Econ assignment help and quizzes for college students

Describe the debt/credit market. Consumer, business, short-term money market.

>Liability
-Consumer: Credit & housing loans
-Business: Loan & bonds
-Short-term money market.

Describe the short-term money market. Identify the specific bond used to exchange.

>Surpluses and deficits are balanced out between individuals and businesses coming together themselves. (also includes overnight money market)
>Only appropriate for large companies.

Define Opportunity Cost.

Opportunity Cost is the benefit that could have been gained from the alternate use of the same resource, for e.g. different usage of money results in different benefits.
If …, then … will be forgone.

Explain how Utility plays a role in the Economic Problem.

Utility is the individual pleasure that is gained from the consumption of goods and services. This is catalyst to the Economic Problem as the individual desire for utility will result in an infinite demand of goods and services.

Define PPF.

A Production Possibility Frontier is a theoretical graph that depicts all possible combinations of production available between two goods and/or services within an economy.

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Explain the 3 purposes of a Production Possibility Frontier for a government body.

>Choice between which combination of public goods
>Understanding of whether underemployment is present
>Understanding of how productive economy is as a whole (and the effect of technology)

Explain why PPFs are note linear in reality.

Resources are not made the same and therefore cannot alternate from one industry to another.

Explains what occurs to a PPF when there is an increase in (labour) resources in the economy. Draw.

Outward shift=increase in “productive capacity”
Labour is assumed as the primary resource

Explain what occurs when an economy operates below the PPF.

Not operating at maximum capacity=decrease production of goods=under employment.

Explain what occurs when new technology for (only one axis) a particular good or service is discovered. Draw.

Slant toward that good to which opportunity cost would decrease (forgoing less of the other one)

Discuss (ad/disad) a businesses decision to spend (labour) or invest (capital).

>Long term gain from capital investment, disadvantage for continuing labour intensity
>Temporary shortage of supply and decrease in profits from capital investment. Steady supply ”.

Describe how a government may face opportunity costs by providing an example. (2 marker question)

Differing demographics desire different goods and services, requiring the Government to deliberate on which to produce with the limited tax revenue they have. For example, if a park is built for children, chessboards for the elderly are forgone.

4 FOPS

Labour
Land
Capital
Enterprise

Reward for labour

Income

Reward for land

Rent

Reward for capital

Interest
When enterprise borrow savings from the economy (as per 3 sector model), the entrepreneur owes the financial sector cost + interest (just boldly called interest). This interest equates to the price of capital bought and is therefore paid to the capital seller.

Define interest rates.

Cost of borrowing money (by a consumer, business, gov or bank) expressed as a percentage of the total amount borrowed.
Borrow=liability= loans + bonds

Reward for enterprise

Profit

Define factors of production

Resources owned by consumers that are sold to firms for production

Define GDP

Gross Domestic Product is the total VALUE of goods and services produced in an economy within a set period of time.
a.k.a. total output, AD, total income in an economy

Define Economic Growth (for exposure)

An increase in GDP of a nation from one year to another.

Define quality of life

The general well-being of a population of people. (generally within a country)
(Just a term to familiarise myself with)

Define HDI. Explain how the scale works.

Human development index measures a comparison of quality of life between economies, from 0 to 1..

Identify the 3 things that HDI takes into account

Gross National Income ppp/capita
Life expectancy at birth
Mean years schooling

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FYI Gross national income includes income earnt by residents in foreign economies and excludes incomes earnt by foreigners in economy.

Identify some indicators of quality of life apart from HDI

Access to food, housing, education, welfare
Adequate sanitation, waste disposal and clean water
Clean and healthy environment
Provision of law and order
Participation in government decision making: human rights, incl freedom of speech

Describe three factors to consider when comparing employment between economies.

Wages
Equality: Unlawful discrimination, physical safety
Distribution between primary, secondary and tertiary sectors

Define distribution of income

Distribution of income describes how GNI/GNP is distributed among a population among a population.

State what both ends of the gini-coefficient scale indicates.

The coefficient ranges from 0 (or 0%) to 1 (or 100%), with 0 representing perfect equality and 1 representing perfect inequality.

Describe the business cycle.

The business cycle is the fluctuation in economic growth. (where troughs eventually lead to growth and vice versa)

Define a mild recession.

A mild recession is any period of extended economic downturn.

Define a technical recession.

A technical recession is a period of 2 quarters where negative economics growth occurs.`

Troughs (recessions) and booms have contrasting effects. List the a few areas that are affected (there are 7).

Production
Income level
Consumption/investment (proportionate to each other)
Employment
Quality of live/standard of living
Inflation
Total output

Define the circular flow of income.

The circular flow of income is a five sector model indicating the five players that influence the economy through injections and leakages.

Outline the relationship between the household sector and the firms sector in the circular flow of income. (3steps)

Consumer sell FOP, receives income
Purchase g and s with income produced from FOP
Business makes a profit and employs FOP.

Draw the 5 sector circular flow of income. Label all sectors and flows.

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Contrast leakages and injections and state the three factors for each

Leakages: items that remove money from economy. Injections vice versa.

Define investment

>Proper: The purchase of capital goods by a firm. (borrowing)
>May be confused by individuals saving money to grow its value (saving, the complete opposite)

Describe the impact of the following on leakages, injections and economics impact on Australia: China, an importer of Australian goods, experiences economic downturn.

Decreased injections (Australia is exporter to the importer)
Contraction

Describe the impact of the following on leakages, injections and economics impact on Australia: Investment in port facilities improve export capacity.

Increased injections
Expansion

Describe the impact of the following on leakages, injections and economics impact on Australia: Superannuation.

Increased leakages
Contraction

Describe the impact of the following on leakages, injections and economics impact on Australia: Increased tax

Increased leakages
Contraction

Describe the impact of the following on leakages, injections and economics impact on Australia: Decreased investment

Decreased injections
Contraction

Describe the impact of the following on leakages, injections and economics impact on Australia: Increased imports

Increased leakages
Contractions

Describe the impact of the following on leakages, injections and economics impact on Australia: Reduction in borrowing

Decreased injections (only focusing on business investments within circular flow)
Contractions

Describe the impact of the following on leakages, injections and economics impact on Australia: $200bn infrastructure project funded by government.

Increased injections
Expansion

Define equilibrium in the circular flow of income.

Equilibrium is where leakages and injections equal.

Define consumer sovereignty

Consumer sovereignty is the collective power where consumer’s freedom of choice determine types of goods produced and in what quantity. Thus demand fluctuates between products depending on preferences.

Describe the 2 aspects of public goods

Public: Non-excludable: Cannot charge price
Non-rival: One’s consumption does not deplete another

Define merit goods

Merit: Not at optimum supply as a result of not at optimum demand

Contrast the differing treatments between merit goods and illicit good by the government.

>Merit produced/subsidised lack supply&demand
>Illicit goods regulated and taxed due to neg externalities + inelastic=revenue

Formulate APC

Average propensity to consume=
Consumption/Income

Formulate APS

Average propensity to save=
Saving/Income

Formula MPC

Marginal propensity to consumer=
Change in C/Change in Y

Formula MPS

Marginal propensity to save=
Change in S/Change in Y

Describe the life cycle theory of consumption

Young: Do not have income, dissave (borrow) to finance education
Middle: Rise in income flow
Old: Disappearance of income, dissave
>Does not take into account family finances and pensions
>Consumption remains constant throughout graph
>All income earnt is spent before death

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Planned v market economy.

Quality of life may be increased or decreased depending on perspective

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Identify two main factors that account for whether or not consumers spend or save. List a few others.

1. Higher income=higher saving (with the exception of US due to inequality as per consum func)
2. Age: Life-cycle theory of cumsumption
Cultural
Personality
Confidence in economy/economic outlook
Specific future spending commitments
Tax rate
Availability of credit (money for borrowing)

7 factors affecting quantity demanded.

>Price
>Price of complements
>Expected future prices
>Changes to taste/preferences
>Income: Increased income (as a whole in society) increases demand for luxuries relative to necessities, vice versa.
>Marketing/new studies
>Demographic.

List some examples of social welfare payments.

1. Pension
2. Family
3. Disabilities
4. Unemployed/sick
5. Veterans
6. Indigenous

Define industry

Industry is the collection of firms that produce similar products, thus competing against one another.

Define niche market

A segregation of a mass market for a good or service that is demanded by specific consumers.

Outline the 4 goals of a firm

1. Profit motive/maximisation
2. Meeting shareholder expectations
3. Increasing market share: Sales maximisation
4. Maximising growth: long term investment

Define satisficing behaviour

Satisficing behaviour is a situation in which a firm does not seek to maximise any one of the four goals.
Rather they set quotas or pursue an overall level in all goals in line with the interests of the firm.

Formulate productivity

(Output/All input)/Time

Formulate labour productivity

(Output/Labour input)/Time

Outline the three specialisations of FOPs.

1. Division of labour
2. Location of industry: Land
3. Large-scale production: Capital

Define internal economies and diseconomies of scale.

Internal economies and diseconomies of scale describes the effects of mass production on efficiency and average cost.

The point of technical optimum along the LRAC curve distinguishes between the two.

Define negative externality.

A cost that is suffered by a third party due to an economic transaction that firm/consumers do not hold account to.

Define external economies and diseconomies of scale. Illustrate external economies and diseconomies of scale.

External factors that may shift the LRAC curve up or down.

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Using the total outlay method, what direction of change in revenue would result from an increase in price for INelastic demand.

Increase price=Increase revenue

Using the total outlay method, what direction of change in revenue would result from an increase in price for UNIT elastic demand.

Increase/decreased price=Same revenue

Using the total outlay method, what direction of change in revenue would result from an increase in price for ELASTIC demand.

Increase price=Decrease revenue

Which 2 sectors would benefit from examining elasticity?

Business: Unit=”Optimal price strategy”
Government: Pricing of public goods + taxing of excise goods

Perfectly elastic demand AND supply
a) Explain curve
b) Example

Horizontal (any quantity),
Demanded: Only willing purchase at set price
Supplied: Price taker
perfect competition of exactly same apples

Perfectly INelastic demand AND supply
a) Explain curve
b) Example

Vertical (any price),
Demanded: Desperately need to buy without choices
Supplied: Abusing monopoly power/limited resource
AIDS cure/Mona Lisa

5 factors that contribute to elasticity of demand

>Luxury: Elastic (Kmart vs Nike, still could be type), Necessity: Inelastic
>Close substitutes (pure/monopolistic): Elastic, No substitutes (monopoly on cure): Inelastic
>Price proportion to income: Durability
>Length of time after price change-
Long run: Elastic (have time to SEEK SUBSTITUTES), Short run: Inelastic (cannot adapt)
>Not addictive: Elastic, Addictive: Inelastic (alcohol, cigarettes, hence excise duty)

Elasticity of demand sheet 29/3 #2

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Movement and shifts of demand curves: Read through 27/3 #1

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7 factors to the quantity supplied of goods

>Price of G&S
>Price of “other” goods
>State of technology for production
>Cost of production
>Scarcity of good
>Number of suppliers
>Eco conditions

Read through 12/4 #1 Increase and decrease of supply

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Read through 12/4 #1 flip side: Perfectly elastic/inelastic

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3 factors affecting elasticity of supply

Length of time after price change
Storage ability of product: Inventory
Excess capacity

Characteristics of market equilibrium

>Intersection of demand and supply curves
>Established through same QS and QD
>No tendency for change in price or quantity

Define price mechanism. Explain what it reflects and doesn’t reflect.

Price mechanism is the interaction between demand and supply in determining price and quantity of goods.
Essentially price of a good reflects
>Costs of production
>Benefits to consumer
Does NOT reflect
>Costs toward society (manufacturing+usage)

Explain how a market economy ensures allocative efficiency. Relate it to the two markets.

Through price mechanism, allocative efficiency ensures supply is satisfied with monetary compensation and demand is satisfied in attainment of good, addressing the eco problem.

Market failure formal definition

Free market=Undesirable outcomes
Market failure is the situation in which there is an inefficient allocation of goods and services in the “purely market economy”, where economic outcomes are determined by the free market without government intervention.

