Economics Exam Review Flashcards
What is Economics?
Economics is the study of the way we make decisions about the use of scarce resources
Why is Economics Considered a social science?
Because it involves the study of people individually or in groups and making decisions about the choices available to them.
What does Effective use of resources mean?
If we consume a certain amount of resources and in the end, get the desired result then our use of those resources can be called effective.
What Does Efficient use of resources mean?
If we use the bare minimum of resources necessary to achieve the desired result, then our use of those resources can be called efficient.
What does opportunity cost mean?
opportunity cost is the sum of all that is lost fro taking one course of action over another.
What is analytical/Positive economics
The branch of economics that deals with facts and observation of the world.
What is normative economics?
The branch of economics that deals with statements that contain value judgements, Express what economists think should be the case based off their value judgments These statements cannot be confirmed or refuted solely by facts
What is an inverse relationship?
(or opposite) relationship: As variable x increases, variable y decreases (and vise versa)
What is a direct relationship?
(or positive) relationship: As variable x increases or decreases, so does variable y
What is Fallacy Mean?
A fallacy is a hypothesis that has been proven false but is still accepted by many people because it makes at first glance
What is Fallacy of composition mean?
Belief that individual benefit automatically translates into societal benefit
Explain the post hoc fallacy
The false assumption that what comes before automatically causes what follows. Derived from the Latin phrase meaning “after this therefore because of this.”
Example: When a newly elected government takes credit for improving the economy. Believing that the economy improved because of this newly elected government is a “post hoc” way of thinking. Did they have enough time to implement economic policies or make any economic improvements? No. Therefore, just because the event of the economy improving came after the event of the newly elected government, this does not mean that this new government caused the economy to improve.
Explain the Fallacy of Single Causation
The fallacy of single causation is The belief that a single factor or person caused an event to occur.
What is the PPC Curve (Production Possibilites Curve)?
Illustrates the fundamental problem of scarcity. Provides a visual model of the production choices faced by people in a simple economy.
What are the only assumptions of the PPC curve?
- Only 2 products can be produced by this economy, in order to make things a lot less complicated
- The economy has fixed technology and resources
- The economy is at full employment: All productive resources, including labour, is fully employed and are used effectively and efficiently to produce the maximum output of goods and services
Explain what Trade-off means
The increased production of one good can be achieved only by sacrificing a sufficient quantity of the alternative product
What are consumer goods
Products and services that directly satisfy human wants
Ex: Bread
What are capital goods
Goods used in the production of other goods
Ex: Ploughs (agricultural tool) prepare the soil for planting, contribute to successful wheat harvest and the future production of bread
Explain the law of increasing relative cost
When a society (in order to get greater amounts of one product) sacrifices an ever-increasing amount of other products
Explain Relative Cost
Relative cost refers to the comparison of costs between different options or alternatives to determine which one is more economical or efficient.
For example, if you are deciding between two products, the relative cost would involve looking at not just the monetary price of each product but also considering other factors like quality, durability, or additional features. It’s about comparing the overall value or benefits of different options, taking into account all relevant costs, not just the monetary ones.
Explain Frontier
The outer limit of production possibility. Attainable only if all productive resources are fully employed. The maximum potential output that can be produced for each of the two products on the production possibility curve.
What is outputs?
Aka products or services
Explain the law of diminishing returns
Deals with the relationship between an input (a productive resource such as labour) and the resulting output.
States that output will increase when a particular input is increased but only to a certain point. After this point, increasing inputs will not have an appreciable effect on the production of outputs.
What is Inputs?
A productive resource such as labour
Explain productive resources
a productive resource refers to any input or factor of production that is used to create goods and services. Productive resources are the building blocks that businesses and individuals combine to produce the things we need and want. There are three primary categories of productive resources, often referred to as factors of production:
What are the 3 factors of production?
- Land: This includes natural resources such as soil, water, minerals, and other elements that are found in the Earth. Land is the source of raw materials used in production.
- Labor: Labor represents the physical and mental efforts of individuals who contribute to the production process. It includes the work done by both skilled and unskilled workers.
- Capital: Capital refers to man-made goods that are used to produce other goods and services. This includes machinery, tools, buildings, and technology.
