Basic Economics

Question 1

Macroeconomics

Answer 1

Field of economics that studies movement and trends in the economy as a whole.

Examines changes in unemployment, GDP, and inflation.

Question 2

Microeconomics

Answer 2

analyzes the market behavior of individual consumers and firms in an attempt to understand their decision-making process.

Focuses on patterns of:

• supply and demand
• price and output

Question 3

Law of supply

Answer 3

A fundamental law of microeconomics that states, all other factors being equal, as the price of a good or service increases, suppliers will increase the quantity of that good or service.

(As the price of an item goes up, suppliers will attempt to maximize their profits by increasing the quantity offered for sale).

Example: when college students learn a certain profession pays more, the supply of students studying that profession will increase.

Example: when consumers start paying more for cupcakes than donuts, bakeries will increase their cupcake output to increase profits.

Example: when your employer pays time and a half for overtime, the number of hours you are willing to supply for work increases.

Question 4

Law of demand

Answer 4

Fundamental microeconomic principle about how price affects demand.

States that, for all other things remaining constant, the lower the price of a good or a service, the higher the demand will be. Conversely, the higher the price, the lower the demand.

Example: when shirts go on sale, you might buy 3 instead of 1. The quantity you demand increases because the price has fallen.

Example: when plane tickets become more expensive, you’re less likely to travel by air and more likely to choose a less expensive option. The amount of plane tickets you demand decreases to zero because the cost has gone up.

Question 5

Durables

Answer 5

a.k.a. “durable goods”

A category of consumer goods, durables are products that do not have to be purchased frequently. (things you buy to last).

• household appliances (machinery, sports equipment, consumer electronics) that are not consumed or destroyed in use and can be used for a period of time (usually 3 yrs or more).

Question 6

Consumer goods

Answer 6

a.k.a. “final goods”

Products that are purchased for consumption by the average consumer. They are the end result of production and manufacturing and are what the consumer will see on the shelf.

Clothing, food, cars, and jewelry are all consumer goods.

Basic materials like copper are not consumer goods because they must be transformed into usable goods.

Question 7

PMI

Answer 7

Purchasing Managers’ Index

An indicator of the economic health of the manufacturing sector.

Based on 5 major indicators:

• new orders
• inventory levels
• production
• supplier deliveries
• employment environment
• A PMI of more than 50 means expansion in the manufacturing sector (compared w/ the previous month).
• less than 50 means a contraction
• exactly 50 means no change

Question 8

Malthusian

Answer 8

Ideas of Thomas Malthus, the 18th century British economist.

At the time, people said we would one day evolve into a utopia.

Malthus said there would always be a starving lower class, as long as population multiplied faster than the means of subsistence.

Question 9

Capitalism

Answer 9

A system of economics based on:

• the private ownership of capital
• production inputs (land, labor, entrepreneurship)
• the production of goods and services for profit.

Question 10

Capitalism is generally characterized by…………………?

Answer 10

Competition between producers.

Question 11

In capitalism, the production of goods and services is based on…………………?

Answer 11

Supply and demand in the general market (market economy) rather than through central planning (planned economy).

Question 12

When did capitalism rise to prominence?

Answer 12

It came to prominence with the end of the feudal economies.

(It is the dominant economic system in developed countries).

Question 13

What are two cornerstones of capitalism?

Answer 13

• Property rights

- wage labor

Question 14

What are the two biggest criticisms of capitalism?

Answer 14

• it focuses on profit (which can lead to social inequality)

- the constant need for consumption to sustain economic growth.

Question 15

Capital

Answer 15

Wealth.

Question 16

Zero-sum game

Answer 16

A situation in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero.

Ex: we each have a penny. If you win, you get my penny and if I win I get your penny.

This is the opposite of a win-win situation - such as a trade agreement that benefits both nations, or a lose-lose situation, like war.

Question 17

What are macro and microeconomics?

Answer 17

The two vantage points from which the economy is observed.

Macro - from a distance, seeing the economy as a whole (the larger picture)
Micro - from close-up, seeing all the small parts that make up the economy

As economists gain understanding of certain phenomena they can help nations and people make more informed decisions when allocating resources.

Question 18

Market economy

Answer 18

• Economic system on which economic decisions and pricing of goods and services are guided by the collective interactions of a country’s citizens and businesses.
• there is little govt intervention or central planning.
• market economies operate on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation’s well-being.

Question 19

Planned economy

Answer 19

a.k.a. “Command Economy”

(A key feature of any communist society - China, Cuba, North Korea, and the former Soviet Union all had one)

• govt controls the economy and acts as the central planner.
• a system where the govt, rather than the free market, determines what goods should be produced, how much should be produced, and the price they should be sold for.
• they don’t work efficiently to allocate goods because of the central planner’s inability to discern how much of a good should be produced (shortages and surpluses are common problems).
• there are thousands of variables and things impossible to predict (weather) and if a planner sets incorrect quotas they can have stores of surplus food that go bad or massive shortages.

Question 20

What is the opposite of a surplus?

Answer 20

A shortage

Question 21

What are the signs that we are in a recession?

Answer 21

• businesses cease to expand
• GDP diminishes for two consecutive quarters
• unemployment rate rises
• housing prices decline

Question 22

What causes recessions?

Answer 22

Inflation is the biggest contributor to recessions (the higher the rate of inflation, the smaller the percentage of goods and services that can be bought with the same amount of money)

• as people and companies cut expenditures, this causes GDP to decline. Unemployment rises because companies lay off workers to cut costs.
• all this contributes to recessions.

Question 23

Stagflation

Answer 23

A condition of slow economic growth and high unemployment - a time of stagnation - accompanied by inflation.

It occurs when the economy isn’t growing but prices are (which is very bad for an economy).

Question 24

What are two generally accepted theories about the cause of inflation?

Answer 24

Demand-pull inflation

Cost-push inflation

Question 25

Demand-pull inflation

Answer 25

A Keynesian economics theory about the cause of inflation.

Can be summarized as “too much money chasing too few goods.”

It happens when there is an imbalance in supply and demand. If supply cannot meet demand, prices will inevitably rise.

This can happen because of:

• an glut of currency in the economy
• a constraint on a particular supply
• an expectation of a decrease in purchasing power (people will buy things pre-emptively)

Question 26

Cost-push inflation

Answer 26

When companies costs go up they need to increase prices to maintain their profit margins.

Increased costs can come from:

• wages
• taxes
• increased cost of imports

Question 27

Economies of scale

Answer 27

• The idea that production becomes more efficient as the number of goods being produced increases.

In most cases, companies that achieve economies of scale lower the average cost of their products by increasing production (because fixed costs that are needed to produce the product are spread out over a larger number of goods)

In economies of scale the cost of each product can depend on the size of the industry (where industry dictates the cost) or on the size of the individual company (where it will depend on how much of the product the company can produce).