Unit 2 Flashcards
What is the law of demand?
As the price of a good or service rises
(or falls), the quantity of that good or
service that people are willing and able
to buy during a certain period of time
falls (or rises).
What is the substitution effect and what are the effects on supply and demand?
If price goes up
for the Big Mac,
consumers will
simply buy
more of another
good.
P⬆️D⬇️
What is the income effect and what are the results of price and demand?
A rise in price
for the Big Mac
will cause an
impact to a
person’s
income.
P⬆️D⬇️
What does a demand shift to the left mean and what does a demand shift to the right mean?
Left: decreased demand
Right: increased demand
What factors cause a demand shift in any direction? (Demand determinants)
Change in one of the five factors (Demand
Determinants)
• Preferences and Tastes
• Income
• price
• Expectations
• price of Related Goods
What are complementary goods? Give an example.
Complementary goods are products that
are used together.
• Coffee and Donuts
• If the price of a complementary good
increases, it decreases demand for the
other good.
• Conversely, if the price of a
complementary good decreases, it
increases the demand for the other good
What is the law of supply?
Quantity supplied is directly
related to price.
If P↑ then Qs ↑
If P↓ then Qs ↓
List the changes and causes in “supply” vs changes in “quantity supplied”
Change in Quantity Supplied (Qs):
•Caused by a change in price
•Movement along the curve
•Change in Supply:
•Shift in the whole curve
•Changes Qs at all price levels
•Caused by changes in non-price factors
• Called Supply determinants
What are the supply determinants?
Resource Prices
• Expectations (producer)
• Number of Sellers
• Technology
• Environment
• Related products (price of)
Explain the fluctuations in resource prices and the effects on supply.
•As input prices increase, production
costs will increase = ↓ supply (shift to
left/inward)
•As input prices decrease, production
costs will decrease = ↑ supply (shift to
right/outward
What are producer expectations?
If prices are expected to increase in the
future, producers may ↓ supply now.
•If the prices are expected to decrease in the
future, producers may ↑ supply now.
What are number of sellers? What’s the effect on supply?
•As the number of sellers increase
= ↑ supply (shift to right/outward)
•As the number of sellers decease
= ↓ supply (shift to left/inward
What’s the effect of technology on supply?
•Technology improvement will
improve production efficiency &
decrease production costs = ↑ supply
(shift to right/outward
What’s the effect of the environment on supply?
•Change in weather (flood, drought,
frost, etc.) can ↓ supply (shift to
left/inward
What’s the effect of price of related goods on supply?
•Increase in supply of a substitute product
= ↓ supply of product
•Decrease in supply of a substitute product
= ↑ supply in produc
Describe market equilibrium.
the interaction
of demand and supply curves
⚫ Compromise between consumers who
want the lowest prices possible and
sellers who want the highest prices
possible
State what the equilibrium price, quantity and point are.
Equilibrium point:
⚫ quantity demanded = quantity
supplied
⚫ Equilibrium quantity: amount of
a good that is bought and sold in a
market that is in equilibrium
⚫ Equilibrium price: price at which
a good is bought and sold in a
market that is in equilibrium
Describe a surplus’ definition, when it occurs, and its effect on price. Also talk about consumer behaviour.
Quantity supplied is greater than
quantity demanded (Qs > Qd)
⚫ Occur only at prices above the
equilibrium price
⚫ Excess supply → prices ↓ because
suppliers hope to sell their
inventory
⚫ Consumer buy more
⚫ Continues until Qs=Qd
Describe a shortages definition, when it occurs, and its effect on price. Also talk about consumer behaviour.
Quantity demanded is greater than quantity supplied (Qd > Qs)
⚫ Occur only at prices below equilibrium price
⚫ Excess demand → prices ↑ because
buyers will offer to pay a higher price to get sellers to sell to them
⚫ Sellers/Producers ↑ prices →
consumers buy less
⚫ Continues until Qs=Qd
What do changes to demand do to the equilibrium? (Increases and decreases)
Increase in Demand:
⚫ Shift of the demand curve to the right
⚫ Pushes up both equilibrium price and
quantity
⚫ Creates a shortage
⚫ Decrease in Demand:
⚫ Shift of the demand curve to the left
⚫ Pushes down both equilibrium price
and quantity
⚫ Creates a surplus***
What do changes to the supply do to the equilibrium? (Increase and decrease)
Increase in Supply:
⚫ Shift of the supply curve to the right
⚫ Pushes equilibrium price down and
equilibrium quantity up
⚫ Creates a surplus
⚫ Decrease in Supply:
⚫ Shift of the demand curve to the left
⚫ Pushes equilibrium price up and equilibrium
quantity down
⚫ Creates a shortage***
Describe general utility and what utils are:
• Utility:
– Satisfaction derived from the consumption of a
good or service.