Explain Capital
The goods that aid in the production of other goods and services, such as factories, warehouses, machinery, and equipment (split into 2 categories).
-Also refers to the money available in an enterprise to acquire these necessary goods
Explain Productivity
The measure of efficiency of resources in the production of goods and services
What are tangible resources
(land, labour, capital): Have physical properties that can be seen, touched and are therefore easily quantified
What are intangible resources
(entrepreneurship, knowledge, environment for enterprise): Lack of physical properties that make them easy to quantify
What is market value
The dollar value that a product will fetch in the marketplace
What is Value Added
Represents the increase in market value resulting from the additional processing or refinement of the product.
-Ex: A car’s engine is tuned, giving it more horsepower. This will increase its market value
All economic systems must address 3 basic production questions, What are they?
- What to produce 2. How to produce 3. And for whom to produce
What is a traditional economy?
Families ensure their subsistence & self-sufficiency by producing their own goods (typically in agriculture). They trade their surplus goods with other families through barter.
What is barter?
Barter in economics refers to the direct exchange of goods and services between two parties without the use of money. In a barter system, individuals or businesses trade items they have for items they need, creating a system of reciprocal exchanges.
What is a command economy?
All productive resources are owned by the state. A centrally planning authority answers all production questions and allocates resources in the best interest of the state
-Individuals have the obligation to serve the state. I’m return, state authorities meet individuals needs such as food, housing, medicine, and education
-Polar opposite of market economy
-Very few command economies left
Benefits: Resources are distributed evenly and fairly
Drawbacks: Planning difficulties, there is no room for profit therefore to incentive to be efficient and limit waste. Lack of freedom
What is a market/free enterprise/private enterprise economy?
A market, free enterprise, or private enterprise economy is a type of economic system where most businesses are privately owned and operate for profit. Here’s a simple breakdown:
Private Ownership: In this type of economy, most businesses, such as shops, factories, and farms, are owned and operated by private individuals or companies rather than the government.
Profit Motive: Businesses aim to make a profit. The owners are motivated by the desire to earn money and compete with other businesses.
Competition: There is usually competition among businesses. They strive to attract customers by offering better products, services, or prices than their rivals.
Market Forces: Prices of goods and services are determined by supply and demand in the market. Customers’ choices and preferences influence what businesses produce.
Limited Government Intervention: The government’s role is typically limited to enforcing laws, protecting property rights, and ensuring fair competition. It doesn’t usually control or own most businesses.
Entrepreneurship: The economy relies on entrepreneurs who take risks to start and grow businesses. Innovation and creativity are encouraged.
what is a market?
Place where buyers and sellers meet to exchange goods and services
-Doesn’t have to be a physical place
-This is where prices are established in a market economy
What is a mixed economy?
Includes both private and state owned enterprises. Canada is a mixed market economy. The Canadian system tries to merge the best features of all 3 economic types.
What is a modern mixed economy?
An economy that has elements from both market and command economies
-Some parts are controlled by the central authority and others are left to the market forces of supply and demand
Example: Canada is a modern mixed economy where healthcare is run by the government but most of what we buy comes from privately-owned businesses
What Hidden economy/underground economy
The hidden economy, also known as the underground or informal economy, refers to economic activities that are not officially recorded or reported to the government. In simple terms, it involves transactions and businesses that operate “off the books,” evading taxation and government regulations.
These activities can include, but are not limited to, unreported income, undeclared work, and businesses that operate without proper registration. Participants in the hidden economy often do so to avoid taxes, regulatory requirements, or to engage in activities that may be illegal or unregulated.
Explain socialism
Socialism is an economic and political system where the government or community owns and controls certain key industries, resources, and services.
What is capitalism
(the free enterprise system): Requires A democratically elected government to maintain public order and to keep competition free and fair.
What are complementary Goals
When reaching one goal makes another easier to achieve.
What are conflicting Goals?
When reaching one goal makes another more difficult to achieve.
What is public debt
Total financial liabilities of a government. Caused/Increases when governments spend more than they make (their revenue).
What is economic growth
An increase in the economy’s total Production of goods and services. Theoretically represents an outward shift in the economy’s production possibilities frontier.This growth can result from the Discovery Of new natural resources and increase in skilled labor force, technological innovations, and more efficient production processes.