Illustrate market failure on demand&supply curve

Optimum: Merit increase, demerit decrease
Concerned with:
>Low quantity of merit/high of demerit
>High price of merit/low of demerit
>Externalities

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5 aspects/outcomes of market failure

>Provision: Q of merit&public
>Income distribution
>Economic stability: Fluctuations
>Abuse of market power: Decrease comp decrease Q and ^P, impeding growth
>Negative Externalities

>State the 2 price intervention methods
>Their position to equilib
>Their purpose
>Their effectiveness

Price ceiling: Below equilib. Rich supplier.
Price floor: Above equilib. Poor supplier.
Both used to equitably distribute income. Both also cause disequilibrium and DISTORT outcomes like in planned economy.

>State the 3 quantity intervention methods
>Their position to equilib
>Their purpose
>Their effect

Q intervention of illicit/merit goods or goods with high social costs/goods with positive externalities-not just low negative externalities. LITERALLY CHANGES EQUILIBRIUM PRICE AND QUANTITY.
>Restricting/quota production
>Imposing tax/reducing tax of particular good
>Fiscal policy/government expenditure

Kinda blah over my mind the 4 market structures:
>Number/size
>Product characteristics
>Barriers to entry
>E.G

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Identify main legislation regulating the abuse of market power (mainly the 4), protecting consumers.
Which organisation administers this act?
What is the legislation that consolidates all consumer protection laws?

Competition and Consumer Act 2010
ACCC
Australian Consumer Law 2011

List 4 ways businesses exercise ‘business sovereignty’.
More about ways a firm diminishes consumer choice to gain profit.
Different to abuse of market power, as business sovereignty is NOT NECESSARILY market failure, just firms outsmarting consumers.

Marketing
Misleading conduct
Planned obsolensce
Anti-competitive behaviour: Actions taken that diminish consumer’s ability to choose what they would have preferred (power supply chords)

4 abuses of market power.
>More about ways firms in highly concentrated industries (thus having greater market power) can abuse that fact.
>Particularly how it is market failure, how price mechanism doesn’t fulfill
>As monopoly=anticompetitive, all 4 are EXAMPLES of anti-competitive behaviour

1. Monopolisation: Use of (already existing) market power to just flat out eliminate existing or upcoming competiting
2. Price discrimination (freely to their discretion, as they don’t need to compete with many firms that could charge more willing consumers at same rate)
3. Exclusive dealing: Set of conditions that retailers set to firms (vice versa) that prevent them from dealing with others (easy to do in concentrated industries)
4. Collusion and market sharing (easy to do in concentrated industries)
*The primary problem in all these is PRICE setting

Brush over the difference between macroµ eco policies: Influence & examples

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2 demonstration of public sector intervention

>Public sector outlay: Gov exp/GDP *100 %: Steady trend at 39-40% since 2010
>Public sector employment/Total employment: Steady trend at 16.5% since 2010
GFC led to greater government role in stabilisation (though trends state consistency of public sector)

2 broad methods of resource allocation by the government

>Influencing business and firm behaviour (law+tax)
>Expenditure (reallocating, producing)

Brush through the 2 broad ways in which government influence business behaviours

>Legislation etc, directly influencing
>Fiscal policy: Mainly tax but also GBE acting as competition

Contrast direct tax and indirect tax

Direct tax: Attached to individual/firm (income/corporate)
Indirect tax: Attached to a G/S and passed onto someone else (GST + excise duty)

Tax base

Things that can be taxed, i.e. income, wealth (levied land) and consumption (GST)

Formulate ART

T/Y

Formulate MRT

Change T/Change Y

Progressive, regressive, proportional tax: Brief run over

Progressive: ^Y=^Average Rate of Tax (Y tax)
Regressive: ^Y=decrease ART (GST, anything fixed for all)
Proportional: ART is fixed (Corporate, fixed rate)

Outline the 3 goals of Fiscal policy. Different to monetary.

Conducting macro-eco policy through various instruments including the budget to:
>influence resource allocation
>redistribute income
>smooth fluctuating eco cycle

Describe how monetary policy affects the economy after it is implemented. (First dot point and then write it as a paragraph. Don’t slack off.)

Policy>RBA securities transactions>Supply of moeny>Cash rate>IR>Price of funds to borrow>Fluctuating demand for funds>Fluctuating purchasing power>Fluctuating AD>Fluctuating economic cycle>rebalance: employment, incomes ect until comes back around.

How long does monetary take to effect the economy?

6-18 months as its the long term plan

Specific target of monetary policy

Inflation between 2-3% on average over the course of the economic cycle. A rate that has determined to produce stable growth.

Corporatisation

Government encouraging their enterprises to operate privately to improve efficiency and innovation, subsequently profitability

Privatisation

Selling of government enterprises to improve efficiency and innovation, subsequently profitability

Describe what is means for governments to “maintain workable competition”

Greater competition=greater no. firms.
Too much competition: EoS cannot be produced
Too little competition: Innovation+efficiency stagnates & abuse of market power
Workable is a balance between both.

2 broad aspects of environmental problems

>Usage of non-renewable resources that will inevitably deplete=unsustainable
>Immediate externalities caused by:
>Production of G/S
>Usage of G/S

Brush through 28/5 #1: Gov respondence to market failure

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Issues associated with monopoly power

>Inefficient production & allocation of resources
>Abuse of market power in PRICE setting (monopolisation, descrimination, collusion, sharing)

Run through 20/3 #1 Shfits and specialisation

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Dixon chapter 1

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Riley chap 2

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Dixon chap 2

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Dixon chap 3

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Dixon chap 4

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Dixon chap 5

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Riley chap 3

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Dixon chap 6

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20/3 #1 FLIP

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Dixon chap 7

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Dixon 14

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13/6 #1

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13/6 #1 flip

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Dixon 15

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Outline the causes of economic instability

1. Inevitable inflation cycle
2. When business errors occur
Consumer(spending)/Business(producing goods & buying capital) confidence drops simultaneously

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Define the budget.

Tool that exercises fiscal policy through planned estimate of expenditure and taxation revenue for the forthcoming year.

Describe the 3 fiscal/budget positions/OUTCOMES.

Gov>Tax: Budget Deficit
Gov<Tax: Budget Surplus
G=T: Balanced budget
Comparison between G and T

Define deficit.

Amount gov expenditure over revenue.

Define surplus.

Amount revenue over gov exenditure.

Describe the 3 budget STANCES.

Expansionary: Larger deficit or smaller surplus
Contractionary: Smaller deficit or larger surplus
Neutral: Same same
Comparison of a deficit or surplus to previous years. (comparison of the different between G and T to previous years.)
*The stance results in the outcome of the following year

Describe discretionary measures in stabilising the economy and give examples.

Government specific funding for things to stabilise economy while acting properly.
>Amount spent
>What is spent

Describe non-discretionary measures in stabilising the economy and give examples. Explain the effects in 2 examples.

Through automatic stabilisers, instruments inherent in the government’s budget that counterbalance economic activity.
Tax, unemployment benefits, look at book.

Analyse the role of the Senate in passing legislation.

+More detailed review of government policies
-Slows process of developing legislation

Define and analyse the role of lobbying.

Advocacy with intention of influencing political decisions by individuals or lobby groups.
+The voice of the people
-Illegal campaign donations from businesses=corrution

Define and analyse the role of unions in politics.

Great numbers>public debaes for workers rights/benefits/entitlements

Define and analyse the role of international influences on government policy.

>Equity: Attempts to remain competitive to encourage foreign investment & increase our productive capacity
>Debt: Attempts to provide competitive funds. ^purchase of our currency ^its demand ^strength/value of currency
>Forex: Allows for all other markets to function
>Overseas: Different national areas of specialisation=^selection of goods + ^output/profit
>Agreements: Blantantly restricting
-Volatility is kept in mind
#globalisation

Define financial intermediaries.

Financial institutions through which accumulated funds of savers can indirectly provide funds to borrowers through loans.

Describe the broad advantage of a financial market to an economy.

Incomes not used for consumption can attribute to AD, ^productive capacity of the economy.

Define securities. Give 2 examples.

Financial instruments representing money, providing holder of the instrument with a claim over real assets or a future income stream.
Shares, bonds.

Define primary financial markets.

In a primary market, a direct exchange occurs between the investor and the company. This facilitates the creation of securities sold into the economy.

Define secondary financial markets.

Secondary markets involve transactions of securities (primarily stocks) that have been previously issued.

Discuss (advantages/disadvantages) the 2 ways in which firms can finance (additional) assets.

1. Entering Liabilitiy: Borrowing.
+Retains power of decision making
+Retains all profits
-Vulnerable to changes in IR, must pay it
-RISK!
2. Selling Equity: Selling ownership of the business.
+Diluting risk>job security (labour force in general)
+No interest rates required (and the changes it has)
-Decreased profits from dilution AND dividends
-Deals with public scrutiny (ethics)
-Security laws diluting firm decision making
-Intro of new shares dilute shareholder’s investment (disad to the shareholder)

Identify 2 ways shareholders can make a profit in the equity market

1. Dividends
2. Capital gains
*Short or long term

Define bonds.

Promissory notes wherein the borrower, in return for funds, promises to pay the bondholder at maturity.
The bondholder may sell the “someone owes me” right-hence the demand for bond.

How does fluctuating interest rates in a secondary bond market affect the face value of the bond? Draw demand and supply for a bond.

Higher interest=Lower demand for the good (a paper that says someone owes)=New face value decreases

Define equity.

A stock or any other security representing an ownership interest. Can be in public or private business.

Define dividends.

The return of equity when a company makes profit.

A REMINDER THAT GOV SECURITIES ARE ONLY BONDS

i.e. borrowing from public to fund gov operations

Describe the 4 financial markets.

1. Share market: Buying and sharing of equity>shares. Stockbroker.
2. Debt market: Connection between borrowers and savers>bonds. Intermediaries>financial institutions.
3. Derivatives market: Trading assets as money.
4. Foreign exchange market: Money

Explain how futures work in a derivatives market.

Derivatives are contracts whose value is based on an asset. A future obligates selling of an asset and repurchasing of the asset (by α) on a future date at the same price regardless of market price. Or just directly fixes in an interest rate on a loan.
>α maintains security over asset/loan
>β is speculative, suffers cost and attains profits

Define share.

A security that provides ownership over a fraction of a company.

Describe the level of competition in Australia’s financial markets. State any trends.

High concentration, i.e. oligopoly. The 4 banks
>CWB
>ANZ
>Westpac
>ANB
Therefore not as much competition=greater interest rates (than other countries). Greater increase in competition recently.

Explain what it means for a market to be concentrated.

The

Define stockbroker

An intermediary between client and equity market.

Define capital gains

A profit made by an investor from the sale of an investment (in anything).

Descrube the role of investors and firms in the sharemarket

Investor
>Earns return through dividends and capital gains
>Participate in firm decision making, may have an ethical motive
Firms
>Funding=Long term growth
>Descreasing risks/liabilities

30/7 #4

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Define float

The initial raising of funds in a company through the sale of shares to the public.

Define all ordinaries index

Stockmarket index measuring changes in the overall value of campanies listed on the ASX.

Discuss the relationship between the sharemarket and the real economy.

Although eco reflects sharemarket as value of firms reflects confidence of investors AND aggregate demand, presence of speculation in sharemarket increases volatility.

Define speculation. Describe the issue of speculation in the financial market.

Buying stock with the hope that it will become worth more money in the NEAR future.
Shares become overvalued, leading to misallocation of resources=instability

Explain the importance of foreign exchange markets

Enable the movement of funds around the world, allowing nations to hold foreign currency, allowing for global stock and debt markets, crucial to the productive capacity of business.

Explain the importance of global debt markets.

Allows deficits and surpluss to be balanced.
Enable funding of government operations + increases competition with domestic markets.

Explain the trend of global financial markets and its cause.

Increasingly connected due to technology and deregulation.

Look over the stats between overseas financial markets in relation to Australia.

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Outline the 4 authorities in Coucnil of Financial Regulators. Define CFR.

