Economics Definition and Concepts

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Questions and Answers

What does the law of diminishing marginal utility indicate about consumer satisfaction as consumption increases?

Satisfaction from each additional unit remains constant.

Satisfaction from each additional unit becomes negative.

Satisfaction from each additional unit initially increases.

Satisfaction from each additional unit decreases. (correct)

Under which condition does a consumer reach their equilibrium when consuming a single good?

When the marginal utility equals the market price. (correct)

When the marginal utility is less than the market price.

When the total utility is maximized.

When income is greater than total expenditure.

What assumption does the law of diminishing marginal utility make about the consumer's preferences?

Preferences remain unchanged during consumption. (correct)

Preferences are based on varying qualities of goods.

Preferences can change frequently.

Preferences are influenced by external factors.

What is the relationship between marginal utility and market price at equilibrium?

Marginal utility equals market price. Signup and view all the answers

How is consumer equilibrium achieved when multiple goods are consumed?

When marginal utility per monetary unit is equal for all goods. Signup and view all the answers

What formula represents the budget constraint for a consumer purchasing multiple goods?

P_xQ_x + P_yQ_y = M Signup and view all the answers

What happens to a consumer's behavior when marginal utility is less than the market price?

They should consume less of the good. Signup and view all the answers

Which of the following is NOT a condition for applying the law of diminishing marginal utility?

The consumer has unlimited budget. Signup and view all the answers

What does the law of supply state?

As the price of a product increases, quantity supplied increases. Signup and view all the answers

Which of the following best describes a supply schedule?

A tabular representation of different quantities offered at varying prices. Signup and view all the answers

What does the supply function mathematically represent?

The relationship between quantity supplied and price. Signup and view all the answers

How does an increase in the price of inputs typically affect supply?

It decreases supply, shifting the supply curve leftward. Signup and view all the answers

What role does technological advancement play in supply?

It enables firms to produce more, shifting the supply curve outward. Signup and view all the answers

How does an increase in the price of related goods affect the supply of a particular product?

It usually decreases the supply of the original product. Signup and view all the answers

What might cause a rightward shift in a supply curve?

A technological advancement. Signup and view all the answers

Which of these factors does NOT typically affect supply?

Marketing strategies of the firm. Signup and view all the answers

What does point price elasticity of demand measure?

Elasticity at a specific point on the demand curve. Signup and view all the answers

What main limitation does point elasticity of demand have?

It requires only minor changes in price and quantity. Signup and view all the answers

What is the primary focus of Marshall's definition of economics?

Study of human actions and welfare Signup and view all the answers

How is arc price elasticity of demand different from point price elasticity?

Arc elasticity uses the average of two points. Signup and view all the answers

According to Marshall, how is wealth viewed in relation to human welfare?

Wealth is a means to achieve human welfare Signup and view all the answers

What is the formula component for calculating point price elasticity of demand?

%∆QD / %∆P Signup and view all the answers

In the example provided, what is the point price elasticity of demand calculated?

-2.5 Signup and view all the answers

Which criticism did Robbins have regarding Marshall's definition of economics?

It does not address scarcity and choice Signup and view all the answers

What aspect of economics does Robbins prioritize in his definition?

Allocation of scarce resources Signup and view all the answers

At a price of Birr 5, what happens to quantity demanded if the price decreases by 1%?

Quantity demanded increases by 2.5%. Signup and view all the answers

What is used to calculate arc elasticity between two points?

The average changes in price and quantity. Signup and view all the answers

What is one reason why Marshall's definition has been criticized?

It is too narrow, focusing only on measurable aspects of welfare Signup and view all the answers

Robbins's definition suggests that economics should be free from which of the following?

Value judgments Signup and view all the answers

What is emphasized in the calculation of arc price elasticity?

Changes across a finite range of a demand curve. Signup and view all the answers

What do critics argue regarding measuring welfare in terms of money?

It is often invalid due to welfare's subjective nature Signup and view all the answers

Marshall's view of economics includes the examination of which of the following activities?

Actions related to money-earning and money-spending Signup and view all the answers

What happens to the budget line if a consumer's income increases while prices remain unchanged?

The budget line shifts outward. Signup and view all the answers

If the price of good X decreases and the price of good Y remains unchanged, what effect does this have on the budget line?

