Economics

Question 1

Economics

Answer 1

Economics is the study of how individuals and societies choose to allocate scarce resources, why they choose to allocate them that way, and the consequences of those decisions.

Question 2

Scarcity

Answer 2

is sometimes considered the basic problem of economics. Resources are scarce because we live in a world in which humans’ wants are infinite but the land, labor, and capital required to satisfy those wants are limited. This conflict between society’s unlimited wants and our limited resources means choices must be made when deciding how to allocate scarce resources.

Question 3

Factors of production

Answer 3

also called the factors of production; these are the land (natural resources such as minerals and oil), labor (work contributed by humans), capital (tools, equipment, and facilities), and entrepreneurship (the capacity to organize, develop, and manage a business) that individuals and businesses use in the production of goods and services.

Question 4

agent

Answer 4

some entity making a decision; this can be an individual, a household, a business, a city, or even the government of a country.

Question 5

incentives

Answer 5

rewards or punishments associated with a possible action; agents make decisions based on incentives.

Question 6

rational decision making

Answer 6

an agent is “rational” if they use all available information to choose an action that makes them as well off as possible; economic models assume that agents are rational.

Question 7

positive analysis

Answer 7

analytical thinking about objective facts and cause-and-effect relationships that are testable, such as how much of a good will be sold when a price changes.

Question 8

normative analysis

Answer 8

unlike positive analysis, normative analysis is subjective thinking about what we should value or a course of action that should be taken, such as the importance of environmental factors and the approach to managing them.

Question 9

microeconomics

Answer 9

the study of the interactions of buyers and sellers in the markets for particular goods and services

Question 10

macroeconomics

Answer 10

the study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment, inflation, economic growth and interest rates.

Question 11

economic aggregates

Answer 11

measures such as the unemployment rate, rate of inflation, and national output that summarize all markets in an economy, rather than individual markets; economic aggregates are frequently used as measures of the economic performance of an economy.

Question 12

capital

Answer 12

When people use the word capital in everyday conversation, many people are referring to money or “financial capital.” In economics, capital is defined as the already-produced goods (tools, machinery, equipment, and physical infrastructure) that are used in the production of other goods or services. A robot on a car factory floor is defined as capital in economics; money you borrow to start your own business is not. The financial value of assets that raise revenue (the production that works so you don’t have to, you do nothing but own).

Question 13

Production possibility curve

Answer 13

The curve created when I plot out how many berries I can get if I spend all my time and get 5 rabbits (0), how many I can get if I spend the amount of time it takes to get 4 rabbits and use the rest for berries (100). Etc. (also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.

Question 14

Production possibility frontier

Answer 14

Everything on the production possibility curve and down is possible. The frontier is optimal. Beyond the frontier is impossible.

Question 15

(implicit) Opportunity cost

Answer 15

The value of the best (non-monetary) option lost when making a decision. The amount of berries I give up by trying to get one more rabbit. the value of the next best alternative to any decision you make; for example, if Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that.

Question 16

Increasing opportunity cost

Answer 16

If I don’t kill any rabbits, I can pick 300 berries per day. If I kill one rabbit, my opportunity cost is only 20 berries because that first rabbit is slow and close. If I want a second rabbit though, I will have to give up an additional 40 berries. My opportunity costs are increasing because the rabbits lake longer and longer to get. The graph bows out from the origin.

Question 17

Decreasing opportunity cost.

Answer 17

The curve is concave to the origin. I am getting better and better at catching rabbits, so I give up less and less berries for each one.

Question 18

Constant opportunity cost.

Answer 18

Every additional rabbit I catch, I give up the same amount of berries. Straight line on a graph.

Question 19

Efficient

Answer 19

When the production level is right on the production possibility frontier. the full employment of resources in production; efficient combinations of output will always be on the PPC.

Question 20

Growth

Answer 20

When you attain a point that is impossible on the PPC as it stands originally through obtaining more land, capital, labor, better technology, better ways of combining all of the above.

Question 21

Inefficiency

Answer 21

the underemployment of any of the four economic resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are represented using a PPC as points on the interior of the PPC.

Question 22

Contraction

Answer 22

a decrease in output that occurs due to a lack of resources that used to be available, not just an inefficient use of them, but a reduction in everything that made the PPC possible. In a graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and on the interior of, the PPC.

Question 23

Productivity

Answer 23

(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC.

Question 24

Comparative advantage

Answer 24

When your opportunity cost for producing one plate is only 1/3 of a cup compared to your competitor who’s opportunity cost for producing one plate is 3 cups, you have a comparative advantage in plate production. It doesn’t mean you actually produce more plates (absolute advantage), it is just that you have the capacity to give up less cups than your competitor when you do produce plates.

Question 25

Specialization

Answer 25

If you specialize in your area of comparative advantage and focus only on making plates, you can make 30 plates every day, but you won’t be getting any cups. If you wanted one cup, you’d have to give up 3 plates. But your competitor has a comparative advantage in cups. If he specializes only in making cups, he can make 30 per day, but he won’t have any plates. If he wanted just one plate, he’d have to give up 3 cups.