RBA: Stability through monetary policy
APRA: Deposits are secure, institutions are capable
ASIC: Consumer protection in financial markets
Treasury: Financial advice & framework
>A coordinating body for financial market regulation that provides for cooperation and collaboration among its four members, allowing for sharing of information and advice.

Outline role of RBA. 5 aspects.

>Monetary policy>cash rate>banker to banks
>Currency: Note printing
>Efficiency&stability of payment systems
>Oversees forex
>Banker to gov, hence affects fiscal

Outline role of Treasury. 2 aspects.

>Advice forms the budget (how gov plans to tax & spend)
>Keeping gov up to date on Au&overseas markets

Dixon Ch 16

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Dixon Ch12 uodate answers in the meantime

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4ish whateves reasons why gov would borrow from financial market

1. Expansionary stance: Deficit in spending
2. Maintain balance when G unintentionally goes over T (doesn’t mean it goes back to balanced budget)
3. Major infrastructure projects
4. Increasing demand/decreasing supply of funds increases IR

Where do supply of funds in debt markets come from?

1. Business surplus
2. Individual savings
3. Gov surplus

Which parties demand funds in debt markets?

1. Indiv: Home/personal loans, credit
2. G>T through loans and bonds
3. Business: Startups, expanding of business, managing cashflow through loans and bonds

Define liquidity.

The ease of which assets can be turned into cash.

Outline the importance of money and its 4 characteristics.

1. Medium of exchange
2. Measure of value
3. Store of value
4. Allows for lending and borrowing (imagine saving apples in a bank)

Define money base

Currency + bank deposits in RBA
>The most liquid

Define M3

RBA’s measure of the money supply that consists of all currency, bank deposits in RBA and private bank deposits.

3 reasons why individual consumers prefer to hold surplus funds rather than invest. (why there is a greater demand for liquidity) (motives)

1. Transactions motive: Lower costs aswell
2. Precautionary motive: Safe
3. Speculative motive: An asset goes up a bit=exchange into cash

Define broad money

M3 + NBFI (holdings) of deposits - NBFI deposits in banks.
Non-bank financial intermediary

Define borrowing rates

The interest rate which banks offer to lenders (consumer saving/ business or gov in surplus)
Lenders are investing their funds
Lenders want a higher IR (suppliers want a higher price)

Define lending rates

The interest rate which banks charge to borrowers (consumer borrowing/ business or gov in deficit)
Borrowers are investing in stuff (capital goods) which require funds
Borrowers want a lower IR (suppliers want a lower price)

Explain the equilibrium curve for interest rates in relation to who is supplying and who is demanding. Briefly outline why a shift in each could happen and the resultant IR.

Where supply is from consumer saving/ business or gov in surplus
Where demand is from consumer borrowing/ business or gov in deficit
*Borrowing = lending rate when disregarding profitable banks

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Define short term interest rates.

Interest rates on short term securities, i.e. (ST promissory notes/temporary shares) with a maturity of less than a year.

Discuss the advantages of holding long term securities.

>Non speculative
+Higher IR for lenders + generally greater returns
-Greater risk
-Less liquid

3 factors that affect supply of funds BY INDIVIDUALS in financial markets. (lenders giving money to banks)

1. 3 motives prior to seeing the rate of return
2. Choice between money or other financial assets: Savings account vs house, which one is more appealing as an investment.
3. Domestic rate relative to overseas: What’s more enticing for a return
*A borrower paying back does not supply fund (think of funds as a good and the interest is just a payment back for the good).
>Within supply & demand, the paying back of funds does not count just like how a banks paying back to savers does not count.

3 factors that affect demand of funds in financial markets. (banks giving money to borrowers)

1. 3 motives prior to seeing cost of fund
2. Business demand for capital goods (so a sudden huge deficit)
3. Domestic rate relative to overseas
*A saver taking money out does not demand funds. May have same effect though.
>Within supply & demand, the bank’s paying back to savers does not count just like how a banks paying back of funds does not count.

2 inpuit and 2 output factors affecting business demand for capital goods

Input factors
>Wage rate relative to capital
>Productivity of labour relative to capital
Output factors
>Economic activity
>Derived demand from demand for firm’s product
*Note this is related to the demand for labour but a bit different

11/8 #1 + flip side

…

Define ESA. Outline 2 factors that affect the size of this.

Exchange settlement accounts banks have with the RBA when interacting in the short term money market
>Banks intentionally increase (shove money in) depending on expectations of net flows OUT of their account
>Transaction between banks

Define cash rate

The interest rate paid on overnight loans from RBA

Explain what determines the supply of money for a particular day and why supply of money is inelastic. Refer to the concept of monetary stance and DMOs.

>Set cash rate aim, based on stance required to counter-cycle, determines supply in the overnight market.
>Change in (bank’s) demand for money has no relationship on the supply that has been determined that day (to target cash rate).

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Describe the an increase AND decrease in supply of money from RBA to banks through DMOs in the overnight market.
>Relate to LOOSE/TIGHT,
>transfer of MONEY and
>exchange of SECURITIES.
>Draw curve.

Si: Loose: RBA buying gov securities (shoving money into banks)
Sd: Tight: RBA selling gov securities (taking money away)

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Explain how cash rate influences IR.
>Explain the two-fold effect this would have on the economy

^Cash rate>^costs>Profit margins maintained by passing off as ^IR to customers.
Two fold: 1. Consumers will be less willing to save=consume
2. Firms will be more willing to invest
Hence consumption and investment

3 Output factors that influence labour demand.

1. Economic conditions: high employment=high output, vice versa
2. Conditions that restrict firms: Contracts, Awards. Hence offshore outsourcing
3. Demand for firm’s product: High demand=higher price=greater profit+greater output=higher incentive to employ

3 Input factors that affect LABOUR demand. How likely will an employer hire person A for job A if there are alternative NON-LABOUR/NON-DOMESTIC OPTIONS..

1. Productivity of labour v other (what is more attractive in the long run)
2. Cost of labour v other
3. Cost of labour v foreign labour

5 factors that affect supply of labour

1. Pay: Not bothered if only jobs @ $30k
2. Working conditions: Not bothered if an economy only offers mining jobs
3. Presence of human capital (how skilled/educated an economy is)
4. Mobility: Responsiveness to changes in demand (from firms), i.e. the ability for labour to move between jobs.
5. Participation rate

Why doesn’t output of a firm correlate directly with economic conditions?

1. EXCESS CAPACITY
2. Employers must be certain by an establishment of economic trend, to which they then intensity of labour is slowly changed.

Short run for labour demand in terms of productivity

Where AD is ^ or more ^ than productivity=^demand for labour
Where productivity is ^ or more ^ than AD=↓demand for labour
When both are stable, demand and supply will be stable

Outline 2 aspects of mobility

1. Occupational: What job? Edu+skills+time preventing movement of labour. Easy jobs have high occupational mobility.
2. Geographical: Where job? Costs&personal upheaval preventing movement of labour

Formulate participation rate

Labour force / Working age population
Want to work / Can work

4 factors affecting participation rate

1. Their perception of economic climate: People won’t even be bothered to search for work (thus more job opportunities begin to open, hence eco cycle)
2. Significant growth in “working age” to labour force due to??? Contradicts itself with statistics with no explanation for why partic is declining.
3. Changing attitudes toward women: Increase
4. Retention of schooling into tertiary: Decrease

Formulate employment and unemployment rate

Employment/Labour force*100
Unmployment/Labour force*100

Define inflation

The sustained increase in the general level of prices over a year, measured by Cunsumer Price Index.

Which aspects of labour supply affects wage differentials between different occupations?

1. Differing levels of edu/skill/exp between jobs
2. Differing working conditions (dangerous jobs=higher pay)
3. Easier jobs with lower occupational mobility does not require high pay. Overlaps with #1.

Which aspects of labour supply affects wage differentials between same occupations?

1. Geographical mobility: Westpac Dubbo vs Westpac Sydney
2. Productivity of (indiv) labour=bargaining power (same job) Competing actuaries for Westpac
3. Capacity for firm to pay: Greater market power (Westpac v Bedigo BANK) determined by profit margins

Which aspects of labour supply affects wage differentials between AGE?

Teen/Graduate: Low levels of edu/skill/exp=decrease wage
Adult: Career progression=^
Old: Less appealing/productive=decrease wage

Define enterprise bargaining

Negotiations between employers and employees about pay and work conditions at the firm.
>Mainly bargaining bargaining for a better wage.

Define non-wage outcomes

Benefits received by employees on to of wage.

Assess the impact of enterprise bargaining on the distribution of income.

+competitive labour
-causes wage differentials within jobs if other workers do not take same initiatives

What are the 4 causes of unemployment and what do they mean?

Structural unemployment-Employment is redundant, requires retraining for another job
Frictional unemployment- Moving from one job to another
Cynical unemployment- Slowing down of economic activity
Seasonal unemployment- Employed as casual work only for that particular season

2 economic advantages of inequality (as a result of market economy/capitalism)

1. Proactivity of employees, price mechanism
^Incentives to accrue skill
^Incentives to work harder (Longer working hours)
^Incentives for (occu/geo) mobility: Changing jobs to higher paying
^Incentives for Risk taking (esp by entrepreneur)
2.
^Saving (more high income earners): Provides domestic funds

5 economic disadvantages of inequality (as a result of market economy/capitalism)

↓overall utility
↓eco growth from ↓expenditure/comsumption
^conspicuous consumption: decadence
↓perpetuating poverty from disadvantage=market failure af
^cost of welfare=burden on gov

4 reasons why inequality exists

1. Perpetuating cycle: accumulation of wealth if one possesses greater capital
2. Differing skills in differing demand
3. Inheritance (related to #1)
4. Networks (in life related to #1&3)-CEO knows many people, thus greater opportunity for son/the people you surround yourself with

Social costs of inequality

Wellbeing (utility)
Social class division (conspicuous consumption and cultural discrimination/mockery/tensions)
The crime, suicide, disease and life exectancy statistically associated w/ poverty

9/8#2

…

Dixon Ch 13

…

What does APRA stand for?

Australian Prudential Regulation Authority

What does ASIC stand for?

Australian Securities and Investments Commission

Discuss casualisation of work

+flexibility for employee and employer
+employers avoid non-wage costs
-less job secuirty, hence difficult to plan for future
-less staff loyalty=less willingness to put full effort & develop skills
-underemployment

Identify 4 unions and an example for each.

1. Occupational: Australian Medical Association
2. Instry-based: Finance sector union
3. Enterprise-based: rare
4. General: Australian Workers Union

Account (3 reasons) for decline in union membership

1. Away from centralised wage determination
2. Indstries that are growing have low membership, that are declining have high
3. Casualisation, esp contractors

3 roles of unions in labour market

1. Represent misc interests
2. Bargaining wage
3. Restrict supply of those that aren’t members (leftward shift=^wage for already employees)

2 roles of employer associations. Give 2 e.g.

1. Lobby to gov: Min wage, tax exemptions, industry assistance
2. Assists in managing industrial relations disputes
>Australian Chamber of Commerce
>Business Council of Australia

Evaluate the effectiveness of employer association lobbying in recent years.

Ineffective as gov is cutting back on domestic protection & industry assistance, allowing market to run itself for the long run benefit.

scarcity

There are fewer resources than are needed to fill human wants and needs.

Market Economy

An economic system in which people choose freely what to buy and sell

Command Economy

An economic system in which the government makes all economic decisions.

Traditional Economy

Goods and services are produced the way it has always been done

Mixed Economy

a mixing together of market and command systems

individuals have economic freedoms

government retains some control for benefit of citizens

Factors of Production

Land, Labor, and Capital

Model of Choice

1. Individuals have unlimited wants. 2. Individuals can rank their preferences. 3. Individuals are rational utility maximizers.

Determinants of Demand

-Seasonality
-Prices of related goods or services. These are either complements or substitutes.
-Income of buyers.
-Tastes or preferences of consumers. (or trends)
-Expectations.
-Population

Determinants of Supply

-Production or input costs.
-Technology.
-Number of sellers in the market.
-Price expectations.
-Nature disasters, shocks to the market
-Government regulations (subsidies or taxes)

TERM

Supply

DEFINITION

Graphic representation of the relationship between product price and quantity of product that a seller is willing and able to supply.

