Module 2 Basic Economic Theory

Question 1

Utility

Answer 1

The total satisfaction received from consuming a good or service.

Question 2

Total cost / demand

Answer 2

The sum of all values at a given quantity (total cost or total demand for X number of items)

Question 3

Average cost / demand

Answer 3

The sum of all values divided by the quantity (average cost of X items or average demand for X items)

Question 4

Marginal cost / demand

Answer 4

The incremental value of each additional unit (marginal cost of producing X units instead of X-1 units or the marginal demand of buying X units instead of X-1 units)

Question 5

Law of diminishing marginal utility

Answer 5

For every additional unit you consume, your marginal utility decreases

Question 6

Law of diminishing marginal productivity

Answer 6

For every additional unit you produce, the marginal cost increases (also called the law of diminishing returns)

Question 7

Marginal willingness to pay

Answer 7

Based on marginal demand, the amount you are willing to pay for each additional unit

Question 8

Individual demand curve

Answer 8

How much an individual is willing to pay for each unit of a product or service

Question 9

Market demand curve

Answer 9

The sum of what all individuals are willing to pay for each unit of a product or service

Question 10

Movement ALONG a demand curve

Answer 10

A change in how much you are willing to buy, but not how much you value a product or service, so your demand moves along the demand curve

Example: if the price goes up, you will buy less but you don’t value that item differently than before

Question 11

SHIFT in a demand curve

Answer 11

A change in how much you value a product and therefore what you are willing to pay

Example: You learn of additional benefits and are willing to pay more for the same amount because you value it more

Question 12

Normal good (2 interpretations)

Answer 12

A regular item / service that you buy

(as opposed to complimentary goods, substitute goods, status goods)

Relating to income elasticity of demand (YED) —A good where an increase in income causes an increase in demand (YED > 0), can be elastic or inelastic.

(as opposed to inferior goods, luxury goods)

Question 13

Complementary goods

Answer 13

Goods that are used together / bought together more than they are bought alone

Example: when they sell limes at the liquor store right next to the tequila because if you want to buy tequila you are more likely to buy limes

(As opposed to normal goods, substitute goods, status goods)

Question 14

Substitute goods

Answer 14

Goods that are alternatives for each other so you can swap between them

Example: Pepsi and Coke

(as opposed to normal goods, complementary goods, status goods)

Question 15

Vablen / Status goods

Answer 15

Goods where an increase in price encourages people to buy more because they associate it with higher status

Example: Designer clothing, diamonds

(as opposed to normal goods, complementary goods, substitute goods)

Question 16

Variable costs

Answer 16

Costs that can vary during a set amount of time

(as opposed to fixed costs)

Question 17

Fixed costs

Answer 17

Costs that cannot be varied during the given time period

(as opposed to variable goods)

Question 18

Short run

Answer 18

The period during which some inputs cannot be changed (mainly capital inputs) and new competing firms cannot be started

(as opposed to long run)

Question 19

Long run

Answer 19

The period during which all inputs can be changed and new competing firms can enter the industry

(as opposed to short run)

Question 20

Elasticity

Answer 20

Change in demand resulting from a change in price

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

Question 21

Elastic good

Answer 21

E > 1

Demand changes a lot based on a small change in price

Question 22

Inelastic Good

Answer 22

E < 1

Demand changes a little based on price changes, but not much

Question 23

Income Elasticity of Demand (YED)

Answer 23

Change in demand to a change in income, not price

Question 24

Inferior good

Answer 24

Relating to income elasticity of demand (YED).

A good where an increase in income results in a decrease in demand

YED < 0

Example: A value / budget product at the grocery store

(as opposed to normal goods, luxury goods)

Question 25

Luxury goods

Answer 25

Relating to income elasticity of demand (YED).

A good where an increase in income causes a larger proportional increase in demand (when your income increases, you spend a higher portion of it on these items)

Example: Designer clothes, big tech items

(as opposed to normal goods, inferior goods)

Question 26

Market Equilibrium

Answer 26

When the price is set where the demand and supply curves intersect and the total surplus is at its maximum.

Question 27

Market Failure

Answer 27

When one of the conditions of perfect competition is not met

Question 28

Externality

Answer 28

Type of market failure

A cost of consumption or production that is not included in the market price

Question 29

Well-defined property rights

Answer 29

Comprehensive: resources are privately or collectively owned, ownership is defined, well-known, and enforced

Exclusive: benefits and costs accrue only to the owners

Transferable: transferable from one owner to another

Secure: secure from involuntary seizure or encroachments

Question 30

Open Access

Answer 30

Resources that don’t have well-defined property rights

Question 31

(Natural) Monopoly

Answer 31

Only one firm that sets the price, demand is low relative to optimal firm size (example: public utilities)

Question 32

Public Goods

Answer 32

Goods that are not exclusive or rivalrous (everyone can use them)

(as opposed to private goods, common pool goods, toll goods)

Question 33

Common Pool Goods

Answer 33

Rivalrous but non-exclusive (you can divide it, but you can’t stop people from using it)

Example: common grazing lands

(as opposed to private goods, public goods, toll goods)

Question 34

Toll Good

Answer 34

Exclusive but non-rivalrous (you can stop people from using it, but you can’t divide it)

Example: National Parks

(as opposed to private goods, public goods, common pool goods)