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Microeconomics Definitions Review Questions with complete Solutions Already Passed

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Microeconomics Definitions Review Questions with complete Solutions Already Passed Microeconomics - Answers The study of the behaviour (supply and demand) of individual markets Scarcity - Answers A situation in which unlimited wants exceed the limited resources available to fulfill those wants ...

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  • October 10, 2024
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  • 2024/2025
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Microeconomics Definitions Review Questions with complete Solutions Already Passed

Microeconomics - Answers The study of the behaviour (supply and demand) of individual markets

Scarcity - Answers A situation in which unlimited wants exceed the limited resources available to fulfill
those wants

Factors of production - Answers All the economic resources (input) necessary to produce a society's
goods and services, such as land, labour, capital and entrepreneurship

Ceteris paribus - Answers All things being equal - one of the assumptions used in many economic
models, where an individual factor is changed while all others are held constant

Opportunity cost - Answers Cost of the next best alternative use of money, time, or resources when one
choice is made rather than another

Economic good - Answers A good or service that is limited in supply, therefore it is scarce and has an
opportunity cost

Free good - Answers Commodities that have no price and no opportunity cost eg. fresh air and sunshine

Public sector - Answers The part of the economy where goods and services are provided by the
government, i.e. public hospitals, roads, schools, parks and gardens.

Private sector - Answers The part of the economy that is characterized by private ownership of the
means of production by profit seeking individuals

Production possiblity curve - Answers A graph that shows the different rates of production of two goods
that an individual or group can efficiently produce with limited productive and fully employed resources
within a specified time with

Free market economy - Answers An economy where all economic decisions are taken by individual
households and firms, with no government intervention

Mixed economy - Answers An economy in which private enterprise exists in combination with a
considerable amount of government regulation and promotion

Sustainable development or Sustainability - Answers Development that meets the needs of the present
without compromising the ability of future generations to meet their own needs

Economic growth - Answers A steady growth in the productive capacity of the economy (and so a
growth of national income), therefore growth in GDP

Economic development - Answers The improvement of living standards by economic growth.

Common market - Answers A customs union with common policies on product regulation, and free
movement of goods, services, capital and labour

,Price mechanism - Answers The process by which prices rise or fall as a result of changes in demand and
supply. Signals and incentives are given to producers and consumers to produce more or less or
consume more or less

Demand - Answers The quantity which buyers are willing to and able to purchase of a particular good or
service at a given price over a given period of time, ceteris paribus

Law of demand - Answers As the price of a product increases, the quantity demanded decreases, ceteris
paribus

Normal goods - Answers A good for which demand rises as income rises, positive income elasticity

Inferior goods - Answers A good whose demand falls as income rises, negative income elasticity

Complementary good - Answers Goods used in combination with each other, negative cross-price
elasticity

Substitute good - Answers Goods which can be sued in place of each ohter, positive cross-price elasticity

Giffen good - Answers A type of inferior good for which an increase in the price raises the quantity
demanded, as a result of a positive income effect larger than the normal negative substition effect

Veblen good - Answers Goods are bought as a display of wealth for ostentatious reasons - so if price
rises, people will buy more of them and buy less when they are cheaper.

Supply - Answers The amount of a good or service that producers are willing and able to supply at a
given price in a given time period

Law of supply - Answers As the price of a product increases, the quantity supplied increases, ceteris
paribus

Supply curve - Answers A curve or line showing the relationship between the price of a product and the
quantity supplied over a range of prices

Productive efficiency - Answers Achieved when firms produce the maximum amount of output for a
given amount of inputs, at the lowest possible average cost curve

Allocative efficiency - Answers Best allocation of resources from society's point of view is at competitive
market equilibrium, where social (community) surplus (consumer surplus and producer surplus) is
maximized (marginal benefit = marginal cost)

Consumer surplus - Answers The additional benefit or utility received by consumers by paying a price
that is lower than they are willing to pay

Producer surplus - Answers The additional benefit received by producers by receiving a price that is
higher than the price they were willing to receive

, Elasticity - Answers A measure of the responsiveness of quantity demanded or quantity supplied to a
change in one of its determinants

Price elasticity of demand - Answers A measure of the responsiveness of the quantity of a good
demanded to a change in its price, PED = %∆ in Qd/%∆ in price

Price elasticity of supply - Answers A measure of the responsiveness of the quantity of a good suplied to
a change in its price, PES = %∆ in Qs/%∆ in price

Cross price elasticity of demand - Answers A measure of the responsiveness of the quantity of one good
demanded in response to a change in the price of a related good, XED = %∆ in Qd of good A/%∆ price
good B

Income elasticity of demand - Answers A measure of the responsiveness of demand for a good to a
cahnge in consumers' income, YED = %∆ in D/%∆ in Y

Perfectly inelastic - Answers One variable is unresponsive to changes in another. Change in price will
have no effect on change in quantity demanded or quantity supplied

Perfectly elastic - Answers One variable is unresponsive to changes in another. Any change in price
results in supply or demand falling to zero

Subsidy - Answers The amount of money given to producers of a product by the government

Direct taxation - Answers Taxation imposed on people's income or wealth and on firms' profit

Indirect tax - Answers Taxes placed upon the expenditure on a good or servies, such as value added or
goods and services tax

Flat rate or specific tax - Answers An indirect tax where a fixed amount is added to the price of a good or
service

Ad valorem tax - Answers An indirect tax where a given percentage is added to price of a good or
service, e.g. VAT

Incidence - Answers Who actually pays the tax, what percentage is paid by the sellers/producers and
what percentage is paid by the buyers/consumers

Resource allocation - Answers A primary focus of the study of economics to examine the way that scarce
factors of production are sued (allocated) to meet unlimited demand

Price ceiling or maximum pricing - Answers A maximum price set by the government or other authority
above which the product may not be sold in order to support the consumers of the product

Price floor or minimum pricing - Answers A minimum price set by the government or other authority
below which te product may not be sold in order to support the producers of a product

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