Chapter 2 Economics-Evolving Systems

Question 1

The Market Economy – Foundation

Guiding Principles

Answer 1

Profit Maximisation-Greed
Firms and people (labour) seek the highest possible income for themselves.
Competition-Fear
Firms compete for customers and labour competes for jobs. Each is free to select the option that best serves their needs.

Question 2

Types of Market Structures

Answer 2

Suppliers to the market

• Perfect competition_Considerable number of the market
• Monopolistic Competition_Many Firms
• Oligopoly_Few Firms
• Pure Monopoly_One firm

Question 3

Perfect Competition

Answer 3

Attribute
Many firms in the market, each relatively small.
Each firm sells products that are very similar to each other.
All firms have good information about prices, supply sources, etc.
Low barriers to entry / exit.

Implication
No one firm can affect the prices in the market (all are Price-Takers)
A firm cannot set itself apart based on its products (Commodities)
Competitors can quickly match any move that a firm makes.
Competitors can easily enter or exit a market.

Question 4

Monopolistic Competition

Answer 4

Attribute
Many firms in the market, each relatively small
Some firms can differentiate their products to some degree.
Information about prices, supply sources, etc. is not perfect.
Modest barriers to entry / exit.

Implication
No one firm can affect the prices in the market (all are Price-Takers)
Some firms can charge a small premium for their products.
Competitors cannot match every move that a firm makes.
Competitors can enter or exit a market, but setting oneself apart is not easy.

Question 5

Oligopoly

Answer 5

Attribute
A small number of producers dominate the market.
Decisions by one firm affect the other producers.
Firms compete on factors other than price.
High barriers to entry / exit.

Implication
A firm can affect the prices in the market (Price-Setters)
Firms may cooperate (collusion) or compete fiercely.
A firm keeps customers through loyalty programs, brands, etc.
Competitors cannot easily enter or exit a market.

Question 6

Monopoly

Answer 6

Attribute
One producer dominates the market, or is the only producer.
High barriers to entry.
Implication
A firm can set the price in the market (Price-Setters)
Competitors cannot enter the market.

Question 7

Macroeconomics: Main Goals

Answer 7

Economic Growth-Increase the nation’s output of goods and services.
(Material standard of living is closely tied to output per person.)
Full Employment-All people who want to work and can work have jobs.
(There will still be 4% - 6% of people in the workforce who are not working.)
Price Stability-Avoid inflation / keep it in careful check
(Target 1%-3% annual increase in prices.)

Question 8

Types of Unemployment

Answer 8

Frictional
Short-term, not related to the business cycle.
Structural
Mis-match between skills needed for the available jobs and the skills of available workers in a sector / region.
Cyclical
Layoffs due to a recession across the overall economy.
Seasonal
Downturns in certain sectors at certain times of the year (e.g.: retail workers after Christmas).

Question 9

Phase of the Business Cycle&Goals

Answer 9

Boom
Slow down the economy
Recession
Boost the economy
Boom
Slow down the economy
Recession
Boost the economy