St Francis’ Canossian College Economics Exam skill for Paper II Basic Economic Concepts

Economics flashcards for exam review.

Opportunity cost

It is the highest-valued option forgone.

Interest

To lender, it is the compensation/premium for postponing (deferring) consumption. To borrower, it is the price/cost of earlier availability of goods for consumption.

Free goods and economic goods

If yes → Yes, the quantity available is sufficient to satisfy all human wants. If no → No, because it is produced from scarce resources, which have alternative uses. OR → No, more is preferred to less. OR → No, the quantity available is insufficient to satisfy all human wants.

Positive statement

If yes → It is a positive statement because it is refutable by facts. If no → It is not a positive statement because it is not refutable by facts.

Normative statement

If yes → Yes, it is a normative statement because it is not refutable by facts. If no → No, it is not a normative statement because it is refutable by facts.

Full cost

Money cost + non-money cost

What to produce

Kinds and quantities of goods to produce.

How to produce

Method of production.

For whom to produce

Distribution of goods and services.

Private property rights

1. exclusive right to use, 2. exclusive right to receive income and 3. right to transfer.

Consumer good

If yes → Yes, it directly satisfy human wants. If no → No, it does not directly satisfy human wants.

Producer good

If yes → Yes, it is man-made resources used in production. If no → No, it isn’t man-made resources used in production.

Private good

If yes → Yes, it is rival in consumption, one people’s consumption would reduce the amount available for other persons. Or → Yes, it is excludable in consumption, it is possible to prevent others from using the goods If no → No, it is non - rival in consumption, one people’s consumption would not reduce the amount available for other persons. Or → No, it is non-excludable in consumption, it is too costly to exclude others from consuming the goods.

Public good

If yes → Yes, it is non - rival in consumption, one people’s consumption would not reduce the amount available for other persons. Or → Yes, it is non-excludable in consumption, it is too costly to exclude others from consuming the goods. If no → No, it is rival in consumption, one people’s consumption would reduce the amount available for other persons. Or → No, it is excludable in consumption, it is possible to prevent others from using the goods.

Land

Gift of nature. (Return: Rent)

Capital

Man-made resources used in production. (Return: Interest)

Labour

He/she contributes mental and physical effort used in production. (Return: Wage)

Entrepreneurship

He/she makes production decisions and bears risks. (Return: Profit)

Primary production

Extracts raw materials from nature.

Secondary production

Turns raw materials into semi-finished or finished goods.

Tertiary production

Provides services.

Time rate over piece rate (employer point of view) Advantage:

Cost of monitoring output quality is lower

Time rate over piece rate (employer point of view) Disadvantage:

Workers have weaker incentive to work hard.

Time rate over piece rate (employee point of view) Advantage:

More stable income.

Time rate over piece rate (employee point of view) Disadvantage:

Cannot earn more even if they work harder.

Piece rate over time rate (employer point of view) Advantage:

Labour productivity will be higher / Cost of supervising workers is lower.

Piece rate over time rate (employer point of view) Disadvantage:

Cost of calculating wages is higher.

Piece rate over time rate (employee point of view) Advantage:

Higher output will yield higher income.

Piece rate over time rate (employee point of view) Disadvantage:

Income may be unstable.

Variable factor (cost)

It is variable factor (cost), because its quantity varies with output.

Fixed factor (cost)

It is fixed factor (cost), because its quantity does NOT varies with output.

Geographical mobility

Increases the geographical mobility as it increases the ease / willingness to move from one place to another (i.e. transportation network improves)

Occupational mobility

Increases the occupational mobility as it increases the ease / willingness to change from one occupation to another (i.e. lower skill requirements)

Advantages of providing the service by a public corporation instead of a private enterprise

Easier to get information about the general public from the government for decision-making. Can provide stable service with a lower price. Easier to get loan with the backup of the government

Disadvantages of providing the service by a public corporation instead of a private enterprise

It may lower the efficiency of the company and reduce its sensitivity to market (price) signals. Lower efficient management. Higher average production costs

Limited liability

The liability of the owner of a limited company is limited to the amount of investment.

