Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
93 Cards in this Set
- Front
- Back
Positive and Normative Statements
|
Positive Statements are statements that can be made based on empirical data.
Normative Statements are based on a persons beliefs or value systems. |
|
Micro vs Macro
|
Micro - studies decisions made by people and firms and their outcomes;
Macro - studies major components of the whole economy |
|
Scarcity
|
Economics is the study of the allocation of resources based on the scarcity we all face.
|
|
3 fundamental Q's of economics?
|
What (to produce); How (to produce); For whom (to produce?)
|
|
4 ways to organize society?
|
Command / Custom / Cooperation / Competition
|
|
Law of Increasing Costs
|
Law of increasing costs: as an economy's production level of any particular item increases, its per unit cost of production rises.
|
|
Factors of Production
|
Land, Labour, Enterprise and Capital
|
|
Ceteris Paribus
|
Other things equal, or remaining the same
|
|
Why is the Demand Curve downward sloping?
|
Substitution Effect
and the Income Effect |
|
Substitution Effect
|
The substitution of one product for another as a result in a change in their relative prices
|
|
Income Effect
|
The effect a price change has on peoples ability to purchase (lower prices = more real income = more product)
|
|
Compliments and Substitute Products
|
Two ways products can be related;
Substitute Products (coffee and tea) Complimentary Products (Skis and Ski Boots) |
|
Inferior Products and Normal Products
|
Inferior - Demand increases with decrease in real income
Normal - Demand increases with increase in real income |
|
Causes for a change in Market Demand?
|
1. Consumers Preferences
2. Consumers Incomes 3. Price of Related Products 4. Expectations of future prices/incomes 5. The size of the market or income and age distribution |
|
Causes for a change in Market Supply?
|
1. Price of resources
2. Business taxes 3. Technology 4. Prices of substitutes in Production 5. Future expectations of suppliers 6. # of suppliers |
|
Four possible combinations of simultaneous change in Demand and Supply?
|
1. +S, +D = +Q, ?P
2. -S, -D = -Q, ?P 3. +D, -S = ?Q, +P 4. -D, +S = ?Q, -P |
|
Price Ceilings
|
(Like Rent Control) Create shortages, and force the use of other form of allocation using: first come, first serve; sellers preference; and rationing.
|
|
Price Floors
|
(Like Price Controls / Minimum Wage) Create surplus, and must then be:
-stored -converted to another product -sold abroad -given away -destroyed |
|
What causes a Vertical Demand Curve?
|
Inelastic Demand or products that invite customers to 'conspicuously consume' (upward sloping demand cure)
|
|
Price Elasticity of Demand
|
Inelastic if coefficient is less than 1;
Elastic if coefficient is greater than 1. Perfectly inelastic = 0 (Vertical Demand Curve) Perfectly elastic = infinity (Horizontal Demand Curve) |
|
Determinants of Price Elasticity (of Demand) are..?
|
1. the number of substitutes available
2. the percentage of the income spent on the product; and 3. the time period involved in the measurement |
|
Price Elasticity - 4 applications?
|
1. Consumers pay a larger portion of a sales tax the inelastic the demand curve
2. Gov'ts raise a great deal of revenue from excise taxes on products with high inelastic demand (cigarettes) 3. any attempt to crack down on crime by focusing on the supply of illegal drugs will likely increase crime; 4. a good harvest for farmers is not always good news for the group |
|
Elasticity of Supply depends primarily on the time period involved with the result that:
|
1. The supply is perfectly inelastic in the market period
2. supply is inelastic, but not perfectly so in the short run, 3. supply is elastic in the long run. |
|
Income Elasticity
|
Causes a shift in the demand Curve as a result of a change of income. A negative coefficient indicates an inferior product, a positive coefficient less than 1 indicates a necessity, and a positive coefficient more than one indicates a luxury.
|
|
Cross-Elasticity of Demand
|
Percentage change in the Q demanded of one products as a result of a percentage change in price of another product.
Positive elasticity = substitute product Negative = Complimentary product |
|
Marginal Utility
|
The amount of extra satisfaction from consuming one more unit of product.
|
|
Law of diminishing Marginal Utility
|
states that the extra satisfaction derived from one more unit of a product declines as more of that product is consumed.
|
|
Optimal Purchasing Rule
|
When the MU per dollar spent is the same.
|
|
Diamond / Water Paradox
|
Realization that consumers purchasing decisions are based on marginal utility not total utility.
|
|
Consumer Surplus
|
The difference between what a consumer is willing to pay (marginal utility per $) versus the cost.
