Final Exam Flashcards
what is economics?
the study of how scare resources are used to produce goods & service to satisfy unlimited human wants
what are the limited resources/factors of production? (4)
1- land: natural resources of nature
2- labour: human resources, mental or physical ability
3- capital: man-made aids (machinery)
4- entrepreneur: individual that combines 3 factors or production, takes risk
what are the 3 basic economic problems + brief explanation
1- what & how much to produce?
> opportunity cost due to scarcity of resources
2- how to produce?
> labour intensive or capital intensive
3- for whom to produce?
> based on income distribution (higher income grp get better quality goods)
what is opportunity cost?
the next best alternative sacrificed for a chosen alternative
what is a change in demand?
due to other factors and not a change in price of the good itself
what are the factors that affect the demand of a good?
1- changes in the price of related goods
a) substitute goods
> increased price of good Y will result in an increased demand of good X
b) complimentary goods
> increased price of good Y will result in a decreased demand of good X
2- income
(a) normal goods
> increased income, increased demand
(b) inferior goods
> increased income, decreased demand
3- consumer’s taste & preference
> festive seasons
4- advertising
5- expected future prices
> expected price to increase, demand now decrease
6- gov policy
(a) subsidy
> subsidise more, demand increase
(b) tax
> higher tax, demand decrease
what is a change in supply?
the change of supply is due to other factors and not the change in price of the good itself
what are the factors that affect supply?
1- prices of related goods
(a) competitive supply
> when price of a good increases, the amount supplied of another good decreases
eg: price of chicken increases, supply of chicken increases, fall in supply of eggs
(b) complements in supply
> the supply of one good will increase the supply of another
eg: beef & leather
(c) substitute in supply
> the price of one good increases, the supply of the other good decreases
2- cost of production
> cost increase, supply decrease
3- climate condition
eg: monsoon season, supply of fish falls
4- technology
> advanced tech, increased supply
5- gov policies
> tax increase, supply fall
> subsidy increase, supply increase
6- no. of producers
> a lot of producers, increase supply
what is demand?
the desire to buy goods & the ability to pay
what is supply?
the quantity of a good or service offered
what is market equilibrium?
when the quantity demanded equal quantity supplied
what is maximum price policy?
- aka ceiling price
- gov set max price below the equilibrium price
- goal: protect consumers
- imposed on essential goods (sugar, cooking oil & rice)
- effect: increase of demand, shortage occur (demand > supply)
- may hv black market, not all buyers able to purchase goods
what is minimum price policy?
- aka floor price
- gov set price below the equilibrium price
- goal: protect producers when prices are too low, generate guarantee return (income)
- imposed on agricultural products
- gov can purchase surplus of goods for future use
- effect:
> consumers pay more
> surplus purchased using taxpayer’s money (less money for other projects)
> may lead to overproduction = wastage of resources
what is GDP + calculation
- gross domestic product
- final goods produced within the country
1- income approach
rent + wages + interest + profit
> transfer payment NOT included
2- expenditure approach
consumption + investment + gov expenditure + ( export - import )
what is GNP + calculation?
- gross national product
- final goods & services produced by the citizens regardless of where they are (ownership)
GNP= GDP + (factor income from abroad - factor income paid abroad)
what is NNP? what is NDP?
- net national product = national income
NNP= GNP - depreciation
NDP= GDP - depreciation
calculation for GDP per capita?
GDP/total population
for average income
what are the factors that influence consumption? (4)
1- level of income
> income increase, consumption increase (+ve relationship)
2- cost & availability of credit (loan)
> low interest rate, increase consumption
> longer pay back period, increase consumption
3- consumer expectation
(a) inflation
> expect price of good rise, consumption now increase
(b) income level
> expect income rise, consumption now increase
(c) employment
> employment rise, consumption rise
4- wealth & savings
> more wealth & savings, higher level of consumption
what is inflation + calculation
a continuous increase in the general price level of goods
inflation rate:
current yr CPI - prev yr CPI/prev yr CPI x 100%
what is CPI?
- consumer price index
- measures changes in general price level
what causes inflation? (3)
1- demand-pull inflation
- due to rising AD
- near full employment
- increase household income, foreign investment & lower interest rate
- increase money supply
2- cost-push inflation
- rise of cost of production
- pass the cost to consumers, increased prices
- decreased production
3- imported inflation
- import goods from countries experiencing inflation
- goods purchased at higher price
- goods sold at higher price in local market
under monetary policy, what are the tools used to control inflation?
monetary policy- contractionary policy, aimed to reduce money supply
1- bank rate
> central bank (Bank Negara Malaysia) increase bank rate
> influence commercial bank, set higher interest rate
> borrowing more costly for consumers, demand for loans will fall
> fall in consumption, fall in investment
> reduced AD, reduced demand-pull inflation, fall of prices of goods
2- open market operations
> central bank sell more Treasury Bills
> bought by commercial banks & individuals
> deposit in commercial banks are reduced
> credit creation in more difficult (careful)
> reduce supply of loans
> fall in consumption, fall in investment
> reduces inflation
3- cash & liquidity ratio
*total liquid assets/total deposits**
> central bank will increase the ratio
commercial banks hv to put more $ in reserve requirement
credit creation is more difficult
supply of loan reduced
fall in consumption, fall in investment
reduce AD
what is labour force + calculation?
- ppl who are willing to work
number of employed + number of unemployed
what is unemployed + calculation
- willing and able to work, but fail to obtain a job
unemployment rate:
number of unemployed/labour force x 100%
what are the causes of unemployment? (5)
1- frictional unemployment
- inevitable, no need gov intervention
- normal turnover labour
- ppl resign and are searching for a job
- job seekers or fresh university graduates
2- structural unemployment
two reasons:
(a) change in structure of economy
> decline of traditional manufacturing industries
> unemployed for **long periods*
> unable find job for their particular skill
(b) change in pattern of demand of good
> change in consumer preference
> goods out of fashion
3- technological unemployment
> change in method of production
> machines & robots replace jobs done by humans
4- cyclical unemployment
> during recession
> lack of AD
> firms produce less, layoff workers
5- seasonal unemployment
> out of work during certain periods or seasons
eg: fishermen, actors, tour guide
under monetary policy, what are the 3 tools used to solve unemployment?
- expansionary monetary policy, to increase money supply in market
1- interest rate
> reduce interest rate
> reduce cost of borrowing for consumers
> supply of loans increase
> increase consumption, increase investment
> firms produce more, hire more employees
> GDP increase, reduce unemployment
2- open market operations
> central bank buy back Treasury Bills from commercial banks/individuals
> deposit in commercial banks increase
> credit creation is easier
> supply of loan increased
> consumption & investment increase
> AD increase, unemployment fall
3- cash & liquidity ratio
> central bank reduce the ratio
> credit creation is easier (more money to lend out)
> supply of loan increased
> consumption & investment increase
> AD increase, unemployment fall
what is money?
- antg that is accepted as a medium of exchange
what are the types of money?
1- legal tender
> notes & coins issued by central bank
> must be accepted
2- commodity money
> precious metals & cowrie shells
> value comes from the commodity it is made out of
eg: gold, silver,rice, alcohol
3- fiat money
> aka representative money
> is money issued by central bank, but has no intrinsic value
> actual value is zero
> only has value by government order
