Economic Theory Unit 1/4

Economics

A social science that studies how individuals, businesses, governments, and societies allocate scarce resources to satisfy unlimited wants.

Oikonomikos

Managing of a household and the unlimited wants of the family members utilising the limited income earned by the head of the family

Wealth Definition of Economics

Economics is concerned with the nature and causes of the wealth of nations.

Welfare Definition of Economics

Economics is the study of mankind in the ordinary business of life.

Scarcity Definition of Economics

Economics studies human behaviour as a relationship between ends and scarce means which have alternative uses.

Growth Definition of Economics

Economics is the study of how man and society choose with or without the use of money to employ the scarce productive resources, which have alternative uses, to produce various commodities over time.

Demand Analysis and Forecasting

Accurate estimates of demand that guide management in maintaining market position and enlarging profits.

Cost and Production Analysis

Yields significant cost estimates useful for management decisions; discovering economic costs for effective profit planning, cost control, and pricing practices.

Pricing Decisions, Policies and Practices

Price is the genesis of a firm's revenue and depends on how correctly the pricing decisions are taken.

Profit Management

Long run profits earned which are taken as an important measure of the firm's success.

Capital Management

Planning and control of capital expenditure by top management.

Microeconomics

Studies individuals or business enterprises within a national economic system.

Macroeconomics

Studies the economy as a whole.

Deductive Method

Deriving new inference from basic assumptions established by other methods.

Inductive Method

Delves into economic inferences based on experiences and observations.

Positive economics

Branch of economics that refers to descriptive and quantification statements, and its common usage involves the analysis of theories.

Normative economics

A branch of economics that focuses on what ought to be rather than what is. It involves value judgments and opinions about economic policies, outcomes, or goals.

Economic variables

Any measurement that helps to determine how an economy functions.

Equilibrium

A state in which opposing forces or influences are balanced.

Utility

Satisfaction a consumer gets from goods/services.

Marginal Utility

Extra satisfaction from an extra unit of a good.

Law of Diminishing Marginal Utility

The satisfaction from a product decreases as consumption increases. As a person consumes more units of a good or service, the additional satisfaction (utility) gained from consuming each extra unit decreases.

Law of Equi-Marginal Utility

Maximizing satisfaction by equating marginal utility per dollar across goods.

Form Utility

Utility created by product design and development.

Place Utility

Utility from easy access to goods/services.

Time Utility

Utility from availability of goods/services when needed.

Possession Utility

Utility from the benefits of owning a product/service.

Demand

Willingness to purchase products at different prices.

Law of Demand

Inverse relationship between price and quantity demanded.

Speculation

Goods where demand increases with price due to expected future price increases.

Status Goods/Veblen Goods

Goods bought to display status; demand increases with price.

Giffen Goods

Inferior goods where demand increases with price.

Income Effect

Increased purchasing power due to lower prices.

Substitution Effect

Switching to cheaper substitutes when a price falls.

Elasticity

Change in one variable relative to a change in another.

Price Elasticity of Demand

Responsiveness of quantity demanded to a change in price.

Relatively Elastic Demand

Demand changes more than proportionally to price changes. percentage change in quantity demanded is greater than the percentage change in price. When the price of a product changes a little, the amount people buy changes a lot.

Relatively Inelastic Demand

Demand changes less than proportionally to price changes: a situation where the percentage change in quantity demanded of a good or service is smaller than the percentage change in its price. When the price of a product goes up or down, the quantity people buy doesn’t change much.

Unitary Elastic Demand

Demand changes proportionally to price changes.

Income Elasticity of Demand

Relationship between consumer income and demand.

Positive Income Elasticity of Demand

Demand increases with income.

Negative Income Elasticity of Demand

Demand decreases with income.

Zero Income Elasticity of Demand

Income change has no effect on demand. A situation that when consumers’ income changes, the quantity demanded of a good stays the same.Simple words: No matter how much your income increases or decreases, you still buy the same amount of the good.

Cross Elasticity of Demand

Responsiveness of demand to a change in the price of related goods.

Demand Forecasting

Predicting future product demand.

Indifference Curves

A graphical depiction that represent the combinations of products which provide the similar kind of satisfaction to consumers that makes them indifferent.

Diminishing Marginal Rate of Substitution

The consumer is willing to trade off the amount of a commodity for another commodity since it provides them with the same level of utility like that of the previous commodity.

Indifference Curve

Measures utility in an ordinal manner where it provides a focal point of the various combinations of two goods providing the same satisfaction level or utility to consumers.

Budget Line

The budget line portrays the various combinations of the two goods through a graphical representation of the combinations that are affordable by the customer at the given market prices and within his or her specific income.

Consumer’s Equilibrium

Consumers gain utility from every commodity they consume, and the utility depends on the price of the product. The point at which the marginal utility of a product is equal to the price represents the maximum satisfaction level of the consumer.

Price-Effect

The change in the quantity demanded because of a change in its price.

Substitute Goods

These are goods that are almost similar to one another, and they satisfy a similar need or desire. These are goods that can be consumed in place of another.

Complementary Goods

These are goods that add value to the other goods and are used in combination with other goods.

Marginal Rate of Substitution (MRS)

Explains where the consumer can give up the quantity of one good for additional units of another good at the same level of utility.

Demand Curve

A graphical representation of his or her demand schedule. It shows how the quantity demanded of a commodity change with variation in its price.

Supply of Goods or Services

The quantity of goods or services that suppliers are willing to provide to consumers at a certain price level during a time period.

Law of Supply

Shows the conduct of the producer during change in prices of different commodities and services, establishing a direct link between pricing and quantity supplied when other factors are constant.

Factors Affecting Supply

Price, Cost of Production, Number of Sellers, Technology, Supply Chain Efficiency, Taxes, Government Policies, Prices of Related Goods, Objectives of the Firm

Elasticity of Supply

Establishes the connection between quantity of product supplied and its price, expressed as the ratio of the percentage change in quantity to the percentage change in price.

Perfectly Inelastic Supply

A commodity has a perfectly inelastic supply when the increase in price does not have an impact on the quantity supplied.

Perfectly Elastic Supply

The commodity with a perfectly elastic supply has unlimited elasticity. For these commodities, even a small change in price results in supply becoming zero and it becomes unlimited with a small rise in price.

Unitary Elastic

The unit elasticity of supply of a product reflects the changes in supply of product quantity which is equal to the change in its price.

Market Equilibrium

The situation in which the combination of economic variables of price and quantity are balanced.

Disequilibrium

A condition that takes place when economic forces of supply and demand within a market-based economy are unbalanced.

Price Ceiling and Price Floors

Regulations imposed by the government on minimum and maximum prices of certain goods or services.

Price Ceiling

A situation where prices charged for goods are more or less than the equilibrium price that is established by the demand and supply forces in the economy.

Price Floor

More effective in the labor-wage market where there are laws in many countries for determining the minimum wage to be paid to the labor or the workforce.