Microeconomics

Question 1

The three key branches of economics

Answer 1

• microeconomics: which focuses on the decisions made by individual consumers and companies.
• macroeconomics: which focuses on the economy as a whole and considers the effect of such factors as inflation, interest rates, and unemployment on economic activity.
• international trade: which focuses on the exchange of products, services, and capital across borders.

Question 2

Economics is defined as

Answer 2

The study of production, distribution, and consumption or the study of choices in the presence of scarce resources.

Question 3

Law of Demand

Answer 3

Quantity demanded and price of a product are usually inversely related.

If the price of a product goes up, consumers will normally buy less of the product.

Question 4

Utility

Answer 4

A measure of relative satisfaction received from possession/consumption of goods/services.

Is relative to the individual.

Question 5

Law of diminishing marginal utility

Answer 5

The economic principle that the additional satisfaction consumers get from each additional unit of a product decreases as the total amount consumed increases.

Question 6

Major factors that affect the demand curve

Answer 6

1. Effect of Income on Demand
2. Effect of the Expected Future Price of a Product on Demand (positive relationship)
3. Effect of Changes in General Tastes and Preferences on Demand (trends)
4. Effect of Prices of Other Products on Demand

Question 7

Income Effect

Answer 7

A change in demand for a product or service as a result of a change in purchasing power.

Question 8

Normal Products

Answer 8

Products whose consumption increases as income increases.

Question 9

Inferior Products

Answer 9

Products whose consumption decreases as income increases.

Question 10

Substitution Effect

Answer 10

Consumers substitute relatively cheaper products for relatively more expensive ones.

So, if the price of a substitute product decreases, demand for this substitute may increase and demand for the original product may decrease.

Question 11

The Law of Supply

Answer 11

The economic principle that when the price of a product increases, the quantity supplied increases too.

Question 12

Narrow definition of a good results in

Answer 12

More substitutes.

Question 13

Market Equilibrium

Answer 13

The situation in which, at a particular price, no buyer or seller has any incentive or desire to change the quantity demanded or supplied, all other factors remaining unchanged.

Question 14

Equilibrium Price

Answer 14

Price at which the quantity of a product or service demanded equals the quantity supplied.

Point at which the demand and supply curves intersect.

Question 15

Elasticity

Answer 15

How the quantity demanded or supplied changes in response to small changes in a related factor, such as price, income, and the price of a substitute or complementary product.

Question 16

Own Price Elasticity of Demand

Answer 16

The percentage change in the quantity demanded of a product or service as a result of the percentage price change in that product or service.

= % change in quantity demanded / % change in price

Question 17

Sign and Magnitude of Own Price Elasticity

Answer 17

-> Less than −1: Negatively, highly elastic
For a given percentage increase in price, the quantity demanded will decrease by a greater percentage than the increase in price.

-> −1: Negatively unit elastic
For a given percentage increase in price, the quantity demanded will decrease by the same percentage.

-> Greater than −1 to 0: Inelastic
For a given percentage increase in price, the quantity demanded will decrease by a lesser percentage than the increase in price.

-> Greater than 0 but less than 1: Inelastic
For a given percentage increase in price, the quantity demanded will increase by a lesser percentage than the increase in price.

-> +1: Positively unit elastic:
For a given percentage increase in price, the quantity demanded will increase by the same percentage.

-> Greater than +1: Positively, highly elastic:
For a given percentage increase in price, the quantity demanded will increase by a greater percentage than the increase in price.

Question 18

Cross-Price Elasticity of Demand

Answer 18

The percentage change in quantity demanded of a product or service in response to a percentage change in the price of another product.

% change in the quantity demanded of Product1 /
% change in the price of Product2

A negative cross-price elasticity of demand indicates complementary goods

Question 19

Accounting Profit VS. Economic Profit

Answer 19

Accounting Profit is the difference between the revenue generated from selling products and services and the explicit costs of producing them.
= Revenue - Cost

Economic profits deduct both explicit and implicit costs (such as opportunity costs) from revenue.
= Accounting Profit - Opportunity Cost

Question 20

Economies of Scale

Answer 20

Cost savings arising from a significant increase in output without a simultaneous increase in fixed costs.

Question 21

law of diminishing returns

Answer 21

The economic principle that the gain in output from adding variable inputs of one factor, such as labour, will increase at a decreasing rate even if the fixed inputs of production remain unchanged.

Question 22

operating leverage

Answer 22

The extent to which fixed costs are used in production. The higher the fixed costs relative to variable costs, the higher the operating leverage.

Question 23

marginal cost & marginal revenue

Answer 23

The cost of producing an additional unit of a product or service.

The amount of money from selling an additional unit of a product or service.

Question 24

Operating Leverage

Answer 24

refers to the extent to which fixed costs are used in production.

Question 25

Oligopoly

Answer 25

A market dominated by a small number of large companies because the barriers to entry are high.