Unit 3 Review
CONSUMER ECONOMICS
REVIEW SHEET UNIT THREE
Chapter 8 Section 1
Demand-Ability and desire to buy.
Utility-ability of any good or service to satisfy consumer wants.
Law of Diminishing Marginal Utility-economic rule stating that the additional
satisfaction consumer gets from purchasing one more unit of a product will lessen with
each additional unit purchased.
Real Income Effect-economic rule sating that individuals cannot keep buying the same
quantity of a product if its price rises while their income stays the same; this works in
reverse direction also-if the price of a product decreases and income remains the same,
purchasing power is increased and the amount of product purchased will likely be
increased.
Substitution Effect-economic principle stating that if two items satisfy the same need and
the price of one rises, people will buy the other.
Chapter 8 Section 2
Price Elasticity of Demand-economic concept that deals with how much demand varies
according to changes in price.
Elastic Demand-situation in which the rise or fall in price of a product greatly affects the
amount of that product which people are willing to buy; if the prices of certain products
rise, consumers will buy cheaper substitutes.
Inelastic Demand-situation in which a price change of a product has little impact on the
quantity demanded by consumers.
***What Determines Demand***
Population-More people, more consumers
Income-If you don't have enough money you can't buy it.
Tastes and Preferences-The feelings about a product. If you don't like it you won't buy it.
Chapter 8 Section 3
Supply-Willingness and ability to provide different goods and services.
Law of Diminishing Returns-economic rule stating that after some point, adding units of
a factor of production to all the other factors of production increase total output for a
time; after a certain point, the extra output for each additional unit will begin to decrease.
Chapter 8 Section 4
Equilibrium Price-price of a product or service at which the amount of producers are
willing to supply is equal to the amount consumers are willing to buy. On a graph, the
equilibrium price is where the supply curve and the demand curve intersect.
Shortages-situations occurring when, at the going price, the quantity demanded is greater
than the quantity supplied.
Surpluses-situation occurring when supply is greater than demand.
Chapter 9 Section 1
Entrepreneur-person who starts a business to gain profits and is willing to take the risks
involved.
***Four Elements of Business***
Expenses-The costs of starting and running the business. Overhead.
Advertising-You need to get the word out about your product or else no one will know
about it. Word of mouth is the best advertising.
Record Keeping-If you don't keep good records you will get in big trouble.
Risk-All businesses involve the risk of failing. Planning reduces risk.
Inventory-supply of whatever items are used in a business, such as raw materials or goods
for sale.
Chapter 9 Section 2
Sole Proprietorship-business owned by one person; most basic type of business
organization.
Small Business Incubator-a business that helps small businesses develop by providing
such forms of assistance as a low-rent building, management advice, and computers;
often operated with state and federal funds.
Partnership-business that two or more individuals own and operate.
Limited Partnership-special form of partnership in which the partners are not equal; the
general partner(s) assumes responsibility for all management duties and debts; the other
partner(s) contributes money or property and has no voice in management.
Joint Venture-temporary partnership set up between individuals or companies for a
specific purpose and for a short period of time.
Chapter 9 Section 3
Corporation-organization owned by many people but treated by the law as though it were
a person; it can own property, pay taxes, make contracts, and sue and be sued.
Articles of Incorporation-document filed with the state establishing a corporation within
a state; these articles include basic information about the corporation, the board of
directors, and the stock being issued.
Corporate Charter-License to operate granted to a corporation by the state where it is
established.
Franchise-contract in which one business sells to another business the right to use the
franchisers name and sell its products.
Chapter 10 Section 1
Perfect Competition-market situation in which there are numerous buyers and sellers, and
no one buyer or seller can affect price.
***Four Characteristics of Perfect Competition***
A Large Market-Numerous buyers and sellers.
Similar Product-A nearly identical good or service is sold.
Easy Entry and Exit-Sellers already in the market can't prevent other sellers from entering
the market. Relatively cheap start-up capital and easily learned.
Easily Obtainable Info-Information about the product is easily obtained.
Chapter 10 Section 2
Imperfect Competition-market situation in which individual or group buys or sell a good
or service in amounts large enough to affect price; includes monopoly, oligopoly, and
monopolistic competition.
Pure Monopoly-most extreme market form of imperfect competition in which a single
seller controls the supply of a good or service and thus had control over price.
***Four Characteristics of a Monopoly***
Single Seller-There is only one seller of the good or service.
No Substitutes-There's no adequate substitute for the good or service.
No entry-The market is protected by barriers to entry.
Control Over Market Price-The monopolist can control the market price.
Natural Monopolies-market situation resulting when one company forces its competitors
at the lowest cost; usually found in industries that need large investments to get started
and when it is more efficient to have one company rather than several.
Geographic Monopolies-market situations occurring when an individual seller had
control over a market because of the location.
Technological Monopolies-market situation resulting when a seller develops a product or
production process for which it obtains a patent; company holds exclusive rights to the
new invention for a specified number of years.
Government Monopolies-market situations created by the government and protected by
legal barriers to entry; activity exclusive to the government.
Cartel-arrangement among groups of industrial businesses, often in different countries, to
reduce international competition by controlling the price, production, and distribution of
goods; international form of monopoly.
Oligopoly-industry dominated by a few suppliers that exercise some control over price.
Monopolistic Competition-market situation in which a large number of sellers offer
similar but slightly different products and each has some control over price.
Chapter 10 Section 3
Antitrust Legislation-laws passed by federal and state governments to prevent new
monopolies from forming and to break up those that already exist.
Interlocking Directorate-situation occurring when the majority of members of the boards
of directors of competing corporations are the same; in effect, having one group of
people mange both companies.
Horizontal Merger-buy-out of a company by one in the same business.
Vertical Merger-a merger in which a business that is buying or selling to another business
merges with that business.
Conglomerate Merger-buying out of unrelated
businesses.
Deregulation-gradual reduction of government regulation and control over business
activity.