• Utils:
– Unit(s) of satisfaction that a person gains from
consuming an item
– Assigned a numerical value
Compare total utility vs marginal utility:
Total: Total satisfaction derived from the
consumption of a good or service
Marginal: increased or decreased satisfaction from consuming one or more units of a product.
When is utility maximization achieved? (Formula)
(MU product A/ Price product A) = (MU product B/ Price product B)
Note: MU/p = amount of satisfaction gained per price dollar
How do you determine MU? (Note: when TU rises MU falls)
Knowing the TU you can calculate MU:
TU 1 - 0
TU 2 - TU 1
TU 3 - TU 2
TU 4 - TU 3
What are the steps to maximizing utility?
- Find out MU
- You then find out where satisfaction per dollar is the same for both products after calculating spd (may be at multiple values)
- Figure out with what spd matching values works out with the given money to spend to maximize utility.
Define the law of diminishing returns:
As one input (ex: machines) increases, the marginal output gets smaller. Finding that perfect amount/ balance of inputs to maximize outputs. Make sure the outputs don’t diminish.
Formula for total profit?
Total profit = total revenue - total costs.
AP (accounting profit) formula?
AP = Total revenue - explicit costs
Define explicit costs:
Payments/expenses made by a
business to a businesses or people outside (wages,
rent))
Define implicit costs:
Owners’ opportunity cost of being
involved with the business.
EP (economic profit) formula?
EP= total revenue - economic costs
Economic costs formula?
EC = explicit costs + implicit costs
Define and describe fixed costs:
overhead costs, fixed inputs
Same at all output levels no matter how many units
are produced
Difficult to adjust in the short term
Rent, property taxes, insurance premiums
Define and describe variable costs:
variable inputs
Change with the number of units produced
Increased production means increased VC
Easy to add more variable inputs in the short term
Target for “emergency” cutbacks
Labour, fuel, raw materials, electricity
Total cost formula?
Fixed costs + variable costs
Describe the short run and provide an example:
- Period over which the firm’s maximum capacity
becomes fixed because of a shortage of at least one
resource
– Firm has at least one fixed factor of production
– Firm does not have sufficient time to vary all of its
input
Example: In manufacturing a firm cannot adjust the quantity
of machinery they use or the size of the factories
on short notice
Describe the long run and provide an example:
- Period when all costs become variable (including
fixed costs)
– Over the long-run, the firm will be able to adjust all
costs
– In LR there are no fixed costs of production
Example: – In cookie production, producers can produce more
cookies by adding more workers and machines
(variable inputs) but production will eventually be
limited by the size of the factory (fixed input)
– In SR – production limited by the number of cookie
factories
– In LR – can build more factories to expand production
Describe and show how to notice the profit maximization point.
Firms should produce up to a point at which there
is no added benefit/profit from producing any more
– This point is referred to the point of:
Marginal Cost = Marginal Revenue
MC = MR
What is Economies of scale in a business?
Efficiency achieved when producing large amounts
of output
– cost per unit decreases as output increases (bargain for bulk purchases and sold)
– Increased output allows a firm to spread FC over an
increasing number of units produce
List 3 impacts John m Keynes made.
Any of these are applicable:
Work revolutionized modern economics
● Ideas greatly influences government economic policies
● Keynes’ ideas had a profound impact on economic policy, particularly
during the great depression and post WW2
● Keynesian economics remains a cornerstone of macroeconomic
theory
● The application of keynesian principles is still relevant in modern
economic policy, especially during economic crisis
● Major Works
○ The General Theory of Employment Interest and Money (1936)
■ Argued that government intervention was essential to
stabilize and stimulate the economy
What is adam smith called?
“Father of modern economics”
Any of these are applicable:
The Theory of Moral Sentiments (1759)
■ First major book that focused on ethics and human behaviour
■ Introduced the concept of “Impartial Spectator” as a basis for moral
judgement
○ An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
■ Explored economic concepts and the concept of the “invisible hand”
■ Emphasized the importance of self-interest in promoting the common
good
■ Advocated for a free-market system with limited government
Define perfect competition and its traits:
Many Producers selling uniform products
○ Many buyers and sellers that individual firms have no
control over total market supply
○ Standardized product
○ Price-takers (no control over price): prices are determined
by the market (equilibrium).
○ Easy to enter/exit: low start up costs and no barriers
○ Little no-price competition: sell identical product
Define a monopoly and its traits:
One firm or organization enjoys complete control
of the market
■ Single firm: complete control over total supply/market
■ Unique product (no close substitutes)
■ Price-maker – by changing supply can get whatever
price will maximize their total profits)
■ No entry or exit (legal or financial barriers)
■ No competition means that there is no need for
non-price competition
What are the 5 factors that shape market structures?
