Test 1 Flashcards
(92 cards)
1
Q
What are the 3 fundamental concepts of economics?
A
Oppertuity cost
Marginalism
Efficient markers
2
Q
List 4 scarce resources:
A
Land
Labour
Capital
Entrepreneur (special category of labour)
3
Q
What is opportunity costs, why do they arise and what do we measure them in?
A
The best alternative that we forgo or give up when we make a choice or decision. They arise because resources are scarce. Nearly all decisions involve trade-offs and opportunity costs can be measured in $ or time.
4
Q
What is merginalism?
A
Weighing costs and benefits of a decision. It is important only to weigh costs and benefits that will arise from the decision not sunk costs (costs that cannot be avoided regardless of what is done in the future because they have already been incurred - we ignore them)
5
Q
What are efficient markets?
A
A market in which profit opportunities are eliminated almost instantly
6
Q
What is the broad definition of a market?
A
A group of buyers and sellers of a good or service, can be real/virtual. Supply and demand refer to peoples behaviour
7
Q
What is the demand schedule?
A
A table showing the relationship between the price of a good and the quantity demanded
8
Q
What is the law of demand?
A
Inverse relationship between price and quantity demanded (downward sloping curve). So as the price goes down, each customer buys more and new customers enter the market.
9
Q
What causes a shift in the demand curve?
A
Tastes
Incomes
Price of related goods
Size of population
10
Q
What causes movement along the demand curve?
A
Price changes
11
Q
What is a normal good?
A
If the demand for a good is positively related to income it is called a normal good e.g wine, cars holidays etc
12
Q
What is an inferior good?
A
When demand is inversely related to income i.e beer, public transport
13
Q
What are substitutes?
A
If the rise of the price of one increases then demand for the other increases e.g butter and marge
14
Q
What are compliments?
A
If one rises in price the other decreases in demand e.g DVD and DVD players
15
Q
Define supply:
A
Quantity supplied is the amount of a good that sellers are willing and able to sell at every price
16
Q
What is the supply schedule?
A
A table that shows the relationship between the price of the good and quantity supplied
17
Q
What is the supply curve?
A
An upward sloping line relating price to quantity supplied
18
Q
What is the law of supply?
A
States that there is a direct positive relationship between price and quantity supplied
19
Q
What causes movement along the supply curve?
A
Price
20
Q
What causes shifts in the supply curve?
A
- Cost of production
- Environment
- Number of suppliers
- Technology used to produce the good
- Climatic conditions
21
Q
What is the equilibrium price?
A
The price that balances supply and demand
22
Q
What is the equilibrium quantity?
A
The quantity that balances supply and demand
23
Q
What are the 2 reasons as to why a disequilibrium may occur?
A
- Shortage of goods = excess demand
2. Surplus of goods = excess supply
24
Q
Describe what happens when there is a surplus of goods:
A
P1 is higher than the equilibrium pice. At P1, suppliers are willing to sell Q’’ but buyers only want Q’. This causes a surplus of products (Q’’-Q’) and stock. Suppliers have an incentive to lower their price to get rid of the surplus stock until equilibrium is reached
25
Describe what happens when there is a shortage of goods:
P1 is lower than the equilibrium price. At P1 suppliers are only willing to sell Q’ but buyers want Q’’. A shortage of goods exists (Q’-Q’’). There will be queues of buyers so sellers will have an incentive to increase the price until equilibrium is reached
26
What is elasticity?
A measure of how much buyers and sellers respond to changes in the market conditions. Helps us to understand the relationship between price changes and revenue prices
27
What is the oqn price elasticity of demand?
The degree of responsiveness of quantity demanded of a good or service to a change in its price
28
Describe when something is perfectly inelastic:
No matter how much the price changes, the quantity demanded is always the same i.e does not change. E=0
29
Describe when something is perfectly elastic:
At a certain price the demand just keeps going on forever E=infinity
30
What is inelastic demand?
When an increase in price leads to a decrease in quantity so total revenue increases
31
What is an elastic demand?
An increase in rice leads to a descrease in quantity demanded that is larger so total revenue decreases
32
How do we calculate elasticity and hat do the values mean?
Change in quantity demanded % ÷ % change in price
E > 1 = elastic
E = 1 = unit elasticity
E < 1 = inelastic
33
What are the determinants of elasticity?
- With respect to price = availability of substitute, time
| - With respect to income = nature of good, luxury, necessity
34
The _____ the number of substitutes, the greater the ______
Elasticity
35
Is demand more elastic or inelastic over time?
