Microeconomics CLEP Test Study Set

The value of the next best alternative foregone

Needs are defined as goods or services that are required and cannot be done without. Wants are goods or services that are not a necessity but we desire/wish for

Every purchase is a trade-off

Elected representative of the consumers that should act on behalf of the people. The government must decide whether or not to intervene in the economy or leave it as is.

An organisation that uses factors of production alongside each other in order to produce output. They produce goods and services demanded by consumers

A group of consumers that buy goods and services. They also supply their labour to firms to produce goods and services in order to earn the income needed to purchase g+s

The available resource inputs used in the production process of g+s (Capital, Enterprise, Land and Labour)

Man made aids for production; goods used to make other goods

The willingness of an entrepreneur/individual to take risks and organise production. An entrepreneur is someone who bears the risk of a business and organises production

The human resource that is available in the economy; the quantity and quality of human resources

The natural resources available in the economy; the quantity and quality of natural resources

Capital=Interest
Enterprise=Profits
Labour=wages
Land=rent

A curve showing the maximum quantities of different combinations of goods and services that can be produced in a set time period given the available resources and current state of technology

As a firm adds variable factors of production(usually labour) to fixed capital, the marginal returns that the firm gains will gradually begin to decrease

A finished good that is sold for consumption

Ant tangible asset that an organisation uses to produce goods or services such as office buildings, machinery etc.

Where individuals, businesses and whole economies are not self-sufficient but concentrate on producing certain goods and services, then trading their surplus.

The assignment of different parts of a manufacturing process or task to different specialised people in order to improve efficiency

Output of a good or service, per factor of production, per period of time

The way in which a society's factors of production are divided amongst their alternative uses

The aim of trying to achieve the highest level of satisfaction possible from the consumption/production of a good

The aim of trying to achieve the highest levels of profit possible

Firms decisions will depend on the potential profits that supplying a product can create. EG. if the price of a product rises, a firm has an incentive to provide more of it assuming that this increases the return they can make from producing it. A04: Not all firms are profit maximisers

Governments base their decisions on how they can further meet the political ideals of those in power, which are typically based on improving people's quality of life. A04: Government officials may be driven by self interest and not what is best for society

An economy in which the market forces of demand and supply determine the allocation of resources

An economy in which the state determines the allocation of resources

An economy in which both the market forces of supply and demand, and also the intervention of the state, determine the allocation of resources

An economic system characterised by the private ownership pf productive resources, and the ability of individuals to freely pursue their self-interest with minimal interference from the government

Self-interest
Private ownership of property
Free choice and enterprise
Competition
Decentralised decision making-'The invisible hand'
Limited government intervention

Choice
Innovation
Efficiency

Public, merit, demerit good provision
Unequal distribution of income
Environment

An arrangement by which buyers and sellers negotiate the exchange of goods and services

Provides the information needed to co-ordinate the workings of a market economy and ensure that decisions can be taken at a decentralised level by millions of individual consumers and producers operating in thousands of different markets.

The quantity of a good or service that consumers are willing and able to purchase at a given price

A law that states that, ceteris paribus, there is an inverse relationship between the quantity demanded and price of a product

A graph that shows how much of a product will be demanded at any given price

The collection of data that is used to draw a demand curve for a product

The amount of a good or service that an individual consumer is willing and able to buy at any given price over a period of time

The sum of all the individual demand curves

The law of diminishing marginal utility-as more of a product is consumed, the marginal benefit to the consumer falls, hence the consumer is prepared to pay less
The income effect-As prices rise, the amount of disposable income falls
The substitution effect-As prices rise, consumers will start to evaluate alternatives

Population
Price of related goods
Changes in interest rates
Expectations of future prices
Seasons
Changes is tastes and advertising
Legislation
Average disposable incomes

The additional benefit that society gains form consuming one more unit of a product

The quantity of a good or service that producers are willing and able to offer at different price levels over a period of time

A law that states that, ceteris paribus, there is a direct relationship between the quantity supplied and the price of a good or service

