American Market Economy I

Question 1

Efficiency

Answer 1

Efficiency signifies a level of performance that describes using the least amount of input to achieve the highest amount of output. Efficiency refers to the use of all inputs in producing any given output, including personal time and energy. It is a measurable concept that can be determined using the ratio of useful output to total input (O/I). It minimizes the waste of resources such as physical materials, energy, and time while accomplishing the desired output.

Question 2

Shift Factors of Demand

Answer 2

Forces other than price that affect how much of a good is demanded. A few important shift factors that can cause the demand curve to move and the prices you pay to change are: Disposable income, tastes, prices of other goods, expectations, etc.

Question 3

Shift Factors of Supply

Answer 3

Forces other than price that affect how much of a good is supplied. A few important shift factors that can cause the supply curve to move and the prices you pay to change are: Changes in the price of raw materials or inputs, changes in technology, changes in supplier’s expectations, and changes in taxes and subsidies.

Question 4

Elasticity

Answer 4

Elasticity is a measure of a variable’s sensitivity to a change in another variable. In business and economics, elasticity refers the degree to which individuals, consumers, or producers change their demand or the amount supplied in response to price or income changes. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service’s price.

Question 5

Elasticity - General Equation

Answer 5

[ % change in y ] / [ % change in x ] = Elasticity

Question 6

Price Elasticity of Demand

Answer 6

Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price when nothing but the price changes. More precisely, elasticity gives the percentage change in quantity demanded in response to a one percent change in price. The terms elastic and inelastic are used to describe this. Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED.

Question 7

Price Elasticity of Demand - Equation

Answer 7

[ % change in quantity demanded ] / [ % change in price ] = Price Elasticity of Demand

Question 8

Price Elasticity of Demand - Elastic Demand

Answer 8

Elastic demand is when consumers buy significantly more or less of a product when its price changes. It has a value greater than one indicating demand for the good or service is affected by the price. Compare with ‘Inelastic Demand’.

Question 9

Price Elasticity of Demand - Inelastic Demand

Answer 9

Inelastic demand means that an increase or decrease in price will not significantly affect demand for the product. It has a value less than one indicating that the demand is insensitive to price. Compare with ‘Elastic Demand’.

Question 10

Price Elasticity of Demand - Determinants

Answer 10

Determinants of price elasticity of demand include: (1) Availability of substitutes: If substitutes are plentiful, then demand should be elastic. (2) Relative percentage of expenditure: If an item takes up a considerable proportion of a consumer’s income, then demand should be elastic; if it takes up a very small amount, then demand should be expected to be inelastic. (3) Amount of time: Consumers can make more adjustments to prices changes over time and, therefore, demand tends to be more elastic as time passes. (4) Necessities or luxuries: Demand for necessities will tend to be inelastic, while demand for luxuries will tend to be elastic.

Question 11

Income Elasticity of Demand

Answer 11

Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain good to a change in real income of consumers who buy this good, keeping all other things constant. The formula for calculating income elasticity of demand is the percent change in quantity demanded divided by the percent change in income. With income elasticity of demand, you can tell if a particular good represents a necessity or a luxury.

Question 12

Income Elasticity of Demand - Equation

Answer 12

[ % change in quantity demanded ] / [ % change in income ] = Income Elasticity of Demand

When the average real income of its customers falls from $50,000 to $40,000, the demand for its cars plummets from 10,000 to 5,000 units sold, all other things unchanged. 50% / 20% = 2.5

Question 13

Income Elasticity of Demand - Normal Good and Necessity Goods

Answer 13

A normal good is one whose demand increases as people’s incomes or the economy rise. A normal good is defined as having an income elasticity of demand coefficient that is positive. Normal goods whose income elasticity of demand is between zero and one are typically referred to as ‘necessity goods’. Compare with ‘inferior goods’.

Question 14

Income Elasticity of Demand - Inferior Good

Answer 14

An inferior good is a type of good for which demand declines as the level of income or real GDP in the economy increases. This occurs when a good has more costly substitutes that see an increase in demand as the society’s economy improves. An inferior good is the opposite of a normal good, which experiences an increase in demand along with increases in the income level. Thus, it has an income elasticity of demand coefficient that is negative. Inferior goods can be viewed as anything a consumer would demand less of if they had a higher level of real income.

Question 15

Cross Price Elasticity of Demand

Answer 15

Cross price elasticity of demand is an economic concept that measures the responsiveness in the quantity demanded of one good when the price for another good changes. Also called cross elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in price of the other good.

