Unit 1-2: Economics Flashcards
Economics
Study of how best to use limited resources to meet wants of citizens
Goods and services and related interaction theories
Macro and microeconomics
Macroeconomics
Analysis of economy-wide phenomena (inflation, unemployment) and related factors in a country
Microeconomics
Study on how people, households, and businesses allocate limited resources based on decisions and behaviours affecting supply and demand = pricing = supply and demand
Economic growth
Long-term expansion of productive potential of economy (% change GDP) adjusted for inflation
GDP
Economic indicator (stability)
Measures progress of rate of expansion of capcaity to produce goods and services
Economic growth
Accumulating human capital (knowledge & skills), physical capital (equipment, machines), new tech
4 Causes of Economic Growth
Natural resources
Capital
Rate of savings
Technological progress
Economic growth: Natural resources
Need skilled people to exploit them; education and training
Economic growth: Capital
Acquiring capital is investment
More capital = production = growth
High quality capital = increased production
Economic growth: Rate of savings
Capital investment is financed by savings, so growth needs society to save consumption
Economic growth: Technological progress
Improving techniques for using scarce resources; greater output from same quantity of resources
Requires scientific skills of country, education, GDP % devoted to R&D
5 Benefits to Economic Growth
Improved standard of living
Stimulates employment
Increases gov’t revenue
Increases capital investment
Enhances business confidence
5 Benefits to Economic Growth: Improved standard of living
lowers rate of poverty with economic growth
5 Benefits to Economic Growth: Stimulates employment
Increased business requires more labourers increases employment rate
5 Benefits to Economic Growth: Increased gov’t revenue
Boosts tax revenues, increases spending for development
5 Benefits to Economic Growth: Increases capital investment
Demand and output encourages investment in new capital to sustain economic growth
5 Benefits to Economic Growth: Enhances business confidence
Company profits increase and confidence increases in business
3 Costs of Economic Growth
Depletes natural resources
Raises inflation rate
Increased environmental impacts
3 Costs of Economic Growth: Depletes natural resources
Renewable and non-renewable resources become depleted with economic growth
3 Costs of Economic Growth: Raise inflation rate
Economy grows too quickly, demand for goods/services rises too fast; prices increase
3 Costs of Economic Growth: Increase environmental impacts
Air, water, noise pollution; traffic congestion; negative effect on quality of life and growth rate
4 Real Estate indicators for economy
Housing starts
Real estate sales
Building permits issued
Vacancy / occupancy rates
4 Real Estate indicators for economy: Housing starts
Number of buildings under construction; positive correlation to economy
Multiplier effect: an increase in economic activity creates a chain reaction in spending and national income
4 Real Estate indicators for economy: Real estate sales
Sales positively correlated to economy and trigger multiplier effect, recirculated w/in economy
4 Sources of Direct Sales Data
Gov’t of AB
Real estate sales databases
CMHC
Stats Can
4 Sources of Direct Sales Data: Gov’t of AB
Stats for families, households/housing, population and demography, construction, society, community
4 Sources of Direct Sales Data: Real estate sales databases
Data on sales and leases compiled by brokerages, real estate boards & associations
4 Sources of Direct Sales Data: CMHC
Research and stats for residential sector (market reports, forecasts, surveys)
4 Sources of Direct Sales Data: Stats Can
Publishes info on residential permits issued, starts, completions, house prices (new), non-res. construction
4 Real Estate indicators for economy: Building permits
Building permit (issued by municipal gov’t granting permission to construct or alter property)
Better predictor than housing starts but not as potent as them
4 Real Estate indicators for economy: Vacancy / occupancy rates
No. of avail units against total units or rental space vs. total space
Residential props: Occupancy rate = units rented / total; expressed as %
Commercial props: Vacancy rate = vacant units / total units (m^2 etc); expressed as %
4 Factors of production
Production and distribution of goods and services from economic resources:
Land, labour, capital (fixed/working), entrepreneurship
4 Factors of production: Land
Real estate component w/ natural resources
4 Factors of production: Labour
The human input in production process
4 Factors of production: Capital
Investment in capital goods for further production
Fixed: machinery, plants, factories etc
Working: inventory of finished and almost finished goods for consumers
4 Factors of production: Entrepreneurship
Activities of people who organize land, labour, capital to produce good/service for a profit
Resource markets
Facilitate exchange of four factors of production: land, labour, capital, entrep.