What is inflation
A general increase in prices. Erodes the dollars purchasing power and raise the cost of living for those on fixed incomes.
What is deflation
A general decrease in prices. Though deflation is rare in Canada, it is commonly associated with periods of economic crisis, such as the great depression
-Both inflation and deflation are symptoms of an unhealthy economy.
-Government policy attempts to maintain stable prices
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When only 6-7% of the work/labour force is unemployed. Full employment becomes increasingly difficult as machines and technology continue to replace jobs (i.e. machines replacing assembly line workers)
What is The principle of Consumer Sovereignty
Says that in a market economy, consumers should be free not only to purchase goods and services of their choice but also, through their purchasing decisions, to determine what goods and services are actually produced. In summary, it states that in a market economy workers, consumers and investors all have economic freedom. Freedom to find a better job, freedom to choose when and how to consume, save, or invest their money, etc.
What is the economic problem?
unlimited wants, limited resources
-This is why we have to make choices
What is utility
Refers to a measure of satisfaction, happiness, or benefit that is gained from a choice. We make choices largely based on the utility they provide us.
-Example: If you’re choosing where to go on vacation and you really like beaches and don’t like mountains, going to the beach in the Bahamas will have a higher utility compared to Skiing in Swiss Alps
Name 3 economic Goals
- Political stability (helps with better planning and implementation of long term policies, goals, and investments)
-If new parties are constantly being elected, it will lead to conflicting outcomes and a decrease in economic growth - Reduced public debt
-When a government spends more money in a year than it makes, it’s called a deficit
-The total of these deficits is the public debt
-To pay off these debts, governments typically take out loans that can only be used towards paying off their debt. Therefore, the money cannot go to other good causes like healthcare, infrastructure, education, etc.
3.Full employment:
-High rates of unemployment is problematic for society and the unemployed individuals
-Economic output is significantly lower and governments are forced to give more funding to unemployed workers when full employment is not in place
What is welfare capitalism
Spends a good amount of money on it’s public sector (ie: hospitals, schools, parks)
-Believes that businesses can provide better social welfare compare to the government
Explain what Adam Smith did
“father of modern economics” or “founder of capitalism”; first person to outline characteristics & benefits of a free-market economy
Many of Adam Smiths ideas were in response to the rapid changes in Great Britain’s economy brought by the Industrial Revolution
Smith learned that citizens would rebel against the government because of heavy government interference, regulations and taxes; this is why he believed in laissez-faire capitalism
Know as the “patron saint of laissez-faire capitalism”
What is Mercantilism
economic system where state controls trade and production, with the goal of maximising the export of goods while importing as few of foreign goods as possible
What is the industrial Revolution
period of technological innovation and factory production; changed & scaled Britain economy from agricultural to industrial/urban
Explain Adam Smiths “Invisible hand Theory”
is a metaphor he used to describe how individuals pursuing their own self-interest unintentionally contribute to the overall economic well-being of society.
Division of Labour: specialization of workers in a complex production process, leading to increased production, resulting in more profits for investors, more consumer goods for workers, and greater economic efficiency for society
Law of Accumulation: when industrialists invest accumulated profits back into production/capital goods (machinery, factories, etc); provides stimulus for further rounds of economic growth
Law of Population: According to Smith, The Law of Population also contributed to the steady rate of economic growth & prosperity
↑Capital = ↑Demand for labour (workers) = ↑Higher wages = ↑Better Living Conditions = ↓Mortality Rates = ↑Population (labour force). ↑Population = ↑ workers = ↑ economy
Or in words: Accumulation of capital increases the demand for labour (workers) to operate additional machinery, leading to competing industrialists offering higher wages, higher wages lead to better working conditions, which in turn lowers mortality rates, which leads to the population increasing.
Explain Thomas Robert Malthus’s Ideas
known as the first professional economist; challenged Adam Smith’s views; warned that growth in economic production could not keep up with pace of population; predicted inevitable famine unless population growth is controlled, this caused economics to be referred to as “the dismal science”
Population Growth: Malthus observed that populations tend to grow exponentially (increasing at a faster rate) if left unchecked. He argued that while population growth could occur rapidly, the availability of resources, particularly food, could not keep up at the same pace.