Question 26

Gains of trade

Answer 26

The ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage

If you make 30 plates a day if you don’t spend any time on cups and you trade at a rate of one plate per one cup with someone who can make 30 cups per day if they don’t spend any time on plates, then your combined efforts will be mutually beneficial since normally, without your trade partner, the cup would cost you 3 times more and your plate would cost them three times more. This can boost you to a new PCC in combination with the partner previously unattainable.
For example, because it has an abundance of maple trees, Canada can produce maple syrup at a very low opportunity cost in relation to avocados, a fruit for which its climate is less suited.
Mexico, on the other hand, with its ample sunshine and warm climate. can grow avocados at a much lower opportunity cost in terms of maple syrup given up than Canada.

Question 27

Equilibrium

Answer 27

a state in which all economic forces (such as supply and demand) are totally balanced.
● In the state of equilibrium, benefits would be maximized for both consumers and producers (I am paying exactly what I want to pay for things and I am receiving the prices for my goods that I am asking for).
● In Smith’s theory, there is little room for government involvement in the management of the economy.
● Ex. $3.00 for a cup of coffee at a coffee shop. Smith would characterize this as the invisible hand at work. The coffee is worth more to you, the consumer, than those 3 dollars, and the owner of the shop, the producer, valued your 3 dollars (way) more than the cup of coffee. You’re both getting something out of this deal.

Question 28

Free Market Economy

Answer 28

● Adam Smith advocated for what we today call a free market economy. A free market economy is one in which Individuals can freely pursue their own benefit through being both a consumer and a worker. Smith believed that economic benefits in a society would spread out to everyone. For example, when a consumer purchases something, it helps a producer, who in turn might hire another worker.

Question 29

Absolute advantage

Answer 29

Given the same amount of inputs as a competitor, you are able to produce more of a given product than that competitor. But even if you have an absolute advantage in both plates and cups over a competitor, it is still better for you to specialize in what you have a comparative advantage in (cups) and trade with someone who has a comparative advantage in plates. Both of you will be able to attain the previously unattainable as long as you trade at a rate that is less than both of your opportunity costs.

Question 30

diminishing marginal utility

Answer 30

• Another way to think of marginal benefit is to consider the satisfaction that a consumer gets from each subsequent addition. One ring would make the consumer very happy, while a second ring would still make her happy, just not as much. The lessening of appeal for additional consumption is known as diminishing marginal utility

Question 31

Marginal benefit

Answer 31

I just rented a DVD and I don’t really have time to watch 2, but if the price is below a certain point for the second one, I’ll rent a second one. That point is the marginal benefit)
Marginal benefits are the maximum amount a consumer will pay for an additional good or service.
- The marginal benefit generally decreases as consumption increases
- Marginal benefit usually declines as a consumer decides to consume more and more of a single good.

Question 32

Marginal cost

Answer 32

(grading the last few papers is way faster than the first few)

• The marginal cost of production is the change in cost that comes from making more of something
• The purpose of analyzing marginal cost is to determine at what point an organization can achieve economies of scale
• Producers consider marginal cost which is the small but measurable change in the expense to the business if they produce one additional unit.
• The workers learn how to move from one task to the next quickly, and the factory can produce more shoes per hour. As more footwear is made in the same specified period, the cost of the factory is further distributed over more shoes, and their cost per unit falls. Also, the cost of materials could go down, as well, as more shoes are made and the materials are purchased in bulk, decreasing the marginal cost

Question 33

Economies of Scale

Answer 33

If a company has captured economies of scale, the cost to produce a product declines as the company produces more and more of it. When your factory gets to the point that increasing production does not require a corresponding increase in cost, meaning, assuming you keep your prices the same, your profits begin to increase exponentially since every new item is produced at a cost lower than the previous item. Adam Smith said this will best happen through division of labor so that each worker becomes more and more specialized in what he does, more and more efficient. Producing more but getting paid the same, or even getting paid more, but not so much more as to produce diseconomies of scale.

Question 34

Explicit opportunity cost

Answer 34

Explicit opportunity costs are often the easier of the two to calculate, because these are costs that involve the company spending money. A firm may have a million dollars available but is faced with the opportunity to increase advertising or pay down debt. Both cost a million dollars, but one would probably have greater utility for the firm than the other. If the firm needs to sell more goods, they would likely choose to increase advertising. Thus, the explicit opportunity cost is the amount that they could have spent paying down debt

Question 35

Monetary Incentive

Answer 35

• Both may prove to be effective motivators in some contexts, but the performance-based monetary award tends to encourage compliance rather than creativity and innovation → i.e. employee acts in a way that allows him to receive the monetary award rather than thinking outside of the box → His motivation is to make money and not necessarily to improve the company or gain additional praise from his employer
• Monetary incentives can be diverse while having a similar effect on associates, such as company health insurance programs
• The purpose of monetary incentives is to reward associates for excellent job performance through money, including profit sharing, project bonuses, stock options and warrants, scheduled bonuses, and additional paid vacation time. Traditionally, these have helped maintain a positive motivational environment for associates
• Monetary incentives may be used to circumvent problems in the workplace. For example, incentives to boost sales can be used to compensate for poor management. Employers also may use monetary incentives as an extrinsic rather than an intrinsic motivator. In other words, associates are driven to do things just for the monetary reward versus doing something because it is the right thing to do. This can disrupt or terminate good relationships between associates because they are transformed from co-workers to competitors, which can quickly disrupt the workplace environment