LOCATION

https://o.quizlet.com/v1AqrhRCA3ustu-sa9WpYw_b.png

TERM

Demand Curve

DEFINITION

Graphic representation of the relationship between product price and the quantity of the product demanded.

LOCATION

TERM

Surplus

DEFINITION

Supply is greater than demand, or supply exceeds demand.

LOCATION

TERM

Shortage

DEFINITION

Demand is greater than supply, or demand exceeds supply.

LOCATION

TERM

Market clearing price/Price Equilibrium

DEFINITION

the price of a good or service at which quantity supplied is equal to quantity demanded

LOCATION

TERM

Price Ceiling

DEFINITION

a government-imposed price control or limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make commodities prohibitively expensive.

LOCATION

TERM

Price Floor

DEFINITION

A price floor is a government- or group-imposed price control or limit on how low a price can be charged for a product. A price floor must be higher than the equilibrium price in order to be effective.

LOCATION

Increase in Demand

Demand curve shifts to the right

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Increase in Supply

Supply curve shifts to the right

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Decrease in Demand

Demand curve shifts to the left

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Decrease in Supply

Supply curve shifts to the left

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Opportunity Cost

This is the benefit that you have given up in order to pursue an alternative

Economics

the system that society uses to produce and distribute goods and services

Wants

are the things which people would like to have (car, cell phone)

Needs

are the things which people need to survive (food/water, shelter, clothing)

Goods

things that can be made or manufactured (tangible)

Capital goods

are the things used to manufacture other goods (tools)

Consumer goods

are goods meant to be sold to consumers for use (new house, cars, phones, appliances)

Services

work that is done for someone for a certain price (grass-cutting, nails done)

Normal Good

any good for which demand increases when income increases

Inferior Good

A type of good for which demand declines as the level of income or real GDP in the economy increases.

Comparative Advantage

When one nation is better able to produce a good or service than another nation
Ex. Saudi Arabia => OIL

Productivity

is the amount of a good or service that can be produced in a given time

Law of Diminishing Returns

economic law that states that the level of return for additional labor or work will decrease at some point and continue to decrease
Costs (eventually) > Profit

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Sole Proprietorships

business owned by a single person or a married couple

Partnerships

business owned by two or more people

Corporations

business that has many owners (stockholders)
sell stocks to investors
pay dividends to shareholders

stocks

pieces or shares of a company

Non-Profit Organizations

business that is organized to provide a service and not to make large profits for the owners
-many are charities or service groups

Business Cycle

The periodic and cyclical ups and downs of the economy

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Standard of Living

A measure of quality of life based on the amounts and kinds of goods and services a person can buy.

Gross Domestic Product

the value of all goods and services produced in a nation in a given year

Inflation

A rise in the general level of prices in an economy.

Fiscal Policy

Government efforts to influence the economy through taxation and spending

Keynesian Economics

The philosophy that government spending is needed to stimulate a sluggish economy

Trickle Down Economics

economic theory that tax cuts for the rich will trickle down and help everyone

Believed that economic growth depends on making increased amounts of capital available to business

Laissez-Faire

idea that the government will stay out of the interests of people and businesses

Monopoly

Complete control of a product or business by one person or group

expenditures

Government spending. Major areas of federal spending are social services and national defense.

Revenue

The money a government collects from taxes or other sources

Certificate of Deposit

a savings certificate that gains interest and has a set time before you can withdraw your money

Federal Reserve

The central bank of the United States and organization that prints money, tracks our economy and decides interest rates.

Progressive Tax

Any tax in which the rate increases as the amount subject to taxation increases. ( for Example: Income Tax)

Regressive Tax

A Tax in which the percentage of income paid in tax goes down as income rises (for example: Sales Tax)

Intergovernmental Revenue

Funds that one level of government receives from the other level of government

Exports

Goods and Services sold to other countries

Imports

Goods and services brought into a nation from another country.

Deficit

The amount by which expenditures exceed revenue

Trade Deficit

An imbalance in international trade in which the value of imports exceeds the value of exports.

Global Interdependence

The reliance of people and countries around the world on one another for goods and services

Demand

Consumer willingness and ability to buy products at a given price.

Law of Demand

the law of demand states that,”conditional on all else being equal, as the price of a good increases, quantity demanded decreases; conversely, as the price of a good decreases, quantity demanded increases

Law of Supply

The law of supply is a fundamental principle of economic theory which states that, other factors held constant, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes

scarcity

We have limited resources but unlimited wants ex: land, water, time

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Factors of Production

Land (trees) Labor (cheesemaker) capital (human made product or human knowledge)

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Physical Capital

objects made by human beings and used to produce goods and services

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Human Capital

human knowledge & experience/skill ex: writing, reading, typing

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shortage

wanting more of a good than producers are willing to make or can make so there is a short supply ex: gas

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Need

something you need to survive ex: food, shelter, water, air, clothes please

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Want

something you desire to have but don’t need to live ex: a new bathroom, new counter tops, trip to New Zealand,

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opportunity cost

the best alternative you miss out on when you make choice (ex: if you work you miss out on friends)

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trade off

get something but have to give up something (ex: I’ll have pizza but no pasta unless you are at Pizza hut LOLZ)

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Guns & Butter

A trade off that country’s make about how to use their $. They can spend it on military or resources for their people

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Free Enterprise/Free Market

Individuals make all the decisions, people earn profits based on supply and demand. Example: no one really has this completely

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Command Style

The government makes all the decisions. Example: North Korea, how many shoes are you going to make!

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Mixed Economy

Individuals have freedom to start businesses and people can make choices BUT government is involved for safety, regulations, law and defense. Example: US Economy

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Demand

To desire something and be able to pay for it.

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Substitute

Item that replaces another item: ex: Butter for Margarine

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Compliment

Two good that are bought and sold together: ex:toothpaste/tooth brush

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Normal good

Name brand item: Ugg, Nike, Adidas that you buy with more income

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Inferior good

Off brand of something: Equate, Roundy’s, Great Value that you buy with less income

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law of supply

The higher the price, the more producers are willing to supply

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fixed cost

you always have to pay this amount ex: rent, taxes, insurance

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variable cost

you sometimes have to pay this depending on the situation ex: penalty fee, attorney bill, seasonal workers

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total cost

final cost of fixed cost + variable cost

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entreprenuer

someone who starts their own business ex: Steve Jobs, Mary Kay

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learning effect

more education the more pay

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Affirmative Action

Business or government policies intended to fix the lack of women and minorities in certain jobs / colleges

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unemployed

Someone without a job who is 16 years or older and is actively looking for a job

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underemployment

you are overqualified for your job & work in a lower skill/paying job

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discouraged worker

they gave up trying to find a job

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inflation

money loses its value & can lead to price increase *wage spiral

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Frictional unemployment

unemployed b/c you are searching for a job (you want a job but you don’t have one b/c you left your job to find one that aligned better with your values)

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Seasonal unemployment

work based on the season ex: lifeguard, farm, construction, ski resort

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Structural unemployment

lose job b/c you don’t have the skills ex: robot takes your job, outsourced

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Cyclical unemployment

lose job because of the economy - it is in a recession/depression (ex: your lose your job building a house b/c no one is buying houses during a recession)

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poverty threshold

if you are below this line you are in poverty according to the govt (doorway to poverty)

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GDP (Gross Domestic Product)

total amount of goods & service produced in one year in a country *helps us measure how healthy the economy is
The value of all the goods and service produced in a country in one yesr
The value of all the goods and service produced in a country in one yesr

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revenue

income received by the government from our taxes

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progressive tax

tax that increases when a person’s income increases ex: federal income tax

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regressive tax

the higher the income the smaller the percentage of income paid in taxes ex: sales tax

proportional (flat) tax

tax that is the same for all people regardless of income

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excise (sin) tax

tax on goods that may be seen as a luxury or not good for society (alcohol, tobacco)

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Types of taxes

income tax (tax on $ earned @ job)
property tax (tax on real estate)
sales tax (tax on goods/services)

Characteristics of a good tax

simplicity, efficiency, certainty, equity

expansionary policy

cut taxes or increasing spending to GROW the economy ex: use this policy during/after a recession or a depression

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contractionary policy

raise taxes or decrease spending to SLOW the economy ex: use contractionary policy to avoid inflation

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fiscal policy

the way the government can influence the economy by using taxes & spending ex: raise taxes to slow the economy or lower taxes to grow the economy *increase spending to grow the economy & decrease spending to slow the economy

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budget deficit

We are spending more money than we are making in revenue

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National debt

Total amount of deficits plus the interest *U.S. 19 trillion

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import

to bring goods into a country

export

to send goods out of a country

interdependence

Our nation’s rely on one another to get goods & services

self-interest

an individual’s own personal gain

law of demand

consumers buy more of a good when its price decreases and less when its price increases

shortage

A situation in which quantity demanded is greater than quantity supplied

surplus

A situation in which quantity supplied is greater than quantity demanded

equilibrium price

the price that balances quantity supplied and quantity demanded

price floor

A legal minimum on the price at which a good can be sold. This leads to a surplus.

price ceiling

A legal maximum on the price at which a good can be sold. This leans to a shortage.

diminishing marginal returns

when the marginal gain in output diminishes as each additional unit of input is added

production possibilities frontier

The line on a production possibilities graph that shows the maximum possible output

elasticity of demand

A measure of how consumers react to a change in price

right to work

set of laws adapted by some states to stop making union membership a requirement of employment

discretionary spending

Federal spending that congress and the president get to decide on.

mandatory spending

Required govt spending by permanent laws

medicare

A federal program of health insurance for persons 65 years of age and older

medicaid

Federal program that provides medical benefits for low-income persons.

monetary policy

managing the economy by altering the supply of money and interest rates

real gdp

GDP adjusted for inflation

purchasing power

the ability to purchase goods and services, hurt by inflation

open market operations

Buying & selling government securities to change the supply of money

required reserve ratio

The minimum fraction of deposits banks are required by law to keep as reserves

easy money

this monetary policy lowers interest rates to expand the money supply

tight money

this monetary policy contracts the money supply by raising interest rates

capital deepening

an increase in the amount of capital goods available per worker. Helped by savers in the economy.

cost-push theory

theory that inflation occurs when producers raise prices to meet increased costs

market basket

a representative collection of goods and services. They can be analyzed to track inflation rates.

ceteris parabis

Latin for “All things being equal”. Assumption made by economists that only the price changes when considering changes in quantity demanded.

creeping inflation

a gradual, steady rise in the price of goods and services over time

hyper inflation

monetary inflation occurring at a very high rate

Consumer Price Index

an index of the cost of all goods and services to a typical consumer. Used in determining and tracking inflation.

entitlement programs

Government programs providing benefits to qualified individuals based on need.

scarcity

We have limited resources but unlimited wants ex: land, water, time

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Resources (Factors of Production)

Land (trees) Labor (cheesemaker) capital (human made product or human knowledge)

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Physical Capital

human made object ex: machines

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Human Capital

human knowledge & experience/skill ex: writing, reading, typing

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shortage

wanting more of a good than producers are willing to make or can make so there is a short supply ex: gas

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opportunity cost

the best alternative you miss out on when you make choice (ex: if you work you miss out on friends)

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trade off

get something but have to give up something (ex: I’ll have pizza but no pasta unless you are at Pizza hut LOLZ)

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Guns & Butter

A trade off that country’s make about how to use their $. They can spend it on military or resources for their people

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Cost/Benefit Analysis

Weighing what you sacrifice compared to what you gain to help you make the best decision

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Traditional Economy

Economy based on trade, grow their own food, do things as they have in the past. Example: Africa, Australian Outback.

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Free Enterprise/Free Market

Individuals make all the decisions, people earn profits based on supply and demand. Example: no one really has this completely

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Command Economy

The government makes all the decisions. Example: North Korea, how many shoes are you going to make!

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Mixed Economy

Individuals have freedom to start businesses and people can make choices BUT government is involved for safety, regulations, law and defense. Example: US Economy

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Demand

To desire something and be able to pay for it.