Malthusian Catastrophe: Malthus proposed the concept of a “Malthusian catastrophe,” suggesting that if population growth remained unchecked, it would eventually lead to a point where the population would exceed the available resources. This situation would result in widespread famine, disease, and a decline in living standards.
Checks on Population Growth: Malthus identified two types of checks that would naturally limit population growth:
Positive Checks: Factors such as disease, famine, and war that increase the death rate.
Preventive Checks: Measures taken by individuals or societies to control birth rates, such as delaying marriage or practicing contraception.
What was the Malthusian Dilemma
Population increases more rapidly that food production, leading the famine, and death
The 2 Types of Population Control (to help decrease population); Malthus believed that these 2 population controls weren’t strong enough to check (significantly decrease) the geometric progression of the world’s population
Positive Checks: things that increases death rate (ie: war, famine, disease and epidemics)
Preventive Checks: things that reduces birth rate (ie: mainly moral restraints like: late marriage and sexual abstinence)
What was David Ricardo Known For
explained advantages of free trade (agreed with Adam Smith, but noticed the class conflicts with Adam Smith thought of the society as a family); his theories exposed class conflicts in the free market; challenged the aristocratic landlord class by questioning their contribution to society, which were hailed by the industrialist and merchant class.
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dentified the 3 main classes in society: Working class, (lived on modest wages), industrialists (made healthy profits from operating their factories), and the aristocratic landlords (received substantial trant from land they owned)
Made a fortune in the stock market
-The landlord-dominated parliament forced through the legislation known as corn laws. Ricardo used this as an example to show the landlord-dominated parliament’s unfair influence
What is absolute Advantage
when a nation can produce a good more efficiently than another
What is comparative Advantage
when a nation can produce a good with fewer resources than another (with a lower opportunity cost)
Explain Karl Marxs ideas
witnessed exploitation of workers during Industrial Revolution, founded international workers’ movement intended to overthrow the ruling class of industrial capitalists and aristocratic landlords (the bourgeoisie); explained why capitalism would destroy itself due to exploitation
Key premise of revolutionary communism: “From each according to ability, to each according to need”
Said that all of human history is governed by economic laws that perpetuate conflict between social classes
Bourgeoisie: term used for corrupt industrial capitalists and aristocratic landlords who, Marx theorized, would be overthrown by working class
Proletariat: the exploited working class who, Marx theorized, would rise up and overthrow bourgeoisie
Communist Manifesto: Call to arms to the proletariat to rise up and overthrow the bourgeoisie
Communism: International socialist movement founded by Karl Marx
-Workers will always product more value than what they are being paid
-Workers are forced to sell their labour for less than it’s truly worth because there is always a “reserve army of the unemployed”: desperate unemployed workers who will work at very lower wages
Explain John Maynard Keynes ideas
recognized importance of government intervention (spending and lowering interest rates ) to combat economic downturns (great depression); explained investor spending and investor confidence is necessary to maintain high employment rates
Wrote the “General Theory”
The WWll peace treaty was greatly influenced by Keynes: Said that in order to secure lasting peace, the defeated enemy should be helped, not punished
Played a role in WWI, WWII, and great depression
WWI: Opposed the idea that Germany (the losers of the war) had to pay more than it could afford
WWII: Proposed the idea of deferred savings: A portion of every workers paycheck would be invested in government war bonds
The WWII peace treaty was greatly influenced by Keynes (argued that to secure lasting peace, the defeated enemy should be helped, not punished
Stated governments and business investors are the key to business cycles and depressions, NOT consumers
Explain John Kenneth Galbraith’s ideas
gave capitalism a social conscience arguing we should favour shifting national production to public services/goods/priorities (schools, hospitals, parks) as they serve the common good;
believed government involvement would also help improve society in a world of international corporations
Affluent society: Summed up the remarkable increase in wealth that the U.S. and Canada had been enjoying since WWII
Rose to prominence during the period of economic prosperity following WWII
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Explain Milton Friedmans idea’s
argued against government intervention as he believed that would cause price inflation and increased public debt; argued best way for government to influence economy is by regulating supply of money in circulation (monetarism)
What is a monetarist
economists who believe that the most effective way for the government to affect the economy is by regulating the supply of money in circulation
What’s an Inelastic coefficient
Between 0 - 1. Any % change in price causes a smaller % change in quantity demanded
Ex: A 7.69% change in price causes a 5.15% change in quantity demanded
Whats an elastic coefficient
Greater than 1. Any % change in price causes a greater % change in quantity demanded
Whats a unitary coefficient
Equals to 1. Any % change price causes an equal % change in quantity demanded
What is elasticity of supply
Measures how responsive quantity supplied by a seller is to a change in price
Explain Marginal Utility
Marginal utility is a concept in economics that refers to the additional satisfaction or pleasure gained from consuming one more unit of a good or service.