Question 36

Non-Monetary Incentives

Answer 36

• The purpose of non-monetary incentives is to reward associates for excellent job performance through opportunities, including flexible work hours, training and education, pleasant work environment, and sabbaticals
  ● Research suggests that desired monetary incentives differ for associates based on their career stage and generation. Surveys by AARP have shown that most workers will work past retirement age if offered flexible schedules, part-time hours, and temporary employment
  ● A balance between monetary and non-monetary incentives should be used to satisfy the diverse needs and interests of associates

Question 37

The Tragedy of the Commons

Answer 37

● Protecting and promoting Americans’ rights to private property not only can be used to encourage environmentalism, but actually offers several incentives for doing so. The basic philosophy here is that people are more likely to cooperate through incentives than through punishments
● 1968→ Garrett Hardin→ ecologist→ essay ‘The Tragedy of The Commons’, which set up the foundation for modern arguments that private property encourages sustainable ecology.
● Hardin looked at the Commons - property accessible to the community in medieval England - and pointed out that in communal space, every person competes against the others to optimize their share. Basically, since everyone is afraid that they won’t get enough, they all try and get as much as they can out of that land, whether it’s for farming or fishing or hunting or ranching. The result is that the land is plundered, completely used up within a short period of time. This scenario has been repeated several times throughout history. Right now, the idea behind the tragedy of the commons is being applied to marine fishing. When everyone shares international waters, the oceans are plundered, and over-fishing is a serious problem in our world
● Supporters of private property argue that when only one person owns the land, they are not competing for its use, and are naturally encouraged to protect it, to make it more sustainable so their personal use will be ensured forever
● The concern about over-fishing led some people to start experimenting with privately owned marine fisheries, and they found that by granting people and companies exclusive rights to these fish populations, they implemented sustainable policies to ensure the long-term safety of their investment
● A great number of endangered species live on private property. Now, the trend has been for the federal government to take away this land so as to protect the species living there, but for many people this feels like a punishment. After all, those species which had died off everywhere else are surviving on this property because the owner is already treating the land responsibly. Therefore, many people feel as if they are being punished for acting responsibly. By protecting the rights of those who own property that sustains endangered species, and perhaps even rewarding them, the government could incentivize more sustainable land ownership
● If we encourage a culture where private property is upheld as a fundamental, integral right of American citizenship, then it must be respected by everyone. Thus, if I am creating a lot of pollution that seeps into the water, the land, or escapes into the air, I am actually damaging someone else’s private property. Not only am I now infringing upon their rights as property owners, but I can be held legally responsible for that damage. So, rather than risk it, I’ll just reduce my pollution
● Private companies rely on people to buy their products, which actually gives the people a large amount of power. People can choose to buy products that are created in a more sustainable way, which is essentially the basis of the organic food movement. When the public demands something, these companies must provide it in order to stay economically competitive. Why aren’t most homes powered by solar or wind energy? Because it’s too expensive. But if people demanded affordable ways to harness renewable energy, you can bet these private businesses would find solutions. Thus, even renewable resources like wind can become incentivized through private property

Question 38

Adam Smith

Answer 38

● 1750s→ wrote about capitalism, or an economic system in which industry is controlled largely by private companies meant to generate profits
● The Wealth of Nations → Smith argues that the most efficient type of economy is one in which individual producers produce as much as they want and then charge consumers any price they see fit→ rationale for this is the concept of the invisible hand
● Invisible hand→ a mechanism that regulates the economy without intervention; the idea is that this system will work because each person will try to maximize his or her own benefit. Although Smith could not directly observe this, he found examples in society to support this phenomenon. For example, since everyone is self-interested, producers would only sell goods for as much or more than they cost to produce, and consumers would only pay as much as the benefit they feel they would get out of the goods → This is known in contemporary economics as equilibrium→ a state in which all economic forces (such as supply and demand) are totally balanced.
● In the state of equilibrium, benefits would be maximized for both consumers and producers (I am paying exactly what I want to pay for things and I am receiving the prices for my goods that I am asking for).
● In Smith’s theory, there is little room for government involvement in the management of the economy.
● Ex. $3.00 for a cup of coffee at a coffee shop. Smith would characterize this as the invisible hand at work. The coffee is worth more to you, the consumer, than those 3 dollars, and the owner of the shop, the producer, valued your 3 dollars (way) more than the cup of coffee. You’re both getting something out of this deal.
● Adam Smith advocated for what we today call a free market economy. A free market economy is one in which Individuals can freely pursue their own benefit through being both a consumer and a worker. Smith believed that economic benefits in a society would spread out to everyone. For example, when a consumer purchases something, it helps a producer, who in turn might hire another worker.