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Substitute

Item that replaces another item: ex: Butter for Margarine

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Complement

Two good that are bought and sold together: ex:toothpaste/tooth brush

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Normal good

Name brand item: Ugg, Nike, Adidas that you buy with more income

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Inferior good

Off brand of something: Equate, Roundy’s, Great Value that you buy with less income

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supply

amount of goods available ex: workers

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fixed cost

you always have to pay this amount ex: rent, taxes, insurance

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variable cost

you sometimes have to pay this depending on the situation ex: penalty fee, attorney bill, seasonal workers

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total cost

final cost of fixed cost + variable cost

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entreprenuer

someone who starts their own business ex: Steve Jobs, Mary Kay

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liable

responsibility (financially)

benefits

insurance, retirement, paid vacation

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outsource

sending jobs overseas because we can get goods cheaper ex: shirt made in china is cheaper but less skilled jobs in U.S. which means Americans need more education/training to get jobs

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wage discrimination

people getting paid less based on gender/race/age ex: wage gap for women

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money

method to get a need/want (medium of exchange, unit of account, store of value)

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bank (financial institution)

A place where you can open a checking, savings account or get a loan, or get a credit/debit card

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interest

the extra money you pay when you take out a loan (the lower the better)

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principal loan

the original amount of money borrowed (not the interest)

mortgage

loan for a house (foreclosure happens if you don’t pay this)

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Investment

the choices you make that can influence your (financial) future ex: stocks, savings, bond, mutual fund

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Bond

An IOU that you can purchase from the government or corporation in which you put your money in & it can grow (ex: savings )

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unemployment

people who don’t have a job (may get help from the government)

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inflation

money loses its value & can lead to price increase *wage spiral

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GDP (Gross Domestic Product)

total amount of goods & service produced in one year in a country *helps us measure how healthy the economy is

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revenue

income received by the government from our taxes

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tax

mandatory payment to government (ex: you pay this to your local, state & federal government)

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expansionary policy

cut taxes or increasing spending to GROW the economy ex: use this policy during/after a recession or a depression

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contractionary policy

raise taxes or decrease spending to SLOW the economy ex: use contractionary policy to avoid inflation

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fiscal policy

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National debt

Total amount of deficits plus the interest *U.S. 19 trillion

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import

to bring goods into a country

export

to send goods out of a country

The principle of comparative advantage

Everyone does best when each person (or country) concentrates on the activities for which his or her opportunity cost is lowest

you need marginal benefit to be equal or greater than the marginal cost

—-

absolute advantage

the ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

comparative advantage

the ability to produce goods at a lower opportunity cost than other economic actors.

principle of increasing opportunity cost

once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well.

reasons for being at inefficient point inside PPF

-under utilization of existing resources (like unemployment)
-inefficient usage of existing resources

productive efficiency

all resources are being used, on the PPF

allocative efficiency

producing the combination of goods and services that consumers WANT

economic growth

increase in the total output of economy (getting more of one good without getting less of another). Producing more using existing resources.

what makes the PPF go up and to the right?

growth

attainable points

those that lie on or within the PPF

slope of PPF

gives opportunity cost of producing an additional unit of the good measured along the horizontal axis

PPF

describes the max amount of one good that can be produced for every possible level of production of the other good

for an economy that produces 2 goods

-the greater the difference among individual opportunity costs, the more bow-shaped the PPF will be
-the more bow-shaped the PPF is, the greater the potential from specialization.

the scarcity principle

people have unlimited wants but limited resources. Having more of one good means less of another

the cost benefit principle

take an action if and only if the extra benefits are at least as great as the extra costs

Pitfalls!

1) measuring costs and benefits as propositions rather than absolute dollar amounts
2) being influenced by framing of the alternatives
3) ignoring implicit costs
4)failure to ignore sunk costs
5) failure to understand the average-marginal distinction

opportunity cost

the value of the best alternative that is sacrificed by the pursuit of a given activity

allocating

allocate each unit of the resource to the production activity where its marginal benefit is highest. And so that its marginal benefit is the same in every activity

firm

organization that transforms resources (inputs) into products (output). Firms are the primary producing unites in a market economy

households

the consuming units in an economy

output markets

the markets in which goods and services are exchanged

input markets

the markets in which the resources used to produce goods and services are exchanged

labor market

the input/factor market in which households supply work for wages to forms that demand labor

capital market

the input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods

land market

the input/factor market in which households supply land or other real property in exchange for rent

factors of production

the inputs into the production process. Land, labor, and capital are the three key factors of production

centrally planned economies

an economy in which a central government either directly or indirectly sets output targets, incomes, and prices.
ex: USSR, Maoist China

Laissez-Faire Economies (the free market)

means “allow them to do” in French. An economy in which individual people and forms pursue their own self-interest without any central direction or regulation

mixed systems

pure forms of centrally planned or laissez-faire economies are hard to find, all economies are in some ways “mixed.”

Quantity Demanded

the amount (# of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

demand schedule

shows how much of a given product a household would be willing to buy at different prices

law of demand

the negative relationship between price and quantity demanded
- demand curves slope downward
- as price rises, quantity demanded decreases
- as price falls, quality demanded increases

Determinants of Household Demand

income, wealth, prices of other goods and services, tastes and preferences, expectations

income

sum of all household’s wages, salaries, profits, intrest payments, rents, and other forms of earnings in a given period of time

wealth or net worth

total value of what a household owns minus what it owes

normal goods

goods for which demand goes up when income is higher and for which demand goes down when income is lower

inferior goods

goods for which demand tens to fall when income rises

subsitutes

goods that can serve as replacements for one another; when price of one increases the demand for the other increases

perfect substitutes

near identical products

complements, complementary goods

goods that “go together”; a decrease in the price of one results in an increase in demand for the other and visa versa

law of diminishing utility

…

movement along demand curve

if there is a change in price and the quantity demanded changes accordinglu, we are simply MOVING from one point on demand curve to another

shift of demand curve

if there is a change in something other than price which influences demand( like income, expectations, preferences, etc), then demand curve SHIFTS

profit

=revenues - costs. It drives supply decisions

quantity supplied

the amount of a good or service that a firm is willing and able to supply at a given price

supply schedule

a chart that lists how much of a good a supplier will offer at alternative prices

Law of Supply

the positive relationship between price and quantitiy of a good supplied

how does a supply curve slope?

upward. . . an increase in price leads to increase in quantity supplied.
a decrease in price leads to a decrease in quantity supplied

determinants of supply

the cost of production, prices and related products, weather and other Natural Disasters, Expectations

movement along supply curve

the change in quantity supplied brought about by a change in price

shift of supply curve

the change in quantity supplied brought about by anything other than price. . .
a change in the quantity supplied at any given price

excess demand

quantity demanded > quantity supplied

excess supply

quantity demanded < quantity supplied

market equilibrium

quantity demanded = quantity supplied

when supply and demand curves shift, the ________ and _________ change.

equilibrium price and quantity change

imports

…

consumer surplus

the difference between the maximum amount a person is willing to pay for a good and its current market price

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producer surplus

the difference between the current market price and the cost of production for the firm

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price floor

a legal minimum on the price at which a good can be sold

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price ceiling

a legal maximum on the price at which a good can be sold

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tariffs

taxes on imported goods

equilibrium price and quantity

the price and quantity at the intersection of the supply and demand curves for the good

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excess supply

the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium

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excess demand

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

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change in the quantity demanded

a movement along the demand curve that occurs in response to a change in price

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change in demand

a shift of the entire demand curve

change in supply

a shift of the entire supply curve

change in the quantity supplied

a movement along the supply curve that occurs in response to a change in price

buyer’s surplus

the difference between the buyer’s reservation price and the price he or she actually pays

seller’s surplus

the difference between the price received by the seller and his or her reservation price

total surplus

the difference between the buyer’s reservation price and the seller’s reservation price

elastic

the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1

price elasticity of demand

the ratio of the proportional change in quantity demanded to the proportional change in price; measures the responsiveness of quantity demanded to changes in price

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elasticity

a general concept used to quantify the response in one variable when another variable changes

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inelastic

the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1

unit elastic

the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1

perfectly inelastic demand

demand in which quantity demanded does not respond at all to a change in price

perfectly elastic demand

demand in which quantity drops to zero at the slightest increase in price

minimum wage

a price floor set for the price of labor

positive economics

an approach to economics that seeks to understand behavior and the operation of systems without making judgements. It describes what existed and how it works

normative economics

an approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action

social optimal allocation

is an economically efficient allocation

price rationing

whenever there is a need to ration a good (when a shortage exists, in a free market, the price of the good will rise until quantity supplied equalis quantity demanded (market clears))

How can the limited supply be distibuted by other mechanisms?

queuing, favored customers, ration coupons, black market

queuing

waiting in line as a means of distributing goods and services

favored customers

those who recieve special treatment from dealers during situations of excess demand

ration coupons

tickets or coupons that entitle individuals to purchase a certain amount of a given product per month

black market

a market in which illegal trading take place at market-determined prices

availability of substiutes

easy to give up something if it can be readily substituted

salt

no good substitute, highly inelastic

the importance of being unimportant

when an item represents a relatively small part of our total budget, we tend to pay little attension to its price

luxuries vs necessites

luxury goods (ex yachts) tend to have relatively elastic demand, and necessities (ex food) have inelastic demand

the time dimension

in the longer run, demand is likely to become more elastic because households make adjustments over time, and producers develop substitute goods

total revenue for the producer

= price x quantity

if E>1

a price increase will decrease total revenue

if E<1

a price increase will increase total revenue

if E=1

a price increase will not change total revenue (approx)

income elasticity of demand

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cross-price elasticity of demand

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elasticity of supply

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budget constraint equation

see equation in notes!

budget constraint

the limits imposed on household choices by income, wealth, + product prices

how to construct the budget constraint graphically

- Find x and y intercepts or how much something
- Intercepts: total amount of good __ txt can be purchased if we spend all of our available budget on good __
- Plot x and y intercepts and connect
- points on and below the budget constraint are part of the “opportunity set”
- points beyond the budget constraint aren’t feasible

how income affects budget constraint

increases: both x and y intercepts will be larger—> budget constraint shifts OUTWARD AND ENLARGES OPPORTUNITY SET, no change in slope

decreases: budget constraint shifts INWARDS towards, no change in slope

how price affects budget constraint

- decreases: we buy more of that good, x intercept will be larger than before—> budget constraint shifts OUTWARD AND ENLARGES OPPORTUNITY SET

- increases: we buy less of tht good—> budget constraint shifts INWARD

- prices of goods will determine the slope of the budget constraint

choice set or opportunity set

- within these constraints imposed by limited incomes + fixed prices, households are free to choose what they will and will not buy

-(a household makes a choice by weighing the good/service tht it chooses against all other things the same money could buy )

- w/in a limited budget, the real cost of any good or service is the value of the other goods and services txt could have been purchas

CPI method

1.household expenditure survey
2.weighted
3.price changes measured
4.index

Problems with the CPI

1 .doesn’t include everyone (pensioners)
2. changes in quality make comparisons hard
3. Doesn’t include every product
4. Ignores housing costs

RPI

Retail price index, similar to CPI but includes more factors like mortgage payments. Makes RPI more volatile than CPI ( increase in IR would increase RPI more than CPI)

Core inflation

measuring the underlying rate of inflation, excludes volatile factors such as raw materials (increase in oil prices would increase CPI while core inflation would remain stable)

Deflation

A general decrease in the price level

Problems of deflation (4)

1. Delays spending
2. Increases the real value of debt
3. Causes real wage unemployment
4. Deflationary spiral

Benefits of deflation (2)

1.Improved competitiveness
2. If deflation is caused by increased productivity and better technology it will better GDP

Benefits of Growth (6)

1.Higher incomes
2. Lower unemployment
3.Lower govt. borrowing
4. Improved public services
5. More spent on environmental spending
6. Increased investment

Costs of growth

1. increased inflation
2. recession(if unsustainable growth)
3. CA deficit
4. eco-costs
5. inequality

Measures on unemployment

1. claimant count
2. labour force survey

Claimant count

1.the official govt. measure
2.counts the number of people claiming benefits

problems with the claimant count (3)

1 .excludes those over 60 and under 18, people on govt. training schemes
2. some claim benefits while still working on the black market
3.strcit rules mean JSA can easily be lost by missing an interview etc

Labour force survey

survey asking 60,000 whether they were unemployed and whether they were looking for a job

problems with the labour force survey

1. people may lie
2. only a sample
3. people may have different conceptions of actively seeking work

Negative output gap

When actual GDP is below the productive potential of the economy.

causes of negative output gap (3)

1. cutting govt. expenditure(austerity)
2. falling house prices
3. increase IR, increase cost of borrowing

impact of negative output gap (6)

1.wasted resources
2. low rates of growth
3. infl, below target
4. low investment
5. lower tax revenue
6. more spent on benefits

Positive output gap

When actual GDP is above potential GDP

effects of a positive output gap

1. inflation
2. lower UE
3. worse CA
4. increase IR to combat inflation
5. unsustainable and could lead to downturn

trading blocs

a group of countries who agree on common rules for trade and tariffs (NAFTA and ASEAN)

free trade trade areas

concentrate on free trade and removing tariff barriers

Single European market

where all restrictions to trade, including tariffs, quotas and other barriers have been abolished between countries who are members of the European Union. This has created free trade within the European Union.