A graph that shows how much of a product will be supplied at any given price

The sum of all the individual supply curves/the total supplied to the market

At least one factor of production is fixed whilst others can be varied-supply can be increased but only by a small amount

All factors of production are fully flexible although the state of technology is fixed. Output can be significantly increased

The difference between the amount that a seller receives for a product, and the price at which they would have been prepared to sell it

The profit motive-When the price of a product rises, it becomes more profitable for businesses to increase their output as they can increase potential return
Production and costs/Law of diminishing returns- When a firm increases output, this tends to lead to an increase in their costs, so a higher price is needed to cover these extra costs. As variable f.o.p are added to fixed state of capital, marginal costs of production will rise so a higher price is needed to cover this
New suppliers/entrants into the market- Higher prices can incentivise other suppliers to enter, leading to an increased quantity supplied as more firms are willing and able to provide output

Productivity and costs of production
Raw material costs
Technology
Subsidies and taxation
Seasons/weather
Prices of related goods
Capacity expansion

Measures the responsiveness of the quantity demanded or supplied of a product to a small change in its price or other variables such as incomes.

Measures the responsiveness of quantity demanded relative to a change in the price of a good or service

Where the percentage change in the quantity demanded of a product is equal to a change in price of the product

A measure of the responsiveness of quantity demanded to a change in incomes

Goods for which a change in income produces a less than proportionate change in quantity demanded (YED<1) eg. necessities

Goods for which a change in income produces a greater than proportionate change in quantity demanded (YED>1) eg. Luxury goods

A good where the quantity demanded increases when income rises (YED>0)

A good where the quantity demanded increases by a proportionately greater amount than a rise in income (YED>1)

A good where the quantity demanded increases by a proportionately smaller amount than a rise in income (0<YED<1)

A good where the quantity demanded decreases as incomes rise (YED<0)

A measure of the responsiveness of quantity demanded for one product relative to a change in price of another product

Products that can be used for similar purposes, such that if the price of one product rises, demand for the other product is likely to rise

Products that tend to be consumed jointly, such that the price of one product rises, demand for the other product is likely to fall.

Measures the responsiveness of quantity supplied relative to a change in price

Where the percentage change in the quantity supplied of a product is insensitive to a change in the price of the product

Where the percentage change in the quantity supplied of a product is sensitive to a change in price of the product.

The sum of money that is paid for a given quantity of a particular product

When the price is such that the quantity consumers are willing to buy is equal to the quantity that firms are willing to supply

An excess of quantity supplied over quantity demanded

An excess of quantity demanded over supply

When a firm produces at the lowest point on the lowest average cost curve (any point on the ppc) allows for output to be maximised from the given resources

When resources are used to produce the goods and services that consumers want in such a way that consumer utility or welfare is maximised (P=MC)

A situation in which both allocative efficiency and productive efficiency have been achieved; a situation in which society is producing the mixture of products that consumers desire at minimum cost

The expenses that a business incurs from the production of a good or service. They can be fixed or variable

Total costs = total variable costs + total fixed costs

Costs that fluctuate with the level of output in the short run, usually by the same proportion eg. wages

Costs that do not fluctuate with the level of output in the short tun and are paid even if output is zero e.g. rent

The unit cost/cost per unit of output (AC= total costs / quantity)

The cost of producing an extra unit (Change in costs/change in output)

Costs incurred by a firm that cannot be recovered if the firm leaves the market e.g. spending on advertising

Those whose input can only be changed with time and effort. They tend to be durable and long-lasting e.g. factory buildings, capital

Those whose input can be quickly as easily changed e.g. raw materials, labour

A summary of the known production techniques available to a firm. It shows the relationship between the input of f.o.p and the output of goods and services that can be produced [Q = F(K,L)] where F=function, K= capital, L = labour. This states that output is a function of the inputs of capital and labour.

