Midterm 1 Flashcards
What is economics
Economics is the study of how individuals, businesses, governments, and the entire society make choices. These choices are influenced by resource scarcity and incentives.
Scarcity
society has limited resources, and cannot produce all goods and services people wish to have.
incentive
is a reward or a penalty that induces an action.
factors of production
Land Labour Capital (Entrepreneurship) How to produce
Labour
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
Efficiency
that society gets the maximum benefits out of scarce resources.
Equity
“justice according to natural law or right, specifically: freedom from bias or favoritism”,
Six key ideas/principles define the way of thinking in economics
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.
marginal benefit
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.
marginal cost
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
Normative analysis
prescriptive statements on what the world `ought to be
Positive analysis
descriptive model of what the world `is’
Production possibilities frontier (PPF)
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
Production efficiency
achieved if the economy cannot produce more of one good without producing less of some other good.
Economic growth
the expansion of production possibilities—an increase in the standard of living.
Two key factors influence economic growth:
- Technological change
- Capital accumulation
A Market
an arrangement with which buyers and sellers get information and trade with each other a particular good or service.
Perfectly competitive Market
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
money price of a good
the amount of money needed to buy it.
The relative price of a good
the ratio of its money price to the money price
of the next best alternate good—is its opportunity cost.
quantity demanded
the amount of the good that buyers are willing to and able to purchase, given a particular price.
Demand
describes how the quantity demanded when the price of
the good changes.
The law of demand.
when the price of a good rises, the quantity demanded of the good falls
when the good’s price
falls, the quantity demanded rises.
quantity supplied
the amount that producers are willing and able to sell.
The law of supply
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.
Market equilibrium
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.
Gross Domestic Product
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.
Y = C + I + G + X − M
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
The Expenditure Approach to GDP
“expenditure” refures to that on goods and services produced in the domestic economy
The Income Approach
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.
The Valued-added Approach
- 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.
Nominal GDP
- 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
Real GDP per person
is real GDP divided by the population
It can be a measure of the standard of living.
Real GDP per person
is real GDP divided by the population
It can be a measure of the standard of living.
Consumer price index
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.
Inflation rate
the percentage increase of the price level.
Measuring CPI
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.
Substitution bias
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
Bias due to new goods
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
Bias due to under-measured quality change
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.
Employment
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.
Unemployment
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.
Labor force
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
Working-age Population
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).
Cyclical unemployment
refers to the deviation of unemployment from its natural rate, it is closely associated with short-run ups and downs of the economy
Full employment
a situation in which the (actual) unemployment rate equals the natural rate of unemployment.
Economic growth
is the sustained increases in aggregate output over a given period.
Bonds
a certificate of indebtedness that specifies the obligation of a borrower to the holder of the certificate
A bond is IOU
Stocks
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.