Elastic
36
Describe cross elasticity and give 2 examples:
The responsiveness of quantity demanded to a given change in the price of another good. Depends on whether the good is a complement or substitute:
1. Substitutes - if the price of tea increases, quantity demanded decreases and quantity demanded of coffee increases then this cross elasticity is positive
2. Complements - if the price of coffee increases, quantity demanded decreases and quantity demanded of coffee creamer also decreases, this cross elasticity must be negative
37
What is the income elasticity of demand?
As peoples incomes increase, their demand also increased for a product. In richer countries, the demand for food and basic clothing does not increase with increases in incomes nearly as much as it does for other products. In richer countries the demand for durable goods is rising most rapidly
38
What is the income elasticity demand eqn?
IED = % change in quantity demanded ÷ percentage change in income
39
What is a normal good?
A rise in income causes more of it to be demanded - positive income elasticity
40
What is an inferior good?
A rise in income income causes less of it to be demanded - negative income elasticity
41
What happens when IED = 0?
A rise in income leaves quantity demanded unchanged
42
What is the effect of the maximum price law/price ceiling?
Price decreases leads to a shortage of goods because at the price ceiling, buyers want Q’’ but sellers are only wanting to sell Q’. A price ceiling above equilibrium has no effect. The suppliers will use the rest of the goods that they will not sell to make other products etc so that they can maximise their profits which leads to people going to the black market
43
What is the effect of a minimum wage law/price floor?
If minimum wage is increased, it will lead to a surplus of goods as buyers only want (Q’) but sellers are willing to sell Q’’. A price floor below equilibrium will have no effect
44
What are taxes?
A way of collecting revenue for public services and discourage consumption of harmful substances like ciggarettes and alcohol
45
Even if the tax is placed on sellers, who ends up paying the tax?
Buyers and sellers
46
How can we calculate government revenue?
Quantity x Tax
47
What is the result of a shift in supply with a highly elastic demand?
When the supply curve shifts, both the price and quantity changes. The relative impact on price and quantity depends on the elasticity of demand at the initial equilibrium. When the demand is highly elastic, a shift in the supply curve will have a small effect on price and a large effect on quantity
48
What is the result of a shift in the supply curve and a highly inelastic demand?
When the demand is inelastic, a shift in the supply curve will have a large effect on price and a small effect on quantity
49
What is tax incidence?
The more inelastic the demand, the higher portion of the tax is borne by the buyer. The more elastic the demand the higher portion of tax is borne by the seller.
50
What is GDP?
Gross domestic product is a measure of income and expenditures of the economy. It is the total market value of all final goods and services produced within a country in a given period of time. (Note - intermediate goods are not counted)
51
Why can we not compare a developed countries GDP to a developed one?
Because the GDP does not take into account the non-market economic activities (e.g second hand clothes and cash etc) so their GDP will be understated. = black economy
52
Name and describe the 2 types of GDP:
1. Nominal GDP values the production of goods and services at their current prices
2. Real GDP values the production of goods and services at constant prices. We need to use real GDP because nominal GDP includes inflation
53
What is the GDP deflator?
A measure of price level calculated as the rate of nominal GDP to real GDP times 1000. It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced.
54
What does the GDP per person indicate?
The income and expenditure of the average person in the economy. Higher GDP per person = higher standard of living. It is the best statistic we have but its only an average so it does not show a true representation
55
What will happen if the market income is pushed towards the equality line?
Society will be destroyed
56
What is inflation?
A situation in which the economic overall price is rising. Inflation rates is the % change in price level from the previous period
57
What is the CPI?
A measure of the overall cost of goods and services bought by a typical household - no luxuries. It is used to monitor changes in the cost of living over time
58
How is the CPI calculated?
1. Fix the basket - determine what prices are the most important for a typical consumer.
2. Find the prices of each good and service at each point in time
3. Compute the baskets cost
4. Chose a base year and compute the index
5. Calculate inflation rate
59
Is the CPI a perfect measure of the standard of living?
No
60
What is PPI?
The producer price index which can affect the CPI
61
What are the 3 problems with measuring the cost of living?
1. Substitution bias
2. Introduction of new goods
3. Unmeasured quality changes
They all lead to the CPI being overstated
62
Describe the problem with the cost of living: substitution bias
The basket does not change to reflect consumer reaction to changes in relative prices. Consumers substitute towards goods that have become less expensive. This results in an overstated cost of living.