Benefits of eu membership (6)

1. more trade and gains from CA
2. greater competition increases efficiency and reduces prices
3. lower costs for firms to have common rules and regulations
4. increased direct investment which promotes better efficiency
5. countries can benefit from more flexible labour markets
6. greater room for international trade negotiations

Disadvantages of EU membership (3)

1. free movement of labour causes overpopulation and housing shortage
2. could be more difficult to reach a consensus because of the large number of countries
3. expensive to join

joining the euro (4)

1. Replacing domestic currency with euro
2. No way of changing ER
3. common monetary policy, IR set by ECB
4. Rules about the size of the budget deficit

Advantages of joining the euro (5)

1. lower transaction costs
2. eliminate ER fluctuations
3. increased inward investment (confidence)
4. better price transparency (easier to compare)
5. lower inflation (ECB has a tradition of low infl.,encourages firms to be competitive as they can’t rely on devaluation)

disadvantages of joining the euro

1. lose the ability to set IR (ID may not be appropriate for all)
2. lack of ER flexibility
3. low infl could conflict other objectives
4. loss of independence over fiscal policy ( no more than 3% of GDP)

OCA

optimal currency area, an economic area where the benefits of a single currency outweigh the costs

what’s required for an OCA (4)

1. Similar economic cycle
2. Similar inflation rate
3. Mobility of labour and capital
4. Fiscal union ( similar budget deficits)

How to alter ER

1. reserves and borrowing
2. IR
3.reduce AD, fewer imports and consumers supply fewer pounds
4. reduced inflation makes goods competitive and demand for currency increases in LR

Market failure in financial sector

1. Asymmetric information
2.Moral hazard
3. Asset bubbles

Asymmetric information

when some parties don’t have accurate information about another party, lenders can charge high rates

Moral Hazard

when financial guarantees alter economic behavior and increase risk-taking and when that risk is borne by others

requirements for moral hazard

asymmetric information, a contract affecting the behaviour of 2 different agents

Assest bubbles

when asset prices rise rapidly and become overvalued. when the bubble bursts, prices fall rapidly

how asset bubbles arise (4)

1. overconfidence
2. short term proft (incentive too look for STP in rising asset bubbles)
3. psychology, think they can outwit the market and get out before the bubble bursts
4. moral hazard (bankers gets bonuses if they sell loans and are bailed out by govt.)

why government borrow

to enable higher spending and investment without having to increase taxes

problems of government borrowing

1.higher debt interest payments
2. higher IR (markets may be unconfident about a govts ability to repay so may demand higher bond yields in return)
3. crowding out (private sector lends to gov and have less to invest and there is no overall boost to economy)
4. higher taxes in future to repay debt

Flexible Labour Markets

labour markets quickly adjust to a competitive equilibrium

Factors of a flexible labour market (3)

1. easy to hire and fire workers
2. labour is mobile
3. govt, intervention doesn’t distort the market

characteristics of flexible labour markets (5)

1. skilled workforce that adapts to changing requirements
2. flexible hours and contracts
3. self-employment
4. labor markets are competitive
5. no unions

what has caused labour markets to become more flexible (4)

1. globalisation, increased competition
2. tech changes, easier to have FLM
3. changing the social environment ( more women, part-time, aging pop.)
4. privatisation, private firms increase profits by cutting excess workers

impact of flexible labour markets (5)

1. reduces unemployment
2. lower wage growth- helps firms keep wages low
3. more job uncertainty (motivation to work)
4. poor labour productivity (could discourage firms from investing, investments could be wasted if workers are on short term contracts)
5. increased profitability ( helps firms reduce costs, employ more workers for fewer hours)

terms of trade

export price index / import price index

export price rise relative to import prices tot

improvement in TOT, increased standard of living as goods appear cheaper to consumers

scarcity

we have to decide how and what to produce from limited resources. It means there is a constant opportunity cost involved in making economic decisions.

who scarcity is solved

by placing a higher price on scarce goods. The high price discourages demand and encourages firms to develop alternatives.

PPF shape

concave because of imperfect factor substitution and a straightPPF is an indication of perfect factor substitutability of resource

specialisation

Specialisation occurs when workers are assigned specific tasks within a production process. Workers will require less training to be an efficient worker.

benefits of specialisation

an increase in labour productivity and firms will be able to benefit from economies of scale (lower average costs with increased output) and increased efficiency.

disadvantages of specialisation (3)

1. If workers do specific tasks, it may become boring and their productivity may fall as a result. 2. High levels of specialization could lead to possible diseconomies of scale.
3. If an assembly line becomes highly specialised, production could be brought to a halt if there is a blockage in one area. It can be beneficial if there are more people specialised in different aspects.

product market

refers to a place where goods and services are bought and sold

factor market

refers to the employment of factors of production, such as labour, capital and land.

Why the AD Curve Slopes Downward

1. Real balance effect-At a lower price level, consumers are likely to have higher disposable income and therefore spend more.
2. Trade effect- If there is a lower price level in the UK, UK goods will become relatively more competitive, leading to higher exports. Exports are a component of AD, and therefore AD will be higher.
3.Interest rate effect-At a lower price level, interest rates usually fall, and this causes higher aggregate demand.

Why the AS curve slopes upward

1. Higher prices for goods and services make the output more profitable and enable businesses to expand production by hiring less productive labour and other resources

consumer surplus

This is the difference between what the consumer pays and what he would have been willing to pay.

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producer surplus

This is the difference between the price a firm receives and the price it would be willing to sell it at.

how elasticity effects consumer surplus

If demand is price inelastic, then there is a bigger gap between the price consumers are willing to pay and the price they actually pay.

Income elasticity of demand (YED)

measures the responsiveness of demand to a change in income. %change in demand/%change in income

Cross-price elasticity of demand (XED)

measures the percentage change in quantity demand for a good after a change in the price of another. % change in Q.D good A/ % change in price good B

Substitute goods

have a positive cross-elasticity of demand

compliment goods

have a negative cross elasticity of demand

disadvantages of minimum wage (economy)

1.there will be a rise in consumer spending. Low-income workers are likely to have a higher marginal propensity to consume
2.an increase in the minimum wage would increase their costs of production. But if they seek to maintain wage differentials - they may need to increase the wages of more qualified workers -
3.Higher spending by workers (demand pull inflation)
4.Higher costs for firms, leading to wage-push inflation.(however firm’s overall costs, the minimum wage bill is only a small component)

disadvantages of minimum wage (workers)

1.Poorest don’t benefit. A limitation of the minimum wage is that it doesn’t increase the incomes of the lowest income groups. This is because the poorest have to rely on benefits and are therefore not affected by minimum wages.
2. Limited impact on relative poverty. Many who benefit from the minimum wage are second income earners, and therefore the household is unlikely to be below the poverty line. A household with a single income earner just above the minimum wage is likely to be relatively poorer. But they will not benefit from the minimum wage.

advantages of minimum wage (6)

1. Reduces poverty. The minimum wage increases the wages of the lowest paid. These workers will have increased income and will reduce relative poverty.
2. Increase productivity. that higher wages can increase the incentive for people to work harder and thus higher wages may increase labour productivity.
3. Increases the incentives to accept a job. With a minimum wage, there is a bigger difference between the level of benefits and the income from employment. A minimum wage could also increase the participation rate as the benefits of work become greater
4. Increased investment. Firms will have an increased incentive to invest and increase labour productivity because labour is more costly. In the long-term, this can encourage greater investment and labour productivity
5. Knock on effect of minimum wage. Although only 5-7% of workers are on the minimum wage, the minimum wage has an indirect effect on the wages of those just above the minimum wage. Firms may need to increase wages for those just above the minimum wage floor - to maintain pay premium for experienced workers.
6. Counterbalance the effect of monopsony employers. If firms have Monopsony power they can drive wages down by employing fewer workers. However, minimum wages will make this more difficult. Therefore a minimum wage could have a positive effect on employment.

benefits of net migration

1. Increase in Labour Force/Offset aging population
Migrants are more likely to be of working age. The majority of migrants come for work or study (students) They may bring dependents, but generally net immigration leads to an increase in the labour force

2. Increase in aggregate demand and Real GDP
Net inflows of people also lead to an increase in aggregate demand. Migrants will increase the total spending within the economy. As well as increasing the supply of labour, there will be an increase in the demand for labour

3. Labour Market Flexibility
Net migration could create a more flexible labour market. Migrants will be particularly attracted to move to the UK if they feel that there are job vacancies in particular areas. The government has also sought to attract migrants from various countries to meet shortfalls in job vacancies in key public sector jobs, such as nursing.

4. Positive impact on the dependency ratio
Net migration helps to reduce the dependency ratio. Migrants are a source of working age people, and this helps to reduce the ratio of retired to working people. This has benefits for the government’s budget. If migrants are of working age, they will pay income tax, VAT - but will not be claiming benefits.

disadvantages of net migration

8. Welfare benefits

A popular idea is that immigrants are more likely to receive welfare benefits and social housing. The suggestion is that Britain’s generous welfare state provides an incentive for people to come from Eastern Europe and receive housing and welfare benefits. While immigrants can end up receiving benefits and social housing.

6. Social issues

Another issue felt keenly in the UK, is the concept that we are already ‘overcrowded’ In this case, a rapid increase in the population due to migration could lead to falling living standards. For example, the UK faces an acute housing shortage, but also an unwillingness to build on increasingly scarce green belt land. In many cities, it is difficult to build more roads because of limited space. The increased population could increase congestion and urban pollution. Therefore, the increase in real GDP has to be measured against these issues which affect the quality of life.

price function

1. Price acts as a signal for shortages and surpluses which help firms and consumers respond to changing market conditions.
2. in the long run, high prices act as an incentive for firms to supply more.

competition policy

Government policies to prevent and reduce the abuse of monopoly power. UK competition policy is regulation by CMA (Competition and Markets Authority). This used to be managed by OFT and Competition Commission.

classical view of LRAS

The Classical view is that Long Run Aggregate Supply (LRAS) is inelastic. This has important implications. The classical view suggests that real GDP is determined by supply-side factors - the level of investment, the level of capital and the productivity of labour e.t.c. Classical economists suggest that in the long-term, an increase in aggregate demand (faster than growth in LRAS), will just cause inflation and will not increase real GDP>

Keynesian view of LRAS

The Keynesian view of long-run aggregate supply is different. They argue that the economy can be below full capacity in the long term. Keynesians argue output can be below full capacity for various reasons:
1.Wages are sticky downwards (labour markets don’t clear)
2. Negative multiplier effect. Once there is a fall in aggregate demand, this causes others to have less income and reduce their spending creating a negative knock-on effect.
3. A paradox of thrift. In a recession, people lose confidence and therefore save more. By spending less this causes a further fall in demand.

Keynesians argue greater emphasis on the role of aggregate demand in causing and overcoming a recession.

