BEC Deck 2-Economic Concepts

Question 1

Many economic concepts & relationships are depicted using graphs. These graphs often show the relationship between two variables:

Answer 1

An independent variable (usually shown on the horizontal “X” axis), an dependent variable (usually shown on the vertical “Y” axis).

Question 2

Ceteris Paribus:

Answer 2

Any influence that other variables (other than the one in the graph) may have on the dependent variable is assumed to be held constant.

Question 3

U=y + q(x)

Answer 3

U=unknown value of the variable Y being determined and/or plotted
Y=the value of the plotted line where it crosses the Y-axis; called the “intercept”. This is commonly the value of Y where X=0
Q=the value by which the value of Y changes as each unit of the X variable changes
X=the value of the variable X

Question 4

Y=mx+B

Answer 4

Y=unknown value of Y
m=slope of the plotted line
x=the value of the variable X
b=the Y-intercept

Question 5

Command Economic System-

Answer 5

A system in which the government largely determines the production, distribution and consumption of goods and services. Communism & socialism are prime examples.

Question 6

Market (free-enterprise) economic system-

Answer 6

A system in which individuals, businesses & other distinct entities determine production, distribution & consumption in an open (free) market. Capitalism is the prime example.

Question 7

A price ceiling is a government-mandated maximum price that can be charged for a good or service. Rent controls, for example, establish the maximum price that can be charged for rent.

Answer 7

Price ceilings result in a lower price than would otherwise occur in a free market and cause the quantity of a commodity supplied to be less than would be demanded at a free market price. Thus, a shortage exists as the difference between quantity supplied at the price ceiling and the greater quantity demanded at that price.

Question 8

A price floor is a government-mandated minimum price for a good or service. The minimum wage law, for example, establishes the minimum wage that can be paid to employees.

Answer 8

Price floors result in a higher price than would otherwise occur in a free market and cause the quantity of a commodity supplied to be greater than would be demanded at a free market price.
Thus, a surplus exists as the difference between quantity supplied at the price floor and the lesser quantity demanded at that price.

Question 9

Elasticity-

Answer 9

Measures the % change in a market factor (e.g. demand) seen as a result of a given % change in another market factor (e.g. price)

Question 10

Elasticity of Demand-measures the % change in quantity of a commodity demanded as a result of a given % change in the price of the commodity.

Answer 10

Formulas:
ED=% change in quantity demanded/ % change in price
Expanded Formula:
ED=(change in quantity demanded/prechange quantity demanded)/(change in price/prechange price)

Question 11

Perfect competition exists in industries or markets characterized by:

Answer 11

1)A large # of independent buyers & sellers, each of which is too small to separately affect the price of a commodity
2)All firms sell homogeneous products or services.
3)Firms can enter or leave the market easily.
4)Resources are completely mobile.
5)Buyers & sellers have perfect information.
6)Government does not set prices.
A market meeting all of these criteria is virtually impossible to identify.

Question 12

Perfect monopoly exists in industries or markets characterized by:

Answer 12

1) A single seller.
2) A commodity for which there are no close substitutes.
3) Restricted entry into the market.

Question 13

A monopoly may as a result of:

Answer 13

1) Control of raw material inputs or processes. (patent)
2) Government action (govnt granted franchise)
3) Increasing return to scale (public utilities)

Question 14

Monopolistic competition exists in industries or markets characterized by:

Answer 14

1)A large number of sellers.
2)Firms sell a differentiated product or service (similar but not perceived as identical), for which there are close substitutes.
3)Firms can easily enter or leave the market.
Thus it has elements of both perfect competition & perfect monopoly.

Question 15

Oligopoly exists in industries or markets characterized by:

Answer 15

1) A few sellers
2) Firms sell either a homogeneous product (standard oligopoly) or a differentiated product (differentiated oligopoly).
3) Restricted entry into the market.

Question 16

Nominal Gross Domestic Product (Nominal GDP)-

Answer 16

Measures the total output of final goods & services produced for exchange in the domestic market during a period.

Question 17

Real Gross Domestic Product (Real GDP)-

Answer 17

Measures the total output of final goods & services produced for exchange in the domestic market during a period at a constant price.

Question 18

Gross Domestic Product (GDP Deflator)-

Answer 18

Real GDP=(Nominal GDP/GDP Deflator) x 100

Question 19

Potential Gross Domestic Product (Potential GDP)-

Answer 19

Measures the maximum final output that can occur in the domestic economy at a point in time without creating upward pressure on the general level of prices in an economy.

Question 20

Frictional Unemployment-

Answer 20

Members of the labor force who are not employed because they are in transition or have imperfect information.

Question 21

Structural Unemployment-

Answer 21

Members of the labor force who are not employed because their prior types of jobs have been greatly reduced or eliminated and/or because they lack the skills needed for available jobs.

Question 22

Seasonal Unemployment-

Answer 22

Members of the labor force who are not employed because their work opportunity regularly and predictably varies by the season of the year.

Question 23

Cyclical Unemployment-

Answer 23

Members of the labor force who are not employed because a downturn in the business cycle has reduced the current need for workers.

Question 24

Components of Business Cycle:

Answer 24

Peak-Marks the end of rising aggregate output & the beginning of a decline in output.
Trough-Marks the end of a decline in aggregate output & the beginning of an increase in output.
Economic Expansion (expansionary period)-Periods during which aggregate output is increasing.
Economic contraction (recessionary period)-Periods during which aggregate output is decreasing.

Question 25

The Federal Reserve System provides 3 definitions of money for the US economy:

Answer 25

M1-Includes paper & coin currency held outside banks & check-writing deposits.
M2-Includes M1 items plus savings deposits, money-market deposit accounts, CD’s(less than 100,000), individual-owned money-market mutual funds, & certain other deposits. This measure of money is the primary focus of Fed actions to influence the economy.
M3-Includes M2 items plus CD’s(greater than 100,000), institutional owned money-market mutual funds & certain other deposits.

Question 26

The World Bank:

Answer 26

With the objective of promoting general economic development, including lending to developing countries, primarily for infrastructure, agriculture, education & similar development needs.

Question 27

The International Monetary Fund (IMF)-

Answer 27

Objective of maintaining order in the international monetary system, largely by providing funds to economies in financial crisis, including:
1)Currency Crisis 2)Banking Crisis 3)Financial Debt Crisis