Legal entity

Legal entity is an independent entity with right and obligations like an ordinary individual and that the company has lasting continuity.

From Sole proprietorship To partnership Advantage

Sharing of risk and work. Wider source of capital

From Sole proprietorship To partnership Disadvantage

Slower decision-making

From partnership to private limited company Advantage

Enjoy limited liability. Wider source of capital

From partnership to private limited company Disadvantage

Be subjected higher profits tax rate

From private limited company to public limited company Advantage

Enjoy limited liability. Wider source of capital

From private limited company to public limited company Disadvantage

Be subjected higher profits tax rate. have to disclose to the public their financial information

From Partnership to sole proprietorship Adventage/Disdavantage

More efficient decision making. Bear all risks and liabilities. Limited source of capital

From Private limited company to sole proprietorship Advantage

Be subjected lower profit tax rate. More efficient decision making

From Private limited company to sole proprietorship Disadvantage

Source of capital become narrower. Lack of continuity

From Private limited company to Public limited company Advantage

Higher liquidity of assets. Wider source of capital

From Private limited company to Public limited company Disadvantage

Have to disclose to the public their financial information. Higher risk of being taken over

From Public limited company to sole proprietorship Advantage

Be subjected lower profits tax rate. Company secrets can be kept secret

From Public limited company to sole proprietorship Disadvantage

Source of capital become narrower

From Public limited company to private limited company (privatisation) Advantage

Lower risk of being taken over. Company secrets can be kept secret

From Public limited company to private limited company (privatisation) Disadvantage

Source of capital become narrower. Lower liquidity of assets

Advantages of issuing shares over bonds

No interest burden. No redemption obligation

Disadvantages of issuing shares over bonds

Higher risk of being taken over. Ownership and control of existing shareholders will be diluted

Advantages of issuing bonds over shares

Ownership and control of existing shareholders will not be weakened.

Disadvantages of issuing bonds over shares

Redemption obligation. Need to pay interest even when no profits. Need to pay the principal when due.

Advantages of buying shares over bonds

Have voting rights. The potential return of shares is higher than that of bonds

Disadvantages of buying shares over bonds

Lower priority in getting back their capital if the company liquidates. May not get any dividend if the firms loss money

Advantages of buying bonds over shares

Can get interest return even if the company does not make any profit that year. Higher priority of getting paid than shareholders if the company is liquidated

Disadvantages of buying bonds over shares

Have no voting rights. The potential return of shares is lower than that of bonds.

Law of diminishing marginal returns

The law states that (holding technology constant) when more units of a variable factor are added successively to a given quantity of fixed factors, the marginal products of this factor will eventually diminish.

Internal economies of scale

The cost of advertising can be spread over a larger quantity of outputs. Discount for bulk purchase of inputs. It can practice a wider degree of specialisation. The firm can also afford employing management specialists to raise efficiency. Spread risks by diversifying its products and markets

Internal diseconomies of scale

Banks may find it too risky to lend too much loan to the same firm and thus a higher interest rate will be charged on the firm. Therefore, average cost will increase. The larger the structure of a company and more level it has, the more difficult the communication between the upper and lower levels will be. When a firm has already spent a huge amount of money on advertising, the effect of advertising on sales will be very limited due to market saturation. The firm may pay a higher marketing cost to develop or promote new products. Therefore, average cost will increase.

External economies of scale

Infrastructures such as transport and communication network will be better developed / the transportation or delivery costs will be lower for suppliers. The average cost of those services will decrease. Other firms and workers supporting the industries would be attracted to the location, reducing the average cost of recruitment and training these factors of production. Customers will be attracted to the location when they know many firms selling similar products are concentrated in the area. It can reduce cost of marketing and promotion

External diseconomies of scale

A larger demand for factors of production will lead to an increase in factor prices, e.g. raw materials and labour. Increasing concentration of firms in a locations may lead to a rise in the demand for inputs premises and other facilities. The rental and cost of using these facilities (i.e. cost of inputs) will increase.