What is GDP
Gross Domestic Product (GDP) is a measure of the total economic output of a country. It represents the total value of all goods and services produced within a country’s borders over a specific period, usually a year.
what is accounting profit
Accounting profit is profit; when revenues exceed costs
Explain the theory of the firm
assumes that producers are all profit maximizers. Adam Smith’s “invisible hand” of self-interest leads them to increase their revenues and decrease their costs in order to increase their profits.
Explain total cost
all the money the firm spends to purchase the resources it needs to produce its good or service
Explain Fixed Costs
costs that remain the same at all levels of output
They must be paid whether or not the firm produces
Examples of fixed costs are rent, property taxes, insurance premi-ums, and interest on loans
Explain Variable costs
They change with the level of production
As production increases, it becomes necessary to employ more resources, so these costs tend to rise as production rises
What is a firm
a firm is a business organization or company that produces and sells goods or services to earn a profit.
Explain the short run
a period over which the firm’s maximum capacity becomes fixed because of a shortage of one or more resources
Explain The Long run
a period when all costs become variable
Over the long run, a firm will be able to adjust ont only labour, fuel, raw materials, but also its plant or factory facilities
Explain Labor intensive production method
where most work is conducted by hand
Explain Capital intensive production method
Require large amounts of capital to produce goods; makes the labour force more productive & the production process more efficient
The drawback: Sharp increase in fixed costs relative to variable costs
Explain Non Price Competition
Competition that involves changing anything but price
what are the 4 basic market structures:
- perfect competition
- Monopolistic competition
- Oligopoly
- Monopoly
Explain Perfect Competition
Perfect competition is a theoretical concept in economics that describes an idealized market structure. In this scenario, there are numerous buyers and sellers, all offering identical products. Information is perfect, meaning everyone has access to complete and accurate details about prices and products. Entry and exit from the market are free, and no individual buyer or seller has the power to influence prices. Firms in perfect competition aim to maximize profits by producing the quantity where marginal cost equals marginal revenue.
Explain Monopolistic Competition
Monopolistic competition is a market structure where many sellers offer products that are somewhat differentiated. This means each firm has some control over its product’s price, distinguishing it from identical products in perfect competition. There are many firms in the market, and entry and exit are relatively easy. Firms often engage in non-price competition, like advertising or product branding, to attract customers. While each firm has limited market power, the market structure allows for product variety, making it a common model for industries where products are similar but not identical, such as clothing or fast food.
Explain Product Differentiation
Distinguishing their products from other firms
When product differentiation is successful it leads to brand loyalty (where consumers become attached to a product & will pay more to satisfy that preference)
Explain Oligopoly
Oligopoly is a market structure in economics characterized by a small number of large firms dominating the industry. Unlike perfect competition with many small firms or monopoly with a single dominant firm, oligopoly falls in between, featuring a handful of powerful companies. In an oligopoly, these firms often have significant market influence, and their actions can impact prices and market conditions. The decisions of one firm in an oligopoly, such as changing prices or introducing new products, can lead to reactions from others, making strategic interactions and competition important features of this market structure.
Explain Collusion
A secret agreement among firms to set prices, limit output, or reduce/eliminate competition
Explain Monopoly
A monopoly is a situation in economics where a single company or entity has exclusive control over the production or supply of a particular product or service within a specific market. In a monopoly, there are no direct competitors, and the monopolist has significant influence over prices and market conditions. This lack of competition can lead to higher prices for consumers, reduced choices, and potentially decreased innovation. Monopolies are often regulated to prevent abuse of market power and ensure fair competition.