63
Describe the problem with the cost of living: introduction of new goods
The basket does not reflect the change in purchasing power bought on by the introduction of new goods. New goods result in greater variety which then makes each $ more valuable so consumers need fewer $ to maintain the same standard of living
64
Describe the problem with the cost of living: unmeasured quality chnages:
If the quality of goods rise from one year to another, the value of the dollar rises regardless if the price of the good stays the same
65
What is the main difference between the GDP deflator and the CPI?
GDP deflator reflects the prices of all goods and services produced domestically whereas the CPI reflects prices of all goods and services bought by customers - not necessarily from NZ
66
What is the result of an overstated CPI?
It can cost the government millions of $ as wage increases are tied to the rate of inflation
67
What is the price index?
It is used to correct for the effects of inflation when comparing dollar figures from different times. This means that the standard of living and a persons purchasing power does not change over time
68
What is indexation?
When some dollar amount is automatically corrected for inflation by law or contract the amount is said to be indexed for inflation
69
What is the nominal interest rate?
The rate that is reported and not indexed for inflation. Quoted bank rates are nominal
70
What is the real interest rate?
The nominal interest rate that is corrected for the effects pf inflation
71
Describe the financial system?
Consists of a group of institutions in the economy that help to match one persons savings with another persons investments (i.e coordinate savers and borrowers). It moves the economy’s scarce resources from savers to borrowers
72
What are the 2 types of financial systems?
1. Financial markets
| 2. Financial intermediatries
73
What are financial markets?
Institutions through which savers can directly provide funds to borrowers
74
What are the 2 types of financial markets?
1. Bond markets
| 2. Share markets
75
What is a bond and what are the characteristics of a bond?
A bond is a certificate of indebtness that specifies obligations of the borrower to the holder of the bond. Characteristics:
1. Term - length of time until bond matures
2. Credit risk - the probability that the borrower will fail to pay interest or the principle
3. Tax treatment - the way in which tax laws treat the interest on the bond
76
What is a share?
A share represents a claim to partial ownership of a firm. The sale of share to raise money is called equity financing. Compared to a bond, a share has a higher risk/reward
77
What are financial intermediatries?
These are financial institutions through which savers can indirectly provide funds to borrowers
78
What are the 2 types of financial intermediatries?
Banks and managed funds
79
What are banks and what do they do?
They take deposits from people who want to save and use them to make loans to people who want to borrow. They pay interest on deposits and charge people higher interest on loans
80
If a company goes bankrupt who is the first to be paid - bond holders or share holders?
Bond holders and shareholders are last which is why they are the biggest risk/reward
81
What are managed funds?
An institution that that sells shares to the public and uses the proceeds to buy a portfolio of various types of stocks, bonds or both. This allows people with small amounts of money to easily diversify which reduces the risk but the shareholder has to accept both loss or gain
82
What are 4 examples of other financial institutions?
1. Credit unions
2. Pension funds
3. Insurance companies
4. Loan sharks
83
What are national savings?
Total disposable income in the economy that remains after paying for consumption and government purchases
84
What are private savings?
The amount is income that households have left after paying their taxes and consumptions
85
What are public savings?
The amount of tax revenue that the government has left after paying for its spending.
86
What do loanable fund markets link?
Links present to future
87
What is the market for loanable funds?
The market in which those who want to save - supply funds and those who want to borrow to invest - demand funds
88
What are loanable funds?
All income that people have chosen to save and lend out rather than use for their own consumption. These funds are usually exchanged as bonds, shares, mutual funds or in a bank.
89
What are the 3 government polices that affect savings and investments?
1. Taxes and saving (incentives to save)
2. Taxes and investments (incentives to invest)
3. Government budget deficits
90
Describe the government policy and how it affects the demand and supply curves: taxes and savings (incentives to save)
A tax decrease increases the incentive to households to save at any given interest rate.
- the supply of loanable funds shifts to the right
- the equilibrium interest rate decreases
- the quantity demanded for loanable funds decreases
Leads to economic growth
91
Describe the government policy and how it affects the demand and supply curves: taxes and investments (incentive to invest)
An investment tax credit increases the incentive to borrow, it:
- increases the demand for loanable funds
- shifts the demand curve to the right
- results in higher interest rates and greater quantity saved
92
Describe the government policy and how it affects the demand and supply curves: government deficit and surplus:
When the government spends more than it has received in tax revenues, it is called a budget deficit. The accumulation of past deficits is called government debt. Government borrowing to finance its budget deficit reduces the supply of loanable funds available to finance investments by households and firms. The fall in funds for private investments is called ‘crowding out’. It causes:
- the supply curve to shift to the left
- increase equilibrium interest rate
- reduces the equilibrium quantity of loanable funds