Question 39

Market Economy

Answer 39

● Market Economy→ A market economy is an economy where most resources are owned and controlled by individuals and are allocated through voluntary market transactions governed by the interaction of supply and demand
- People exchange resources, such as money, for other resources, such as goods or services, on a voluntary basis in the market. The value of the resources exchanged is based upon how scarce each resource is and how many people want the resource. If the supply of a resource is low, but the demand is high, the price will tend to be high. If the demand is low and the supply high, the price will tend to be low
- Government involvement in regulating market transactions in a market economy is limited to pretty much ensuring that the rules of the market are enforced and applied fairly to all participants. Additionally, government involvement in planning or directing economic development and growth is very limited. In practice, there is no such thing as a pure market economy because that would mean there would be no taxes on economic activities or government regulation of economic activities at all
- Market economy has several advantages:
■ Competition leads to efficiency
■ Innovation is encouraged because it provides a competitive edge
■ A large variety of goods and services are available as businesses try to differentiate themselves in the market
■ Freedom of individual choice is possible to the extent that the market provides options for work, developing a business, and purchasing goods and services (so long as you can afford them)
- Market Economy Disadvantages:
■ Disparity in wealth and mobility exists in market economies
■ Environmental damage results with no government regulations because it’s usually more expensive to produce in an environmentally sound manner, which reduces profits
■ Poor working conditions can result due to a lack of government regulations because health and safety cost money, thus reducing profits

Question 40

Command Economy

Answer 40

• A state-controlled economy is referred to as a command economy→ the government and not the free market controls all economic activity
• Ex. communism
• Goods within a command economy are often rationed for, what is promoted as, the good of the people. In other words, the government will decide who gets what and who needs what when. Putting it into concrete terms, a government commanding the production of bread might say it is unfair for one person to be able to buy bread everyday while others only get to buy it once a week. Therefore, they ration the bread out

Question 41

Karl Marx

Answer 41

●	Capitalism= exploitation, or a situation where an individual is not receiving benefits to meet his or her needs 
●	Capitalism provided an advantage to those who are already wealthy because these individuals are able to own the means of production, or the facilities or resources required to produce goods→  Poorer members of society don't have the resources to make a living in this way, so they're forced to sell their labor to the owning class 
●	two classes the bourgeoisie (the wealthy owners) and the proletariat (the working class). In other words, under a capitalist system the bourgeoisie takes advantage of, or exploits, the proletariat 
●	Marx believed that the bourgeoisie would seek to maximize their own interests by keeping the wages of the proletariat as low as possible, furthering poverty. And this proletariat can’t just go out and start their own small means of production because the B have used military might, the state’s monopoly on force, to take all land away. 
●	Marx believed that the solution to the problems of capitalism was a revolution by the proletariat in which they overthrew capitalism, creating a social order that did not allow individual owners to exploit labor. Marx envisioned a society in which the proletariat, or the working class, owned the means of production 
●	Marx meant a society where land and labor are owned by everyone. Wealth would be shared among all of the people and, very important for Marx, the class structure would be completely eliminated 
●	Marx would have said that the barista who sold you the coffee is being exploited because he is forced to sell his labor to the owner of the coffee shop. In Marx's ideal society, that coffee shop would be collectively owned by workers, and profits would be shared equally among everyone. The 3.00 that you spend on the coffee, the exchange value that the owner assigned, is only at the level of equilibrium because of not paying you what your labor is worth, which, by definition is 3.00 minus the cost of the materials. The ability of the owner to make a profit REQUIRES paying you less than your labor is worth. However, if all laborers were part owners in the company, they would get the direct market value of their labor.

Question 42

Substitution effect

Answer 42

One of the Substitutes to the Law of Supply and Demand
(I prefer gray socks, but I buy more brown socks now because the gray ones are too expensive)
replacing one product with a similar, lower-priced option
- Effect that consumers switching to other goods has on demand for a good when that good’s price rises, or conversely the effect that consumers switching away from other goods has on demand when price for a good falls
- Consumers have the tendency to replace or substitute normal economic goods with cheaper alternatives when prices increase. The same consumers tend to substitute low-cost alternatives with higher-priced goods when the good’s price decreases
- substitution effect will be stronger for goods that are closer substitutes, such as grey socks vs brown socks, then between goods that can serve some similar purposes but are less interchangeable, such as volleyballs and golfballs
- The substitution effect works together with the income effect to give the total change in demand for a good when its price changes

Question 43

Income effect

Answer 43

(I buy more brown socks now because I make more money now or because I finally paid off my mortgage or something)
→ in microeconomics, is the change in demand for a good or service caused by a change in a consumer’s purchasing power (not in the actual amount of money they have, but in how many socks that money can buy them. Inflation will make it so you will need more money to buy the same amount of socks) resulting from a change in real income (how much money you make adjusted for inflation). This change can be the result of a rise in wages etc., or because existing income is freed up by a decrease or increase in the price of a good that money is being spent on
● For normal goods, the income effect and the substitution effect both work in the same direction; a decrease in the relative price of the good will result in an increase in quantity demanded both because the good is now cheaper than substitute goods and because the lower price means that consumers have a greater total purchasing power and can increase their overall consumption

Question 44

Debt Financing

Answer 44

One of the 3 ways to raise money for capital. Involves borrowing money either from a bank, or from investors by issuing bonds. Lenders or investors need to believe the business will make adequate profits to pay them back, and lenders may require collateral.

Question 45

Equity Financing

Answer 45

One of the 3 ways to raise money for capital. The lender obtains a share of ownership and claims to a percentage of the business’s future profits. Investors buy stock to become part-owners of corporations.