Question 16

Cross Price Elasticity of Demand - Equation

Answer 16

[ % change in quantity demanded of good A ] / [ % change in price of good B ] = Cross Price Elasticity of Demand

Question 17

Cross Price Elasticity of Demand - Substitute Good

Answer 17

The cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases. For example, if the price of coffee increases, the quantity demanded for tea (a substitute beverage) increases as consumers switch to a less expensive yet substitutable alternative. This is reflected in the cross elasticity of demand formula, as both the numerator (percentage change in the demand of tea) and denominator (the price of coffee) show positive increases. Compare with ‘Complimentary Good’.

Question 18

Cross Price Elasticity of Demand - Complementary Good

Answer 18

A complement refers to a complementary good or service that is used in conjunction with another good or service. Usually, the complementary good has little to no value when consumed alone, but when combined with another good or service, it adds to the overall value of the offering. A product can be considered a complement when it shares a beneficial relationship with another product offering. Compare with ‘Substitution Good’.

Question 19

Wage Elasticity of Labor Supply

Answer 19

Elasticity of labor supply measures the extent to which labor supply responds to a change in the wage rate in a given time period. For example, WELS for teenagers is generally fairly elastic. That is, a certain percentage change in wages will lead to a larger percentage change in the quantity of hours worked. Whereas, the WELS for adult workers in their thirties and forties is fairly inelastic. When wages move up or down by a certain percentage amount, the quantity of hours that adults in their prime earning years are willing to supply changes but by a lesser percentage amount.

[ % change in quantity of labor supplied ] / [ % change in wage ] = Elasticity of Labor Supply

Question 20

Wage Elasticity of Labor Supply - Equation

Answer 20

[ % change in quantity of labor supplied ] / [ % change in wage ] = Elasticity of Labor Supply

Question 21

Wage Elasticity of Labor Supply - Factors

Answer 21

• Nature of skills and qualifications required to work in an industry. - Specific skills and educational requirements make supply inelastic. - Lengthy and costly training periods makes labour supply inelastic. - When the minimum skill factor needed is relatively low, then the pool of available labour will be large, making labour supply elastic. - Vocational nature of work - in vocational jobs such as nursing, people are less sensitive to changes in wages when deciding whether to work and how many hours to work.
  Time period: In the short run, the supply curve for labour to a particular occupation tends to be relatively inelastic. - It takes time for people to respond to changes in relative wages and earnings – especially if people need to be re-trained to enter a new occupation. - When labour is geographically and occupationally mobile, then labour supply will tend to be relatively elastic even in the short term.

Question 22

Elasticity of Savings

Answer 22

In markets for financial capital, the elasticity of savings—the percentage change in the quantity of savings divided by the percentage change in interest rates—determines the shape of the supply curve for financial capital. Sometimes laws are proposed that seek to increase the quantity of savings by offering tax breaks so that the return on savings is higher. Such a policy will increase the quantity if the supply curve for financial capital is elastic, because then a given percentage increase in the return to savings will cause a higher percentage increase in the quantity of savings. However, if the supply curve for financial capital is highly inelastic, then a percentage increase in the return to savings will cause only a small increase in the quantity of savings. The evidence on the supply curve of financial capital is controversial but, at least in the short run, the elasticity of savings with respect to the interest rate appears fairly inelastic.

[ % change in interest rate ] / [ % change in quantity of financial saving ] = Elasticity of Savings

Question 23

Elasticity of Savings - Equation

Answer 23

[ % change in interest rate ] / [ % change in quantity of financial saving ] = Elasticity of Savings

Question 24

Substation Effect Vs. Income Effect

Answer 24

The substitution effect is the economic understanding that as prices rise — or income decreases — consumers will replace more expensive items with less costly alternatives, or vice-versa. Although beneficial to some companies like discount retailers, the substitution effect is generally very negative within an economy, as it limits consumer and producer choice. Compare with ‘Income Effect’.

Question 25

Substation Effect Vs. Income Effect

Answer 25

The income effect is the change in demand for a good or service caused by a change in a consumer’s purchasing power resulting from a change in real income. This change can be the result of a rise in wages etc., or because existing income is freed up (or soaked up) by a decrease (or increase) in the price of a good that money is being spent on. Compare with ‘Substitution Effect’.

Question 26

Substation Effect Vs. Income Effect

Answer 26

The main difference between the income effect and substitution effect is that income effect deals with levels of consumption as income changes while the substitution effect describes the how consumption changes in terms of which goods are purchased as a result of income change. In other words, when a person has an increase in income, they choose to generally consume more, this is the income effect in action. While their choice to purchase more expensive goods rather than cheaper goods is due to the substitution effect.