Roles of the bank of England

1. Money Supply. issuing bank notes and coins. need enough to meet demand, without causing excess inflation.
2. Lender of Last Resort. if commercial banks suffer a shortfall of cash then they can always borrow money from the Bank of England. This is an important function has it helps maintain liquidity and confidence in the banking system. This role was tested in 2007 when Northern Rock couldn’t raise enough funds on the money markets and were forced to borrow from the Bank of England with government acting as guarantor.
Setting Interest Rates. In particular the Bank have an inflation target of CPI 2% +/-1. The Bank produces an inflation forecast and set interest rates according to predictions of future inflation.

who regulates banks

Banks are regulated by the Financial Services Authority. FSA. The FSA regulate the way banks treat money and the criteria they use for lending and dealing with complaints.

factors of flexible labour markets (3)

1. easy to hire and fire workers
2. labour is geographically and occupationally mobile
3. govt intervention doesn’t distort the market

why has there been increasingly flexible labour markets 4

1. globalisation, more competition, firms have to keep labour costs low
2. technology
3. changing social enenvironment such as more women in the workforce having part time/ flexible work. ageing population choosing part-time work
4. privatisation private firms increasing profits by cutting access workers and inflexible labour contracts

UK merger policy

any merger must give details to OFT. if OFT is concerned they can refer to the CCA

Public private partnerships

occurs when th government seeks to involve a private firms in a public investment programme eg. m4 relief road

advantages of public private partnerships (4)

1. private firms will pay part of the cost( saves money)
2. private firms avoid ‘white elephants’ (schemes not needed by the market)
3. private firms encourage efficiency because they have profit incentive
4. government subsidy ensures that the external benefits of the scheme are considered

disadvantages of PPP (3)

1. government invests substantial funds but private firm gets better benefits
2. private firms will pick most profitable schemes and ignore the necessary ones
3. private firms may run the scheme to be profitable

contestable markets

where there is free and costless entry and exit. this requires low sunk costs

conditions for contestable markets (3)

1. absence of sunk costs
2. perfect information
3. freedom to advertise and a legal right to enter the market

hit and run competition

1. new firms see supernormal profit being made and join the market
2. if prices fall and the industry is no longer profitable the new firms will leave
3. in a contestable market, firms need to be happy with normal profits

benefits of contestable market (4)

1. Lower prices
2. increased incentives to cut costs
3. incentives to respond to consumers
4. could be economies of scale because theory doesn’t require many firms

disadvantages of contestable markets (2)

1. policy makers should look at degree of contestability
2. regulators tend to remove barriers to entry instead of breaking up big firms

what is the point of price

1. price mechanism
2. signalling function
3. incentive function

Price mechanism

price provides the main method through which resources are allocated

signalling function

signals what is available, conveying information to consumers and producers

incentive function

priced creates incentive for agents to behave in ways consistent with their self interest. rising price nay result in firm expanding production or consumers contracting demand to maximize utility

why do some workers earn more than others?(7)

1. barriers to entry(qualifications)
2. occupational mobility
3. regional immobility ( house prices, north/south divide)
4. discrimination (age,gender,race, sexuality, religion)
5. desirability/ risk
6. trade unions
7. part/ full time work

gender pay gap (6)

1. maternity leave(women miss experience and child bearing age is when career progression is high)
2. cultural perception( that women are 2nd income earners and men are more qualified)
3. occupational segregation (“women’s work”)
4. workplace segregation (“glass ceiling”, women less likely to go for promotions)
5.travel patterns (women less likely to commute so smaller pool of jobs and lower wages)
6. trade unions(women less likely to be a part of a trade unions)

predatory pricing

selling a product below cost to drive competitors out of the market

price discrimination

involves charging a different price to different groups of people for the same good

1st degree price discrimination

charging consumer the max price they are willing to pay. no consumer surplus

2nd degree price discrimination

charging different prices depending on quantity bought (loyalty cards for frequent flyer)

3rd degree price discrimination

charge different prices to different groups of people

requirement for 3rd degree price discrimination (3)

1. ability to set price. some market power
2 ability to segment the market (oap card)
3. ability to prevent resale

benefits of price discrimination (4)

1. some get lower prices
2. higher profits
3. avoid congestion ( managed demand, incentive to travel at quieter times)
4. firms can offer services which would otherwise be unprofitable

disadvantages of price discrimination (6)

1. some pay higher prices
2. potentially unfair
3. admin costs
4. decline in consumer surplus
5. pensioners can be richer (unneeded discounts)
6. profits from PD can fund predatory pricing

reasons for protectionism (6)

1) To protect jobs
2) To protect infant industries
3) To prevent dumping
4) To raise revenue
5) avoid risk of specialisation
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why is there a discontinuity in the MR for kinked demand curve

the 2 mr curves for each section don’t cross

what affects investment within firms (5)

1. IR (high ir makes borrowing and therefore investment more expensive, higher opportunity cost
2. Econ growth ( firms invest to meet future demand so if growth is high, investment will increase)
3. confidence(investment is riskier than saving so will only invest if confident)
4.inflation ( will affect confidence)
5.wage growth (makes labour more costly so firms will seek to maximise productivity and invest in their labour)

what affects levels of FDI (6)

1, wage growth (firms will outsource labour in counties with low wages to save costs)
2. labour skills (mncs will invest in countries with a combination of low wages, high labour productivity and skills)
3. tax rates (Laffer curve, lower corp tax will attract FDI)
4. transport and infrastructure ( if it is costly to get goods onto the global market it defeats the point of investing in a country with low wage and skills)
5.political stability (confidence)
6. exchange rates (a weak exchange rate in host country attracts FDI as its cheaper for MNCs to buy assets)

FDI

when companies purchase capital and invest in a foreign country

government failure

when the costs of intervention outweigh the benefits

reasons for government failure

1. lack of incentives (low profit motive in public sector, not need to be efficient, e,.g govt. overstaffed due to political backlash over unemployment)
2. poor information ( poor knowledge over what services are needed and wanted)
3. policy myopia (short term relief for political gain)
4. regulatory capture (regulators feeling sympathetic towards the business and allowing monopolies to continue charging high prices)
5. law of unintended consequences ( how economics decisions may have effects that are unexpected)

Market Failure

when the free market fails to allocate scare resources at the socially optimum level

Factors that cause a CA deficit

1. overvalued exchange rate ( M becomes cheaper and Q increases and X becomes more expensice)
2. Econ growth (

characteristics on monopoly (7)

1. 25% of market share
2. Profit max
3. price makers
4. limited products
5.low contestability
6. high barriers to entry
7. make SNP

characteristics of oligopoly (9)

1. few firms dominate the market (high concentration ratio)
2. interdependence
3. price makers
4. differentiated goods
5. price rigidity
6. non-price competition
7. kinked D curve
8. high barriers to entry
9. focus on market share

Characteristics of monopolistic competition. (8)

1. many, small buyers and sellers
2. low barriers to entry
3. differentiated products (branding)
4. slight price making power
5. elastic demand
6. good information
7. pmax
8. normal profit in LR and SNP in SR

Efficiency of Monopolistic Competition

1. allocative inefficiency
2. productively inefficient
3. dynamically inefficient (no profits)

Characteristics of perfect competition (7)

1. many buyers and sellers
2. homogenous goods
3. no barriers to entry
4. perfect information
5. normal profits
6. price takers
7. pmax

Efficiency of Perfect Competition

1. productively efficient
2. allocative efficient
3. dynamically inefficient (no SNP to invest)

actors of Production

Capital refers to goods that are used to produce others goods and services eg machinery
Enterprise = having ideas and taking risk is setting up or running a business. An individual who seeks to supply products to a market to make a profit.
Labour is the human input into the production process. Physical or Intellectual.
Land includes land and all the natural resources on, above and below the land .

Economic Problem

We have unlimited wants but only limited resources to satisfy them - how do we make a choice?

Opportunity Cost

The cost of the next best alternative forgone when making a decision

Economic activity

Purpose is to produce goods and services to satisfy consumers’ needs and wants.

Production of goods and services.

Goods are items that you an touch (tangible). Services are intangible.
Primary sector- extraction of raw materials - mining, farming, fishing, forestry.
Secondary Sector- Raw materials are manufactured into goods - car manufacturing, furniture, electronic goods.
Tertiary - Service sector- Tourism, banking, education, transport

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Questions for allocating resources

What goods and services should be produced ?
How should the economy uses it’s resources ?
What mix of goods will it produce?
Best way to produce goods and services?
Best use of scarce resources?
Who is to receive goods and services? Online professional tutoring made easier at www.perfectgrader.com. At www.perfectgrader.com, we offer essay help and writing services tailored to help college students in the United States, Uk, Singapore, Austraria, and many other countries across the globe. www.perfectgrader.com not only help students through a virtual platform but also provide an array of services for you as the client to converse with your tutor in real-time. Our services include Math help, essay writing services, research paper help and so much more. When it comes to service provision, Acemy-homework.com is an unmatched website. Hire a tutor to get homework and assignment help instantly Register at www.perfectgrader.com today and begin an exciting journey in academic proficiency.

Different types of economies

Market economy - where all resources are allocated by private individuals and groups- everyone acts in their own self interest and there is no government involvement in the allocation of resources.
Mixed economy - mix between market and planned economy - some resources are controlled by the government and some are controlled by private individuals e.g. UK government controls healthcare but there is also private ownership

Public vs Private Enterprise

Public - Run by the government - purpose is not to make a profit - they are run to provide vital services 40 % of economic activity in the UK.
Private - owned and run by private individuals and groups - objective is to make the largest possible profit.

Specialisation

A method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas.

Why do we specialise?

To increase productivity and efficiency - we produce more of one type of good

Benefits of Specialisation

To the firm- Workers become more productive, Increased productivity leads to production cost decreasing, production levels are increased.
To the workers- Specialised workers tend to get higher pay , workers’ specific skills will be improved, more motivation from job satisfaction

Costs of specialisation

To the firm- greater cost of training workers, quality may suffer if the workers become bored by the lack of variety in their job, more expensive workers.
Costs to the worker- boredom for the worker as they do the same job every day, workers’ skills may suffer as they are only doing on job, workers may eventually be replaced by machinery.

Functions of money

Medium of exchange - exchanging money for a good or service.
Unit of count- gives us the ability to give goods and services a monetary value.
Store of value- Ability to store and keep a value.
Means of deferred payment- Deferring payment of a good or service by borrowing money

Competitive market

A market situation where there are a large number of buyers and sellers i.e. demand and supply.

Implications on firms ( by operating in a competitive market)

A firm that can successfully supply the goods or services consumers want , at a price they wish to pay, will thrive and earn profits itself. It may be able to grow larger and gain a larger market share. If a firm fails to satisfy consumers they will fail.

Monopoly

A situation where there is only one firm selling in a market.
Different ways to achieve monopoly power( more than 25 % of market share)-
Merger and takeover
Statutory monopoly ( given monopoly status by government think water companies)
Internal expansion - increases market share
Branding - create a reputable brand and gain more market power
Cost barriers overcome as they are large so they gain internal economies of scale

Consequences of Monopoly Power

Bad-
High prices as there is lack of competition so only one supplier controls the cost of the goods- demand is inelastic.
Poor quality- no competition so there is no incentive to produce high quality goods.
Good-
Research and development as the monopoly has high profit levels, benefits the consumer in the long run.
International competitiveness - The monopoly power is strong enough to gain advantages that allow it to compete on an international scale.
Exploitation of economies of scale

Evaluation of monopoly power

First question - is it a full 100% monopoly or just a partial - if it is partial then there still may be some degree of competition.
Also consider consequences to the firm itself- does it have the ability to keep up with consumer choice or will it become complacent.
Effect on others not just the consumers and the firm- will workers be exploited if there is no alternative employment in that industry or is it so large that they can afford to pay their workers generously. Online professional tutoring made easier at www.perfectgrader.com. At www.perfectgrader.com, we offer essay help and writing services tailored to help college students in the United States, Uk, Singapore, Austraria, and many other countries across the globe. www.perfectgrader.com not only help students through a virtual platform but also provide an array of services for you as the client to converse with your tutor in real-time. Our services include Math help, essay writing services, research paper help and so much more. When it comes to service provision, Acemy-homework.com is an unmatched website. Hire a tutor to get homework and assignment help instantly Register at www.perfectgrader.com today and begin an exciting journey in academic proficiency.

