Microeconomics: Consumer and Business Decision Making

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Questions and Answers

Define Demand in economics.

Demand is the quantity of a good or service that buyers are willing to purchase at various prices during a given period of time.

What does the Law of Demand state?

The quantity demanded of a good or service decreases with its price. (correct)

The quantity demanded of a good or service increases with its price.

The quantity supplied of a good or service decreases with its price.

The quantity supplied of a good or service increases with its price.

The _____________ illustrates the demand schedule for a product.

Demand Curve

Equilibrium price is set by the interaction of demand and supply and may result in surpluses or shortages in the market.

True Signup and view all the answers

Define dynamic pricing.

Dynamic pricing is the practice of changing prices as demand increases or decreases within a short time frame. Signup and view all the answers

What is price elasticity of demand?

Expression of how responsive quantity demanded is to a change in price Signup and view all the answers

Price inelastic means that the quantity bought does not change much when prices rise or fall.

True Signup and view all the answers

_______ is a coefficient for a product of more than one, indicating that a given percentage change in price causes a greater percentage change in quantity demanded.

Elastic coefficient Signup and view all the answers

Match the following factors with their impact on the elasticity of supply:

Time = Ease of Storage Cost Factors = Change in QS Signup and view all the answers

Define Asset.

Anything of value owned by an individual or entity. Signup and view all the answers

Explain the Easy Money Policy.

A monetary policy approach that involves increasing the money supply to stimulate economic activity. Signup and view all the answers

What is the Rate of Return?

Gain on investment Signup and view all the answers

______ is the global marketplace for trading national currencies against one another.

Foreign Exchange Signup and view all the answers

Inflation is a measure of the rate at which prices for goods and services are falling.

False Signup and view all the answers

Define Aggregate Demand (AD).

The total quantity of goods and services demanded by all households, firms, and the government in an economy at a given price level and in a given time period. Signup and view all the answers

What does the term 'Full Employment' refer to?

The condition where all individuals who are willing and able to work can find employment. Signup and view all the answers

What does the Consumer Price Index (CPI) measure?

Average change in prices paid by consumers Signup and view all the answers

_____ defines economic activities that are not reported or taxed by the government.

Underground Economy Signup and view all the answers

Study Notes

Microeconomics

Microeconomics: Study of how consumers and businesses make economic decisions.
Demand: Quantity of a good or service that buyers will purchase at various prices during a given period.
- Law of Demand: Quantity demanded varies inversely with price, ceteris paribus.
Supply: Quantity of a good or service that sellers will offer for sale at various prices during a given period.
- Law of Supply: Quantity supplied increases if price increases, and decreases if price falls, ceteris paribus.
Market Equilibrium: Price at which the quantity demanded equals the quantity supplied.
Price Elasticity of Demand: Measure of how responsive the quantity demanded is to a change in price.
Price Elasticity of Supply: Measure of how responsive the quantity supplied is to a change in price.

Consumer Behavior

Marginal Utility Theory: Consumers maximize satisfaction by equalizing the marginal utility of each product.
Consumer Equilibrium: State of satisfaction when the marginal utility per dollar is equal for all products.
Paradox of Value: Demand for necessities is not high enough to ensure prices match those of luxury items.

Market Structures

Perfect Competition: Rare market structure where many sellers sell identical products, with no barriers to entry.
Dynamic Pricing: Practice of changing prices in response to changes in demand.
Monopoly: Market structure where one firm has complete control over supply.

Labor Markets

Derived Demand: Demand for resources (e.g. labor) that is dependent on direct demand for goods and services.
Marginal Revenue Product of Labor: Additional revenue generated by adding one more worker.
Labor Demand Curve: Graphical representation of the relationship between labor demand and wage rate.
Labor Supply Curve: Graphical representation of the relationship between labor supply and wage rate.

Production and Cost

Explicit Costs: Costs that appear on a business's accounting statements.
Implicit Costs: Costs not included in accounting statements, such as owner's time and invested capital.
Economic Profit: Excess of revenue over economic costs (explicit and implicit costs).

Firms and Markets

Firm: Privately owned organization engaged in business activities.
Economies of Scale: Greater efficiency achieved by producing large quantities of output.
Regulation: Government rules that oversee, standardize, and control markets and industries.

Business Organization

Sole Proprietorship: Business owned and operated by one person.
Partnership: Business owned by two or more people.
Corporation: Business firm recognized as a separate entity, with ownership divided into shares.
Co-operative: Business owned equally by its members, with a common goal.

Macroeconomics

Macroeconomics: Study of the overall performance and structure of the economy.
Inflation: Rate at which the general level of prices for goods and services is rising.
Gross Domestic Product (GDP): Total value of all goods and services produced within a country's borders in a specific time period.### GDP and Economic Growth
Expenditure Approach: calculates GDP by summing consumption, investment, government spending, and net exports
Income Approach: calculates GDP by summing all incomes earned by individuals and businesses
GDP = C + G + I + (X - M)

GDP Components

Consumption (C): total spending by households on goods and services
Investment (I): expenditure on capital goods, such as machinery and buildings
Government Spending (G): government expenditures on goods and services
Net Exports (X - M): exports minus imports

Economic Indicators

GDP per Capita: GDP divided by population, indicating average economic output per person
Nominal GDP: total value of goods and services produced, not adjusted for inflation
Real GDP: GDP adjusted for inflation, providing a more accurate measure of economic output

Unemployment

Unemployment Rate: percentage of labor force that is unemployed and actively seeking employment
Labor Force: total number of people employed or seeking employment
Types of Unemployment:
- Structural Unemployment: skills or location of worker no longer matches labor demand
- Technological Unemployment: more technology, less need for employers
- Replacement Unemployment: cheaper labor
- Geographical Unemployment: affects a region of a country
- Frictional Unemployment: moving between jobs
- Cyclical Unemployment: results in reduction of consumer spending
- Seasonal Unemployment: caused by seasonal variation in jobs
- Classical Unemployment: wages driven too high

Aggregate Demand and Supply

Aggregate Demand (AD): total quantity of goods and services demanded by all households, firms, and government
Aggregate Supply (AS): total quantity of goods and services that producers are willing and able to supply
Full-Employment Equilibrium: point at which aggregate demand equals aggregate supply, resulting in stable employment levels

Fiscal Policy

Expansionary Fiscal Policy: increasing government spending or reducing taxes to stimulate economic growth
Contractionary Fiscal Policy: decreasing government spending or increasing taxes to cool down an overheated economy
Automatic Stabilizers: features in the economy that automatically counteract economic fluctuations without direct government intervention
Discretionary Fiscal Policy: deliberate changes in government spending and taxation to achieve economic goals

Money and Banking

Currency: physical forms of money, such as banknotes and coins
Money: a medium of exchange widely accepted in transactions, serving as a store of value and unit of account
Fractional Reserve Banking: system where banks keep only a fraction of deposits as reserves
Fiat Money: currency without intrinsic value, declared legal tender by a government