The horizontal intercept moves outward. Signup and view all the answers

Which of the following describes a situation where both prices of goods X and Y increase proportionately?

The budget line shifts inward. Signup and view all the answers

What does the slope of the budget line represent?

The ratio of the prices of the two goods. Signup and view all the answers

If the price of good Y increases while the price of good X remains constant, what effect does this have on the budget line?

The vertical intercept moves upward. Signup and view all the answers

When consumer preferences are illustrated on a graph, what do the curves known as indifference curves represent?

Combinations of goods yielding the same satisfaction level. Signup and view all the answers

What occurs if there is a decrease in income while the prices of goods remain unchanged?

An inward shift of the budget line. Signup and view all the answers

How does the budget line change if the price of good X increases while the price of good Y and income remain constant?

The slope of the budget line becomes steeper. Signup and view all the answers

Study Notes

Economic Definitions and Theories

Marshall defines economics as the study of human activities aimed at achieving welfare.
Two sides of economics: a study of wealth and a study of man.
Economics examines the material requisites of well-being related to individual and social behavior.
Wealth is deemed a means to achieve human welfare, not an end.
Economics is a social science focusing on measurable actions related to income and expenditures.
Overemphasis on material welfare in Marshall's definition leads to critiques of being too narrow.

Critiques of Marshall's Definition

The focus on material welfare neglects non-material welfare aspects.
Robbins critiques the connection between economic activities and human welfare, citing harmful economic activities.
Measuring welfare through monetary value is considered invalid as welfare is subjective.
Robbins argues that economics should avoid normative judgments and focus on positive science, criticizing Marshall’s normative approach.
Marshall’s definition overlooks fundamental issues like scarcity and choice.

Robbins' Scarcity Definition

Economics defined by Robbins revolves around allocating scarce resources to satisfy human wants.
Neither wealth nor welfare are seen as central to economics in Robbins' perspective.

Elasticity of Demand

Point Price Elasticity of Demand measures elasticity at a specific point using the formula: [ e_d = \frac{ %\Delta Q_D }{ %\Delta P } ]
Example illustrates point elasticity: price drop from Birr 5 to Birr 4 increases demand from 100 to 150 units, resulting in an elasticity of -2.5.
Point elasticity varies at different points on a straight-line demand curve.

Arc Price Elasticity of Demand

Arc elasticity applies when changes in price and quantity are larger, measuring elasticity across a segment of the demand curve.
It uses midpoints of old and new price quantities for calculation.

Theory of Supply

Supply indicates the quantities produced by sellers at various prices over a timeframe.
The law of supply states that higher prices lead to an increased quantity supplied.
Supply schedule presents quantities offered at different prices, while supply curves express this information graphically.
Supply function formula: ( S = f(P) ).
Market supply is determined by aggregating quantities from all sellers at each price level.

Determinants of Supply

Key factors influencing supply include:
- Input prices: Rising input costs decrease supply.
- State of technology: Advancement can increase supply.
- Price of related goods: Changes in related goods' prices can shift supply dynamics.
- Objectives of firms: Goals beyond profit maximization can alter supply levels.
- Weather conditions significantly affect agricultural outputs.

Law of Diminishing Marginal Utility

States that additional consumption of a good yields lower satisfaction as quantity increases.
Assumptions include rational consumer behavior and uniform quality in consumed products.

Consumer Equilibrium

Objective: Maximize total utility subject to budget constraints.
For one commodity, equilibrium is reached when marginal utility equals market price (MUx = Px).
In cases of multiple commodities, equilibrium occurs when marginal utility per money spent is equal across goods.

Budget Constraints

Changes in consumer income shift the budget line outward (increases) or inward (decreases).
Price changes affect the slope of the budget line depending on whether one or both goods' prices alter.
The relationship between price changes and budget lines is crucial for understanding consumer choice behavior.

Preferences and Indifference Curves

Consumer preferences are illustrated through indifference curves, showing combinations of goods.
The budget line represents the purchasing combinations enabled by the consumer's income.

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Description

Explore the fundamental definitions of economics by Marshall, focusing on how it relates to wealth and human welfare. This quiz delves into the study of mankind's economic activities in daily life. Test your understanding of these key concepts and their implications.