- Number or size of firms in market
- Nature of product sold
- Control over price
- Ease of entry/exit
- Amount of non-price competition
Describe monopolistic competition and its traits:
● Product can be differentiated and there are a substantial number
of firms operating in the market
○ i.e. service and retail sectors (restaurants, clothing stores
■ Many sellers
■ Similar products: they are similar but not identical
■ Some control over price (product differentiation): individual firms are
large enough to influence total supply
■ Easy to enter/exit
■ Significant non-price competition (brand loyalty): consumers become
attached to a product and will pay more to satisfy their preferenc
Describe oligopolistic competition and its traits:
● Operate as huge firms in each of their respective
markets
○ Few large firms
○ Product may be similar or differentiated (steel vs. car)
○ Control to set price varies from slight to substantial
■ Each firm has a large market share
■ Common pricing strategy among oligopolistic may occur
○ Significant barriers to enter: financial
○ Significant non-price competition (loyalty, product differentiation
What is a price ceiling?
A price ceiling is a restriction placed by a
government in order to prevent the price of a
product from rising above a certain level
Where is a price ceiling set amongst the equilibrium?
Below
What is the main occurrence during a price ceiling?
A shortage:
At the ceiling price, there is more demand
than there is at the equilibrium price, there
is also less supply
Therefore, there is more quantity
demanded than quantity supplied
What is a price floor?
A price floor is a restriction that prevents a price from falling below a certain level
The most common floor price is the
minimum wage.
Floor prices are also often used in agriculture to try to protect farmer
Where is a price floor set amongst the equilibrium?
Above
What is the main occurrence during a price floor?
Surplus: At the floor price, consumers aren’t willing
to buy as much quantity.
However, since the price is higher,
suppliers are willing to supply more:
Therefore, there is less quantity demanded
than quantity supplied
What is a quota:
A quota is a restriction placed on the amount of
product that individuals are allowed to produce.
Restrict/decrease the overall supply to increase prices
These restrictions are administered by
organizations called marketing boards, which
are comprised of representatives from the
government and from the producers.
Benefits producers because steepness of demand
means change in price is greater than change in
quantity, therefore increases revenues
What is a subsidy?
A subsidy is a financial grant made to a
particular industry by the government.
The immediate impact is that the supply line
increases by the amount of the subsidy,
which results in a new equilibrium.
What is tax?
A fee paid by an industry or person to the government.
State the 4 components of the circular flow models and briefly describe them.
Factor market is where the resources needed to make
finished products are bought and sold.
● Product market is where finished goods and services are
bought and sold.
● Business sector is comprised of all the firms in economy.
an
● Household sector represents all the individuals within an
economy
Define GDP:
Gross Domestic Product (GDP)
The total market value of all final goods
and services produced within a country’s
borders during a given period (usually a
year)
This is one indicator of economic
health/economic performance.
What are the 3 identifiers of GDP?
Was a new final good or service produced
this year?
Was it produced within the country?
Was money exchanged in a formal market?
Show how to calculate GDP with the income approach
Add all of these:
Wages and salaries
Payments for labour
Corporate profits
Dividends
Interest Income
Earned on bank loans, investment income
Proprietors’ Incomes and Rent
Income for self-employed individuals
Rent for buildings and land
Indirect Taxes
Income earned by government on sale of goods
and services (sales taxes)
Depreciation
Income lost from reinvesting money to replace old
capital equipment
Show how to calculate the GDP using the expenditure approach
GDP = C + G + I + (X – M)
C – Consumption
Total spent on final goods (durable,
semi-durable and non-durable) and services
G – Government Expenditures/Purchases
Total spent on wages for government employees, public
capital goods (government buildings, schools, hospitals,
roads, etc.)
I – Investment
Total spent on purchase of new capital goods (for
production), construction of new buildings and
inventory
Net Exports (X – M)
X – Exports: items produced inside Canada
M - imports: items produced outside of Canada
What is the economic growth formula?
((Real gdp year 2 - real gdp year 1)/real gdp year 1) x 100
What is the labour force participation rate?
(Employed + unemployed)/ population
What is the unemployment calculation? Also describe what labour force is.
(#unemployed/#labour force) x 100
Labour force: people working + people looking for work
List and describe the 4 types of unemployment:
● Seasonal: Examples include students
employed during the summer
at Wonderland,construction,
Snow Plow drivers or
Farming
● Frictional: a brief
period of unemployment caused by
moving between jobs or into the labor
market. People have the skills and
knowledge necessary to get a job, and
the jobs are available.
● Structural: is
unemployment caused by a mismatch
between the skills or location of job
seekers and the requirements or
location of available jobs.
● cyclical: is
unemployment caused by a
lack of job vacancies; an
inadequate level of
aggregate demand. Cyclical unemployment
commonly occurs during
recessions.
