions

Question 1

Microeconomics

Answer 1

The study of individual economic units such as households and firms

Question 2

Scarcity

Answer 2

refers to limited resources relative to society’s unlimited needs and wants/demand for goods and services

Question 3

Choice

Answer 3

when resources are scarce and not all needs and wants can be satisfied

Question 4

efficiency

Answer 4

quantifiable concept showing the ratio of useful output to total input

Question 5

Allocative efficiency

Answer 5

scarce resources are used to produce goods and services in optimal combinations for society, minimising the waste of resources.

Question 6

equity

Answer 6

idea of fairness applying to distribution of income, wealth, or economic opportunity

Question 7

economic wellbeing

Answer 7

level of prosperity and quality of living enjoyed by members of an economy, includes ability to meet basic needs

Question 8

sustainability

Answer 8

maintaining the ability of the environment and the economy to satisfy the needs and wants of this generation without compromising future ones

Question 9

interdependence

Answer 9

exists between different groups within an economy; the decisions of one economic agent impacts other agents

Question 10

intervention

Answer 10

action, usually carried out by a government, that affects the market with the objective of changing the free market equilibrium/outcome

Question 11

labour

Answer 11

a worker working in the production process - reward = wage

Question 12

enterprise

Answer 12

the owner (takes economic risks in bringing together other factors of production to produce good/service) - reward =

Question 13

land and natural resources

Answer 13

naturally occurring resources that are relatively unprocessed - reward = rent

Question 14

capital

Answer 14

man made good used in provision of another good/service - reward = interest

Question 15

primary sector

Answer 15

extraction of natural resources: farming, fishing, forestry, mining

Question 16

secondary sector

Answer 16

conversion of natural resources into goods: manufacturing and construction

Question 17

tertiary sector

Answer 17

production of services: finance, tourism

Question 18

quaternary sector

Answer 18

production of technology, information services, education

Question 19

ceteris paribus

Answer 19

“all other things being equal” - economically: effect that one variable has on the other provided all other variables remain unchanged

Question 20

opportunity cost

Answer 20

what is forgone/sacrificed after a choice, ‘the next best foregone alternative to a choice made’

Question 21

Production Possibility Curve PPC

Answer 21

represents the maximum possible output of goods and services that an economy can produce over a given period of time (assumes all available resources are being used, 100% efficient production, tech=unchanged) can be made larger by investment, i.e. more capital -> more goods/services, tech advancements, + more resources

Question 22

Infrastructure

Answer 22

widely used expensive capital important to the smooth running of an economy, e.g. roads, power plant, hospitals

Question 23

Public sector economy

Answer 23

The part of national economy providing basic goods or services that are either not, or cannot be, provided by the private sector

lacks production efficiency -> a lack of innovation, necessities are more affordable and inequality is lower

Question 24

private sector

Answer 24

part of the economy run by private individuals or groups, usually as a means of enterprise for profit, and is not controlled by the State

overproduction of certain products and underproduction of others with low income groups being marginalised

Question 25

scarcity

Answer 25

resources used to produce goods and services are in limited supply, unlimited human wants are chasing too few resources, which is the central economic problem of scarcity

Question 26

Markets

Answer 26

the interaction of consumers and producers buying and selling products

Question 27

demand

Answer 27

the quantity of a product consumers are willing and able to buy at a given market price

Question 28

Non-price factors of demand

Answer 28

Change in taste/fashion, changes in price of substitutes/complements, changes in income, advertising, changes in price expectations, number of consumers

Question 29

supply

Answer 29

quantity producers are willing and able to sell at each market price

Question 30

non price factors of supply

Answer 30

weather shocks, production costs change in FOPs, changes in the relative profitability, taxes and subsidies affect supply (indirect), new technology, future price expectations, number of firms, price of related goods (joint and competitive supply)

Question 31

PED

Answer 31

PED measures the sensitivity (or responsiveness) of demand to a change in market price.

PED = % change in quantity demanded / % change in price

When PED > 1, demand is elastic, change in quantity demanded bigger than change in price
When PED < 1, demand is inelastic, change in price bigger than change in quantity demanded
When PED = 1, demand has unitary elasticity, change in price equal to change in quantity demanded

Perfectly inelastic (PED=0) vertical line
Perfectly elastic (PED=infinite) horizontal line

Question 32

Factors affecting PED

Answer 32

• % of income spent on the product, the more spent, the more elastic the demand
• Availability of substitutes, the more available products, the more elastic the demand
• The higher the addictiveness of the product, the more inelastic and lower PED
• The higher the necessity of the product, the more inelastic and lower PED
• Advertising

Question 33

YED

Answer 33

YED measures the sensitivity of consumer demand to a change in income

YED = % change in quantity demanded / % change in income

Normal goods, e.g. nike trainers
- direct relationship exists between change in income and change in demand, therefore YED is positive
Inferior goods
- An inverse relationship exists between change in income and change in demand, therefore YED is negative

During booms with rising household incomes, normal good demand tends to rise, thus producer revenues rise
During recessions, with falling household incomes, inferior good demand tends to rise, thus producer revenues rise

Necessities tend to be income inelastic YED < 1 - demand is quite stable
Luxuries tend to be more income elastic YED > 1 - demand is more volatile
Vebien goods: goods of ostentation - luxury products where the high price attracts customers

Question 34

PES

Answer 34

PES measures the responsiveness of producers (supply) to a change in market price

PES = % change in quantity supply / % change in price

When PES > 1, supply is elastic, change in quantity supplied bigger than change in price
When PES < 1, supply is inelastic, change in price bigger than change in quantity supplied
When PES = 1, supply has unitary elasticity, change in price equal to change in quantity supplied

Question 35

PES is influenced by the following:

Answer 35

• The time period involved: the longer the time period, the greater the PES
• Whether spare capacity exists: with spare capacity, PES is greater
• Production time: the shorter the production time, the greater the PES
• The durability of the product: the less durable, the harder to keep in stock, the lower the PES
• Resource availability and mobility:

Question 36

Types of goods

Answer 36

normal, inferior, necessity, luxury, + complimentary/susbstitute

Question 37

consumer surplus

Answer 37

The consumer surplus is the difference between the price the consumer is willing to pay for a good and the market price of that good. (top part of graph)

Question 38

producer surplus

Answer 38

The producer surplus is the difference between the price the producer is willing to sell their good for and the market price of the good.

Question 39

societal surplus

Answer 39

Welfare is maximised in society when the social or community surplus in a market is maximised- benefit to society of the production and consumption of a good is equal to its cost. social surplus is the sum of the consumer surplus and producer surplus in a market.

Question 40

Revenue

Answer 40

Revenue is the value of income a business receives from selling a good. It is calculated by:
price x quantity = total revenue