Economics Exam Definitions

Economics

The study of how society make decisions about the use of scarce resources

Opportunity Cost

The sum of all benefits lost from engaging in one activity over another

Analytical Economics

The branch of economics that deals with facts or direct observation of the world around us

Normative Economics

The branch of economics that deals with primary statements that have valued judgment

The law of increasing opportunity cost

As you increase the production of one good, the opportunity cost to produce the additional good will increase

The law of diminishing returns

The decline in the rate of extra outputs produced that occurs when one input used in the production of the output is held constant and the others are increased

Marginal production

The additional output that a company produces by adding one unit of labor when all other units are constant

The law of increasing returns to scale

The increase in the rate of extra outputs produced when all inputs are used in production are increases and no inputs are held constant

Productive resources

Are the natural, human, and capital resources used to make goods and services

Demand

The consumer's desire to buy goods and services without any hesitation and pay the price for it

The law of demand

Where there is an inverse relationship between price and quantity demanded

Quantity demanded

Change in the quantity of a product that buyers are willing to buy

Supply

Is the amount of product that a firm is able to produce

The law of supply

An increase in the price of goods or services results in an increase in quantity supply

Quantity supplied

The change of supply in response to the change in current market price

Equilibrium price

The consumer cost assigned to some product or service such that supply and demand are equal, or close to equal.

Non-price factor

Factors other than the current price that can potentially influence the need for a service or product, resulting in a shift in its demand curve.

Substitute goods

Products or service that can be easily replaced with another by consumers

Complement goods

Items that are sold together with other goods

Elasticity

Used to measure the change in the aggregate quantity demanded of a good or service in relation to price movements of that good or service.

Ceiling prices

The highest price that a product can be sold at

Floor prices

Is the lowest legal price that can be paid in a market for goods and services, labor, or financial capital

Subsidy

Is a direct or indirect payment to individuals or firms, usually in the form of a cash payment from the government or a targeted tax cut

Quota

A restriction placed on the amount of product that an individual producer is allowed to produce

Consumer good

Products that directly satisfy human wants

Minimum wage

The minimum wage is the lowest wage rate that an employer can legally pay its employees and is a core labour standard.

Utility theory

Determines the worth or value of a good or service

Unitary coefficient

If the elasticity coefficient is equal to 1

Elastic coefficient

A coefficient that is greater or equal to 1 means the product has elastic demand

Inelastic coefficient

A coefficient that is less than 1 means the product has inelastic demand

Corporation

These are legal entities that are separate and distinct from its owners. These types of businesses enjoy the rights and responsibilities that an individual possesses; that is, these types of businesses have the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.

Sole proprietorship

These types of businesses have a single owner, who is fully responsible for all debts and obligations related to the business. All profits are kept by the owner. Because the owner is personally liable, a creditor can make a claim against their personal assets as well as their business assets in order to satisfy any debt

Partnership

These types of businesses are autonomous associations of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through jointly owned and democratically controlled enterprises.

Cooperative

These are non-incorporated businesses that are created between two or more people. The financial resources of those people are combined and put into the business. Those people then share in the profits of the business according to any legal agreement that has been agreed upon and drawn up.

Stakeholder

An individual, person, or group, that is directly impacted by the outcome of a cirtain event.

Shareholder

A person or institution that has invested money in a corporation in exchange for a “share” of the ownership

The underground economy

All economic activity or transactions in goods or services that are partially or entirely hidden from the government in order to evade paying taxes and other government reporting obligations

Total revenue

The sum of all revenues from a product or service

What is the equation for total revenue

TR = Q x P

Total costs

The total costs needed to operate a firm

What is the equation for total costs

TC = FC + VC

Fixed costs

The costs that do not vary with the amount produced

Variable costs

Costs that changes in proportion to how much a company produces or sells

Theory of the firm

The theory of the firm is the microeconomic concept that states that the nature of companies and their existence is to maximize profits

The short run

The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied

The long run

The long run is a period of time in which quantities of all inputs can be varied

Marginal revenue

The increase in revenue that results from the sale of one additional unit of output.

Marginal costs

The increase in production costs generated by the production of additional product units.

Perfect competition

Perfect competition occurs when all companies sell identical products, market share does not influence price, companies are able to enter or exit without barriers, buyers have perfect or full information, and companies cannot determine prices.

Monopolistic competition

Monopolistic competition exists when many companies offer competing products or services that are similar, but not perfect, substitutes.

Oligopoly

A market is characterized by where a few companies exert significant control over a given market.