Question 46

Self Financing

Answer 46

One of the 3 ways to raise money for capital. involves putting profits back into the business rather than distributing them to the owners.

Question 47

shift factors of demand

Answer 47

forces other than price (a decrease in price will increase the quantity demanded all things being equal) that affect how much of a good is demanded. Things that move the demand curve to the right (increase demand): Income increase, population increase, expectations of higher prices in the future, substitutable product prices increasing, complementary product prices decreasing, taste for the product increases.

the mnemonic TONIE can help you remember the changes that can shift demand (T-tastes, O-other goods, N-number of buyers, I-income, E-expectations)

Question 48

Shift factor of taste on demand

Answer 48

Have you ever seen a popular singer, artist, or sports figure endorse a certain product and as a result, the demand for that product increased? It happens all the time with sports drinks, clothing lines, perfumes, and so on. As people’s tastes change and a product becomes more popular, this shifts demand for the product to the right (right is high, left is low?) People are now willing to pay more for that product than before

Question 49

Shift factor of Expectations on demand

Answer 49

Expectations about the future of a product, your job status, the state of the economy, and many other things can shift the entire demand for specific goods and services. For example, if you expect that a new cheaper and more efficient laptop will be coming out in the next year, you might put off the purchase of the new computer you need. If enough people expect this, this can shift the demand for laptops to the left

Question 50

Shift factors of supply

Answer 50

forces other than price that affect how much of a good is supplied.
● Changes in the price of raw materials or inputs - This can be increases or decreases in the prices of things like gas, oil, fabrics, cotton, steel, and so on. For example, if the price of cotton increased, which made it more expensive to make t-shirts, less t-shirts would be made

The price of blueberries (a substitute) goes up, so I’m going to take land from my grapes and use it for blueberries. The supply of grapes will go down.

Number of suppliers of grapes go up- then, even though I personally may want to grow something else since there is too much competition in grapes, the aggregate supply of grapes will go up so the supply curve will shift to the right.

● Changes in technology - These are any advancements with computers, machines, and software that can affect the efficiency and cost of producing a product. Things that help suppliers and manufacturers make things cheaper and quicker increase supply, causing a shift to the right
● Changes in supplier’s expectations - The decision to sell or manufacture a certain good today depends on expectations of future prices. If a seller expects the price to rise in the future, they are inclined to sell less now, decreasing the overall supply of goods. If a seller expects the price to decline in the future, they are inclined to sell more now, increasing the supply of goods. Current supply goes down because you are hoarding it to sell tomorrow when you know it will be worth more.
● Changes in taxes and subsidies - This shift factor is much like the change in price of raw materials. Some goods, such as tobacco, alcohol, and food, can have various taxes placed on them to produce. When these taxes increase, this increases the cost to produce the product, so supply goes down.

Question 51

Price equilibrium.

Answer 51

This is the price at which the quantity supplied equals the quantity demanded.

Question 52

Elasticity of demand.

Answer 52

consumers’ responsiveness or sensitivity to changes in price. Elastic demand is when consumers buy significantly more or less of a product when its price changes. Inelastic demand means that an increase or decrease in price will not significantly affect demand for the product

Question 53

Perfectly competitive market.

Answer 53

This type of market is characterized by a large number of small businesses that sell the same types of products with the same characteristics → businesses will compete with each other by lowering prices. Of course, in the real world, a perfectly competitive market does not exist. The closest example is a commodity, like oranges

Question 54

Monopoly market.

Answer 54

buyers can only buy the product they want from one seller. No other business offers the same thing. It’s very hard, if not impossible, for new businesses to enter the market. For example, a drug company with a patent on a new drug will have a monopoly on that medicine until the patent expires.

Question 55

Monopolistic competition.

Answer 55

you have a large number of small businesses just like in a perfectly competitive market. However, in a monopolistic market, businesses don’t sell identical products like you find in a perfectly competitive market. Instead, they sell similar products. This means that businesses can compete not only on price but also on different characteristics of their products. For example, by adding a new feature.

Question 56

Oligopoly

Answer 56

consists of a few large businesses that sell either identical or very similar products. These industries are marked by a small number of businesses that require a high degree of initial capital investment, which makes entry by new businesses difficult. Nevertheless, businesses in an oligopoly do compete on price and other characteristics of their products and services. Examples of oligopolies include the oil industry and auto manufacturing

Question 57

Pricing

Answer 57

● Target profit pricing’s ultimate goal is to reach a particular level of profit by using price to get sales that produce a certain profit per unit. In this manner, a specific price needs to be selected that will bring in sales but also maximize profits.
● Competitor pricing strategy is very common with companies such as airlines and supermarkets. The goal is to set prices based on their competition. Airlines also follow a type of competitor pricing called status quo, which means companies only change prices to meet competitors. For example, if Airline A drops prices by $100 on all East Coast flights, then Airline B will quickly match Airline A’s prices
● target return pricing objective is specific rates of profit and wants to use pricing strategies to get to measurable return on investment to placate stockholders. This method is most concerned with rates of return on investment
● customer orientation strategy. This entails focusing on value and what the customer expects. If a company is known for high-end technology, then the price should be set as a premium with limited stock available. The company could also use a base price with no sales discount to communicate the overall value for a non-premium product
● price ceilings act to limit prices, but often cause a shortage due to the market not being at equilibrium
● price floors act to ensure a minimum price, but often cause a surplus due to more producers wanting to make more goods

