Economics Final Exam Review

define & explain: fiat currency, commodity bank currency, commodity currency

- Fiat Currency: In this respect, unlike currencies backed by gold or silver, fiat money does not have any intrinsic value (e.g., paper money and much coinage). The U.S. dollar is an example of fiat money. - Commodity bank currency:Many currencies have consisted of bank-issued notes which have no inherent physical value, but which may be exchanged for a precious metal, such as gold. - Commodity currency: Most commodities that are tied to currencies are natural resources such as gold, oil timber and other minerals.

Explain the 2 tools the Government/Dept. of the Treasury can use as they engage in Fiscal Policy.

- Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals have to spend. - Spending is used as a tool for fiscal policy to drive government money to certain sectors that need an economic boost.

determinants of demand (things that causes a change in, rather than a movement along)

- The price of the good or service. - Prices of related goods or services. These are either complementary (purchased along with) or substitutes (purchased instead of). - Income of buyers. - Tastes or preferences of consumers. - Expectations.

How does price discrimination benefit producers and consumers?

- allows an unprofitable business to avoid going bankrupt - some groups benefit from cheaper prices - avoid congestion - investment

3 tools the federal reserve can use they engage in monetary policy

- discount rate- the interest rate charged by Federal Reserve Banks to depository institutions on short-term loans. - reserve requirements- the portions of deposits that banks must maintain either in their vaults or on deposit at a Federal Reserve Bank. - open market operations- Open market operations involve the buying and selling of government securities.

components of GDP

- personal consumption expenditures - investment - net exports - gorvernment expenditure

four kinds of non-price competition

- physical characteristics - location - service level - advertising, image, or status

determinants of supply (things that causes a change in, rather than a movement along)

- prices - resource prices - technology - taxes - subsidies - prices of other goods - price expectations - number of sellers in the market

two examples of barriers to entry in the magazine market

- start up costs - technology

advantages of a monopolistically competitive market for consumers

-buyers get plenty of options due to differentiated product as every product has some additional feature -since different companies are selling differentiated products, they tend to advertise about it through various means of communication which helps the customers in the making informed decision by comparing the features of various products -it helps in innovation because the only thing which will help the company in surviving in case of monopolistic competition is to constantly add new features to product

disadvantages of a monopolistically competitive market for consumers

-due to differentiated products, chances are companies may charge more than fair price from the consumers for extra features in products -companies in order to differentiate their products from other companies ass irrelevant features & don't focus on improving the basic product -companies sped too much money on advertising rather than improving the product

four conditions of perfect competition

-many buyers and sellers -identical products -informed buyers and sellers -free market entry and exit

Three basic decisions must be made by all economies. What are they?

1. "What goods and services should be produced?" 2. "How should these goods and services be produced?" 3. "Who consumes these goods and services?"

4 phases of the business cycle

1. Expansion: increasing employment, economic growth, and upward pressure on prices 2.Peak: highest point of the business cycle, when the economy is producing at maximum allowable output, employment is at or above full employment, and inflationary pressures on prices are evident 3. Contraction: growth slows, employment declines (unemployment increases), and pricing pressures subside 4. Trough: the economy has hit a bottom from which the next phase of expansion and contraction will emerge.

Which would you use to promote the following products: (Explain your rationale) - A new brand of bottled water - In home computer repair - Protein bars

1. a new brand of bottled water- simple branding because water is so nearly a homogeneous product that quality wouldn't be an issue, marketing a brand name would be best 2. in-home computer repair- emphasize service quality & response times 3. protein bars- any number of selling points work for this product, but if the bars have an advantage in either most protein per bar, lowest total sugar, lowest sugar to protein ration, lowest total calories per gram of protein, etc... then that's the point to differentiate on. other than that, taste/variety of flavors might be the only option

3 types on unemployment

1. cyclical: because of the government 2. frictional: changing jobs, seasonal 3. structural: innovation & technology takes over & workers are no longer needed

four conditions of monopolistic competition

1. many firms 2. few artificial barriers to entry 3. slight control over price 4. differentiated products

three different forms of price discrimination

1st degree discrimination- considering individual customers, finding out what your customers are willing to pay for an item and selling it at that price 2nd degree discrimination- allowing customers to choose a deal, refers to special deals & prices offered to customers who meet certain conditions or who are seeking certain special qualities 3rd degree discrimination- special prices for special groups, offer special discounts to members of certain groups, such as students, seniors, or military personnel.

