Chapter 2 - 7
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| Consumer | An individual who makes the decision whether to buy goods or services.
They buy goods and services for their own personal use, not to sell on.
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| Utility | is the amount of benefit or satisfaction derived from the consumption of a good or service.
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| Economic Good | a product or service that commands a price, provides utility and is transferable.
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| Marginal Utility | the addition to total utility (TU)/the extra utility received caused by the consumption of one extra unit of a good.
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| The Law of Diminishing Marginal Utility | As more units of a good are consumed, a point will be reached where extra utility eventually begins to decline.
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| Equi-Marginal Principle | the consumer must spend their income in such a way that the ratio of MU to Price is the same for all the commodities that they buy
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| Equilibrium | The condition where there is no tendency to change.
The consumer is in the ideal situation.
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| Util | one unit of satisfaction.
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| Demand | The number of units of goods a consumer will buy at various prices.
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| Law of Demand | An increase in price leads to a decrease in quantity demanded or a decrease in price leads to an increase in quantity demanded.
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| Consumer Surplus | The difference between what a consumer actually pays for a good and what they would have been willing to pay.
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| Demand Schedule | A table that shows the different quantities demanded for a good at various market prices at any given time.
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| Demand Curve | A graph illustrating the demand for a good at various prices at any given time.
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| Effective Demand | Demand backed by the necessary purchasing power.
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| Derived Demand | Where demand occurs for a commodity not for its own use but for its contribution to the production process, e.g.bricks for building a house.
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| Composite Demand | Occurs when a commodity is required for a number of different uses, e.g. sugar.
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| Joint Demand | When the demand for one product is joined with the demand for another. Complementary goods, e.g. petrol and cars.
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| Complementary Goods | Goods that are used jointly. The use of one involves the use of the other.
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| Substitute Goods | are goods that satisfy the same needs and thus can be considered as alternatives to each other.
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| Substitute Goods | are goods that satisfy the same needs and thus can be considered as alternatives to each other.
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| Normal Good | A good that follows the Law of Demand and which has a positive income effect.
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| Inferior Good | A good with a negative income effect.
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| Giffen Good | As the price falls, real incomes increase and consumers buys less of these goods and purchase more of better quality goods. As the price rises consumers have less income to spend on other types of goods so they devote more of their income to these goods.
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| Snob Goods | A rise in the price makes these goods more exclusive, and therefore more attractive to those who have the incomes to purchase them.
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| Speculative Goods | If prospective consumers think that prices are likely to be even higher in the future, the current level of demand may not fall even if prices increases.
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| Price Effect | Substitution Effect + Income Effect
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| Supply | refers to the quantity of a good that firms are willing to make available at various prices over a particular period of time.
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| Individual Supply | refers to the quantity of the good an individual firm is willing to supply at different prices.
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| Market Supply | refers to the quantity of a good supplied by all the firms in the market at different prices.
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| Supply Schedule | A table illustrating the different quantities of a good made available for sale at different market prices at any given time.
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| Individual Supply Schedule | A table illustrating the different quantities of a good made available for sale by an individual firm at different market prices at any given time.
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| Market Supply Schedule | A table illustrating the total quantities of a good that all the firms in the market are willing to make available for sale at various prices at any given time.
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| Supply Curve | A graph illustrating the number of units of a good made available for sale at different market prices at any given time.
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| Fixed Supply | Occurs when the supply of a product cannot be changed in the short run.
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| Market Equilibrium | The position where there is no tendency for prices to change.
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| Elasticity | A measure of responsiveness of the quantity demanded of a good to a change in some variable.
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| Price Elasticity of Demand | Measures the proportionate change in the quantity demanded for a good caused by the proportionate change in the price of the good itself.
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| Elastic | When the proportionate change in the quantity demanded of a good is greater than the proportionate change in the price of the good itself.
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| Perfectly Elastic | When any increase in the price of that good results in its quantity falling to zero.
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| Unitary Elastic | When the proportionate change in the quantity demanded of a good is
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| Inelastic | If the proportionate change in quantity demanded of a good is less than the proportionate change in price of that good.
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| Perfectly Inelastic | If the proportionate change in the price of a good causes no change in the quantity demanded of that good.
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| Cross Elasticity of Demand | Measures the proportionate change in the quantity demanded for one good caused by the proportionate change in the price of another good.
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| Income Elasticity of Demand | Measures the proportionate change in the quantity demanded for a good caused by the proportionate change in the income of consumers.
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| Price Elasticity of Supply | Measures the relationship between proportionate change in quantity supplied and a proportionate change in price.
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| Short Run | A period of time during which at least one factor of production is fixed in supply.
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| Long Run | A period of time during which all the factors of production are variable in quantity.
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| Explicit Costs | Costs incurred by a firm when it pays an amount of money for something.
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| Fixed Costs | Costs that don't change as output changes.
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| Variable Costs | Costs that vary as output changes.
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| Total Cost | Fixed + Variable Costs
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| The Law of Diminishing Marginal Returns | As more and more of a variable factor is added to a fixed factor, at some stage the increase in output caused by the last unit of the variable factor will begin to decline.
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| Average Cost | Total Cost/Quantity
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| Normal Profit | the return that sufficiently rewards the risk-taking of an entrepreneur and it must be earned to stay in business.
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| Average Variable Cost | Variable cost/quantity
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| Average Fixed Cost | Fixed Cost/quantity
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| Specialisation of Labour | dividing a job into many individual parts which allows for greater efficiency.
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| Internal Economies of Scale | Forces within a firm that cause the average cost of that firm to decline as it grows in size.
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| External Economies of Scale | Forces outside a firm that cause the average cost of that firm to increase as the industry grows in size.
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| Returns to Scale | Refers to changing all factors, e.g. doubling all the factors of production and the consequent effect on output.
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| Increasing returns to scale | doubling inputs with outputs more than doubling
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| Decreasing returns to scale | Doubling inputs with output less than doubling.
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| Constant returns to scale | output changing at exactly the same rate as factors. Horizontal LRAC.
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| Social Cost | a cost to society of an action or output
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| Social Benefit | the advantage that accrues to society as a whole as a result of an individual firm consuming/producing a commodity that is not measured by the price system.
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| External Diseconomies of Consumption | occurs when an action taken by a consumer imposes a cost on third parties
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| External Economies of Consumption | Occurs when a consumer undertakes an action and it benefits third parties for which the consumer is not compensated.
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| External Diseconomies of Production | occurs when a producer carries out an activity and imposes a cost on third parties for which they are not compensated
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| External Economies of Production | happens when actions taken by producers result in benefits to third parties for which the producer is not compensated.
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