Economics Flashcards
Economics
The study of the ways societies allocate resources to individuals and groups.
(including the choices to fund certain initiatives)
Since resources in any society are finite, allocation of resources is a reflection of what that society values.
Economic Systems are based on…
- what goods are produced
- how those goods are produced
- who acquires or benefits from the goods
2 Categories of Economics
Macroeconomics: larger systems
Microeconomics: smaller systems
Market Economy
Economy where supply and demand are determined by consumers
Planned Economy
A planning authority (possibly a public entity) makes decisions about resources will be produced, how they are produced, and how people benefit from them.
Market Socialism
In between Market and Planned Economies. A planning authority determines the allocation of resources at a higher level, while consumer goods are driven by a market economy.
Demand
What customers want and need, and how much they are willing and able to purchase
Supply
How much of a good suppliers are willing and able to sell.
Market Equilibrium Price
Where the interests of the consumers meet the interest of the suppliers. The price people are willing to buy at, and sellers are willing to sell at.
Dependent on the overall economy, beliefs and considerations of individuals, and other factors.
Elasticity
How quickly the quantity of a product responds to change in the price demanded for the product. If it changes quickly it is said to be very elastic.
Market Efficiency
When a market can produce enough output of goods to meet consumer demands, it is said to be efficient.
Comparative Advantage
When a country can produce a product more efficiently and cheaply - or at a lower opportunity cost - than other countries, it has a comparative advantage in production of that product.
Microeconomics
Focuses on economic factors such has how consumers behave, how income is distributed, and output and input markets.
Focused on the industry or firm level, rather than a whole society.
Studies factors of production, costs of production, and factor income. These factors determine production decisions for individual firms.
Market Classification
Markets are classified by assessing these conditions:
- existence of competition
- number and size of suppliers
- influence of suppliers on price
- variety of available products
- ease of entering the market
Market Failure
5 Types:
- competition is inadequate
- information is inadequate
- resources are not mobile
- negative externalities (side effects that affect 3rd parties)
- failure to provide public goods
Factors of production
Resources needed to produce a good or service
- labor
- land
- capital
- entrepreneurship
Can be fixed (land, equipment) or variable (labor), producing fixed or variable costs (costs of production).
Factor Income
Factors of Production have an associated factor income. Factors that earn income include:
- Labor: earns wages
- Capital: earns interest
- Land: earns rent
-Entrepreneurs: earn profit
Each factors income is determined by its contribution - in a market economy this is not guaranteed to be equal.
Output Market
4 kinds of market structures in an output market: perfect competition, monopoly, monopolistic competition, oligopoly
Perfect Competition
All firms sell an identical product
No one controls the final price
Nothing makes it difficult to enter or leave the industry (called a barrier to entry)
Example: agriculture
Monopoly
One seller controls the product and its price.
High barriers to entry - like high fixed cost structures.
Monopolistic Competition
Many firms sell similar but not identical products (different brands of food or clothing)
Low barriers to entry
Oligopoly
A few firms control the production and distribution of products. Barriers to entry are high, preventing most firms from entering the market.
Example: automobile
4 types of monopolies
natural monopoly, geographic monopoly, technological monopoly, government monopoly
Natural Monopoly
A single supplier has a strong advantage over others
Geographic Monopoly
Only one business offers a product in a certain area
Technological Monopoly
One company controls the technology necessary to supply a product
Government Monopoly
A government agency is the only provider of a good or service
Sherman Anti - Trust Act
- Prohibited trusts, monopolies, and any other situations that eliminated competition.
Clayton Anti-Trust Act
- Prohibited price discrimination.
Robinson-Patman Act
- Strengthened provisions of the Clayton Anti-Trust Act.
Securities and Exchange Commission
Requires companies that provide public stock to provide financial reports on regular basis.
Control by US government
Banks are regulated more than other businesses, and required to provide information to the government.
Marketing
All activity used to convince consumers to acquire goods, convince them of its utility.
Utility
The ability of a product or service to satisfy the need of a consumer.
Four Types: Form, Place, Time, Ownership
Form Utility
A products desirability lies in its physical characteristics.
Place Utility
A product’s desirability is in its location and convenience
Time Utility
A product’s desirability is determined by its availability at a certain time.
Ownership Utility
A product’s desirability is increased because ownership of the product passes to the consumer.
Determining a Product’s Market
- Market Research: to decide if the market will be receptive to the product
- Market Surveys: Part of market research, ask specific questions to help determine the marketability of a product
- Test Marketing: Releasing a product in a small area to see how it sells. Followed by wider marketing if the product does well.
