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ECON151G 2017 SEM 2 > Test 1 > Flashcards

Test 1 Flashcards

1
Q

What are the 3 fundamental concepts of economics?

A

Oppertuity cost
Marginalism
Efficient markers

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2
Q

List 4 scarce resources:

A

Land
Labour
Capital
Entrepreneur (special category of labour)

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3
Q

What is opportunity costs, why do they arise and what do we measure them in?

A

The best alternative that we forgo or give up when we make a choice or decision. They arise because resources are scarce. Nearly all decisions involve trade-offs and opportunity costs can be measured in $ or time.

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4
Q

What is merginalism?

A

Weighing costs and benefits of a decision. It is important only to weigh costs and benefits that will arise from the decision not sunk costs (costs that cannot be avoided regardless of what is done in the future because they have already been incurred - we ignore them)

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5
Q

What are efficient markets?

A

A market in which profit opportunities are eliminated almost instantly

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6
Q

What is the broad definition of a market?

A

A group of buyers and sellers of a good or service, can be real/virtual. Supply and demand refer to peoples behaviour

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7
Q

What is the demand schedule?

A

A table showing the relationship between the price of a good and the quantity demanded

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8
Q

What is the law of demand?

A

Inverse relationship between price and quantity demanded (downward sloping curve). So as the price goes down, each customer buys more and new customers enter the market.

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9
Q

What causes a shift in the demand curve?

A

Tastes
Incomes
Price of related goods
Size of population

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10
Q

What causes movement along the demand curve?

A

Price changes

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11
Q

What is a normal good?

A

If the demand for a good is positively related to income it is called a normal good e.g wine, cars holidays etc

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12
Q

What is an inferior good?

A

When demand is inversely related to income i.e beer, public transport

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13
Q

What are substitutes?

A

If the rise of the price of one increases then demand for the other increases e.g butter and marge

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14
Q

What are compliments?

A

If one rises in price the other decreases in demand e.g DVD and DVD players

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15
Q

Define supply:

A

Quantity supplied is the amount of a good that sellers are willing and able to sell at every price

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16
Q

What is the supply schedule?

A

A table that shows the relationship between the price of the good and quantity supplied

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17
Q

What is the supply curve?

A

An upward sloping line relating price to quantity supplied

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18
Q

What is the law of supply?

A

States that there is a direct positive relationship between price and quantity supplied

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19
Q

What causes movement along the supply curve?

A

Price

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20
Q

What causes shifts in the supply curve?

A
  1. Cost of production
  2. Environment
  3. Number of suppliers
  4. Technology used to produce the good
  5. Climatic conditions
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21
Q

What is the equilibrium price?

A

The price that balances supply and demand

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22
Q

What is the equilibrium quantity?

A

The quantity that balances supply and demand

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23
Q

What are the 2 reasons as to why a disequilibrium may occur?

A
  1. Shortage of goods = excess demand

2. Surplus of goods = excess supply

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24
Q

Describe what happens when there is a surplus of goods:

A

P1 is higher than the equilibrium pice. At P1, suppliers are willing to sell Q’’ but buyers only want Q’. This causes a surplus of products (Q’’-Q’) and stock. Suppliers have an incentive to lower their price to get rid of the surplus stock until equilibrium is reached

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25
Q

Describe what happens when there is a shortage of goods:

A

P1 is lower than the equilibrium price. At P1 suppliers are only willing to sell Q’ but buyers want Q’’. A shortage of goods exists (Q’-Q’’). There will be queues of buyers so sellers will have an incentive to increase the price until equilibrium is reached

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26
Q

What is elasticity?

A

A measure of how much buyers and sellers respond to changes in the market conditions. Helps us to understand the relationship between price changes and revenue prices

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27
Q

What is the oqn price elasticity of demand?

A

The degree of responsiveness of quantity demanded of a good or service to a change in its price

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28
Q

Describe when something is perfectly inelastic:

A

No matter how much the price changes, the quantity demanded is always the same i.e does not change. E=0

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29
Q

Describe when something is perfectly elastic:

A

At a certain price the demand just keeps going on forever E=infinity

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30
Q

What is inelastic demand?

A

When an increase in price leads to a decrease in quantity so total revenue increases

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31
Q

What is an elastic demand?

A

An increase in rice leads to a descrease in quantity demanded that is larger so total revenue decreases

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32
Q

How do we calculate elasticity and hat do the values mean?

A

Change in quantity demanded % ÷ % change in price

E > 1 = elastic
E = 1 = unit elasticity
E < 1 = inelastic

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33
Q

What are the determinants of elasticity?

A
  • With respect to price = availability of substitute, time

- With respect to income = nature of good, luxury, necessity

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34
Q

The _____ the number of substitutes, the greater the ______

A

Elasticity

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35
Q

Is demand more elastic or inelastic over time?