What is demand
The quantity of a good or service that buyers are willing & able to purchase at various prices during a given period of time
The relationship between a products price and quantity demanded = inverse
Ie: a pair of shoes you can actually buy (want & can afford) means you have a “demand” for those shoes
Demand exists only for goods that you want and can afford to buy (desire + financial resources = demand)
What is quantity demanded
refers to the quantity of a particular good or service that buyers are willing and able to buy at a specific price during a specific time frame.
Changes in quantity demanded are caused by price changes (shown by movements on the demand curve)
Explain the law of demand
The quantity demanded varies inversely with price (assuming ceteris paribus/all other factors remain constant)
In simple terms: The quantity of a product purchase depends on its price (higher price=less demand/purchased, lower price=more demand/purchased)
Reasons for this inverse relationship is due to the substitution effect and income effect
Explain the substitution effect
s the price of a good rises, we tend to substitute similar goods for it, if possible
Ie: if the price of a name brand soft drink rises, many consumers will stop buying that brand and buy cheaper no-name brands instead. Conversely, if the price of the name brand drink falls, consumers will start to substitute the name-brand for the no-name brand soda, thereby increasing the quantity demanded of the name brand type
Explain the income effect
When the price of the name brand soda falls, consumers can now buy the same amount of soda for a lower price. The money they save from the purchase now represents a certain amount of $ in extra income. When the price of the name-brand soda rises again, buyers must pay more to receive the same amount. As a result, their real income has declined and many of them will buy less soda thereby decreasing the quantity demanded.
Explain Market Demand/Aggregate Demand
The sum total of all the consumers quantity demands for a product
Ex: There are 4 consumers with different demands for t-shirts. By examining figure 4.4, we can see that the market demand is the total of each of the individual demands of the 4 buyers at each price level
Explain Supply
The quantities that sellers will offer for sale at various prices during a given period of time
Like consumers, suppliers react to price changes but in a completely opposite way ; as price rises, they want more supply, while consumers want to purchase less.
Explain the law of supply
The quantity supplied will increase if price increases and fall if price falls, as long as other things remain constant.
In contrast to demand, where there is an inverse relationship between price and quantity demanded, quantity supplied is directly related to price.
Explain Non-Price Factors
Responsible for the changes in supply or demand and shifts the whole supply or demand curve. Up to this point, we’ve assumed that “other things do not change” in the discussion of supply and demand. These other things are all non-price factors that we have so far held constant in constructing our demand and supply curves
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What are the 5 shifters/Factors of demand
- Income
Increase in income means more quantity demanded at each price level because buyers have more buying power. As a result, there is an increase in demand, shifting the curve right, meaning the equilibrium price must shift up until quantity supplied matches quantity demanded again (at the old price there’s a shortage)
A decrease in income means less quantity demanded at each price level because buyers have less buying power. As a result, the demand curve shifts left, meaning the equilibrium price must be shifted down until supply meets demand again (at the old price, there’s a surplus) - Population/Number of Buyers
An increase in population means an increase in the number of consumers, meaning an increase in demand, shifting the curve to the right with an increase in equilibrium price
A decrease in population does the opposite. There are less consumers, meaning a decrease in demand, shifting the curve to the left and causing equilibrium prices to fall
Demographics: Population statistics that show changes in age, income, and overall numbers. Business owners use this to determine whether or not the demand for their product is increasing. - Taste & Preferences
Depending on what consumers want/prefer during a given time period, the demand for a product can increase or decrease
Ex: Greek yogurt has risen to popularity because it’s healthy. The result is the people buying more of it without a price reduction, meaning an increase in demand
Ex 2: A well publicized medical report on the dangers of high cholesterol have increased the demand for low fat foods, and decreased the demand for high fat foods. - Consumer Expectations: People’s expectations about 2 things can impact demand:
- Future prices 2. Future income
If consumers think the price of a good will rise in the future, they will decide to purchase it immediately/buy more of it, thereby increasing the demand for a product
If consumers think the price of a good will fall, they will delay purchasing that product, which will drive down the demand for it
If people think their income will increase, demand for items like houses and cars will increase
If people are worried about losing their jobs (meaning their income decreases), they will likely cut back on spending, decreasing the demand for those things - Prices of substitute goods/inferior goods
Demand can fall for a product when its prices rise. A reason for this is because people will tend to substitute those goods for cheaper goods
For these substitute products, the demand for them now increase, meaning the demand curve for them shifts right
Ex: If Tim Horton’s doubles the price of its coffee, the demand for an alternative product, like hot chocolate, will increase
-For complementary products, a rise in the other product’s prices causes a lower demand for it and its complementary product. As a result, the complimentary products demand also decreases meaning a shift to the left in the demand curve
Ex. with complementary products: If the price of nachos rises, the demand of sal
-Note: Complementary products are things that are typically bought with each other because they go well with each other. E.g., a tennis racket and a tennis ball, nacho chips and salsa, etc
What are substitute or inferior goods
Products that are cheaper alternatives to the more expensive ones.
