Midterm 1

Question 1

What is economics

Answer 1

Economics is the study of how individuals, businesses, governments, and the entire society make choices. These choices are influenced by resource scarcity and incentives.

Question 2

Scarcity

Answer 2

society has limited resources, and cannot produce all goods and services people wish to have.

Question 3

incentive

Answer 3

is a reward or a penalty that induces an action.

Question 4

factors of production

Answer 4

Land
Labour
Capital
(Entrepreneurship)
How to produce

Question 5

Labour

Answer 5

input is the work time and work effort that people devote to producing goods
and services.

The quality of labour depends on human capital—the knowledge and skill that people obtain from education, on-the-job training, and work experience

Question 6

Efficiency

Answer 6

that society gets the maximum benefits out of scarce resources.

Question 7

Equity

Answer 7

“justice according to natural law or right, specifically: freedom from bias or favoritism”,

Question 8

Six key ideas/principles define the way of thinking in economics

Answer 8

A choice is a trade off.

People make rational choices by comparing benefits and costs.

Benefit is what you gain from something.

Cost is what you must give up to get something.

Most choices are “how-much” choices made at the margin.

Choices respond to incentives.

Question 9

marginal benefit

Answer 9

The additional benefit from pursuing an incremental increase in an activity

If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity.

For now, marginal benefit can be measured by the amount that a person is willing to pay for an additional unit of a good or service.

Question 10

marginal cost

Answer 10

The opportunity cost of pursuing an incremental increase in an activity

The marginal cost of a good or service is the opportunity cost of producing one more unit of it

Question 11

Normative analysis

Answer 11

prescriptive statements on what the world `ought to be

Question 12

Positive analysis

Answer 12

descriptive model of what the world `is’

Question 13

Production possibilities frontier (PPF)

Answer 13

is a graph showing the various combinations of output that the economy can possibly produce (at most), given the available factors of production and the available production technology that firms can turn those factors into output.

highlights some basic ideas in economics: scarcity, efficiency, opportunity cost, trade-offs, economic growth

Question 14

Production efficiency

Answer 14

achieved if the economy cannot produce more of one good without producing less of some other good.

Question 15

Economic growth

Answer 15

the expansion of production possibilities—an increase in the standard of living.

Two key factors influence economic growth:

• Technological change
• Capital accumulation

Question 16

A Market

Answer 16

an arrangement with which buyers and sellers get information and trade with each other a particular good or service.

Question 17

Perfectly competitive Market

Answer 17

exists if no single buyer or seller has any influence on the market price.

We often require that the good or service being sold in a perfectly
competitive market is the same across all sellers

Question 18

money price of a good

Answer 18

the amount of money needed to buy it.

Question 19

The relative price of a good

Answer 19

the ratio of its money price to the money price

of the next best alternate good—is its opportunity cost.

Question 20

quantity demanded

Answer 20

the amount of the good that buyers are willing to and able to purchase, given a particular price.

Question 21

Demand

Answer 21

describes how the quantity demanded when the price of

the good changes.

Question 22

The law of demand.

Answer 22

when the price of a good rises, the quantity demanded of the good falls

when the good’s price
falls, the quantity demanded rises.

Question 23

quantity supplied

Answer 23

the amount that producers are willing and able to sell.

Question 24

The law of supply

Answer 24

the higher the price of
a good, the greater is the quantity supplied

the lower the price of a good, the smaller is the quantity supplied.

Question 25

Market equilibrium

Answer 25

a situation in which price has reached a level such that quantity demanded equals quantity supplied.

Equilibrium is a point where the demand curve and supply curve intersect.

The price at the intersection is the equilibrium price.

Question 26

Gross Domestic Product

Answer 26

The total unduplicated market value of all goods and services produced in a country during a given period of me.

the market value of all final goods and services produced in a country given a period of me.

Question 27

Y = C + I + G + X − M

Answer 27

Y: Households’ income consists of labor income, capital income, income from business ownership.

C: Households’ expenditure consists of consumption expenditure and

I: expenditure on housing and capital (investment)

G: government collect taxes (T)

X: exports

M: Imports

Question 28

The Expenditure Approach to GDP

Answer 28

“expenditure” refures to that on goods and services produced in the domestic economy

Question 29

The Income Approach

Answer 29

GDP consists of three types of income:

-Labor income: wages and employer’s social contributions.

-Capital income from owned stocks of capital (machinery and equipment,
buildings, etc.)

-Profits of business owners.

Question 30

The Valued-added Approach

Answer 30

• GDP is the sum of values added in producing all goods and services.
• Value added = Revenue from sales - cost of intermediate inputs.
• It is apparent that value added equals income.

Question 31

Nominal GDP

Answer 31

• is the value of goods and services produced during a given year evaluated at the prices prevailed in the same year.
• measures the current-dollar values of GDP

Question 32

Real GDP per person

Answer 32

is real GDP divided by the population

It can be a measure of the standard of living.

Question 33

Real GDP per person

Answer 33

is real GDP divided by the population

It can be a measure of the standard of living.

Question 34

Consumer price index

Answer 34

measures the overall cost of the goods and services bought by a typical consumer

The goal of CPI is to measure changes in the cost of living

But it is an imperfect measure.

Question 35

Inflation rate

Answer 35

the percentage increase of the price level.

Question 36

Measuring CPI

Answer 36

CPI is measured in three steps:

Step 1. Fix the basket of goods and services, assign weights to them; Find the price of each good and service in the basket at each point in me.

Step 2. Compute the price (the cost) of the basket, using the weights and individual prices of goods and services.

Step 3. Choose a base year and calculate the index.

CPI = Price of basket of goods and services in current year / Price of basket of goods and services in base year × 100.

Question 37

Substitution bias

Answer 37

Prices of goods and services in the CPI basket do not change proportionately.

Some prices rise more than others

Consumers substitute toward those goods whose prices become relatively lower

Question 38

Bias due to new goods

Answer 38

When a new good is introduced, consumers have more variety to choose from.

This reduces the cost of maintaining the same level of economic well-being, because each dollar is worth more

Question 39

Bias due to under-measured quality change

Answer 39

If the quality of a good rises over me, the value of a dollar becomes higher, because consumers get more of a good for the same amount of money.

Question 40

Employment

Answer 40

A person is employed if the person has a paid job, or works in the person’s own business, or does unpaid work in the person’s family business.

Question 41

Unemployment

Answer 41

A person is unemployed if the person is without work but had looked for work in the past four weeks, or if the person is temporarily laid-off and is available for work, or if the person is without work but expects to start a job within four weeks from a reference period.

Question 42

Labor force

Answer 42

Labor force = Number of employed + Number of unemployed.

the total number of workers, including both the employed and the unemployed. A person who is neither employed nor unemployed is not in the labor force

Question 43

Working-age Population

Answer 43

includes all persons aged 15 years and over residing in the provinces of Canada, but excluding members of full-me regular army forces and institutionalized persons (inmates, parents in hospitals or nursing homes).

Question 44

Cyclical unemployment

Answer 44

refers to the deviation of unemployment from its natural rate, it is closely associated with short-run ups and downs of the economy

Question 45

Full employment

Answer 45

a situation in which the (actual) unemployment rate equals the natural rate of unemployment.

Question 46

Economic growth

Answer 46

is the sustained increases in aggregate output over a given period.

Question 47

Bonds

Answer 47

a certificate of indebtedness that specifies the obligation of a borrower to the holder of the certificate

A bond is IOU

Question 48

Stocks

Answer 48

represents the ownership in a firm, i.e., a stock is claim to the profits of the firm.

Stocks are traded in the stock market.