7. Economic Factors Flashcards
economics is…
what is the difference between micro and macroeconomics?
the study of wealth creation.
micro: study of economic behaviour of individual firms.
macro: aggregate behaviour and the study of the economy as a whole.
the main conditions that effect demand are… (4)
- income
- taste
- substitutes
- population
elasticity of demand formula and results
(% change in QD) / (% change in P)
> 1: price inelastic: % change in QD smaller than % change in P
=1: unit elasticity
<1: price elastic: % change in P greater than % change in QD
factors that effect PED (4)
- income
- substitutes
- time
- market
- necessity/luxury
- habit
XED formula
(% change in QD of A) / (% change in price of B)
government minimum prices cause …. (3)
- misallocation of resources
- excess supply
- wasted resources
government imposed maximum prices cause…
- misallocation of resources
- shortages of supply
- arbitrary ways of allocating products
in the short run, the total cost curve is U-shaped because…
in the long run, the total cost curve is U-shaped because…
SR: of the law of diminishing returns
LR: of dis-economies of scale
AD =
the trade cycle =
C + I + G + X - M
boom, peak, recession, depression, trough, recovery.
economic growth
2 +
2 -
+ job creation
+ disposable income
+ higher quality of living
- inequality
- environment
- goods may become scarce
inflation
2 +
2 -
+ boosts growth
+ better than deflation
- worse real income
- imported goods look cheaper
- consumer confidence knocked
unemployment
2 +
2 -
+ large pool of workers for recruitment
+ staff can be paid lower
- costly
- loss of income tax
components of the BoP (3)
- current account: imports and exports
- capital account: ownership of foreign assets, such as loans
- financial account: cash flows
a budget deficit is…
this is referred to as…
it is used to..
- when government expenditure exceed income.
- They have to borrow money, referred to as the Public Sector Net Cash Requirement.
- boost AD
a budget surplus is…
this is referred to as…
it is used to…
- when government expenditure is less than its income.
- contractionary policy
- when AD is higher than the country can supply.
what is a fractional reserve system?
quantitative easing is…
banks only keep a small % of deposits in cash, assuming customers will not all cash out at once.
- an unconventional monetary policy in which a country’s central bank buys government assets using money it has generated electronically.
classical theory says (3)
- no government intervention
- market will sort itself
- economy will naturally move to equilibrium point
Keynesian economics suggests (3)
- government should manipulate AD
- done through borrowing money and injecting it into economy
- budget surplus
monetarists suggest…
that the economy does not find equilibrium point because of market imperfections.
remove imperfections, market will clear on its own.
unemployment types (4)
- cyclical unemployment: demand deficient unemployment caused by a ‘bust’ in the trade cycle.
- frictional unemployment: short-term unemployment, likely moving between jobs.
- structural unemployment: the skills set of those requiring jobs does not match those of job vacancies available.
- real wage unemployment: unions keep wage artificially high; employment thus remains low.
types of inflation (6)
- demand-pull inflation: demand grows faster than output.
- cost-push inflation: input costs rise so in turn, manufacturers also have to raise prices.
- imported inflation: if the national currency weakens, the cost of imports will rise, leading to domestic inflation.
- monetary inflation: caused by expansionary monetary policy.
- expectations effect: wages and prices increase due to expected later inflation. This creates inflation sooner and increases the value of it.
- stagflation: inflation while economic growth slows.