An increase in price for one good leads to an increase in demand for its substitute good. Therefore, substitute goods have a direct relationship between price and quantity demanded.
What are complementary Goods
tems that are typically bought together with other goods.
Ex: Gasoline and cars, nachos and salsa, country club memberships and golf equipment, tennis racquet and tennis ball, pencil and eraser, etc
A decrease in price of one compliment will result in an increase in demand for the other compliment (Ex: a decrease in the price of salsa lead to an increase in demand for nachos)
Explain Changes in Supply/ supply factors/supply determinants:
Non-price factors that shift the entire supply curve by increasing or decreasing it. There are 5 main factors that cause the the supply curve to shift (right for increase, left for decrease)
What are the 6 non prices factors that cause the supply curve to shift
- Productions Costs/resource prices
An increase or decrease in production costs will affect the quantities that sellers are willing to supply because a change in costs affects profits.
-An increase in production costs lead to a decrease in supply (shift to the left & an increase in the equilibrium price)
-A decrease in production costs leads to an increase in supply (shift to the right & a decrease in the equilibrium price) - Number of sellers
Has an effect on the amount of a product that is supplied in a market. If the number of sellers decreases, and the remaining sellers don’t increase their production, quantities supplied at any given price in that industry will decrease. This will shift the curve to the left
If the number of sellers increases, the quantity supplied at any given price will increase, shifting the supply curve to the right - Technology
An improvement of technology decreases the cost of production, enabling manufacturers to increase supply, shifting the supply curve to the right
A decrease in technology increases the cost of production, leading to a decrease in supply, shifting the supply curve left
-Ex: your truck broke down and now you can can’t plow as many driveways - Nature and the environment
Good weather causes the an increase in supply (supply curve shifts right)
Droughts, and storms decrease the supply of a product (shift left)
Ex: Droughts can decrease the quantity of crops farmer - Prices of related outputs/products (ie: other products that suppliers can produce with their resources)
The production of one item may affect the supply of another related item
An increase in price of one good causes the supply of the related good to decrease (shift left)
A decrease in the price of one good causes the supply of the related good to increase (shift right)
Bottom line is that producers will follow the money by switching their production over to the more profitable product
Ex: Farmers may switch from growing oats to barley if the market price of barley rises. This will reduce the supply of oats offered at any given price, shifting its supply curve to the left - Consumer Expectations
An expectation of lower prices causes the supply curve to shift right as producers try to “beat the price decrease”
An expectation of higher prices causes the supply curve to shift left as producers withhold their products from the market until the price increases
What is a Pure/perfect competition market
Perfect competition is an idealized market structure in economics characterized by a large number of small firms producing identical products. In this scenario, no single firm has the power to influence prices, and all goods are considered perfect substitutes. Both buyers and sellers have complete information, and entry and exit to the market are unrestricted. Firms in perfect competition aim to maximize profits by adjusting production levels where marginal cost equals marginal revenue.
Explain Frictional Employment
This type of unemployment occurs when people are in the process of moving between jobs or entering the workforce for the first time.
Example: Someone graduating from college and actively searching for their first job is experiencing frictional unemployment.
Explain Structural Employment
Structural unemployment arises from a mismatch between the skills workers have and the skills employers are looking for, or due to changes in the structure of industries.