Reasons for unemployment:
New grad looking for very first job
● People quit if they are unhappy or want to
change fields
● Fired
● Laid off (not enough work available)
- discouraged workers
- dishonest workers
- underemployed
What is inflation and how is it measured?
Is a rise on the general level of prices of goods
and services in an economy over a period of
time
• Is measured by calculating the inflation rate of a
price index, usually the Consumer price Index
(CPI) or a GDP Deflator
What is the CPI calculation?
(Price of basket in current year/ price of basket in base year) x 100
What is the inflation rate calculation?
(C(PI year 2 - CPI year 1)/ CPI year 1) x 100
What are the main effects of inflation?
Negative effects of inflation include
• Decrease in the real value of money and other
monetary items over time
• Uncertainty over future inflation may discourage
investment and savings
• High inflation may lead to shortages of goods if
consumers begin hoarding out of concern that
prices will increase in the future
What is nominal gdp?
The GDP of a country which does not account for inflation.
Describe aggregate demand.
Total demand for final goods and
services in the economy at a given
time and price level
•It is the amount of goods and services
in an economy that will be purchased
at all possible price levels
What causes a shift in aggregate demand either way (left or right)?
- consumer spending
(Income levels, taxes, interest rates) - changes in investment
(Tech advancements, business confidence) - government spending
(Fiscal policies, natural disasters) - net exports
(Income levels, trade policies)
Describe aggregate supply and short run aggregate supply.
Aggregate Supply is the total of all goods supplied in
the economy
When we say short run aggregate supply (SRAS) we
are referring to the changes in the quantity supplied
in the short run only (less than 1 year)
Similar to aggregate demand in that it includes the
production of all things, from toothbrushes to
Lamborghini’s
Describe long run aggregate supply.
Represents how much an
economy is capable of producing
when using its resources fully (full
employment).
This is the natural rate of output-
meaning how much we make
when the economy is working
well. Long Run Aggregate Supply
doesn’t shift in the short run (less
than one year)
Over time however, as our
resources become more
productive (labour, tech,
equipment) the economy is able
to make more goods/services at
its base level
What causes a shift in aggregate supply?specify for long run and short run
Short run: caused by temporary factors that affect production costs.
Long run: caused by changes in the economy’s productive capacity.
What happens when equilibrium output is equal to potential output?
Economy is at full employment.
What happens when equilibrium output is below potential output?
They are producing less than potential.
Causes a recessionary gap.
What happens when equilibrium output is above potential output?
Producing more than potential.
Causes an inflationary gap.
When does output equilibrium occur?
When aggregate supply = aggregate demand.
Define and describe the difference between fiscal policies and monetary policies.
Governments affect the macroeconomic landscape (mainly aggregate
demand) through both fiscal and monetary policies
Fiscal Policy: How the government spends money
Monetary Policy: The country’s supply of money
Both aim to close recessionary/ inflationary gaps.
Show the difference between expansionary fiscal policies vs contractionary.
Expansionary Policy
The goal is to expand or speed up economic growth - good when in a
recessionary gap
Contractionary Fiscal Policy
The goal is to slow down or contract the economy, good when the economy is
in an inflationary gap
What can we do in terms of fiscal policies during a recessionary gap?
Decrease Taxes
● Income taxes
● Corporate taxes
● Sales tax
● Investment taxes
Increase Government Spending
● Infrastructure
● Social services
● Poverty relief
● Education, health, etc.
What can we do in terms of fiscal policies during an inflationary gap?
Increase Taxes
● Income taxes
● Corporate taxes
● Sales tax
● Investment taxes
Decrease Government Spending
● Infrastructure
● Social services
● Poverty relief
● Education, health, etc
What are the limitations of fiscal policies?
Timing
Recognition Lag: hard to see the changes as GDP data is only reported
monthly and quarterly
Decision Lag: Slow to create or change a fiscal policy
Implementation Lag: Slow to actually roll out the new policy, hand out the
new money, ect
Impact Lag: takes time to see if the policy you created actually worked
Global Economic Shocks foreign or global problem
- Impossible to plan for, and can’t fix if its a foreign or global problem
Net Export Effect
Hard to control other countries behaviour - Exports and imports
fluctuate outside of our control
What is the role of the bank of Canada?
Its principal role is “to
promote the economic and financial welfare of Canada”
Issues new bills
● Prints new money, destroys old money
- Controls the Money Supply: how much money is in the economy (useful
for controlling inflation) - Setting the interest rate (Bank Rate) at which it will loan funds to the
chartered banks and other banking institutions
What are the limitations of monetary policies?
The Bank of Canada does not control the amount of money that
households choose to hold or deposits in banks.
● The Bank of Canada does not control the amount of money that bankers
choose to lend or consumers choose to borrow.
