Micro

Question 1

What is a free good?

Answer 1

A free good is a good that is not scarce, and therefore is available without limit. A free good is available in as great a quantity as desired with zero opportunity cost to society. e.g. air, sunlight

Question 2

Free market

Answer 2

The free market is an economic system based on supply and demand with little or no government control

Question 3

Planned Economy

Answer 3

an economic system in which the elements of an economy (such as labour, capital, and natural resources) are subject to government control and regulation designed to achieve the objectives of a comprehensive plan of economic development

Question 4

Mixed Economy

Answer 4

mixed economy, in economics, a market system of resource allocation, commerce, and trade in which free markets coexist with government intervention.

Question 5

What does the circular flow of income model show?

Answer 5

The circular flow of income represents money moving through the economy. It shows how households purchase goods and services from firms by using the income they earned from firms by working for them.

Question 6

Demand

Answer 6

Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period

Question 7

The Law of Demand

Answer 7

Ceteris paribus, as the price of a product falls, the quantity demanded of a product will usually increase

Question 8

Income effect

Answer 8

If the price of a product rises and we assume that income remains constant they will naturally buy less of the product.

Question 9

Substitution effect

Answer 9

The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises.

Question 10

5 non-price determinants of demand

Answer 10

• changes in income
• changes in tastes amd preferences
• prices of related goods
• demographic changes
• seasonal changes

Question 11

Supply

Answer 11

The quantity of a good or service that producers are both willing and able to sell at a given price in a given time period

Question 12

The law of supply

Answer 12

Ceteris paribus, as the price of the product rises the quantity supplied of that product will usually increase.

Question 13

6 non-price determinants of supply

Answer 13

• Changes in costs of factors of production
• Changes in technology
• Changes in prices of related goods
• Expectations of the future
• Indirect taxes and subsidies
• Number of firms in the market

Question 14

What is a positive statement?

Answer 14

Positive statements are objective statements that can be tested, amended or rejected by referring to available evidence.

Question 15

What is a normative statement?

Answer 15

Normative statements are subjective statements i.e. they carry value judgements about what ought to be.

Question 16

Negative Externalities of consumption

Answer 16

When certain goods are consumed, such as demerit goods, negative effects can arise on third parties.

Question 17

Demerit Goods

Answer 17

Demerit goods are goods and services that negatively effect third parties when consumed e.g. tobacco, junk food

Question 18

Price Elasticity of Demand (PED)

Answer 18

The responsiveness of quantity demanded to a change in price, along a given demand curve.

Question 19

What are price ceilings?

Answer 19

A price ceiling is a ‘maximum price’ imposed by the government on a particular good (or service)
Normally imposed on neccesity goods such as essential food items or merit good that would be underprovided if left to the free market.

Question 20

What are price floors?

Answer 20

A price floor is a minimum price that the government sets above the equilibrium
They may do this to raise the incomes of producers of important goods e.g. agricultural products.

Question 21

Negative externalities of production

Answer 21

occurs when the production of a good or service creates external costs that are damaging to third parties .
e.g. manufacturing plants cause noise and atmospheric pollution during the manufacturing process.

Question 22

Common access resources

Answer 22

Typically natural resources such as, fishing grounds, forests and pastures,oil and gas fields, national parks, grazing lands and irrigation systems, which are difficult to exclude people from (non-excludable) and rivalrous.

Question 23

Public goods

Answer 23

Goods that are non-rivalrous in consumption and non-excludable (creates a “free-rider” problem).
e.g. street lighting, national defense, roads.

Question 24

Law of diminishing marginal returns

Answer 24

As more and more units of a variable input are added to one or more fixed inputs, the marginal product of the variable input at first increases, but there comes a point where it begins to decrease

Question 25

Increasing marginal costs

Answer 25

Marginal Cost is the increase in cost caused by producing one more unit of the good. The Marginal Cost curve is U shaped because initially when a firm increases its output, total costs, as well as variable costs, start to increase at a diminishing rate.

Question 26

Price Elasticity of Supply

Answer 26

The measure of responsiveness of quantity supplied to changes in price.

Question 27

Elasticity values

Answer 27

less than 1 = inelastic
greater than 1 = elastic
equal to 1 = unit elastic

Question 28

What is allocative efficiency?

Answer 28

Occurs where there is an optimal distribution of goods and services. (D=S)
Social surplus is maximised
Net social benefit is maximised (MSC=MSB)

Question 29

What are the functions of price mechanism?

Answer 29

Signalling
Incentive
Rationing
Resource Allocation

Question 30

Price Mechanism

Answer 30

Price mechanism refers to the system where the forces of demand and supply determine the Prices of commodities and the changes therein

Question 31

Consumer Surplus

Answer 31

The extra utility that is gained by consumers from paying a lower price than they were initially willing to pay.

Question 32

Producer surplus

Answer 32

The excess actual earnings that a producer makes from a given quantity of output over and above what the producer was willing to accept for that output.

Question 33

Income elasticity of demand (YED)

Answer 33

The measure of responsiveness of demand to changes in income.

Question 34

Law of diminishing marginal utility

Answer 34

As consumption of a good increases, the marginal utility (/the extra utility) that the consumer receives decreases with each additional unit consumed.