Labour is most analyzed b/c 60% of this resource used in production
Canadian Economy
Mixed economy
Private ownership and public enterprise w/ centralized economic planning and gov’t regulation
Private = profit (taxed)
Public funded by private
Citizens pay taxes on goods and services from both sectors
Economic systems
Institutions & procedures that societies put in place to address issues from limited resources
Economic exchanges
Goods and services provided
Money to complete transaction (from spending, revenue, payments, income, taxes)
Government role in mixed economy
Regulator, lawmaker, consumer, producer of goods and services
Simple economies
Exchanges occur through barter, trading
Complex economy
Uses money as medium of exchange for transactions
Canada’s economy = price system instead of barter/exchange
Principles of supply and demand
Supply: amount of a goods/service market can offer at certain price; proportional price and quantity supplied (higher price means more production) = supply relationship
Non-price determinants: costs of production, state of tech, producer expectations, # suppliers, gov’t taxes and subsidies
Movements (supply line)
Movements occur due to quantity change from a change in price; movement occurs to new points alone the existing supply line called “changes in quantity supplied”
Price increases = quantity supplied increases and vice versa
Leftward shift in supply line reduces quantity supplied (S to S1)
Rightward shift increases quantity (S to S2)
Shifts (supply line)
Occurs when changes in factors other than price:
costs of production
state of tech
producer expectations
# suppliers in market
gov’t taxes and subsidies
Demand
Quantity of a good or service at a specific price at period of time
Theory of demand
Price and quantity demanded in a market are inversely related (higher price, less purchases)
Demand relationship
Correlation btwn price and how much goods/services are demanded
Demand non-price determinants
Market size
Consumer expectations
Disposable income
Tastes and preferences
Price of similar products
Movements along demand line
Movement occurs if price changes leading to change in quantity
Demand remains consistent w/ demand relationship
Shifts in demand line
Occurs when changes in non-price factor
Leftward shift reduces quantity (D to D2)
Righward shift increases quantity (D to D1)
Market equilibrium
State of balance between supply and demand (lines intersect in x)
Price point = accepted by both consumers and producers (equilibrium price)
Quantity of goods provided = same as demand
Market surplus
Quantity supplied exceeds quantity demanded at set price
(sales happen)
Price decrease = quantity decreases = demand increases = equilibrium
Market shortage
Quantity demanded exceeds supply at set price (price will be lower than equilibrium)
Sellers raise prices to gain equilibrium
Market indicators
Measuring economic activity to assess supply and demand through numbers; analyze economic indicators
Business indicators
Businesses provide supply of goods and services to fulfill demand; measures include:
GDP
Gross national product (GNP)
Manufacturing
Inventories
Capacity utilization rate
GDP
Reflects state and health of country’s economy and standard of living
Domestic levels of production
Monetary value of all goods/services in a period calculated annually as a %
All consumer, gov’t, business spending plus exports minus imports
GNP
Total economical output
Value of finished goods and services produced by citizens and enterprises globally
Does not include foreign residents income
GNP = GDP + net income abroad - net income to foreign countries
Manufacturing activity
21 industry groups
Plants, factories, homes, mills
New orders, shipments, inventories
New orders are leading economic indicator b/c = positive changes in production (decline is opposite)
Inventories
Maintain inventory levels to meet unexpected product demand
Rising/falling inventories indicate future direction of output and employment
Capacity utilization rate
rate that output levels by a business are met or used
Is a percent about how close to max production capacity firms are
Stats can uses construction, manufacturing, oil/gas extraction for reports
Consumer indicators
Retail sales
Consumer confidence
Consumer price index
Retail sales
Consumer goods/services to public
Typically seasonal trends (sales increase in Sept; peak Dec; decline Jan/Feb)
Swings reflected in GNP
Consumer confidence
Degree of optimism about state of economy and personal finances
Conference board of Canada measures this (can buy subscription)
Consumer price index
Economic indicator measures change in prices
Compare cost of fixed basket of goods/services = inflation or deflation
Compensate workers by adjusting wage for inflation = Indexation
CPI uses
Commercial tenancy agreements to increase rent
Index pensions, social security, child support
Interest payments, bonds
Produced monthly by stats can
Changes in economic activity
Seasonal fluctuations: short-term in a year; winter slower etc.
Business cycles: periodic up/down in economics over time; distinct stages
Secular trends: long-term movement of economics that is not seasonal/cyclical (baby boom, revolutions etc)
Types of real estate markets
Balanced, buyers, sellers
Balanced market
Available properties = potential buyers
Demand = supply
Property prices stable
Financing rates do not affect market
Lots to choose from
Sale happens quickly
Buyer’s market
Properties are more than number of buyers
Prices lowered
More negotiating
Local economy contracting
Fewer buyers avail.
Properties on sale longer
Larger inventory
Seller’s market
Market demand higher than supply
Buyer’s compete for properties
Sell quickly
Prices increase
Buyers increase
Small inventory
Short turnaround
Affordable mortgage rates
Characteristics of real estate
Local in nature; considered separate (cities etc)
Slow to respond to changes in supply/demand (can change during building, too)
Not standard marketing method
Private transactions
Physical characteristics of real estate
Unique: each parcel of land differs (non-homogeneous)
Fixed: properties/land
Durable: use may change but land exists
Scarce: land is finite, bylaws limit use
Supply & demand in real estate
Demographics: population stats (baby boomers needed bigger houses)
Employment & wages: positively correlated; GDP increases, real estate good.
Interest rates: fall = higher demand = prices increase; vice versa
Mortgage volume: high volumes of lending = confidence and desirability of real estate (when confidence declines, lenders become conservative)
Building activity: increased demand causes increased building, due to lag = oversupply after demand dissipates
Government policies (demand)
Residential: social housing, rent supps, capital grants
FTHBP
Rate protection etc
Commercial/Rural: financing programs for start, develop, grow operations
Business cycles
Repeated sequence of economic expansion, decline, recovery (economic cycle)
Reflected in production, employment, profits, prices, wages
Expansion = prosperity until peak
Contraction = recession to trough
Recovery and start again
Recession
Two consecutive quarters (6 months) of negative GDP; can develop into depression
Real estate market cycle
Expansion, peak, contraction, trough, recession, recovery, peak recession…
Affected by geography and property type with related factors for them (demand for retail = pop growth and increased wages)
Market bubble
Created when the price of real estate increases faster than rate of inflation, income, and economic growth
Temporary
Characterized by: increased prices, lots of construction, lots of lending, low interest rates
Bubble burst
Houses purchased at inflated prices causes overconfidence in market; number buyers decreases; interest rates rise; home prices plummet, bubble bursts
Effects: left with overvalued asset; economic activity decreases = unemployment rises
Market corrections
Downturn in demand for and increasing supply of real estate; necessary for stability of industry
