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LC Econ Micro Review

Review of LC Econ Micro Review-terms

QuestionAnswer
Economics The study of the production distribution and consumption of goods and services by society.
Macreconomics The part of the subject which studies the decision making process of governments in areas such as income inflation international trade employment and growth.
Microeconomics The part of the subject which studies the decision making process of small units in the economy such as individual producers and individual consumers.
Opportunity cost The alternatives that have to be done without in order to have an item.
Centrally planned economy Where the state controls and directs all economic activity.
Factors of production The resources required to produce goods and services.
Free Enterprise Economy Where economic activity is undertaken by companies and indiviuduals who are free to operate without undue government interference.
Mixed Economy Where state and private enterprises exist but the government exercises a certain amount of regulation.
External economies of scale That factors that lower the average cost of production as the industry grows in size and that benefits all firms in the industry.
External diseconomies of scale That factor that cause average cost of production to rise as output expands and that are common to every firm in the industry.
Internal economies The factors that lower a firms average cost of production as the firm expands in size.
Internal diseconomies The factors that cause a firms average cost of production to rise once the firms reaches a certain size.
Economic good A good that gives utility is scare relative to the demand for it and is transferable.
Law of Diminishing Marginal Utility As extra units of a good are consumed the utility or satisfaction gained from each extra unit of that good falls.
Law of Equi-Marginal Returns To enjoy maximum utility a consumer must spend his/her income so that the ratio of marginal utility to price is the same for all the goods he/she buys.
Commodity markets The markets where major commodities or raw materials are bought and sold.
Final market A market that supplies goods and services that give consumers utility and for which they are willing to pay a price.
Intermediate market A market where a good is sold to be used as an input in the production of another good.
Complemetary goods Goods that are in joint demand. The use of one involves the use of the other.
Giffen good A good which quantity demanded increases if price increases and quantity demanded falls if price falls.
Normal good A good with a positive income effect. More of it will be bought as income rises.
Inferior good A good with a negative income effect. Less of it will be bought when income rises.
Law of demand The relationship between price and quantity demanded that applies to the vast majority of goods.That is if price rises quantity demanded falls and if price falls quantity demanded rises.
Snob good A good that is attractive to some consumers because it is expensive. A rise in price will cause an increase in demand and a fall in price will cause a fall in demand.
Substitute good Goods that satisfy the same need and so can be used instead of each other.
Capacity constraint The physical limit to the quantity of good a firm is able to supply.
Perfectly inelastic supply A situation where quantity supplied is fixed regardless of price.
Law of supply The relationship between price and quantity supplied that applies to the vast majority of goods. That is if price rises quantity supplied rises and if price falls quantity supplied falls.
Cross elasticity of demand The responsiveness of the demand for one good to a change in the price of another good.
Income elasticity of demand The responsiveness of demand for a good to changes in income.
Unit elasticity of demand A good is said to have unit elasticity of demand if the proportionate change in quantity demanded is equal to the proportionate change in price.
Law of Diminishing Marginal Returns If increasing quantities of a variable factor are combined with a given amount of a fixed factor eventually a stage will be reached where the addition to total output (that is, marginal output) will decline.
Marginal cost The change in total cost as a result of producing one extra unit of output.
Supernormal profit (SNP) Any profit received in excess of normal profit.
Free entry and exit A situation where there are no restrictions preventing the entry of new firms to the industry or the exit of existing firms.
Long- run equilibrium The combination of price and quantity that gives the firm the highest profit in the long run.
Short-run equilibrium The combination of price and quantity that gives the firm the highest profit in the short run.
Barriers to entry Obstacles preventing the arrival of new firms to compete with the monopolist.
Monopoly A monopoly is a market structure where the the entire output of a good or service is supplied by one firm.
Patent A temporary monopoly granted to a company that has invented a new product or process so that it an recoup its costs before facing competition.
Price discrimination The selling of the same good (or service) to different customers at different prices, where the difference in price is not caused by differences in costs.
Product differentiation This is where the consumer can distinguish the product of one firm from that of all others because of branding of goods and competitive advertising.
Collusion Any action undertaken by separate and rival companies to restrict competition between them with a view to increasing their total output.
Price rigidity A reluctance on the part of the firm in oligopoly to change from the current price because any such change will cause a fall in total revenue.
Created by: MrFromholz