|
|
Price Discrimination
|
Charging different prices to different groups based on:
- Consumers with different demands - No ability to resell the product 2 main forms: Discrimination among units purchased (BOGO offers) and Discrimination among buying groups (ex, movies, some willing to pay more). |
|
Explicit Cost vs Implicit Cost
|
Explicit Cost = Cost actually paid out in money
Implicit Cost = Cost that doesn't require an actual expenditure of money |
|
Normal Profit vs Economic Profit
|
Normal Profit = The minimum profit that must be earned to keep the entrepreneur in business (TR-EC)
Economic Profit = Revenue over and above ALL costs including Normal Profit (TR-EC+IC) |
|
AP will..
|
rise if MP is above it;
fall if MP is below it. |
|
MP is at a maximum when..
|
MC is at a minimum.
|
|
AP is at a maximum when..
|
AVC is at a minimum.
|
|
MC = ATC
|
indicates economic capacity
|
|
MC = AVC
|
indicates the most productive output
|
|
MC / AVC / ATC decrease IF..
|
-input prices fall
-productivity increases |
|
Economic Capacity is..
|
always below physical capacity and occurs when ATC is at a minimum.
|
|
Law of Diminishing Returns..
|
as more of a variable input is added to a fixed input in the production process, the resulting increase in output will at some point begin to diminish. (Assuming that at least one input is fixed = short run).
Even when diminishing returns set in, the total product continues to rise, however the rate increase falls. |
|
MP = AP
|
Point of Maximum Productivity
|
|
Long Run
|
Has NO fixed inputs, used for planning.
|
|
LRAC
|
Long Run Average Cost curve
|
|
Constant Returns to Scale
|
The situation in which a firms output increases by the same percentage as the increase in its inputs.
Minimum cost (lowest points) connected the LRAC are horizontal. |
|
Economies of Scale
|
Cost advantages achieved as a result of large-scale operations (cheaper to run larger firms).
- Division of Labour, Management Specialization, and Machine specialization. |
|
Increasing Returns to Scale
|
The situation in which a firm's output increases by a greater percentage than do its inputs.
|
|
Pecuniary Economies
|
-Lower Costs of Borrowing
-Bulk buying and selling -selling by-products -lower cost of advertising |
|
DISECONOMIES of scale
|
Bureaucratic inefficiencies in management that result in decreasing returns to scale..
|
|
Decreasing Returns to Scale
|
The situation in which a firms output increases by a smaller percentage than its input.
|
|
Four Major Types of Markets?
|
1. Perfect Competition
2. Monopolistic Competition 3. Oligopoly 4. Monopoly |
|
Perfect Competition
|
- No single producer or consumer can effect the price or quantity produced (price-takers).
-Must be a large number of buyers/sellers and all must be small in relation to the whole market -no preference shown -easy entry/exit for new firms -the same market info available for all |
|
Institution of Private Property
|
Private Ownership of productive resources. The desire for wealth = big incentive for people to work hard and be innovative (without private property, the gov't would have to provide incentives/rewards in order to promote economic efficiency).
|
|
Competitive Firm will MAXIMIZE PROFIT when..
|
total revenue - total cost is highest
MR = MC |
|
Marginal Profit = change in total profit divided by Q
|
Marginal Profit = the additional economic profit from the production and sale of an extra until of output. MProfit varies because MC for each unit produced is different
|
|
If MR > MC
|
Produce MORE
|
|
If MC>MR
|
Produce LESS
|
|
Break-even Price and Shutdown Price (Competitive firm)
|
Price < AVC - shutdown
Break-even output where TR=TC, AC=P |
|
Lassiez-Faire
|
Adam Smith, "A truly competitive market runs best without intervention."
|
|
Will Competitive Markets make economic profit in the LONG RUN?
|
No.
|
|
Productive Efficiency / Allocative Efficiency
|
Productive Efficiency = production f an output at the lowest possible average cost (P = minimum AC)
Allocative Efficiency = the allocation of scare productive resources toward the production of goods & services that society values most. (P = MC) |
|
5 Benefits of a Competitive Market
|
1. Encourages Innovation
2. productively efficient 3. allocatively efficient 4. costless system 5. offers economic freedom |
|
5 Ways a Competitive Market can FAIL
|
1. it may create gross income and wealth inequalities
2. it can be quite unstable 3. it cannot prevent the rise of monopolies 4. unable to provide public goods 5. ignores external costs and benefits. |
|
External Costs/Benefits
|
Costs dealt with by: Legislative Controls, imposing per unit taxes, selling permits.
Benefits by providing public/quasi-public goods. |
|
Day Care example for external benefits
|
A subsidy to day care workers = raise the Q traded and lower $;
or, A subsidy to parents, which would raise Q traded and RAISE the $. |
|
Nonrival
Public Goods Non-excludable |
Nonrival - one persons consumptions does not reduce the amount available to others
Public Goods - goods or services that benefits are not affect by the number of users, which no one can be excluded Non-excludable - it is impossible to prevent non-buyers from enjoying the benefits (lighthouse) |
|
Monopoly
|
Market where there is a single producer, of one product for which there is no close subsitute.
