Economic Concepts

Question 1

Economics

Answer 1

The study of how scarce resources are allocated to satisfy unlimited wants.

Question 2

Microeconomics

Answer 2

The study of decisions related to the allocation of scarce resources by small, individual economic agents, such as households or firms. Buyers in the economy provide the demand for products/services and sellers provide the supply of products/services

Question 3

Demand/Demand Curve

Answer 3

The amount (quantity) of a product or services that a market will absorb (demand) at a given price, assuming all other factors remain constant. The demand curve is a graph showing the inverse relationship between price and quantity demanded.

Question 4

Supply/Supply Curve

Answer 4

A graph showing the amount (quantity) of a product or service that will be provided (supplied) at any price, assuming all other factors remain constant. The supply curve is a graph showing the direct relationship between the price and quantity supplied (offered).

Question 5

Demand Curve Shift/ Reasons

Answer 5

Changes in the quantity demanded of a product/service for reasons other than a change in price. Reasons for an upward (positive) demand curve shift includes:

• The price of substitute goods increases
• expected future price increases
• Income increases so demand for normal goods increases
• The market size increases

Question 6

Elasticity

Answer 6

A measure of the sensitivity of supply or demand to a change in determinant, such as price, which normally has a direct relationship withe supply and an inverse relationship with demand; or consumer income, which normally has a direct relationship with demand, driving up price and stimulating supply.

Question 7

Price Elasticity of Demand (Ed)

Answer 7

The ratio of the change in demand compared to a change in the price measured as the change in demand, stated as a percentage, divided by the change in price, also stated as a percentage
(Change in qty demanded/avg qty demanded)/(Change in price/Avg price)

Question 8

Elastic

Answer 8

When the absolute value of ED is greater then 1, ignoring the fact that is is generally a negative number , indicating an increase in price will result in a decrease in demand that is proportionately higher than the increase in price causing total revenue to decrease. If, for example, a 5% increase in price causes a 10% decrease in demand, total revenues decline.

Question 9

Inelastic

Answer 9

When the absolute value of ED is less than 1, ignoring the fact that it is generally a negative number, indicating that an increase in price will result in a decrease in demand that is proportionately lower than the increase in price causing total revenue to increase. If, for example, a 10% increase in price causes a 5% decrease in demand, total revenues increase.

Question 10

Unitary Elasticity

Answer 10

When the absolute value of ED is equal to 1, ignoring the fact that it is generally a negative number, indicating that an increase in price will result in a proportionate decrease in demand causing total revenue to remain unchanged.

Question 11

Income Elasticity of Demand (EI)

Answer 11

The ratio of the change in demand compared to a change in income measured as the change in demand, stated as a percentage, divided by the change in income, also stated as a percentage
(Change in qty demanded/avg qty demanded)/(Change in income/ avg Income)
EI>0 normal good
EI<0 inferior good

Question 12

Cross Elasticity of Demand (EXY)

Answer 12

A measurement comparing the change in qty demanded for one product (X) to the change in price of another (Y) to determine if the products are substitutes, indicated by a positive number, or compliments, indicated by a negative number.

Question 13

Price Elasticity of Supply (ES)

Answer 13

The ratio of the change in supply compared to a change in price measured as the change in supply, stated as a percentage, divided by the change in price, also stated as a percentage
(Change in qty supplied/avg qty supplied)/(Change in price/avg price)
Tells how a change in price will affect the qty supplied.

Question 14

Opportunity Cost

Answer 14

The value of the best alternative that is not selected when resources can be applied to more than one purpose, such as a job offer that was rejected in order to accept a more desirable alternative.

Question 15

Equilibrium Price

Answer 15

The point where qty demanded meets qty supplied, meaning everything supplied (offered for sale) is sold (demanded).

Question 16

Marginal Propensity to Save (MPS)

Answer 16

The portion of the next dollar of available disposable income a consumer will save measured as the Change in Savings/Change in disposable income.
1-MPS=MPC (Marginal propensity to consume/spend).

Question 17

Price ceiling

Answer 17

a maximum legal price at which a product or service may be sold, usually imposed by governments, and generally results in a shortage (When qty demanded exceeds qty supplied)

Question 18

Price Floor

Answer 18

a minimum legal price at which a product or service may be sold, usually imposed by governments and generally results in surplus (When qty supplied exceeds qty demanded).

Question 19

Law of Diminishing Marginal Utility

Answer 19

The theory that the more of a resource consumed, the lower the marginal utility (satisfaction) will be for the next unit such that the marginal utility of a second cookie, for example, is greater than the marginal utility of a third cookie.

Question 20

Indifference Curve

Answer 20

A graphic representation of the various combinations of two resources that will provide equal value such that a consumer will be indifferent as to which combination af resources was to be acquired.