Large firm can have consequences on other competitors and potential competitors eg land grabbing to stop rivals building there. Predatory pricing - reducing the price so low to drive out all other competition and then suddenly increasing the price.

Government and competition

Competition policy - promote competition makes markets work better Technological innovation which promotes dynamic efficiency in different markets
Effective price competition between suppliers
Safeguard and promote the interests of consumers through increased choice and lower price levels

Demand

The quantity of buyers are willing and able to buy at a given price in a given period of time.
Effective demand- for demand to be effective a consumer must be both willing and able to buy the good or service. They must want the g or s , and they must have the means to afford the g or s .

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Contraction of demand

The fall in the quantity demanded due to a rise in the price.

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Extension of demand

The increase in the quantity demanded due to fall in the price.

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Shifts in demand

Right shift demand increases but the price stays the same.
Left shift demand decreases but the price stays the same

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Factors that cause the demand curve to shift

PASIFIC
Population- increase in population = increase in demand
Advertising = increasing advertising increases the amount of people aware of a product = makes them more likely to buy them.
Subsitutes = price of goods that could be used instead of that good. Eg pepsi and coca cola. If price of coca cola fell, demand for pepsi may fall as more people would buy coca cola.
Income= Average income rises so there is more disposable income so demand will increase as consumers buy more.
Interest rates- if interest rates rise - more people may save so there will be less spending and loans will become more expensive so demand will fall.
Complementary goods- in joint demand eg dvd player and DVDs

Price Elasticity of Demand

PED measure responsiveness for a quantity demanded to a change in price. Percentage change in quantity demanded / percentage change in quantity demanded.

Perfectly inelastic demand

Value of 0. The quantity demanded remains the same even if the price changes

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Inelastic demand

<1 . The quantity demanded changes at a lesser rate than price.

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Unit elastic demand

1. The quantity demanded changes at the same rate as the price.

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Elastic demand

>1. The quantity demanded changes at a greater rate than the price.

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Perfectly elastic demand

Value of infinity. Any quantity is is demand at a given price.

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Implications of PED.

Firms look at PED to decide what they can do to increase their total revenue.
If demand for a product is elastic, firm must decrease its prices in order to increases total revenue.
If demand for a product in inelastic, the firm must increase its price in order to increase total revenue.

Influencing factors of PED

Number of close substitutes within the market- if there is more and closer substitutes the demand will be more elastic.
Cost/ease of switching- if cost of switching is high then demand will be inelastic.
Degree of necessity or luxury- If good is a necessity then demand will be inelastic as consumers need these goods. If the good is a luxury then demand will be very elastic as the consumers can do without the good.

Supply

The quantity a producer is willing and able to produce at a given price in a given period.
Basic law of supply is that as the price of a product rises businesses expand their supply onto their market.
If price rises there will be an extension of supply but if the price falls there will be a contraction of supply

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Factors other than price which affect supply

Productivity - if productivity increases , the quanity supplied will increase and cause the supply curve to shift right
Indirect taxes- if the governemtn increases the tax on a good supply will shift to the left.
Number of firms in the market - if there are more firms entering the market overall supply will increase so there will be a right shift in supply
Technology - more advanced technology allows the same amount of goods to be produced in a smaller time so more goods can be produced so supply will shift to the right.
Cost of production - if the cost of production is high then supply will shift left as it wants to make a bigger profit.

Price elasticity of supply

Responsiveness of quantity supplied to a change in the price

Perfectly inelastic supply

0. Quantity supplied remains the same as the price changes

Inelastic supply

< 1. The quantity of supplied changes at a lesser rate than price

Unit Elastic supply

1. Quantity supplied changes at the same rate as the price.

Elastic Supply

>1. The quantity supplied changes at a greater rate than price.

Perfectly elastic supply

Infinity. Any quantity supplied is at a given price.

Factors which affect PES

Level of spare capacity. If there is a lot of spare capacity a producer should be able to without a rise in costs and therefore supply will be elastic in response to a change in demand
Stocks of finished products and components- Same idea as above firm is able to respond to a change in demand quickly by supplying these stocks onto the market , so supply is elastic.
Product lag - eg harvest of crop.

Market forces determining equilibrium .

Equilibrium means there is an equality between market demand and supply.
Buyers are able to buy exactly the quantity they want and producers are able to sell exactly the quantity they want.

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Taxes

Indirect taxes are taxes on spending ( they can be avoided by not spending)
Specific tax - fixed amount that’s charged per unit of a particular good.
Ad valorem tax - charged as a proportion of the price of the good eg 20 % vat.
Indirect taxes increase costs for the producers so they cause the supply curve to shift to the left.

Subsidies Online professional tutoring made easier at www.perfectgrader.com. At www.perfectgrader.com, we offer essay help and writing services tailored to help college students in the United States, Uk, Singapore, Austraria, and many other countries across the globe. www.perfectgrader.com not only help students through a virtual platform but also provide an array of services for you as the client to converse with your tutor in real-time. Our services include Math help, essay writing services, research paper help and so much more. When it comes to service provision, Acemy-homework.com is an unmatched website. Hire a tutor to get homework and assignment help instantly Register at www.perfectgrader.com today and begin an exciting journey in academic proficiency.

Paid to producers to encourage production. Increases supply so the supply curve shifts to the right. Leads to price falling and the demand for the good increasing.

Maximum Prices

Maximum prices to increase consumption of a merit good or make a necessity more affordable eg rent.
Advantages - increase fairness + prevent exploitation of consumers.
Disadvantages - demand is higher than supply there will be shortages
May be a need for rationing
Can lead to black market

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Minimum prices

Set to make sure suppliers get a fair price.
Adv- Producers have a guaranteed minimum income and stockpiles can be used when supply is reduced
D.Adv- Consumers will be paying a higher price than the market equilibrium
Resources used to produce excess supply could be used elsewhere

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Business objectives

Break even
Increase market shjare
Survival
Provide a good service
Long run - maximising profit and sacrificing profit in the short term

Costs

Total costs = all costs
Average cost = total costs/ output
Fixed costs = dont change with ouput eg rent and interest on loans
Variable costs = Vary directly with output - eg raw materials

Revenue

Average revenue = total revenue/ output
Total revenue = Price x Quantity sold

Profit

Total revenue- Total costs

Productivity

Measured as output per worker per period of time.
!Specialisation increases productivity !

Adv. of productivity

Workers are given jobs they are more suited to
Increased output
Lower average costs
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Higher pay for specialised workers
Improved skills

Disadv. of productivity

Higher costs of training
Boredom as workers are doing the same job every day
Quality may suffer as a result of boredom
Workers may be replaced by machinery

How to increase productivity

Capital intensive- productivity increases as machinery can run continually without taking breaks so the amount produced in a certain time period increases
Specialisation
More training

Impact of competition

Lower average costs as production increases in the same time period
More competitive prices as they can offer customers lower prices whilst maintaining profits- useful in a competitive market as more customers will be attracted
Higher profits as average costs fall and product margins increase. Could be used to reinvest in new machinery which may help increase productivity further

How do firms grow

Internal growth- generated through increasing sales. EG buying new equipment,outlets or factories, buy in more labour or market it’s product differently.
External growth - through merger or takeover.

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Why do firms grow

Main reason- increase profit. Others-increase brand image, reduce costs by achieving economies of scale, increase market power

Benefits of growth

Increased profits
Increased market share
New ideas gained from other businesses
Less competition as you are bigger than other rivals
Gains from economies of scales
Less workers necessary

Costs of growth

Different managers may disagree
Merged businesses may have different objectives and targets
Mergers and takeovers initially cost a lot of money
Less choice for consumers in the market
Higher prices to pay
Possible job losses
Possible diseconomies of scale

Economies of scale

As firms grow larger in scale, the long run of average costs fall.
6 different types (internal)
Risk-bearing - firm grows larger- it has the ability to spread the risk over a larger number of outlets/ factories/products
Financial - As a firm grows larger it has the ability to obtain cheaper sources of finance as banks are willing to lend money at a lower rate because they are more likely to pay back the money
Marketing - larger friends find it more cost effective to advertise nationally
Technical- Able to invest in machinery that can increase productivity and therefore lower the average cost of production
Managerial- Ability to employ specialist managers such as finance managers to help make workers more efficient
Purchasing - Ability to take advantage of price reductions as they buy in bulk

External economies of scale

Occur when a whole industry grows - might be because transport and communication links are improved or local training and education opportunities become more focused on that industry

Diseconomies of scale

When a firm grows too large and average costs start to rise
Loss of control - as it becomes too difficult to monitor workers
Lack of co-ordination - too difficult to co-ordinate all aspects of production process when a firm grows larger, especially if a production spans a number of factories
Lack of co-operation - workers may become alienated and lose motivation

Rewards for labour

Wage = individual payment usually for a week’s work - tends to be given as an amount for per hour
Salary = individual payment usually for a month’s work. It tends to be given as an amount per year, divided into 12 equal payments

Gross and net income

Gross income is the amount a person receives before all deductions are taken into account. Deductions include taxes such as income taken and national insurance , pension contributions and student loan repayments.
Net income is a person’s take-home pay
net income = gross income-deductions

Nominal and real income

Nominal income is the income paid to labour unadjusted for the the effects of inflation.
Real income is the income paid to labour adjusted for the effects of inflation.

Labour market

Is the interaction between workers and employees - made up of supply for labour and demand for labour

How are wages determined?

Demand for labour is derived labour- this means that the demand for labour is caused by a demand for the product so if demand for the product increases , demand for labour also increases.

Normally there is an inverse relationship between demand for labour and the wage rate. This is because the higher the wage , the fewer workers the employer is likely to employ.

Supply for labour

Total number of workers willing to supply their labour at a given wage rate. The relationship between wage offered and the supply of labour is positive. This is because as the wage rate rises, more people are willing to supply their labour.
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Change in supply or demand for labour will change the equilibrium and cause a change in both the wage and the level of employment.

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Differences in wage rates

Main reasons for differences in wage
Differences in productivity - higher productivity=higher average wage or salary
Elasticity of supply of labour - the more inelastic the supply , the higher the wage. Elasticity is affected by the skills,education and qualifications
Trade union power - strong trade unions can negotiate higher wages
Differences in demand for the final demand for the product- earnings are higher in booming industries
Government pay policy- public sector workers may have their annual pay level pre-determined
Compensation for high risk level jobs
Different regional costs of living
Employer discrimination

National minimum wage

A pay floor introduced by the government , which sets a wage level below which producer cannot legally go
Main aims are to reduce poverty and to reduce pay differentials between men and women- also reducing exploitation of low-paid workers and providing incentives for unemployed people actively for paid work.

Arguments for a minimum wage

Higher tax revenue is receiver from the increased earnings of those low-paid jobs.
State benefits cost less- there is less need for benefit top-ups
Income is more fairly distributed across population
Poverty is reduced

Arguments against minimum wage

More expensive to employ workers, so firms will cut jobs and unemployment will rise
Other workers will demand higher wages to maintain pay differentials
Higher wage costs will lead to rising inflation
Young and unskilled workers will lose out - firms tend to employ older workers
Some firms may cut back on investment in worker training
Minimum wage will not ease poverty because many poor households do not have a low income earner
Does not take into account regional differences in cost of living

Evaluation of the minimum wage

PED of workers is important consideration. If minimum wage is set above the equilibrium wage for an occupation, and the demand for workers is elastic, then it will lead to a relatively large loss of jobs. Where demand for workers is inelastic , job losses will be fewer.
PES of workers is also relevant. If supply is elastic the total unemployment caused by the minimum wage will be greater than where supply is inelastic. So a minimum wage set above the equilibrium wage could cause particularly high unemployment in occupations where the demand for, and supply, of labour is elastic. And the higher the minimum wage is set, the more dramatic its effects are likely to be

Winners and Losers

Workers who lose their jobs will suffer, while those who retain them at a higher wage rate will gain. We could ask what is the point of raising the wage rate of some workers if it means they all lose their jobs and end up with no wage at all ?

One aim is reduce poverty. But the poorest in society do not work , so this measure will have no effect on them. It will make the gap larger between those who work and those who don’t