Question 27

Economics - Property Rights

Answer 27

Property rights refer to the theoretical and legal ownership of specific property by individuals and the ability to determine how such property is used. In many countries, including the United States, individuals generally exercise private property rights – the rights of private persons to accumulate, hold, delegate, rent, or sell their property. In economics, property rights form the basis for all market exchange, and the allocation of property rights in a society affects the efficiency of resource use.

Question 28

Property Rights - Real Property

Answer 28

Real property (or sometimes referred to as real estate) is land and any property attached directly to it. It is any subset of land that has been improved through legal human actions. In land law, where the term is most commonly used, real property also entails the right of use, control and disposition of the land and its attached objects. Real properties can include buildings, ponds, canals, roads, and machinery, among other things.

Question 29

Married Women’s Property Acts

Answer 29

An example of major change regarding property rights came as a result of the Married Women’s Property Acts that began in 1839. Under English common law, married women only had rights to property through their husband. They could not purchase property of their own, receive a salary, enter into contracts, or write a will. Over the years, American courts changed their view of women’s property rights until the rights of both men and women to own property were recognized.

Question 30

Property Rights - Intangible Property

Answer 30

Intangible property is defined as property that can’t be touched or doesn’t have a physical substance, which includes patents, copyrights, and trademarks. All of these are very important sources of revenue for businesses and other organizations.

Question 31

Perfectly Competitive Market

Answer 31

A purely competitive (price taker) market exists when the following conditions occur: - Low entry and exit barriers: There are no restraints on firms entering or exiting the market - Homogeneity of products: Buyers can purchase the good from any seller and receive the same good. - Perfect knowledge about product quality, price, and cost. - No single buyer or seller is large enough to influence the market price.

Question 32

Monopolistic Competitive Markets

Answer 32

Monopolistically competitive markets have the following characteristics: - There are many producers and many consumers in the market, and no business has total control over the market price. - Consumers perceive that there are non-price differences among the competitors’ products. - There are few barriers to entry and exit. - Producers have a degree of control over price.

Question 33

Oligopoly

Answer 33

Oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. The concentration ratio measures the market share of the largest firms. A monopoly is one firm, duopoly is two firms, and oligopoly is two or more firms. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others.

Question 34

Monopoly

Answer 34

A monopoly refers to a sector or industry dominated by one corporation, firm, or entity. Monopolies can be considered an extreme result of free-market capitalism in that absent any restriction or restraints, a single company or group becomes large enough to own all or nearly all of the market (goods, supplies, commodities, infrastructure, and assets) for a particular type of product or service. Antitrust laws and regulations are put in place to discourage monopolistic operations – protecting consumers, prohibiting practices that restrain trade and ensuring a marketplace remains open and competitive. “Monopoly” can also be used to mean the entity that has total or near-total control of a market.

Question 35

Economics - Capital

Answer 35

Capital is a term for financial assets or their financial value (such as funds held in deposit accounts), as well as the tangible factors of production including equipment used in environments, such as factories and other manufacturing facilities. Additionally, capital includes facilities, such as the buildings used for the production and storage of the manufactured goods. Materials used and consumed as part of the manufacturing process do not qualify.

Question 36

Debt

Answer 36

Debt is an amount of money borrowed by one party from another. Debt is used by many corporations and individuals as a method of making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.

Question 37

Collateral

Answer 37

Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. Since collateral offers some security to the lender should the borrower fail to pay back the loan, loans that are secured by collateral typically have lower interest rates than unsecured loans. A lender’s claim to a borrower’s collateral is called a lien.

Question 38

Lien

Answer 38

A right to keep possession of property belonging to another person until a debt owed by that person is discharged.

Question 39

Economics - Bond

Answer 39

A bond is a form of loan or IOU: the ‘holder’ of the bond is the lender (creditor), the ‘issuer’ of the bond is the borrower (debtor), and the ‘coupon’ is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Bonds are used by companies, municipalities, states, and sovereign governments to raise money and finance a variety of projects and activities.

Question 40

Equity

Answer 40

Equity can have somewhat different meanings, depending on the context and the asset type. In finance, you can think of equity as one’s degree ownership in any asset after subtracting all debts associated with that asset. For example, a car or house with no outstanding debt is entirely the owner’s equity because he or she can readily sell the item for cash and pocket the resulting sum. Stocks are equity because they represent ownership in a firm, even though ownership of shares in a public company rarely come with accompanying liabilities.