4 Elements of a Marketing Plan
Product, Price, Place, Promotion
Product
Elements that pertain directly to the product - packaging, presentation, services that go with it
Price
Calculates cost of production, distribution, advertising, and desired profit to determine final price
Promotion
Ways to let consumers know the product is available
Place
Where or how the product will be sold
Distribution Channels
Determine the route a product takes from the producer to the consumer. This can influence the price and availability of the product.
2 major forms of distribution: wholesale and retail
Additional channels include club warehouse stores, catalogues, and the internet. Usually newer distribution channels sell directly to the consumer.
Wholesale Distribution
Distributor buys in large quantities and resells smaller amounts to to other businesses.
Retail Distribution
Sell directly to consumers
Income Distribution
To determine income distribution family incomes are ranked lowest to highest, and these rankings are divided into quintiles which are compared to one another.
In most societies income is not distributed evenly. Uneven income distribution can be linked to higher levels of education in the upper classes, discrimination, and existing monopolies.
Income Gap in the US
Income gap is growing due to
- growth in the service
- changes in the US family unit
- reduced influence of labor unions
Poverty
Defined by comparing incomes to poverty guidelines, which determine the level of income necessary for a family to function.
Those below the poverty line are often eligible for assistance from the government
2 Major Types of Consumer Behavior
Marginal Propensity to Consume
Utility
Marginal Propensity to Consume
The tendency of consumers to increase their spending when their income increases.
Utility
The satisfaction experienced by a consumer when they acquire and use a good or service. Providers of goods/services will stress utility to convince consumers they want a product.
Macroeconomics
Studies economics on a national level
Variables studied:
Output, Consumption, Investment, Government Spending, Net Exports
GDP (definition)
Gross Domestic Product, measures a nation’s economic output over a time period (such as a year)
Expenditures Approach to Measure GDP
based on how much money is spent in each individual sector (same results as Expenditures Approach)
Income Approach to Measure GDP
Based on how much money is earned in each sector (same results as Income Approach).
Income Factors to calculate:
- Compensation of employees
- Rent from the land
- Interest on invested capital
- Entrepreneurial income
indirect business taxes (including property and sales taxes) and depreciation, are subtracted.
4 Economic Sectors in Macro Economy
Consumers, Business, Government, Foreign Sector.
Entrepreneurial Income
2 Forms: Proprietor’s Income and Corporate Profit.
Proprietor’s Income comes back to the entrepreneur itself
Corporate Profit is divided into corporate profits, taxes, dividends, and retained earnings.
Population and GDP
If population grows more quickly than GDP, individual income or income per individual will diminish.
Population growth can also lead to economic growth because economic growth requires consumers to purchase goods and workers to produce them.
Ideal Balanced Economy
aggregate supply is equal to aggregate to demand
national output = the amount of output that is purchased
During times of inflation or rising unemployment, government intervention is necessary to stabilize an economy so supply and demand are balanced.
Phases of Economies
Boom - High GDP
Recession - GDP falls, unemployment rises
Trough - Lowest point of recession
Recovery - Unemployment lowers, prices rise, economy begins to stabilize
Inflation
Occurs when the economy is growing too quickly. Too much spending and demand outstrips supply - so prices are driven artificially high.
Unemployment
Too little spending and supply is far beyond demand, creating a surplus of product. Companies cut back on production and reduce the number of workers they employ.
5 Forms of Unemployment
Frictional, Structural, Cyclical, Seasonal, Technological
Frictional Unemployment
Workers change jobs and are unemployed between jobs
Structural Unemployment
Economic shifts reduce the need for workers
Cyclical Unemployment
Natural business cycles bring about a loss of jobs
Seasonal Unemployment
Seasonal cycles reduce the need for certain jobs
Technological Unemployment
When advances in technology result in elimination of certain jobs
Creeping Inflation
Rate of 1 - 3 percent annually
Galloping Inflation
High rate of 100 - 300 percent annually
Hyperinflation
Rate over 500 percent annually. Usually leads to complete monetary collapse in a society. It is impossible for people to buy what they need.
Government Fiscal Policy
Monetary Policy, Contractionary Policies, Expansionary Policies
Contractionary Policies
Counteract inflation by increasing taxes and decreasing government spending, to slow spending
Expansionary Policies
Increase government spending and lower taxes to increase spending and lower unemployment.
Monetary Policy
Can take several forms, affects the amount of funds banks have to make loans.
