Economics Exam Review (copy)

the economic problem

economists deal with the economic problem, which presumes economic agents mist continually make choices, their wants are unlimited, and they face a limited supply of economic resources

scarcity

having unlimited wants but limited resources with which to satisfy them

economics

the study of how to distribute scarce resources to make choices

microeconomics

the branch of economics that focuses on the behaviour of individual participants in various markets

macroeconomics

the branch of economics that takes a wide-ranging view of the economy through four sectors: households, businesses, governments and foreigns

economic choice

decision- makers must keep in mind the opportunity costs of each alternative

opportunity cost

defined as the utility of the best forgone alternative OR the cost of the next best option or alternative

production possibility curve

illustrates the tradeoffs that society faces in using its scarce resources

three assumptions (PPC)

an economy makes only two products, resources and technology are fixed, all resources are employed to their fullest capacity

basic economic questions

what to produce, how to produce and for whom to produce

demand

a relationship between a products price and quantity demanded

supply

a relationship between a products price and quantity supplied

demand factors

income, the number of buyers/change in population, prices of substitute goods/other products, consumer expectations and consumer preferences/change in taste

supply factors

number of producers, resource prices, state of technology, prices of related products, changes in nature, producer expectations

equilibrium price

a price set by the interaction of demand and supply, the perfect price for consumers and producers, there is no shortage or surplus

price above the equilibrium

results in a shortage of goods, thee is excess supply and the price is pushed down

price below the the equilibrium

results in a shortage of goods, there is excess demand and the price is pushed up

elasticity

an economic group concept that refers to the responsiveness of quantities demanded and supplied to changes in price

price elasticity of demand

shows how responsive consumers are to price changes

price elasticity of supply

measures the responsiveness of quantity supplied to price changes

income elasticity

the responsiveness of a products quantity demanded in consumers income

cross price elasticity

the responsiveness of a products quantity demanded of one product to a change in price in another

4 determinants of demand elasticity

the portion of consumer incomes, access to substitutes, nature of the product, time

total revenue

the total amount of sales of the product x the price of the product

explicit costs

costs that appear on a businesses accounting statements, such as payment for materials, machines, rent, utilities and taxes

implicit costs

costs not included amoung expenses on the income statement of a business, such as the amount of the owners time spent devoted to the business and the money invested in the business that could have earned interest if invested somewhere else

economic profit

money earned after taking explicit and implicit costs into account

total product

output a given quantity of labour can produce

average product

measures output per worker employed or output per unit of capital

marginal product

the change in output from increasing the number of workers used by one person, or by adding one more machine to the production process in the short run

law of diminishing marginal returns

the addition of more variable input cause the marginal product to fell after some point

total cost

the total of all fixed and variable costs at each quantity of output

average cost

shows the cost of producing each quantity in the long run

marginal cost

the change in total cost when additional output is produced in the short run and some costs are fixed

fixed costs

economic costs for inputs that remain fixed at all quantities of output

variable costs

economic costs for inputs that vary at each quantity of output

increasing returns to scale

a stimulation in which a percentage increase in all inputs causes a larger percentage increase in output

constant returns to scale

a situation in which a percentage increase in all inputs results in an equal percentage increase in output

decreasing returns to scale

a situation in which a percentage increase in all inputs causes a smaller percentage increase in outputs

industries

a period in which all factors of production and costs are variable

perfect competition

many buyers and sellers, a standard product, easy entry and exit

monopolistic competition

many buyers and sellers, slightly different products, easy entry and exit

oligopoly

a few businesses, provide a standard or similar product, intense non-price competition

monopoly

a single business provides a product with no close substitute, many barriers to entry and no real competitors

profit maximizing output rule

a manger maximizes profit when the value of the last unit of product (marginal revenue) equals the cost of producing the last unit of production (marginal cost)

profit maximization in the short run

a firm maximizes its profits by choosing to supply the level of output where its marginal revenue equals its marginal cost, when marginal revenue exceeds marginal cost the firm can earn greater profits by increasing its output

economic welfare

the level of prosperity and standard living of either an individual or a group of persons

exercise taxes

have a wide range of uses, commonly it is a way for the government to increase revenue

price controls

an economic policy imposed by the governments that set minimums and maximums for the prices of goods and services to make them more affordable for consumers

price ceilings

a restriction imposed by the government to prevent the price of a product from rising above a certain level

price floor

a restriction imposed by a government to prevent the price of a product from lowering below a certain level

GDP

used to measure a country’s output, the final value of goods and services that an economy produces, the total dollar value of all final goods and services produced in an economy during a period

the expenditure approach

the sum of purchases in product markets, based on values added at each production stage to avoid doubling, excludes financial exchanges and second hand purchases that are already accounted for

the income approach

includes 4 classes of income, wages and salaries, corporate profits, interest income, proprietors incomes and rent

per capita

GDP/person equals GDP divided by population, expressed in constant dollars, used to compare living standards in a country over time, measure in a single currency

real GDP

expressed in reference year dollars, equals nominal GDP divided by the GDP deflator

gross national income

total income acquired by Canadians both within Canada and elsewhere, equals GDP minus Net income to the rest of the world

disposable income

the money leftover after taxes are deducted for your own needs and wants, personal income minus personal taxes and other transfers to the government

consumer price index

the most common measure of inflation

GDP deflator

indicates price changes for all products appearing in GDP

frictional unemployment

due to being temporarily between jobs or looking for a first job

cyclical unemployment

due to fluctuations in output and spending

seasonal unemployment

due to the seasonal nature of some occupations and industries

structural unemployment

due to a mismatch between people and jobs

technological unemployment

caused by the replacement of workers with more capital intensive production methods

replacement unemployment

caused by the movement of firms with labour intensive production to foreign countries in which labour rates are lower

geographical unemployment

created in specific parts or geographical regions of a country due to a weak economy in the area that its overly reliant on one or two struggling industries

full employment

an economy in which the unemployment rate equals the NAIRU, no cyclical unemployment exists and GDP is ay its potential

aggregate demand

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

aggregate demand factors

consumption, investment, government purchases and net exports

aggregate supply

the relationship between the general price level and real output in an economy

aggregate supply factors (short run)

caused by varying input prices

aggregate supply factors (long run)

resource supplies, productivity, government policies

economies equilibrium

occurs when aggregate demand and aggregate supply intersect

expansionary fiscal policy

involves more government purchases and/or lower taxes to shift AD rightward, to increase aggregate demand directly through an increase in government spending

contractionary fiscal policy

involves fewer government purchases and/or increased taxes to shift AD leftward, a monetary measure to reduce government spending or the rate of monetary expansion by a central bank

benefits of fiscal policy

focused on specific regions, direct impact on spending

drawbacks of fiscal policy

subject to delays, higher amount of government spending devoted to servicing the debt

government budgets

complicated documents drafted for both political and economic purposes, contain forecasts, macroeconomics goals and policy objectives

deficit budgets

government spends more that it collects in tax revenue, and borrows money to cover shortfall

surplus budgets

government collects more in tax revenue than spends, money leftover

balanced budgets

results when the government spends an amount equal to what it collects in tax revenue

functions of money

a means of exchange, a sore of purchasing power, a measure of value

a canadian financial system

chartered banks, trust companies, insurance companies, investment dealers

bank of canada functions

manage money supply, acts as the bankers bank, acts as the governments fiscal agent, helps supervise the operations of financial markets to ensure their stability

expansionary monetary policy

expanding the money supply faster than usual or lowering short term interest rates

contractionary monetary policy

a tool used to reduce government spending or the rate of monetary expansion by a central bank to combat rising inflation