Example: Technological advancements that make certain jobs obsolete can lead to structural unemployment if workers lack the skills needed for the new jobs created by these advancements.
Explain Cyclical Unemployment
This type of unemployment is associated with fluctuations in the business cycle. During economic downturns, demand for goods and services decreases, leading to a reduction in production and a subsequent rise in unemployment.
Example: A recession causing businesses to cut production and lay off workers, resulting in higher levels of unemployment, is an example of cyclical unemployment.
What is an Oligopoly?
Oligopoly is a term in economics that describes a market structure where a small number of large firms dominate the industry. In simple terms, it’s a situation where only a few companies control a significant share of the market for a particular product or service.
What is a monopoly
A monopoly occurs in economics when a single company or entity has exclusive control over the production or supply of a particular product or service in a given market. In simple terms, it’s a situation where one company dominates an entire industry, and there are no direct competitors. This dominance gives the monopoly significant pricing power and control over market conditions, often limiting choices for consumers.
What is seasonal Unemployment
is due to the seasonal nature of some occupations and
industries (e.g. landscaping).
Explain the expenditure approach to calculating GDP
is based the sum of purchases in product
markets
distinguishes between final products
and intermediate products
excludes financial exchanges (which
only represent the movement of money)
and second-hand purchases (which were
already counted when the goods were
sold as new)
Explain the income method to calculating GDP
This method calculates GDP by summing up all the incomes earned by individuals and businesses within the country. Incomes include wages, profits, rents, and taxes (minus subsidies). The income method provides a perspective on how the produced goods and services are distributed among different factors of production.
Explain What Unemployment means
it refers to where a person is working in a job that does not fully utilize their skills or experience. It occurs when someone is overqualified or underutilized
What’s the Formula for calculating CPI
CPI = Total $ value current year/Total $ Value Base Year
X100
What’s the formula for calculating inflation rate
Inflation Rate = CPI(yr2) - CPI (yr1)/CPI(yr1)
x100
Which way does a demand curve shift for an increase?
Shifts Right
Which way does a demand curve shift for a decrease?
Shifts Left
What does a point inside the ppc curve mean
An not efficient use of resources
What does a point outside of the ppc curve mean
Impossible cannot be done
What is the difference between variable and fixed costs
Fixed costs remain constant regardless of the level of production or output. Examples include rent, salaries, and insurance, which must be paid regularly.
variable costs change with the level of production. These costs increase as production increases and decrease as production decreases. Examples of variable costs include raw materials, direct labor, and utilities directly tied to production.
What is the most important assumption in the theory of the firm
One of the most important assumptions of the Theory of the Firm is that firms aim to maximize profits. In simple terms, the theory assumes that businesses make decisions and operate with the primary goal of maximizing their overall profits.
What is monetary policy
Monetary policy is a tool used by a country’s central bank (like the Federal Reserve in the United States or the European Central Bank in the Eurozone) to manage the money supply and influence economic conditions.
Goals of Monetary Policy:
- Price Stability: To keep inflation at a target level to ensure stable prices.
- Full Employment: To promote maximum sustainable employment in the economy.
- Economic Growth: To support long-term economic growth and stability.
What does elastic supply mean
Elastic supply means % change in
quantity supplied is more than % change
in price.
What does inelastic supply mean
Inelastic supply means % change in
quantity supplied is less than % change
in price.
What does perfectly elastic mean
Perfectly elastic supply means a
constant price and a horizontal
supply curve.
What does perfectly inelastic mean
Perfectly inelastic supply means
a constant quantity supplied and
a vertical supply curve.
What is a mixed economy
A mixed economy combines elements of both market and command economies. It allows for private ownership and market forces but also involves government intervention in certain areas to address social issues and regulate the economy.
What is a traditonal economy
In a traditional economy, economic decisions are based on customs, traditions, and historical practices. Activities often revolve around agriculture and small-scale, self-sufficient communities.
What is cross price elasticity
Cross-price elasticity (ei) is the responsiveness of the
quantity demanded of one product (x) to a change in
price of another (y).
explain the law of demand
The law of demand states that price and
quantity demanded are inversely related.
What’s the formula for calculating elasticity
Elasticity= % Change in Price / % Change in Quantity Demanded