Question 58

Government Regulation of the Economy

Answer 58

● the government regulates legal and social framework→ the government helps ensure that legal contracts for businesses are enforceable through a court system
● the government helps maintain competition→ Part of the government’s role is to enforce anti-trust laws, which keep monopolies from happening. This ensures many businesses are able to compete and offer products and services to consumers. As a result, you experience better quality products and lower prices
● correcting externalities. Externalities are effects of business decisions that can affect people or parties that had no say in a matter or no control over decisions in the first place. An example is factory pollution→ the government can step in and can tax or set regulations to help ensure pollution and waste are kept at acceptable levels
● provides public goods and services→ public schools, transportation, and delivering mail
● redistribution of income. In a capitalist and free market economy, there are often inequalities or gaps in how income is distributed among social classes. The government uses a progressive tax system to help distribute income in a more socially just manner so that all individuals have opportunities to improve their standard of living
● promote economic stability. Through the Federal Reserve Bank, tax policies, and spending programs, the government is able to help control and manipulate the unemployment and inflation in the economy to what it deems are appropriate levels.
● Why is this important? Additional government projects and lower taxes on business owners can result in more jobs for the economy
● The U.S. government uses both fiscal and monetary policy to protect our economy and promote long-term economic growth
● The protections that fiscal policy provides are help in a recession, keeping inflation in check, and preventing boom and bust periods in the economy
● Monetary policy also provides the protections of promoting maximum employment, stable prices, and moderate long-term interest rates
● During the 1980s, both parties supported President Reagan’s attempts to loosen government regulations on the economy, a process known as deregulation. Home ownership rose dramatically during this period.
● However, by the early 2000s, the pendulum had swung too far in the direction of deregulation. People who were otherwise unqualified for mortgages were given loans that were bundled as a high-risk, high-reward option for investors. The inability of homeowners to repay the loans at high interest rates was a contributing factor for the Great Recession of 2008. As a result, the government passed the Dodd-Frank Act, which served to prevent banks from making such risky loans.

Question 59

Monetary Policy

Answer 59

● The amount of money that is circulating at any given point must be carefully monitored. Controlling the growth rate of the money supply is called monetary policy
● The Federal Reserve, which is the nation’s central bank, has total control over the money supply. It is also an independent body. The president can attempt to influence the board most directly by being the person who appoints the chairman of the Federal Reserve
● Monetary policy is a tool that is used by the Federal Reserve, or central bank, to control the amount and growth of the money supply in the economy
● monetary policy influences inflation and the economy-wide demand for goods and services–and, therefore, the demand for the employees who produce those goods and services
● changes in financial conditions affect economic activity. For example, when short- and long-term interest rates go down, it becomes cheaper to borrow, so households are more willing to buy goods and services and firms are in a better position to purchase items to expand their businesses, such as property and equipment. Firms respond to these increases in total (household and business) spending by hiring more workers and boosting production. As a result of these factors, household wealth increases, which spurs even more spending. These linkages from monetary policy to production and employment don’t show up immediately and are influenced by a range of factors, which makes it difficult to gauge precisely the effect of monetary policy on the economy

Question 60

Natural capital

Answer 60

defined as the land, air, water, living organisms and natural resources of the earth that produce value to people. Nature has many economically important assets, including mineral deposits, energy resources, farm land, forest timbers, and fisheries

Question 61

Minimum Wage

Answer 61

● Governments often impose a minimum wage to raise the wages of workers who are earning very little. A minimum wage is very similar to a price floor, because it is set above the market wage. It increases the supply of laborers. When minimum wages are imposed, unemployment increases.

Question 62

Unemployment compensation

Answer 62

● The unemployment insurance in the United States was provided for under the Social Security Act of 1935. Each state administers its own program, subject to federal standards
● Finally, unemployment benefits have a stimulative effect on a struggling economy because the benefits permit people to purchase goods and services they would not otherwise be able to purchase. This helps sustain, and perhaps increase, demand. If demand for stuff is high enough, employers will have to hire to keep up. The cycle will continue until the economy pulls itself out of recession

Question 63

Labor Market

Answer 63

● The labor market, a set of social mechanisms through which labor is bought and sold, can be divided into two types - primary (skilled, high paying) and secondary (unskilled low paying)

Question 64

Impact of Technology

Answer 64

● opening an online storefront on the Internet. He can now compete with larger rivals like Home Depot and Lowe’s. He has also gained access to millions of consumers across the globe he otherwise would not have been able to reach.
● Information technology has redefined organizational boundaries. No longer are businesses confined to brick and mortar stores
● gather customer information for targeted marketing and advertising. It is much more effective to send a user an advertisement specific to their likes rather than just a general advertisement. The ability to predict consumer preferences and behavior is greatly increased using this method. The concern that arises is privacy
● Globalization is the increasing movement of goods, services, and capital across national borders. Global commerce has transformed the world’s economy. In fact, one fourth of all goods and services produced worldwide are sold to other nations→ Technology has improved transportation, making it faster and cheaper to move goods from one place to another. Globalization transfers technology. This means the best and newest innovations spread quickly and become accessible to people all over the globe.
● Globalization tends to reduce prices for consumers. Costs are kept down by moving operations abroad, where it may be cheaper to hire labor or conduct business
● Globalization may come with some costs. One common cost is outsourcing of jobs to foreign workers. Outsourcing is taking a workplace activity once performed inside the organization and moving it outside of the organization

