Economics TB1

Cost

what must be given up in order to gain something, + example + benefit

Merit goods

Goods that individual/society should have, regardless of ability to pay and have positive externalities

Market economy

Decisions made by individuals and firms interacting in markets guided by prices

Demerit goods

Negative externality

Trade off

Act of giving up one thing in order to get something else

Microeconomics

Economic behaviour and decisions of individual consumers, firms

Macroeconomics

Focuses on performance, structure and behaviour of entire economy

Demand

consumers desire and willingness to purchase a good or service at a specific price

effective demand

the willingness and ability to purchase a good or service which is backed up by the ability to pay for it.

demand curve

illustrates the relationship between price and quantity demanded of a good - negative relationship

Movement of a demand curve is caused by a..

change in price

causes contraction or extension

Shift in demand- non-price determinants

• price of substitutes/complements

• expected future income/ income

• change in consumer preferences

• expected future price

• population size

Normal goods

• increase Y, increase D

• decrease Y, decrease D

inferior goods

• increase Y, decrease D

• decerase Y, increase D

Quantity demanded

the amount of a good that consumers plan to purchase at a particular price- affected by movement

Supply

Amount of goods and services firm/producers are willing to produce and sell at different prices

Law of supply

• Increase price increase supply

• Decrease price decrease supply

Positive relationship

Non-price determinants of supply

• COP

• State of nature

• technology

• taxes and subsidies

Gov intervention

Designed to resolve a market failure or achieve societal goals

Types of government intervention

• Subsidies

• Taxes- indirect/direct

• Quotas

• Price floor/ price ceiling

• nudge theory

• grant

Gov intervention policy tool- 12 marker- micro

1. define gov intervention + purpose

2. define policy tool + purpose

3. draw D/S graph

4. effect on D, Q, P

Macroeconomic objectives

1. price stability

2. economic growth

3. low unemployment

4. balanced BOP

5. trade balance

PED

Measures the responsiveness of quantity demanded following a percentage change in price

PED formula

% change in Q.d. / % change in P

Point PED formula

\frac{1}{slope}\cdot\frac{P}{Q}

Determinants of PED

• substitutes available

• proportion of income

• luxury/necessity

• inelastic/ elastic

• time

GDP

Measures the total monetary value of all finished goods and services produced within a country's borders in a given time period.

GNP/ GNI

Measures the total monetary value of final goods and services earned by country’s national citizens, including those placed abroad

GDP/AD formula

= C+I+G+(X-M)

RGDP formula

Nominal GDP/GDP deflator x 100

GDP growth rate

new-old/old x 100

Economic growth formula

new-old/old x 100

Real GDP

The total monetary value of all finished goods and services within a country's borders in a given year at constant market prices – adjusted for inflation

Nominal GDP

The total monetary value of goods and services produced within the countries borders during a given year at current market prices — not adjusted for inflation

Policy tools to manage EG

1. Monetary policy

2. Fiscal Policy

Economic Growth

The increase in the production of goods and services in one period of time compared with a previous year

• can be measured using GDP/GNP

nominal growth rate formula

new-old/old x 100

CPI

Measures overall change in prices over a period of time, for a basket of goods

GDP deflator

Captures price changes across everything produced in an economy

CPI formula

new-old/old x 100

Inflation

A sustained increase in the general price level over a period of time

Cost-push inflation + effect on supply

an increase in prices due to an increase in production costs.

• S shifts left

Demand pull inflation + effect on demand

surge in demand. when prices rise due to a increase in demand.

• D shifts R

Philips Curve

Relationship between inflation and unemployment- Negative relationship.

• High inflation, low unemployment

• Low inflation, high unemployment

Policy tool for Philips Curve

Monetary policy/ Fiscal policy

PC line

Demand line

PC axis

x-axis: % unemployment rate

y-axis: inflation %

Economically active

People who are willing and able to take a job – includes employed and unemployed

Economically inactive

Not wanting a job

Unemployment rate formula

unemployed/ workforce x 100

working age group

employed + unemployed

labour force participation rate/ Economic Activity Rate

workforce/ working age population x 100

Employment rate

employed/ working age population x 100

labour participation rate definition

The number of people who are willing and able to work in the labour force under either employed or seeking a job.

Why gov wants to manage/control unemployment rates

1. loss of GDP

2. loss of gov tax revenue

3. gov expenditure on welfare payments

4. decrease consumer spending

5. decrease investments due to low firm confidence

How to fix a Trade deficit

1. Protectionism - tarrifs, quotas, embargoes

2. Demand-side policies: Contractionary MP/FP

3. Supply Side policies

4. Export subsidies

Managing Trade surplus

1. Allow currency appreciation

2. Expansionary FP/MP- increase D for M’s

3. Remove trade barriers

Reasons for protectionism in trade

• protect infant industries

• prevent dumping

• prevent unemployment due to M competition

Adv of Trade/ Globalisation

1. reduced global poverty

2. increase consumer welfare thru more choices

3. boost EG and employment

4. increase competition and productivity

5. competitive advantage

Trade surplus

When a country has competitive advantage in producing certain goods or services, or strong domestic demand that decreases the reliance on imports

Trade deficit

High consumption level that exceeds production capacity or faces trade barriers from other countries

BOP

Records all country’s economic transactions with the rest of the world

Trading Bloc

Groups of countries in specific regions that manage and promote trade activities.

Trade liberalisation

The removal or reduction of restriction/barriers on the free exchange of goods between nations e.g. EU

Trade Agreement

To ease flow of goods and services from one country to another on agreed terms and conditions.

Trade agreements affect…

1. GDP

2. Inflation: stability & predictability

3. unemployment

Absolute advantage

when a country can produce more units of a good compared to another country using the same amount of resources.

Comparative Advantage

when a country can produce a good with a lower opportunity cost than its trading partners.

Causes of currency depreciation

1. trade deficit

2. lower IR: currency unattractive to foreign investors, decrease demand for currency

3. Higher relative inflation

Currency depreciation diagram + effect on m&x

S shifts R

• X cheaper, M expensive

Exchange rate

the price of one currency relative to another currency

Real ER + formula + meaning

Adjusted for relative price levels between countries

formula:

R= E . domestic price level/ foreign price level

R>1 = foreign goods cheaper —>less int. competitive

R<1 =domestic goods cheaper —>more int. competitive

R=1 = priced equally

currency appreciation

value of currency increase relative to another

currency depreciation

value of currency falls relative to another

causes of currency appreciation

1. trade surplus

2. lower relative inflation

3. higher IR: FDI, increase D

Managing ER

Monetary policy