The cost savings to a firms average total costs resulting from an increase in the scale of production

When the free market mechanism does not result in an optimal allocation of resources, thus, causing allocative inefficiency

Externalities
Information asymmetries
Monopoly
Immobilities
Public goods
Merit goods
Inequality

A negative or positive spill over effect to a third party resulting from the consumption or production of a good or service

The additional benefit that society gains from consuming one more unit of the product

The cost to society of producing one more unit of a product

Costs incurred by an economic agent as part of its production or other economic activities

Costs that are imposed on a third party due to an economic agent's production or other economic activity

Benefits experienced by an economic agent as part of its production or other economic activities

Benefits accrued by a third party due to an economic agent's production or other economic activity

Economic agents not directly involved in a specific economic decision

Private costs+external costs

A good that must be purchased to be consumed, and whose consumption by one person prevents another person from consuming it; excludable and rivalrous

A good that one person can consume without reducing its availability to others- non rivalrous and non excludable

Someone who directly benefits from the consumption of a public good, but who does not contribute to its provision

When a person cannot be excluded from consuming a good, and thus has no incentive to pay for its provision

A situation in which some economic agents in a market have better information about market conditions than others; when information is unequally shared between two parties

When government intervention to correct a market failure creates inefficiency, does not maximise welfare and leads to a misallocation of scarce resources

The way in which the burden of paying a sales tax is shared out between buyers and seller

A sum of money given by the government to producers to encourage production of a good or service.

The reward to owners of a business, entrepreneurs or shareholders for taking a financial risk in investment. Profit=Revenue-costs

The opportunity cost of capital and enterprise. The return needed for a firm to stay in a market in the long run

Growth, through increasing economies of scale, increasing market share and reducing competition and expanding into new markets.

Any potential difficulty or expense a firm might face if it wants to enter a market. They allow incumbent firms to make supernormal profits before new entrants come and erode the profits away.
Patents
High sunk costs
Strong branding and brand loyalty
Aggressive pricing tactics
Threat of a price war
economies of scale

The condition of multiple firms having equal access to a market for identical products

Where a single firm is the supplier of a product with no close substitutes i.e. the firm is the industry. A legal monopoly is where the firm has 25% market share.

When the LRAC curve falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available as duplication would be unnecessary and wasteful.

The process by which a firm can charge different customers different prices for essentially the same product. Three conditions:
Firm must have price making power (monopoly/oligopoly)
Must be able to identify different market segments with different PED's
Must be able to prevent seepage- customers who bought at a low price cannot resell at a higher price to consumers who could've been charged more. Main aim of PD is to increase firm's total revenue and profits by reducing consumer surplus.

A market structure in which there are a small number of large firms, each with a significant share of the market:
Interdependence
Barriers to entry
Strategy

Commercial competition characterised by the repeated cutting of prices below those of competitors

When an established firm reduces its price to below its rivals' costs of production in order to eliminate competition or to strengthen its position in the market

When the various firms in an oligopoly cooperate with each other, especially over what prices to charge.

The market structure that resembles many real-life industries whereby the conditions for perfect competition are relaxed. Conditions:
Some product differentiation
Low or no barriers to entry
Many buyers and sellers
Abnormal profit in SR, not in LR

The stock of skills and expertise that contribute to a worker's productivity.

The accumulated stock of assets that households own at a fixed point in time

A method used by governments to decide whether a project would be beneficial for society. 1. Identify all costs and benefits including future c+b
2.place a common monetary value on all of these
Advantages: Evaluates the most effective use of scarce resources
Social benefits and costs are evaluated
Allows for a more informed decision to be made
Allows for projects to be prioritised
Not useful:
Hard to place a monetary value on external benefits and costs
Shadow pricing leads to inaccuracy
Data may be skewed by bias
Hidden costs may exist
CBA cannot include the unpredictable e.g. natural disasters
Planning takes a long time and costs can constantly change
Costs of undertaking a CBA may be greater than the usefulness of the information that it provides.
Eval: depends on the accuracy of the information gathered, no other alternatives-best solution would be to find a better way of calculating the costs and benefits

The selling of state assets to the private sector e.g. the sale of the Post office.

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