Population
Populations are studied by size, rate of growth due to immigration, fertility rate, and life expectancy.
US population is larger today, but growing slower. Fertility rate is low and life expectancy is high - projected imbalance between older and younger people in the future. Increase in percentages of Asian, Hispanic, and Black populations.
Money
Ways it is Used: - as an accounting unit - as a store of value - as an exchange medium Money must be accepted throughout a society, should be relatively scarce, retain a stable value, be easily carried and divisible, and durable.
3 Types of Money
Commodity, representative, fiat
Commodity Money
gems or precious metals
Representative Money
Can be exchanged for items which have inherent value, such as gold or silver
Fiat Money
Legal Tender, no inherent valued but has been declared to function as money by the government. Often backed by gold or silver, but not necessarily a 1:1 ratio.
US Money
When economists calculate the amount of money available, take into account currency, deposits in checking accounts, debit cards, and “near moneys” that can be quickly converted into cash, such as savings accounts.
M1 - currency, checkable deposits, and traveler’s checks
M2 - savings deposits, CDs, and other monetary deposits
M1 + M2 = total quantity of available money
The Federal Reserve System
“The Fed” implements all monetary policy.
Can increase or decrease the amount of money available for loans by regulating the amount of money available in the banking system. Can also change the Discount Rate - the interest rate charged by the fed when banks borrow money from them.
Policies can be expansionary or contractionary.
Banks
Banks earn income by loaning out money and charging interest on the loans.
If less money is available to them, they can make fewer loans, which can lower spending in the overall economy.
Not allowed to loan out all of their money - must retain some on reserve (called the reserve ratio)
A higher reserve ration means less money is available for loans, lower reserve ratio means more money can be given away in loans.
Reserve ration is determined by the fed
Open Market Operations
The fed can buy or sell bonds it has purchased from banks or individuals. When the fed buys bonds, this puts more money into circulation to stimulate the economy (expansionary act).
When the fed sells bonds, money is taken out of the economy (a contractionary situation) to slow economic growth if there is inflation.
However US banks can circumvent actions by the fed, by borrowing and lending money in markets outside the US.
International Trade
Allows markets to bring a wider variety of products to the consumers.
Also allows countries to specialize in particular products where they have a comparative advantage and sell this product around the world. And to buy other products that are harder to produce domestically, from around the world.
To participate in intl trade, nations must develop efficient use of native resources, and maintain sufficient income to be able to purchase imported products.
Many countries participate in intl trade, but many others face major economic barriers to participation.
Characteristics of Developing Nations
- Low GDP
- Rapid Population Growth
- Economy centers on subsistence agriculture
- Poor conditions: high infant mortality rates,, disease rates, insufficient housing
- Low literacy rate
Often under oppressive governments, extreme disparities between rich and poor, with little opportunity to improve one’s economic condition.
Difficult to acquire funding to move into other stages of economic development. Some receive help from developed countries or international organizations like the International Monetary Fund or the World Bank.
Stages of Economic Development
- agricultural stage
- manufacturing stage
- service sector stage
Obstacles to Economic Growth
- rapid population growth
- trade restrictions
- misused resources (often perpetrated by nation’s government)
- traditional beliefs that reject change
In general, country are more likely to experience economic growth if their governments encourage entrepreneurship and provide private property rights.
Major Problems with Rapid Industrialization
Often triggered by rapid global economic growth, some countries industrialize too quickly leading to artificially rapid economic growth. Major problems are:
- Use of technology not suited to the goods or services being supplied
- Poor investment of capital
- Lack of time for the population to adapt to changes
- Lack of time to experience all stages of development and adjust to each change
Example: Indonesia
E - Commerce
Many traditional supply channels are bypassed because e - commerce makes it possible to set up a direct market to consumers. Many more people can sell goods, so competition is high. This also increases the variety of products available to consumers.
Many industries are struggling with how best to adapt to the changes caused by e - commerce. How e- commerce will affect the economy long term is yet to be seen.
Knowledge Economy
Growing sector in the economy - includes the trade and development of:
- data
- intellectual property
- technology, esp communications
Knowledge as a resource is becoming more and more important in the “information age,” bringing changes thought to be as significant as the Agricultural and Industrial Revolutions.
Cybernomics
Related to the knowledge economy
Economics driven by e- commerce and other computer - based markets and products.
Marketing has changed drastically with the growth of cyber communication.
- secure online trade
- intellectual property rights
- rights to privacy
- interaction with developing nations
Many of the old ways of doing business no longer work and industries are changing to function in the new system
