7. Economical Factors Flashcards
Define economics, micro and macro
Economics - study of wealth creation
Micro-analyze effects of supply/demand decision of individuals on prices
Macro-focus how economy works as a whole (AD, National output)
Individual vs market demand
Individual - how much I buy at specific price?
Market - shows total demand for all consumers
Expansion vs contraction
Demand-price relation is result of_____ (2)
Expansion- demand up & price fall
Contraction-demand fall & price rise
•substitution effect
•income
What are conditions of demand ?
Income
Tastes
Price of other goods(car-tyres,substit.)
Population(increase=market grows)
How price change affect demand ?
How change of COD affect demand ?
Price - contraction or expansion
COD - shift in demand
PED
% change in Q. / % change in price
If <1 price is inelastic
If revenue increase after price cut d. Price is elastic
PED is influenced by______ (6)
Proportion of income spent on goods
Substitutes
Necessities
Habit
Time
How market is defined
XED
How demand for one good change when price of another changes
%change inQ. Good A / % change in price of good B
What min/max price set by gov can lead to ?
Min. Above Eq cause excess of supply, waste
Max. Price benefits those with low income, controls inflation. Misallocation of supplies, black market
What factors and how affects cost of production ?
Indirect tax - increase
Tech. Innovation, cheaper materials - decrease
Explain cost behaviours over time U shaped
Short term -law of diminishing return
Long term -diseconomies of scale ( business grows but lacks control, less efficient)
Outline types of markets
Perfect market (lot of suppl and customers, no barriers and dominance)
Monopoly(1 supplier)
Monopolistic competition(different products , high adv. cost, no barriers)
Oligopol(difficult to enter, influence over price)
Outline FoP
Labour-wages
Land-rent
Capital-interest
Entrepreneurship-profit
Through policies gov can_____(4)
Increase economy
Keep prices stable
Get ppl to work
Manage trade with other countries
What are key factors of business activity in economy ?
AD -total demand for national output (High demand>more output>growth)
Consumer confidence- how optimistic about economy and fin state(high confidence>more $pent)
Capital- more available=business expansion(up AD>investments)
Gov policy-adjusting fiscal (spending &tax, rise in tax>lower confidence)
Ex. Rate movement (currency-import/export)
Use of resources (new tech., high education improve)
Outline trade cycles
Fall in demand starts recession >unemployment >lower household income > lower demand > low confidence no invest > slump»_space; confidence restoration > war, new invention > income up > more spending > expansion > boom
Key economic issues
•stagnation & growth - problems- gap rich/poor, rise demand for imported goods, if demand rise too fast= prices also(inflation)
•inflation -problems-less spending> no growth or investments confidence low
•Unemployment- if high loss of income tax and vat, may benefit firms
•balance of payments (all trans. With foreigns) 1current acc.(import export) 2capital acc.(assets & loans) 3 Fin. Acc.(cash flow)
What are economic policy options ?
- Fiscal (gov tax and spending)
- Monetary policy
Outline fiscal options
-balanced budget (income from tax match expense)
-Budget deficit: gov borrows to fund deficit, inject more than take to boost AD ( insufficient to lead employment)
-budget surplus (income>spending): AD is reduced ( inflationary gap)
Monetary policy options
Expansionary- increase money to help invest./unemployment
Contractionary- less $ in economy to reduce demand/inflation
How money supply in economy can be regulated ? (4)
-interest rates (high reduces invest/AD)
-reserve req.(banks have less to lend)
-open market operations (bonds)
-quantitative easing (digital $ gov. Releases)
What are economic theories? (3)
Classical -gov does nothing, economy adjust itself
Keynesian- EQ= full employment, borrow/inject $ into economy to stimulate growth or increase taxes to slow down
Monetarist(supply side) - EQ is where supply=demand & market imperfections (inflation, price fixing) prevent it. easy access to prod. Factors to grow, (cheap materials, labour training)
Types of unemployment and how to counter it
Cyclical, frictional (short term), structural (economy change), seasonal, real wage (unions)
Gov funding, tax breaks, retrain, loans, reduce union powers.
Types of inflation and how to counter
Demand-pull - reduce AD, cut spending
Cost-push - when cost of FoP rise so do prices
Imported - weak currency>cost of import raise
Monetary - (money will boost demand eventually) - IR up to slow
Expectation effect - measures to protect
How to avoid deficit in BOP ?
Exp.-reducing - shrink economy with budget surplus
exp.-switching -increase export, control import through tariffs, devaluation