Barriers to Entry Can determine EITHER the $ or Q but not both Profit MAXIMIZED when MC=MR Breakeven when AC=AR, TC=TR |
|
Barriers to Entry
|
1. Technical Barriers = monopolist is sole owner of resource or technology in order to produce product
2. Legal barriers = prevent other firms from competing in a particular industry by force of law (Crown Corp of Canada) 3. Economic Barriers - extensive start-up costs (automobile industry). |
|
Monopolies criticized for:
|
1. being able to make economic profit indefinitely
2.being productively /allocatively inefficient 3. producing less / charging more 4. creating a more unequal distribution of income and wealth within a society 5. Using price discrimination |
|
Benefits of Monopolies:
|
Economies of scale = lower costs
Natural Economies = being able to produce at a lower cost than competing firms. Research and Development Can offer better salaries and working conditions to employees. |
|
How to control the Monopolist?
|
1. Taxation (Profits Tax/ Monopoly Sales Tax)
2. Price Setting (Socially optimum price = the price that produces the best allocation of products from society's point of view/ Fair Return Price = a price where the firm will earn normal profits only P=AC) 3. Nationalization = gov't removes them from private ownership by nationalization. |
|
IMPERFECT COMPETITION
|
market structure in which producers are identifiable and have some control over price (Oligopoly and Monopolistic Competition).
|
|
Product Differentiation
|
The attempt by a firm to distinguish its product from that of its competitors.
Pros: provides consumer with vital info, enhances competition, lowers $, finances mags and TV shows. Cons: mostly uninformative/wasteful, it encourages concentration within industries, raises $ to the detriment of consumers |
|
Monopolistic Competition
|
-Many Small firms that act independently of eachother
- There IS freedom of entry - Some control over price - Each firm sells a differentiated product Max Profit: MR=MC / Long run, firm only makes normal profits. - Not efficient / excess capacity |
|
Franchising
|
Attempt to raise profit by controlling entry.
Pros: Bulk purchasing, national ads, and Brand identification. |
|
Blocked Entry as result of Gov't Policy
|
Quota's, ex taxi Licence
|
|
Oligopoly
|
-Dominated by few large firms
- Entry by new firms is difficult - non-price competition widely practiced -each firm has significant control over price - mutual interdependence between firms |
|
Game Theory
|
a method of analyzing behaviour that highlights mutual interdependance and NASH equilibrium (a situation where each rival chooses the best actions given the anticipated actions of the others).
|
|
Collusion
|
Agreement to set Price among suppliers OR the Q that will be produced
Different ways to collude: Geographically (divide up areas), client lists, agreement of Quota. Illegal. |
|
Non - Collusive Oligopoly
|
Price Leadership - price fixing w/o collusion
Kinked Demand Curve |
|
Inter temporal Price Discrimination
|
Where consumers are grouped based on elasticity of demand (high initial price for those willing to pay, later lowered for others).
Mixed Bundling (restaurants bundling mixed goods) Coupons/Rebates |
|
Monopsony
|
Market structure in which there is only one buyer
|
|
Increases in labour productivity as a result of..
|
technological change, increases in the nation's capital stock, and is closely related to the long run demand for labour, and the real wages of canadians.
|
|
Real wage
|
nominal wage / price level
|
|
Trade Unions benefit members by..
|
increasing demand for their work, raising their nominal wages, and improving working conditions.
|
|
Wage Differentials exist because
|
-variation in the level of human capital between individuals
-risk -unpleasant jobs -attractive non-pecuniary benefits -discrimination in labour markets |
|
Economic Rent
|
It is the return to a factor over and above the factor's transfer earnings
|
|
2 Questions facing natural resource market
|
1. What is the best rate of exploitation of a nonrenewable resource?
2. How best to regulate common property resources such as wild fish? |
|
Voluntary Trade
|
Both Parties must benefit
|
|
Theory of Absolute Advantage vs Comparative Advantage
|
Absolute Advantage = Adam Smith, Nations should specialize in producing goods and services for which they have an advantage.
Comparative Advantage = the advantage that comes from producing at a lower opportunity cost than others are able to do (David Ricardo) |
|
Free Trade Benefits
|
1. Lower Prices
2. Higher Incomes 3. A greater variety and quality of products 4. Increased competition. |
|
Trade Restrictions
|
Tariffs/Quotas:
-Increase the domestic prices of a product that is imported, and reduce the Quantity traded of that product. Exhange Controls Voluntary Exports Restrictions |
|
Four Arguments against Free Trade
|
1. Strategic Industry (Military, healthcare)
2. Infant Industry (new firms/industries don't have a chance) 3. cultural identity 4. lower environmental and labour standards argument |