What does a Production Possibilities Curve measure?

A graphical representation of the alternative combinations of the amounts of two goods or services that an economy can produce by transferring resources from one good or service to the other.

Why is a mixed economic system the predominant system in the world?

A mixed economic system features characteristics of both capitalism and socialism. It protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.

How are natural monopolies and government monopolies different? How are they similar?

A natural monopoly is a market that runs most efficiently when one large firm provides all of the output. Governmental monopolies, on the other hand, consist of several firms. A government monopoly is created by the government.Some governmental monopolies are given patents that allow that company or monopoly to exclusively sell a new good or service. Government monopolies are also given franchises and licenses to operate. Franchises are given to a governmental monopoly to allow them to sell a good or service within an exclusive market. Licenses are given to government monopolies to allow them to operate. One example of a natural monopoly is public water. To avoid the use of unnecessary land, water, and resources natural monopolies are created. However, technology and change can often destroy natural monopolies.

commodities

A reasonably interchangeable good or material, bought and sold freely as an article of commerce.

change in supply vs. change in quantity supplied

Change in supply: a change in the relationship between price and how much suppliers make Change in quantity supply: *any* change in the amount that gets bought and sold.

Law of demand

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 (↑)

What is elasticity of demand?

Demand elasticity refers to how sensitive the demand for a good is to changes in other economic variables, such as the prices and consumer income

What makes a good elastic? Inelastic?

Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a curve is more elastic, then small changes in price will cause large changes in quantity consumed. If a curve is less elastic, then it will take large changes in price to effect a change in quantity consumed.

During a period of expansion, what type of Monetary Policy should be enacted?

Expansionary monetary policy increases the money supply in order to lower unemployment, boost private-sector borrowing and consumer spending, and stimulate economic growth.

Why is GDP not a perfect indicator of economic health and development?

GDP counts "bad" as well as "good." When an earthquake hits and requires rebuilding, GDP increases. When someone gets sick and money is spent on their care, it's counted as part of GDP. But nobody would argue that we're better off because of a destructive earthquake or people getting sick.

3 functions of money

Medium of exchange- Money's most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one good or service for another. Store of value- In order to be a medium of exchange, money must hold its value over time; that is, it must be a store of value. Unit of account- Money also functions as a unit of account, providing a common measure of the value of goods and services being exchanged

Law of supply

Microeconomic law that states that, all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.

Is a seashell a good medium of exchange? Explain

No, it has no value. It needs to have constant inherent value of its own or it must be firmly linked to a definite basket of goods and services

HDI

The Human Development Index (HDI) is a composite statistic (composite index) of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development.

PPC

The Production Possibilities Curve (PPC) models a two-good economy by mapping production of one good on the x-axis and production of the other good on the y-axis. The combinations of outputs produced using the best technology and all available resources make up the PPC.

What are the coefficients of elasticity?

The coefficient of elasticity or COE for short is the measure of elasticity. It is defined as the percentage change in the quantity demanded divided by the percentage change in price.

What makes microeconomics different from macroeconomics?

The difference between micro and macro economics is simple. Microeconomics is the study of economics at an individual, group or company level. Macroeconomics, on the other hand, is the study of a national economy as a whole. Microeconomics Focuses on issues that affect individuals and companies.

what is opportunity cost?

a benefit, profit, or value of something that must be given up to acquire or achieve something else. Since every resource (land, money, time, etc.) can be put to alternative uses, every action, choice, or decision has an associated opportunity cost.

what does it mean to be magically employed?

a circumstance in which an employment relationship is not earning an employee enough money to make a decent living and/or when the employee is failing to meet the expectations of the company or employer.

inflation

a general increase in prices and fall in the purchasing value of money

What is a natural monopoly?

a market situation in which the costs of production are lower when only one firms provides an output

oligopoly

a market structure in which a small number of interdependent firms complete

monopolistic competition

a mix of perfect competition and a monopoly, demand is downward sloping

government monopoly

a monopoly that exists because the government either owns and runs the business or authorizes only one product

discouraged worker

a person of legal employment age who is not actively seeking employment or who does not find employment after long-term unemployment. This is usually because an individual has given up looking or has had no success in finding a job, hence the term "discouraged".

counted vs. not counted in GDP

all consumption by households, all investment by businesses, and all purchases by the government, plus purchases made by foreigners minus purchases of things made abroad.

price fixing

an agreement among firms to charge one price for the same good

collusion

an illegal agreement among firms to divide the market, set prices, or limit production

How do you calculate price elasticity of demand?

calculated by taking the percent change in quantity of a good demanded and dividing it by a percent change in another economic variable

change in demand vs. change in quantity demanded

change in demand: the willingness and a person's ability to purchase. change in quantity demanded: the amount of an economic good or service desired by consumers at a fixed price.

