Economics Unit 2

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Demand

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101 Terms
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Demand

the desire to own something and the ability to pay for it

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Microeconomics

the study of how households and firms make decisions and how they interact in markets

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Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded

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Incentive

something that induces a person to act

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Demand Curve

a curve that shows the relationship between the price of a product and the quantity of the product demanded

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Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

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Marginal Utility

satisfaction or usefulness obtained from acquiring one more unit of a product

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Diminishing Marginal Utility

Decreasing satisfaction or usefulness as additional units of a product are acquired

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Price

Causes a change in demand

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The Income Effect

the change in consumption that results when a price increase causes real income to decline

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Substitution Effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

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Change in Demand

a shift of the demand curve, which changes the quantity demanded at any given price

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Complementary Products

Items that are used in conjunction or bought together

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Consumer Income, Future Expectations

What causes demand to change (rather than price)?

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Elasticity of Demand

consumers' responsiveness or sensitivity to changes in price

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Demand Elasticity

the extent to which a change in price causes a change in the quantity demanded

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Elastic

describes demand that is very sensitive to a change in price

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Inelastic

Describes demand that is not very sensitive to a change in price

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Unit Elastic

a given change in price causes a proportional change in quantity demanded

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Measure Elasticity

% of change in the quantity demanded/% of change in price

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Expenditure

An amount of money spent.

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Total Expenditures Test

it shows the impact of price change on total expenditures, determine elasticity. formula = p x qd

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Capital Expenditure

money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

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Revenue Expenditure

The payment of an operating expense necessary to earn revenue

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Supply

The amount of goods available

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Law of Supply

Tendency of suppliers to offer more of a good at a higher price

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Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

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Supply Curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

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Market Supply Curve

a graph of the quantity supplied of a good by all suppliers at different prices

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Quantity Supplied

the amount of a good that sellers are willing and able to sell

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Change in Quantity Supplied

the change in amount offered for sale in response to a change in price

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Change in Supply

a shift of the supply curve, which changes the quantity supplied at any given price

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Cost, Producing, Technology, Taxes

What factors cause a change in supply?

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Supply Elasticity

responsiveness of quantity supplied to a change in price

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Elastic Supply

Exists when a small change in price causes a major change in quantity supplied.

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Inelastic Supply

exists when a change in a good's price has little impact on the quantity supplied

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Unit Elastic Supply

when the percentage change in the quantity supplied equals the percentage change in price

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Production Function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

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Short Run

the period of time during which at least one of a firm's inputs is fixed

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Long Run

the time period in which all inputs can be varied

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Total Product

total output produced by the firm

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Stages Of Production

phases of production that consist of increasing, decreasing, and negative returns

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Stage 1

Increasing marginal returns

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Stage 2

Decreasing marginal returns

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Stage 3

Negative marginal returns

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Fixed Cost

a cost that does not change, no matter how much of a good is produced

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Overhead

broad category of fixed costs that includes interest, rent, taxes, and executive salaries

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Variable Cost

a cost that rises or falls depending on how much is produced

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Total Cost

fixed costs plus variable costs

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Marginal Cost

the cost of producing one more unit of a good

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Average Revenue

total revenue divided by the quantity sold

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Total Revenue

the total amount of money a firm receives by selling goods or services

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Marginal Revenue

the additional income from selling one more unit of a good; sometimes equal to price

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Profit Maximization

A method of setting prices that occurs when marginal revenue equals marginal cost.

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Break Even Point

the point at which the costs of producing a product equal the revenue made from selling the product

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E-Commerce

the buying and selling of goods over the internet

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Price

The amount of money exchanged for a good or service

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Price as a Signal

Price sends messages to consumers and producers about whether to enter or leave a market e.g. high prices signal to producers to enter and consumers to leave.

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Neutrality

policy of supporting neither side in a war

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Flexibility

The ability to move your body parts through their full range of motion

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Familiarity

A general sense that a certain stimulus has been encountered before.

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Efficiency

The percentage of the input work that is converted to output work

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Rationing

A limited portion or allowance of food or goods; limitation of use

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Surplus

A situation in which quantity supplied is greater than quantity demanded

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Shortage

A situation in which quantity demanded is greater than quantity supplied

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Economic Model

a simplified version of reality used to analyze real-world economic situations

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Equilibrium Price

the price that balances quantity supplied and quantity demanded

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Market Structure

The nature and degree of competition among firms operating in the same industry.

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Pure Competition

the market structure that exists when there are many small businesses selling one standardized product

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Monopolistic Competition

a market structure in which many companies sell products that are similar but not identical

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Product Differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

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Non-price Competition

a way to attract customers through style, service, or location, but not a lower price

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Oligopoly

A market structure in which a few large firms dominate a market

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Collusion

secret agreement or cooperation

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Price Fixing

an agreement among firms to charge one price for the same good

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Monopoly

A market in which there are many buyers but only one seller.

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Laissez Faire

Idea that government should play as small a role as possible in economic affairs.

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Natural Monopoly

a market that runs most efficiently when one large firm supplies all of the output

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Geographic Monopoly

a monopoly based on the absence of other sellers in a certain geographic area

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Governmental Monopoly

When the government controls one, essential element of the economy.

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Technological Monopoly

occurs when a firm controls a manufacturing method, invention, or type of technology

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Market Failure

a situation in which a market left on its own fails to allocate resources efficiently

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Five Main Causes of Market Failures

Not enough competition, not enough information, resources that cant or wont move, too few public goods, externalities or spillover effects

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Not Enough Competition

Reduces efficient use of scarce resources

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