Horizontal integration

They are doing the same or similar businesses.

Vertical forward expansion

The manufacturer expands to the next stage of production.

Vertical backward expansion

The manufacturer expands to the previous stage of production.

Lateral expansion

The products are related but not directly competitive.

Conglomerate expansion

The firm has expanded into unrelated industries.

General motives

To enjoy economies of scale. Obtain loan from bank at a lower interest rate. More efficient use of resources. Structure simplification (Allocation of resources will be more flexible and efficient.). Acquisition of technology (The company can acquire new technology and low cost of research and development.). Diversify sources of income and spread risk (not applicable to horizontal expansion). Take advantage of brand names (Save time and cost for promoting a new brand.)

Horizontal expansion

To increase market share and influence. To reduce the number of competitors (external horizontal expansion only). To reduce duplication of facilities

Vertical Backward expansion

To ensure a reliable/stable supply of input

Vertical Forward expansion

To ensure a stable sales outlet for its products. Easier to get first-hand market information

Lateral expansion

Diversifying investment over different industries to reduce risks (as the source of income is wider). By making use of the brand name of one product on other product

Monopolistic Competition Features

Many sellers / many buyers. Differentiated products. No entry barriers. Imperfect information. Price competition. Non-price competition

Oligopoly Features

A few dominant sellers. Interdependency of pricing. Differentiated products. Price competition. Non-price competition. Imperfect information

Monopoly Features

Single seller. Barriers to entry. Imperfect information. Price and non-price competition

Explain under what condition the price increase

Verbal elaboration: increase in demand (1 mark) decrease in supply (1 mark) Increase in demand is larger than increase in supply (1 mark)

Explain under what condition the price decrease

Verbal elaboration: decrease in demand (1 mark) decrease in supply (1 mark) decrease in demand is larger than decrease in supply (1 mark)

Explain under what condition the quantity increase (decrease)

increase (decrease) in demand. decrease (increase ) in supply. increase in demand is larger than decrease in supply

Given the fall in supply (increase in price), explain under what condition the total expenditure would rise

Supply decrease, The condition: inelastic demand, percentage increase in price is larger than percentage decrease in quantity transacted

Given the rise in supply (decrease in price), explain under what condition the total expenditure of would fall

Supply increase, The condition: inelastic demand,percentage decrease in price is larger than percentage increase in quantity transacted

Given the rise in supply (decrease in price), explain under what condition the total expenditure would rise

Supply increase, The condition: elastic demand, percentage decrease in price is smaller than percentage increase in quantity transacted

Given the fall in supply (increase in price), explain under what condition the total expenditure of would fall

Supply decrease, The condition: elastic demand, percentage increase in price is smaller than percentage decrease in quantity transacted

Explain why the demand of a good is elastic

It is a durable good (Consumers can delay purchases if prices increase.), It is not habit-forming, There is enough time for adjustment, There are many substitutes available, The good has many uses, it takes up a larger proportion of consumers' total expenditure

Explain why the demand is inelastic

It is a necessity or essential good Consumers need it regardless of price changes (e.g. basic food, medicine).

Explain why the demand of a good is inelastic

It is habit-forming or addictive(Consumers continue buying even at higher prices (e.g. cigarettes, coffee).), There is little time for adjustment, There are few or no close substitutes, The good has limited uses, It takes up a small proportion of consumers' total expenditure

Explain why the supply of a good is elastic

factors of production for_ are easily available, have excess capacity in production, low production threshold

Explain why the supply of a good is inelastic

factors of production for _are more specialized, have no excess capacity in production, high production threshold, high barriers to entry