A

Elastic

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36
Q

Describe cross elasticity and give 2 examples:

A

The responsiveness of quantity demanded to a given change in the price of another good. Depends on whether the good is a complement or substitute:

  1. Substitutes - if the price of tea increases, quantity demanded decreases and quantity demanded of coffee increases then this cross elasticity is positive
  2. Complements - if the price of coffee increases, quantity demanded decreases and quantity demanded of coffee creamer also decreases, this cross elasticity must be negative
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37
Q

What is the income elasticity of demand?

A

As peoples incomes increase, their demand also increased for a product. In richer countries, the demand for food and basic clothing does not increase with increases in incomes nearly as much as it does for other products. In richer countries the demand for durable goods is rising most rapidly

38
Q

What is the income elasticity demand eqn?

A

IED = % change in quantity demanded ÷ percentage change in income

39
Q

What is a normal good?

A

A rise in income causes more of it to be demanded - positive income elasticity

40
Q

What is an inferior good?

A

A rise in income income causes less of it to be demanded - negative income elasticity

41
Q

What happens when IED = 0?

A

A rise in income leaves quantity demanded unchanged

42
Q

What is the effect of the maximum price law/price ceiling?

A

Price decreases leads to a shortage of goods because at the price ceiling, buyers want Q’’ but sellers are only wanting to sell Q’. A price ceiling above equilibrium has no effect. The suppliers will use the rest of the goods that they will not sell to make other products etc so that they can maximise their profits which leads to people going to the black market

43
Q

What is the effect of a minimum wage law/price floor?

A

If minimum wage is increased, it will lead to a surplus of goods as buyers only want (Q’) but sellers are willing to sell Q’’. A price floor below equilibrium will have no effect

44
Q

What are taxes?

A

A way of collecting revenue for public services and discourage consumption of harmful substances like ciggarettes and alcohol

45
Q

Even if the tax is placed on sellers, who ends up paying the tax?

A

Buyers and sellers

46
Q

How can we calculate government revenue?

A

Quantity x Tax

47
Q

What is the result of a shift in supply with a highly elastic demand?

A

When the supply curve shifts, both the price and quantity changes. The relative impact on price and quantity depends on the elasticity of demand at the initial equilibrium. When the demand is highly elastic, a shift in the supply curve will have a small effect on price and a large effect on quantity

48
Q

What is the result of a shift in the supply curve and a highly inelastic demand?

A

When the demand is inelastic, a shift in the supply curve will have a large effect on price and a small effect on quantity

49
Q

What is tax incidence?

A

The more inelastic the demand, the higher portion of the tax is borne by the buyer. The more elastic the demand the higher portion of tax is borne by the seller.

50
Q

What is GDP?

A

Gross domestic product is a measure of income and expenditures of the economy. It is the total market value of all final goods and services produced within a country in a given period of time. (Note - intermediate goods are not counted)

51
Q

Why can we not compare a developed countries GDP to a developed one?

A

Because the GDP does not take into account the non-market economic activities (e.g second hand clothes and cash etc) so their GDP will be understated. = black economy

52
Q

Name and describe the 2 types of GDP:

A
  1. Nominal GDP values the production of goods and services at their current prices
  2. Real GDP values the production of goods and services at constant prices. We need to use real GDP because nominal GDP includes inflation
53
Q

What is the GDP deflator?

A

A measure of price level calculated as the rate of nominal GDP to real GDP times 1000. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.

54
Q

What does the GDP per person indicate?

A

The income and expenditure of the average person in the economy. Higher GDP per person = higher standard of living. It is the best statistic we have but its only an average so it does not show a true representation

55
Q

What will happen if the market income is pushed towards the equality line?

A

Society will be destroyed

56
Q

What is inflation?

A

A situation in which the economic overall price is rising. Inflation rates is the % change in price level from the previous period

57
Q

What is the CPI?

A

A measure of the overall cost of goods and services bought by a typical household - no luxuries. It is used to monitor changes in the cost of living over time

58
Q

How is the CPI calculated?

A
  1. Fix the basket - determine what prices are the most important for a typical consumer.
  2. Find the prices of each good and service at each point in time
  3. Compute the baskets cost
  4. Chose a base year and compute the index
  5. Calculate inflation rate
59
Q

Is the CPI a perfect measure of the standard of living?

A

No

60
Q

What is PPI?

A

The producer price index which can affect the CPI

61
Q

What are the 3 problems with measuring the cost of living?

A
  1. Substitution bias
  2. Introduction of new goods
  3. Unmeasured quality changes

They all lead to the CPI being overstated

62
Q

Describe the problem with the cost of living: substitution bias

A

The basket does not change to reflect consumer reaction to changes in relative prices. Consumers substitute towards goods that have become less expensive. This results in an overstated cost of living.

63
Q

Describe the problem with the cost of living: introduction of new goods

A

The basket does not reflect the change in purchasing power bought on by the introduction of new goods. New goods result in greater variety which then makes each $ more valuable so consumers need fewer $ to maintain the same standard of living

64
Q

Describe the problem with the cost of living: unmeasured quality chnages:

A

If the quality of goods rise from one year to another, the value of the dollar rises regardless if the price of the good stays the same

65
Q

What is the main difference between the GDP deflator and the CPI?