Explain what happens during a price war.

competitions cute their prices very low to win business and cut out competitors

Why must firms be able to divide customers into distinct groups in order for price discrimination to work?

customers have a maximum amount they will spend on a good and monopolists will divide and charge two different prices in order to make the maximum for their goods

what is scarcity?

dictates that economic decisions must be made regularly in order to manage the availability of recourses to meet human needs (ex. the gasoline shortage in the 1970s)

How do price fixing & collusion help producers?

each tactic includes an incentive to cheat & undo any benefits

If Fiscal Policy is trying to promote stability and economic growth through tax cuts, what type of policy is Fiscal policy using?

expansionary fiscal policy

Explain the rights that a patent gives a company.

gives a company exclusive rights to sell a new good or service for a specific period of time

What would happen to a perfectly competitive market if it stopped dealing in commodities?

if a perfectly competitive market stopped dealing in commodities, it would not be a perfectly competitive market because there's no real competition

How do economists determine whether or not a market is an oligopoly?

if the 4 largest firms produce 70-80% of output

If the economy is in an inflationary period, what action would Fiscal Policy most likely take?

increase taxes

How does differentiation help monopolistically competitive firms sell their product?

it enables a monopolistically competitive seller to profit from the differences between their products and competitors' products

Do you think price discrimination is fair? Explain

it is fair & unfair because not everyone will benefit from it, only some people.

what are the factors of production?

land: all the natural resources, income earned from land or other such natural resources is called rent. labor: involves any human input capital: manufactured resources such as factories and machines entrepreneurship: bringing the other three factors of production together

What is the law of diminishing marginal utility? Provide an example.

law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.

how do you calculate unemployment?

number of unemployed persons / labor force.

GDP

one of the primary indicators used to gauge the health of a country's economy. It represents the total dollar value of all goods and services produced over a specific time period, often referred to as the size of the economy.

How many of the following markets come close to perfect competition? Explain. - Television - Bottled water - Cars - White socks - Baseballs - Paper clips

perfect competition- a market with many buyers & sellers, identical products, & free entry & exit -Television- yes -Bottles water- yes -Cars- yes -White socks- yes -Baseballs- yes -Paper clips- no

Why must perfectly competitive markets always deal in commodities?

products must be at equilibrium or customers will buy the cheaper product since they care about the price and not the name, which is a commodity

What is market power?

the ability to control prices and total market output

what is economics?

the branch of knowledge concerned with the production, consumption, and transfer of wealth

Federal Reserve

the central bank of the United States. It was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system

monopoly

the exclusive possession or control of the supply or trade in a commodity or service

Why must a monopoly supply a unique product?

the good or service provided has no close substitute

Why must firms use land, labor capital and other resources efficiently in perfectly competitive markets?

the prices that consumers pay and the revenue that suppliers receive accurately reflect how much the market values the resources that have gone into the product

perfect competition

the situation prevailing in a market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers.

What is the problem with monopolies?

they can take advantage of their market power and charge high prices

In what ways does the government regulate oligopolies? Why do you think the government has imposed these regulations?

through the enforcement of antitrust laws. the government regulates oligopolies to keep them from acting like monopolies.

What are the goals of Monetary Policy?

to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.

what are the 4 types of economic systems?

traditional: an economic system in which people produce and distribute goods according to customs handed down from generation to generation command: an economic system in which the government makes all economic decisions market: an economic system in which individual choice and voluntary exchange direct economic decisions mixed: an economy that has elements of traditional, command, and market systems

when does imperfect competition occur?

when a market structure fails to meet the conditions of perfect competition

unemployment

when a person who is actively searching for employment in unable to find it

how do startup costs discourage entrepreneurs from entering a market?

when start up costs are high, entrepreneurs are less likely to enter the market because they are starting without much