Question 65

GDP

Answer 65

A measure of the total Production, but it ends up also being an accurate measure of total spending, and total income. If you divide it by the number of people in a country, you get the average income per person. Only counts market values, not non-monetary values. Values trees only when they are cut down and made into boxes that are sold. Does not count the work you do for which you don’t get paid, like homemaking. Doesn’t count the work for which you get paid but don’t report like smuggling or working for cash (shadow economy).

refers to the total economic output of one country, often measured by the year. This includes all of the goods that were produced within the country’s borders and all of the services performed. It’s important to note the second word in the term, ‘domestic,’ as GDP only counts the goods and services completed within a country’s borders.

total value of all final goods/services produced in a year within that country

iv. Media uses changes in GDP as indicators of societal well-being; also increases with expenditures on natural disasters, epidemics, war, crime, other detriments- must be cautious in interpreting changes in GDP
1. Increase in real GDP- more money demanded for purpose of making additional expenditures- drives up equilibrium interest rate; investment decreases as interest rates rise
2. Crowding out- decrease in real investment stemming from higher interest rates due to government purchases

Question 66

Pro Tariffs

Answer 66

• Consider the situation in which firms in a country are attempting to enter a new industry in which many large firms already exist in the international arena. The foreign firms have taken advantage of economies of scale and have therefore achieved relatively low levels of production costs. New firms, facing low levels of output and higher average costs, may find it difficult to compete. The infant industry argument suggests that by offering protection during an industry’s formative years, a tariff or quota may allow the new industry to develop and prosper
• The infant industry argument played a major role in tariff policy in the early years of U.S. development. The high tariffs of the early nineteenth century were typically justified as being necessary to allow U.S. firms to gain a competitive foothold in the world economy. As domestic industries became established, tariff rates fell. Subsequent increases in tariffs were a response in part to internal crises: the Civil War and the Great Depression. Tariff rates have fallen dramatically since 1930
• a nation should not depend too heavily on other countries for supplies of certain key products, such as oil, or for special materials or technologies
• The desire to maintain existing jobs threatened by foreign competition is probably the single most important source of today’s protectionist policies
• One reason often given for the perceived need to protect American workers against free international trade is that workers must be protected against cheap foreign labor
• Another justification for protectionist measures is that free trade is unfair if it pits domestic firms against foreign rivals who do not have to adhere to the same regulatory standards. In the debate over NAFTA, for example, critics warned that Mexican firms, facing relatively lax pollution control standards, would have an unfair advantage over U.S. firms if restraints on trade between the two countries were removed

Question 67

Against Tariffs

Answer 67

• Critics of the infant industry argument say that once protection is in place, it may be very difficult to remove. Inefficient firms, they contend, may be able to survive for long periods under the umbrella of infant industry protection
• The U.S. has dramatically transformed since the days in which the tariff was instrumental in protecting American industry and providing revenue for the federal government. New sources of revenue and the comparative strength of American manufacturing have mooted the historical justifications for the protective tariff

Question 68

Labor Unions

Answer 68

i. Procedures for benefits: collective bargaining and lobbying strengths to form labor unions to increase demand for labor, decrease supply of labor, negotiate higher wages
1. Exclusive unionism- some craft unions attempt to increase wages by restricting supply of workers with their skills
2. Lobbying for child labor laws, immigration restrictions, compulsory retirement, occupational licensing
3. unskilled/semiskilled workers form inclusive/industrial unions that encourage as many workers as possible to join- use size to advanage when negotiating wage floors and compensation packages
ii. Effects of unionization
iii. Minimum wage: contaction of demand (income and substitution effect), expansion of supply
1. Greater equity, distribution of income narrowed, poverty reduced, less worker exploitation,
2. inflation
iv. Unemployment insurance: stimulative effect on a struggling economy because the benefits permit people to purchase goods and services they would not otherwise be able to purchase. This helps sustain, and perhaps increase, demand. If demand for stuff is high enough, employers will have to hire to keep up. The cycle will continue until the economy pulls itself out of recession
1. Hysteresis- systemic long-run unemployment when marketable skills obsolete

Question 69

Indexes

Answer 69

i. Price indexes used to measure inflation and adjust nominal values for inflation to find real values

Question 70

Consumer Price Index (CPI)

Answer 70

An index. Government’s gauge of inflation used to adjust tax brackets and social security payments for inflation - checks price of items in fixed “market basket” of thousands of goods and services
1. May overestimate inflation rate (inflexible dependency on base year market basket), does not consider substitutions for less expensive goods, quality improvements, price changes in new products

Question 71

Producer Price Index (PPI)

Answer 71

An index. Same as CPI but applies to prices of wholesale goods like lumber nd steel- good predictor of future inflation because producers pass cost increases on to consumers

Question 72

Gross Domestic Product Deflator (GDPD)

