Economics Unit 2 Vocabulary Test Questions

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Demand
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the desire to own something and the ability to pay for it
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Law of Demand
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consumers buy more of a good when its price decreases and less when its price increases
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Substitution Effect
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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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Income Effect
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the change in consumption resulting from a change in real income
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Demand Schedule
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a table that lists the quantity of a good a person will buy at each different price
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Market Demand Schedule
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a table that lists the quantity of a good all consumers in a market will buy at each different price
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Demand Curve
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a graphic representation of a demand schedule
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Normal Good
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a good that consumers demand more of when their income increases
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Inferior Good
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a good that consumers demand less of when their incomes increase
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Complements
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two goods that are bought and used together
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Substitutes
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goods used in place of one another
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Elasticity of Demand
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a measure of how consumers react to a change in price
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Inelastic
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describes demand that is not very sensitive to a change in price
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Elastic
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describes demand that is very sensitive to a change in price
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Unitary Elastic
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describes demand whose elasticity is exactly equal to 1
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Total Revenue
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the total amount of money a firm receives by selling goods or services
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Supply
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the amount of goods available
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Law of Supply
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tendency of suppliers to offer more of a good at a higher price
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Quantity Supplied
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the amount a supplier is willing and able to supply at a certain price
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Supply Schedule
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a chart that lists how much of a good a supplier will offer at different prices
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Variable
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a factor that can change
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Market Supply Schedule
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a chart that lists how much of a good all suppliers will offer at different prices
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Supply Curve
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a graph of the quantity supplied of a good at different prices
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Market Supply Curve
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a graph of the quantity supplied of a good by all suppliers at different prices
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Elasticity of Supply
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a measure of the way quantity supplied reacts to a change in price
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Marginal Product of Labor
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the change in output from hiring one additional unit of labor
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Increasing Marginal Returns
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a level of production in which the marginal product of labor increases as the number of workers increases
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Diminishing Marginal Returns
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a level of production in which the marginal product of labor decreases as the number of workers increases
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Fixed Cost
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a cost that does not change no matter how much of a good is produced
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Variable Cost
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a cost that rises or falls depending on how much is produced
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Total Cost
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fixed costs plus variable costs
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Marginal Cost
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the cost of producing one more unit of a good
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Marginal Revenue
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the additional income from selling one more unit of a good; sometimes equal to price
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Operating Cost
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the cost of operating a facility, such as a store or factory
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Subsidy
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a government payment that supports a business or market
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Excise Tax
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a tax on the production or sale of a good
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Regulation
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government intervention in a market that affects the production of a good
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Equillibrium
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the point at which quantity demanded and quantity supplied are equal
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Disequilibrium
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describes any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market
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Excess Demand
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when quantity demanded is more than quantity supplied
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Excess Supply
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when quantity supplied is more than quantity demanded
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Price Ceiling
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a maximum price that can be legally charged for a good or service
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Price Floor
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a minimum price for a good or service
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Rent Control
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a price ceiling placed on rent
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Minimum Wage
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a minimum price that an employer can pay a worker an hour for labor
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Surplus
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situation in which quantity supplied is greater than quantity demanded; also known as excess supply
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Shortage
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situation in which quantity demanded is greater than quantity supplied; also known as excess demand
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Search Costs
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the financial and opportunity costs consumers pay when searching for a good or service
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Supply Shock
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a sudden shortage of a good
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Rationing
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a system of allocating scarce goods and services using criteria other than price
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Black Market
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a market in which goods are sold illegally
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Spillover Costs
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costs of production that affect people who have no control over how much of a good is produced
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Perfect Competition
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a market structure in which of a large number of firms all produce the same product
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Commodity
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a product that is the same no matter who produces it, such as petroleum, notebook paper or milk
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Barrier to Entry
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any factor that makes it difficult for a new firm to enter a market
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Imperfect Competition
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a market structure that does not meet the conditions of perfect competition
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Start-Up Costs
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the expenses a firm must pay before it can begin to produce and sell goods
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Economies of Scale
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factors that cause a producer’s average cost per unit to fall as output rises
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Natural Monopoly
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a market that runs most efficient when one larger firm supplies all of the output
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Government Monopoly
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a monopoly created by the government
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Patent
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a license that gives the inventor of a new product the exclusive right to sell it for a certain period of time
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Franchise
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the right to sell a good or service within an exclusive market
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License
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a government issued right to operate a business
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Price Discrimination
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division of customers into groups based on how much they will pay for a good
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Market Power
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the ability of a company to change prices and output like a monopolist
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Monopolistic Competition
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a market structure in which man companies sell products that are similar but not identical
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Differentiation
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making a product different from other similar products
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Non-price Competition
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a way to attract customers through style, service, or location, but not a lower price
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Oligopoly
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a market structure in which a few large firms dominate a market
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Price War
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a series of competitive price cuts that lowers the market price below the cost of production
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Collusion
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an agreement among firms to divide the market, set prices, or limit production
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Price Fixing
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an agreement among firms to charge one price for the same good
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Cartel
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a formal organization of producers that agree to coordinate prices and production
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Predatory Pricing
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selling a product below cost to drive competitors out of the market
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Antitrust Laws
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laws that encourage competition in the marketplace
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Trust
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an illegal grouping of companies that discourages competition
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Merger
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combination of two or more companies into a single firm
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Deregulation
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the removal of some government controls over a market

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