Basic economic concepts

chapters 1-2

What’s a business

A business is an entity that offers goods and/or services to customers

What’s the main characteristic of the economy

Exchanging goods and services against money or other means of payment (or exchange)

What’s opportunity cost

Opportunity cost is the (financial) benefit of the (next best) alternative that is lost or given up in order to choose or achieve something else

What’s economics

Economics is the study of how individuals (as part of private households) and businesses make decisions to satisfy their needs and wants with limited resources

What does microeconomics focus on

Microeconomics focuses on the behaviour and decisions of individual households and businesses and how they interact

What does macroeconomics focus on 

Macroeconomics focuses on the bigger picture and deals with questions concerning the overall economy (of one country for example).

What are the three functions of money

1. Medium of exchange

2. Unit of account (expresses the value of things)

3. Store of value

What do price indexes do

Price indexes allow us to measure the extent of the general increase in prices.

What’s inflation

Inflation is a general increase in prices

How is a circular flow of goods created

Households offer labour and receive wages, while businesses offer foods and services that are bought by households and other businesses and receive money for what they sell

What role do public authorities (governments) play in the circular flow of the economy

They levy taxes from households and businesses and use the money to provide goods, transfer payments and subsidies

Example of specialisation in a household

individuals concentrating on what they can do best or what they like doing (one individual does the shopping, the other one does the cooking)

Example of specialisation in businesses

Some people concentrate on production, others on procurement, others on sales.

Example of specialisation between businesses

Some offer all kinds of furniture, others just bends and couches, some others just produce kitchens.

Example of specialisation on an international level

Due to different conditions, countries differ in their conditions for different industries (industries being a number of businesses that produce or sell the same product)

What’s a market economy

A market economy is an economy in which individuals and businesses are -more or less- allowed to make many of their own economic decisions

What’s a planned economic system

A planned economic system is an economy in which the government plays a dominant role. They (mainly or partly) decide which goods are produced and which services are offered (at which prices). They (mainly or partly) control the resources and the means of production.

What is a free market economy

A free market economy is an economy in which the government plays a minor role by only providing the legal framework and not influencing the economy much.

What are “social market economies” and “eco-social market economies”

They are economies in which the government plays a more important role by influencing the economy to a somewhat higher extent, by supporting the poor and protecting the environment for example.

What’s supply

Supply (of a certain good or service) is the quantity of that good or sevice that is available for purchase.

What’s the “law of supply”

The higher the price (that can be charged for a good or service) is, the higher the supply will be.

What’s marginal cost

Marginal cost is the cost of producing an additional unit of a good or by providing an additional unit of a service.

In what scenario would a business be willing to produce and supply a higher amount ( of a product or good)

Only if the price level increases and exceeds (or at least equals) marginal costs

What’s demand

Demand is the quantity of a good or service that customers are willing and able to buy

What is the “law of demand”

The higher the price is, the lower the demand will be.

What is “market price” and “equilibrium price”

These are prices at which the supply ( of a product or good) equals the demand of this product or good.

On supply-demand model this is the point where both curves intersect.

What’s a surplus

A surplus is when the supply is higher than the demand

What’s a shortage

A shortage is when the demand is higher than the supply

What factors affect demand

1. Changes in income. When income increases people can afford more, so the demand curve shifts to the right. When income decreases people can afford less so the curve shifts to the left.

2. Changes in consumer preferences. 

3. Complementary goods.

4. The availability of substitute goods. 

What factors affect supply

1. Number of suppliers. As the number of suppliers increases, supply will increase and the supply curve will shift to the right

2. Technological changes. 

3. Changes in resource prices.

4. Price expectations.

What is the level of competition in a market influenced by

The level of competition in a market is mainly influenced by the number of suppliers and the availability of substitute goods.

What’s a monopoly

A monopoly is a marekt situation in which there is o ly one supplier of a certain good or service.

What’s an oligopoly

An oligopoly is a market in which there are a few suppliers.

What’s cartel

Cartel is an agreement between supplier in an oligopoly used to negotiate their terms of sale in order to prevent high competition. Cartels are usually not considered legal. 

Where can “perfect competition” be found (theoretically)

Perfect competition can be found in a market with so many suppliers and buyers that no single individual or business can possibly influence the price.

What other prerequisites must be true in a “perfect competition” market

1. All market players must have access to all information at all times

2. there mist not be any barriers to enter or exit the market

3. There must not be any (personal) preferences.