Answer 72

An index. Reflects importance of products in current market baskets rather than in base year market baskets that become less relevant over time - current year quantities used; reflects price changes and substitutions away from expensive goods → lower inflation rate than CPI

Question 73

Unemployment

Answer 73

1. Discouraged workers not counted among unemployed in official statistics- unemployment rate lower than actually
2. Dishonest workers- bias unemployment figures upward- claim to be unemployed in order to receive benefits
3. Natural rate of unemployment- typical rate of unemployment, sum of frictional and structral unemployment
4. Full employment- level of employment that corresponds with natural rate of employment- no cyclical unemployment
5. Frictional unemployment can be good- moving into jobs more satisfying for worker and employee
6. High rates of unemployment devastating→ loss of self-confidence, crime, family breakups, suicide, losses to output/income; every 1% point increase in unemployment rate above natural rate → output falls by 2-3% (Okun’s Law)

Question 74

Inflation

Answer 74

sustained increase in overall price level

1. Money illusion- can lead to excessive spending (notes increase in salary but not similar increase in prices)
2. Detrimental effects: change price listings to keep up with inflation- menu costs
   a. Fixed incomes/incomes that increase at rate less than inflation rate decrease in value
   b. Value of interest payments that do not increase actually decreases, hurting lenders and savers
   c. Social tensions increase- uncertainty and redistribution of income
   d. Increased shoe leather costs- time and effort trying to counteract effects of inflation- ex: holding less cash on hand and having to make frequent trips to ATM
   e. Unit of amount unstable
3. Benefits: those who borrowed money at fixed rates pay back amounts worth less in real terms

Question 75

International Currency Exchange

Answer 75

i. Equilibrium in currency market determines exchange rate- reciprocal relationship between two currencies- demand for one currency inherently creates a supply of other currency
ii. Factors: change in relative income levels between countries; increase in another nation’s income will increase demand for US goods and dollars
1. Change in relative inflation rates- nation with lower inflation rate → less expensive than international competitors, in higher demand
2. Change in consumer preferences for a nation’s goods in comparison to other nations’ goods
3. Increase in national confidence

Question 76

No Gains from Trade

Answer 76

Despite absolute advantage. If both countries have the same opportunity costs in both products, there is no comparative advantage in one of the products so there is no gains from trade. In this case both countries have the same Production Possibilities Curve slope and so trading is not going to get either beyond the frontier.

Question 77

Clearing Price

Answer 77

The opportunity cost for China to make pants is 1 shirt. The oc for U.S. to make pants is 3 shirts. So China has a comparative advantage in pants (their opportunity cost is less). The oc for China to make shirts is 2 pants and the oc for U.S. to make shirts is 1 pants. So U.S. has a comparative advantage in shirts. They should trade, but at what exchange rate? China will want to sell pants for any price greater than 1 shirt. If the U.S. makes pants in its own factories, it will be giving up 3 shirts for them, so the U.S. will want to buy pants for any price less than 3 shirts. So 1 pant for 2 shirts would be getting both countries to levels beyond their own Production Possibility Frontiers.

Question 78

Law of demand

Answer 78

If you raise the price the demand for the quantity will decrease. If you decrease the price, the quantity demanded will increase.

Question 79

Demand

Answer 79

The relationship between the price and the quantity demanded. Demand is a description of all quantities of a good or service that a buyer would be willing to purchase at all prices.

Question 80

Demand schedule

Answer 80

A chart showing at what rate the quantity demanded changes with price changes. How many books are demanded when I sell for 2.00 per book? How many when I sell for 5.00 per book? (less, all things being equal, such as the prices of related products staying the same) This can be plotted on a demand curve, with price on the vertical axis and quantity demanded on the horizontal.

Question 81

Related Ebooks become more expensive (substitutes)

Answer 81

Shifts entire demand curve to the right because suddenly my product is comparatively cheaper at each price point.

Question 82

Kindles become more expensive (compliment)

Answer 82

For any given price, the quantity demanded will be lower so the whole demand curve will shift to the left (decrease) because people won’t have much money left over after buying the Kindle which is necessary to see my ebook.

Question 83

Normal goods

Answer 83

Goods that increase in demand if income goes up. At a given price point, like $800 for a laptop, more people will want to buy it at that price because income has increased.

Question 84

Inferior goods

Answer 84

Goods that decrease in demand if income goes up. At a given price point, like $5,000 for a Kia, more people can afford it, but less people will want to buy it because if they now have enough for a superior product. The goods people would prefer to not own if they only had more money, such as the cheapest car on the market in a country where everyone at least has a car.

Question 85

Price

Answer 85

Price is not a determinant of demand, thus a change in price does not cause demand to increase or decrease. If the price of new cars changes, ceteris paribus, there will be a change in the quantity demanded and a movement along the demand curve, not shift in the demand curve itself.

For example, when the price of hot dogs falls three things happen: Quantity demanded for hot dogs increases, demand for hot dog buns (a complement) increases, and demand for hamburgers (a substitute) decreases

Question 86

Law of Supply

Answer 86

If the price I can get for my grapes go up, I am going to produce more of them. When price of goods go up, there are more people who will want to produce them.

Question 87

Interest rates

Answer 87

As bonds go up interest rates go down.