Microeconomics

Question 1

What is a Market?

Answer 1

Where buyers and sellers come together to carry out an economic transaction

Question 2

Define Demand

Answer 2

The total amount of goods and services that consumers are willing and able to purchase at a given price within a given time period

Question 3

Define Ceteris paribus and explain when you would mention it in an exam setting

Answer 3

Ceteris paribus is latin for everything else stays the same, you would use it when describing an economic variable’s effect on another (it is assumed that all other variables stay the same)

Question 4

Substitute

Answer 4

An alternative good or service that may be purchased by consumers.

Question 5

Complementary goods

Answer 5

Goods that are consumed together, paid separately.

Question 6

Remote complements

Answer 6

Goods that are sometimes consumed together, but the consumption of one good does not depend on the other. (eg. Book and reading lamp)

Question 7

Close Complements

Answer 7

Goods that are usually consumed together, such that one good has little use without the other. (eg. cereal and milk)

Question 8

Income

Answer 8

Payments for the factors of production, such as rent, wages, interest, dividends and profit.

Question 9

Nominal GDP

Answer 9

the value of all goods/services produced in an economy in a one-year period
Nominal GDP = C + I + G + (X-M)

Question 10

Law of Supply

Answer 10

As the price of a product increases, the quantity supplied will usually increase, ceteris paribus.

Question 11

Individual Supply

Answer 11

The supply of one product by one firm at every price.

Question 12

Market Supply

Answer 12

The sum of all the individual supplies of a product at every price.

Question 13

Factors of Production

Answer 13

Land, Labour, Capital, entrepreneurship or enterprise

Question 14

Inferior good

Answer 14

A good whose demand falls as income rises

Question 15

Normal good

Answer 15

A good whose demand rises as income rises

Question 16

Capital goods

Answer 16

The tools and machinery necessary for the production of other goods. They are what we call the ’capital’ factor of production.

Question 17

Consumer goods

Answer 17

Finished products that are ready for satisfying people’s wants, not used in any further production process.

Question 18

Demerit Goods

Answer 18

Goods that have negative effects when consumed and cause negative externalities of consumption.

Question 19

Merit Goods

Answer 19

Goods that are beneficial to the individual and society as a whole, and are usually under-provided in a free market.

Question 20

Positive Externalities of Production

Answer 20

Positive production externalities refer to the benefits that are generated for third parties as a result of the production of a good or service. These benefits are not reflected in the market price of the good/service and are therefore not taken into account by the producers or consumers. Instead they are enjoyed by the wider society, resulting in market failure and an inefficient allocation of resources.

Eg. Research and Development, Infrastructure, Education.

May be subsidised by government to encourage production.

Question 21

Positive Externalities of Consumption

Answer 21

Positive consumption externalities occur when the consumption of a good or service positively benefits a third party.
Positive consumption externalities can lead to the underconsumption of goods or services, as consumers do not consider the full social benefit of their consumption. This can result in an inefficient allocation of resources, where too little of a good or service is consumed leading to a net loss in social welfare.

Eg. Vaccination, Education

May be subsidised by government to encourage consumption.