Question 21

Returns to Scale

Answer 21

The increase in units produced (Output)resulting from an increase in production costs incurred, input is measured by the ratio: percentage increase in Output/Percentage increase in Input.
If > 1 = Economies of scale
so outputs > inputs
If < 1 = Dis-economies of scale,
so outputs < inputs

Question 22

Pure (Perfect) Competition

Answer 22

An environment that includes a large enough number of suppliers of a product or service, with ease of entering or exiting the market, such that no individual market participant has the ability to influence the market or set prices. Perfectly elastic demand curve.

Question 23

Pure Monopoly

Answer 23

A situation where there is only one supplier for a particular product or service and for which there are no close substitutes. The demand curve is downward sloping, almost vertical.

Question 24

Monopolistic Competition

Answer 24

A situation where multiple suppliers with the ability to easily enter or exit the market, compete on the basis of factors other then price by differentiating their products such that they are not perceived as substitutes for one another. Demand curve is slightly downward sloping.

Question 25

Oligopoly

Answer 25

A situation with barriers to entry into the market, which limit the number of suppliers to a few who are producing heterogeneous or homogeneous products, providing those providers limited ability to control prices. The demand curve is kinked.

Question 26

SWOT analysis

Answer 26

Formal definition and analysis of an organizations (SWOT) Strengths, Weaknesses, Opportunities, Threats. This is part of strategic planning, in which the organization attempts to identify its long-term goals and determine how to best reach those goals.

Question 27

Mission Statement

Answer 27

A statement outlining the long-term purpose of an organization, the reason for its existence. This is the first step in strategic planning.

Question 28

Macroeconomics

Answer 28

The study of the economy as a whole, which includes unemployment, inflation and long - term economic growth.

Question 29

Gross Domestic Product (National Gross Domestic Product or GDP)

Answer 29

The final market value of all goods and services produced by domestic residents of a country in one year, calculated using the production or output approach, the income approach, or the expenditure approach.

Question 30

Demand - Pull inflation

Answer 30

An increase in prices caused by an increase in aggregate demand at a faster pace than the increase in aggregate supply, shifting the demand curve to the right

Question 31

Cost-Push Inflation

Answer 31

An increase in prices caused by an increase in the cost of goods and services for which no suitable substitutes are available, such as a rise in the price of oil, shifting the supply curve to the left.

Question 32

Multiplier Effect

Answer 32

The disproportionate increase in economic activity in response to an initial change in activity, such as a government purchase causing suppliers to increase production to fulfill the order as well as an anticipated increase in demand based on the increase in spending measured with the formula: (Change in spending/Marginal propensity to Save)

Question 33

Business Cycle

Answer 33

A fluctuation in aggregate economic output that may last from a few months to several years, beginning when the economy is at the peak of a period of expansion and ending when it is at the lowest point in a period of contraction (recession), of vice versa.

Question 34

Expansion

Answer 34

A period which production and GDP increase on an uninterrupted basis, beginning when the economy is at the lowest point of a period of contraction and ending when it reaches its highest point before declining again.

Question 35

Contraction (Recession)

Answer 35

A period during which production and GDP decrease on an uninterrupted basis, beginning when the economy is at the highest point of a period of expansion and ending when it reaches the lowest point before increasing again

Question 36

Economic Indicators

Answer 36

Economic factors used to gauge, evaluate and predict current and future economic conditions. Tells us which part of the business cycle the economy is in. Includes Leading indicators (predicts the duration of a period of expansion or contraction), Coincident indicators (factors that move simultaneously with, and in the same direction as , the overall economy), Lagging indicators (factors that begin to move after the beginning of a period of expansion or contraction)

Question 37

Frictional Unemployment

Answer 37

(Normal Unemployment) results from people changing jobs or newly entering the workforce

Question 38

Structural Unemployment

Answer 38

is a circumstance where supply of labor exceeds the demand while the work force may not be suitable to meet the demand either due to differences between skills needed and those held by workers or the geographical location of laborers.

Question 39

Cyclical Unemployment

Answer 39

Caused by variations in business cycles

Question 40

Institutional Unemployment

Answer 40

Caused by restrictions on the workplace resulting from government regulation, such as minimum wage

Question 41

Full Employment Unemployment Rate

Answer 41

Calculated as Frictional unemployment+Structural Unemployment

Question 42

Economic Policies

Answer 42

Fiscal policies consists of actions by the government related to revenues and spending that impact the economy (taxes, subsidies, government spending). Monetary policy consists of actions by the federal reserve that impact the economy (reserve ratio, discount rate, open market operations), which may be expansionary by increasing money supply, or may be designed to contract the economy by decreasing the supply of money.

Question 43

Economic Theories

Answer 43

Schools of thought to explain recurring business cycles and how governments contribute to their changes. Classical Economic Theory - No government intervention Keynesian Theory- Government taxation or spending Monetarist Theory - Use of monetary policy Supply-Side Theory - Reduction of Taxes New-Keynesian Theory - Combination of the Keynesian and monetarist theory Austrian Theory - Low interest rates cause excessive borrowing, which results in volatile and unstable economy