Monopoly

Where one firm or organization has complete control over the market

Collusion

Collusion is a non-competitive, secret, and illegal agreement between rivals which attempts to disrupt the market's equilibrium.

Privatization

The transfer of ownership, property or business from the government to the private sector

Deregulation

Is the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.

Marginal revenue product of labour (MRPL)

The change of revenue from adding additional units of labour

Labour union

Is an organization of workers with an interest of "maintaining or improving the conditions of their employment"

Trade union

Is an organization that represents workers in one occupation (ie. crafts union)

Strike

A temporary work stoppage to force the employer to accept a union contract

Lockout

The tactic of withholding employment, typically used by employers to hinder union organization or to gain leverage in labour disputes.

Gross domestic product (GDP)

The total value of all final goods and services produced by an economy in a given year

GDP equation 1

Expenditure: C + G + I + (X - M)

GDP equation 2

Income: W + R + i + PR + Indirect Business Tax + Depreciation

Unemployment rate

The percentage of the labour force that is not working at any given time period; the total number of Canadians unemployed divided by the total labour force

What is the unemployment rate equation

Unemployment rate = (number of unemployed / labour force) x 100

The labour force

The total of all Canadians holding jobs plus all those actively seeking work

Participation rate

The percentage of the working-age population that is working or looking  for work

What is the participation rate equation

Participation rate = (civilian labour force / working age population) x 100

Full employment

The lowest possible rate of unemployment, seasonally adjusted, after allowing for frictional and structural unemployment

Frictional unemployment

Unemployment caused by workers who are between jobs or who are entering or reentering the labour force

Seasonal unemployment

Unemployment caused recurring climatic factors, such as the impact of winter on construction, tourism, farming and so on

Cyclical unemployment

Unemployment caused by a downturn in the business cycle

Structural unemployment

Unemployed caused by long term changes in the economy, such as shifts from goods production to services, or the introduction of technology that replaces labour

Okun’s law

A formula that states that for every percentage point that the actual unemployment rate exceeds the natural rate, a GDP gap of 2 % occurs

What is okun’s law equation

GDP gap = actual GDP x (unemployment rate - natural rate of unemployment) x 2 / 100

GPD gap

The difference between the actual GDP produced by the economy and the potential GDP that could be produced if the unemployment rate was not higher than the natural rate.

What is the GDP gap equation

GDP gap = actual GDP x (unemployment rate - natural rate of unemployment) x 2 / 100

Potential GDP

The output that the economy can produce if the unemployment rate is not higher than the natural unemployment rate

What is the potential GDP equation

Potential GDP = GDP + GDP gap

Inflation

A general rise in the price levels of an economy

What is the inflation equation

P = (Current CPI - Previous CPI/Previous CPI) x 100

Nominal GDP

The total value of the GDP before it is adjusted for prices increases; also called money GDP

Real GDP

The total value of of all goods and services produced in Canada in a given year, adjusted for price changes, also called constant dollars GDP

Low Income Cut-Off (LICO)

Is a measure that determines the income threshold below which a family will likely devote a larger share of its income on necessities (food, shelter, clothing) than the average family

Gini coefficient

Measures how much distance there is between a countries lorenz curve and the line of perfect equality, compared to how much distance there could be

Gini coefficient equation

Gini Coefficient = A / (A + B)

Aggregate demand

The total demand for all goods and services produced in the economy

Aggregate supply

The total supply of goods and services produced in the economy

Recessionary gap

The gap between aggregate demand and full employment equilibrium, characterised by high unemployment, low inflation and low GDP growth

Inflationary gap

The gap between aggregate demand and full employment equilibrium; characterised by high inflation, low unemployment and high GDP growth

Chain fisher volume index

A newer method of determining the GDP deflator that uses a formula to “rebase” the GDP of each quarter instead of comparing it to a base year

GDP deflator

A broad price index to measure price changes on all goods and services in the GDP, not just consumer goods and services

Consumer Price Index (CPI)

A price index that measures changes in the prices of consumer goods

Micro-racism

Bias against a marginalized group (ex. remarks)

Deskilling

Reducing the level of skill required to perform a job (ex. robots)

Macroeconomics

The study of the economy as a whole in contrast to microeconomics, which studies parts of the economy

Microeconomics

The study of what is likely to happen (tendencies) when individuals make choices in response to changes in incentives, prices, resources, and/or methods of production

Hyperinflation

When a country experiences a monthly inflation rate of over 50%/month or around 13000% annual inflation

Closed shop

Business that only hire workers that have a union membership

Open shop

Where union memberships are voluntary for employment