A

GDP deflator reflects the prices of all goods and services produced domestically whereas the CPI reflects prices of all goods and services bought by customers - not necessarily from NZ

66
Q

What is the result of an overstated CPI?

A

It can cost the government millions of $ as wage increases are tied to the rate of inflation

67
Q

What is the price index?

A

It is used to correct for the effects of inflation when comparing dollar figures from different times. This means that the standard of living and a persons purchasing power does not change over time

68
Q

What is indexation?

A

When some dollar amount is automatically corrected for inflation by law or contract the amount is said to be indexed for inflation

69
Q

What is the nominal interest rate?

A

The rate that is reported and not indexed for inflation. Quoted bank rates are nominal

70
Q

What is the real interest rate?

A

The nominal interest rate that is corrected for the effects pf inflation

71
Q

Describe the financial system?

A

Consists of a group of institutions in the economy that help to match one persons savings with another persons investments (i.e coordinate savers and borrowers). It moves the economy’s scarce resources from savers to borrowers

72
Q

What are the 2 types of financial systems?

A
  1. Financial markets

2. Financial intermediatries

73
Q

What are financial markets?

A

Institutions through which savers can directly provide funds to borrowers

74
Q

What are the 2 types of financial markets?

A
  1. Bond markets

2. Share markets

75
Q

What is a bond and what are the characteristics of a bond?

A

A bond is a certificate of indebtness that specifies obligations of the borrower to the holder of the bond. Characteristics:

  1. Term - length of time until bond matures
  2. Credit risk - the probability that the borrower will fail to pay interest or the principle
  3. Tax treatment - the way in which tax laws treat the interest on the bond
76
Q

What is a share?

A

A share represents a claim to partial ownership of a firm. The sale of share to raise money is called equity financing. Compared to a bond, a share has a higher risk/reward

77
Q

What are financial intermediatries?

A

These are financial institutions through which savers can indirectly provide funds to borrowers

78
Q

What are the 2 types of financial intermediatries?

A

Banks and managed funds

79
Q

What are banks and what do they do?

A

They take deposits from people who want to save and use them to make loans to people who want to borrow. They pay interest on deposits and charge people higher interest on loans

80
Q

If a company goes bankrupt who is the first to be paid - bond holders or share holders?

A

Bond holders and shareholders are last which is why they are the biggest risk/reward

81
Q

What are managed funds?

A

An institution that that sells shares to the public and uses the proceeds to buy a portfolio of various types of stocks, bonds or both. This allows people with small amounts of money to easily diversify which reduces the risk but the shareholder has to accept both loss or gain

82
Q

What are 4 examples of other financial institutions?

A
  1. Credit unions
  2. Pension funds
  3. Insurance companies
  4. Loan sharks
83
Q

What are national savings?

A

Total disposable income in the economy that remains after paying for consumption and government purchases

84
Q

What are private savings?

A

The amount is income that households have left after paying their taxes and consumptions

85
Q

What are public savings?

A

The amount of tax revenue that the government has left after paying for its spending.

86
Q

What do loanable fund markets link?

A

Links present to future

87
Q

What is the market for loanable funds?

A

The market in which those who want to save - supply funds and those who want to borrow to invest - demand funds

88
Q

What are loanable funds?

A

All income that people have chosen to save and lend out rather than use for their own consumption. These funds are usually exchanged as bonds, shares, mutual funds or in a bank.

89
Q

What are the 3 government polices that affect savings and investments?

A
  1. Taxes and saving (incentives to save)
  2. Taxes and investments (incentives to invest)
  3. Government budget deficits
90
Q

Describe the government policy and how it affects the demand and supply curves: taxes and savings (incentives to save)

A

A tax decrease increases the incentive to households to save at any given interest rate.

  • the supply of loanable funds shifts to the right
  • the equilibrium interest rate decreases
  • the quantity demanded for loanable funds decreases

Leads to economic growth

91
Q

Describe the government policy and how it affects the demand and supply curves: taxes and investments (incentive to invest)

A

An investment tax credit increases the incentive to borrow, it:

  • increases the demand for loanable funds
  • shifts the demand curve to the right
  • results in higher interest rates and greater quantity saved
92
Q

Describe the government policy and how it affects the demand and supply curves: government deficit and surplus:

A

When the government spends more than it has received in tax revenues, it is called a budget deficit. The accumulation of past deficits is called government debt. Government borrowing to finance its budget deficit reduces the supply of loanable funds available to finance investments by households and firms. The fall in funds for private investments is called ‘crowding out’. It causes:

  • the supply curve to shift to the left
  • increase equilibrium interest rate
  • reduces the equilibrium quantity of loanable funds

ECON151G 2017 SEM 2 (2 decks)

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