ECON 102

The Fundamental Macroeconomic Question 2 Answers

"If left alone by government, do the price mechanisms of market economies adjust quickly to maintain steady growth in living standards, full employment, and stable prices?" 1. Yes- Markets Self-Adjust (say's Law) 2. No- Markets Fail often

Incentives (Positives and Negatives)

*Incentives*: Rewards and penalties for choices - Positive: More likely to choose a path with rewards - Negative: Avoid paths with penalties Ex. that business deal is now $100, or you could take a free vacation

4. Leisure 5. Political

*Leisure* — lowers real GDP, but may be desirable *Political* freedoms and social justice — countries with high real GDP per person can have limited political freedoms, unequal distributions of income

Problem with GDP as a measure of well-being: 1. Non-market Production 2. Underground Economy 3. Environmental Damge

*Non-market* *production* — household production is not counted but improves the quality of life *Underground* *economy* — hides activities that are illegal, or legal but avoiding taxes (cash payments for services, unreported tips) *Environmental* *damage* — does not subtract costs of environmental damage and resource depletion

Positive Statements/ Normative Statements

*Positive* *statements* about: what is; can be evaluated as true or false by checking the facts Ex. Toronto is closer to Vancouver than Calgary (This is a false statement) *Normative* *statements* about what you believe should be; involve value judgments Ex. You should by this game instead of that game (Cannot be factually checked)

Five ways to shift demand curve 4. Expected Future Prices

- "Thinking about buying today for tomorrow" - An expected future price fall decreases demand today - An expected future price rise increases demand today

Players in Macroeconomics 4. Banks

- *Monetary* *policy*: Bank of Canada changes interest rates and supply of money to achieve the macroeconomic outcomes - Making loans or not

What is an Economic Model?

- A simplified representation of the real world, focusing attention on what's important for understanding - Economic models assume all other things not in the model do not change (The mental equivalent of controlled experiments in a laboratory)

Chapter 3: Marginal Cost

- Additional opportunity cost of increasing quantity supplied - Changes with circumstances Ex. I make 100 shirts, what are the additional opportunity cost of producing the 101st T-shirt Marginal cost increases as you increase quantity supplied - To buy inputs, a business must pay the price matching the best opportunity cost of the input owner

Five ways to shift demand curve 1. Preferences

- Advertising can increase your want/need for an item: a. *Increase* *in* *Demand*: increase in consumers' willingness and ability to pay Ex. A successful ad campaign for the new Iphone b. *Decrease* *in* *Demand*: decrease in consumers' willingness and ability to pay Ex. A failed ad campaign for the new Iphone (Shows it has no headphone jack)

ROW choices

- Buy Canadian exports or products and services from elsewhere - Sell imports to Canada or elsewhere - Invest and borrow money in Canada or elsewhere

Players in Macroeconomics 5. Rest of World (ROW)

- Buying Canadian exports or not, selling imports to Canada or not - Investing money in Canada or not, accepting Canadian investments or not

Government Choices

- Collect taxes, make transfer payments - Spending on products and services - Policy choices

Moving along the curve (no shift)

- Decrease in quantity supplied is movement down along unmoved supply curve - Increase in quantity supplied is movement up along the unmoved supply curve

When demand decreases and supply increases

- Equilibrium price falls - Equilibrium quantity may rise/fall/remain constant

When both demand and supply decrease

- Equilibrium price may rise/fall/remain constant - Equilibrium quantity decreases

When both demand and supply increase:

- Equilibrium price may rise/fall/remain constant - Equilibrium quantity increases

When demand increases and supply decreases

- Equilibrium price rises - Equilibrium quantity may rise/fall/remain constant

Economic growth does what?

- Expansion of economy's capacity to produce products and services - increases GDP/person and shifts macro PPF outward

What are Expectations in business?

- Expectations are self-fulfilling, as long as most people share them Ex. If investors expect housing prices to rise, they will buy (sell or, flip) to make profit and overall causes it to rise even more. But since these prices are based on expectations and not economic fundamentals, a change can cause the bubble to burst

Answer 2: No — Left Alone, Markets Fail Often — Hands On Camp (What do they believe?)

- Fallacy of composition — macroeconomic and microeconomic outcomes are different - Markets cause business cycles through connection failures between input and output markets, roles of money, banking, and expectations - Market failure is more likely than government failure - Government should be hands-on - Composed of left wing politicians

Opportunity Cost

- Give up/get = opportunity cost - The true cost of any choice - In weighing the benefits and costs of any decision we compare what we give up vs what we get out of each path (or choice) - For a smart choice, the value of what you get must be greater than value of what you give up Ex. You have the choice of making a $1,000,000 business deal, or going on a free trip with your girlfriend who is always busy. (The choice doesn't always involve money)

Players in Macroeconomics 2. Businesses

- Hire labour and other inputs from consumers in input markets, and sell products and services produced with those inputs in output markets - *Investment* *spending*: business purchases of new factories and equipment - Hiring workers or not - Buying inputs domestically or importing - Selling outputs domestically or exporting

Business Choices

- Hiring inputs and producing products and services - Investment spending (often financed by borrowing)

What can change the Demand Curve?

- If a price changes, that affects quantity demanded. This is represented graphically by a movement along an unchanged demand curve Ex. Price of gas increases= decrease in quantity demanded - If anything else changes, that affects demand. This is represented graphically by a shift of the entire demand curve

Your supply of hours worked Example (Quantity supply)

- If price of a product or service rises -> quantity suppled increases Ex. Businesses increase production when higher prices either create higher profits or cover higher marginal opportunity costs of production

The 3 Key Macroeconomic Outcomes 3. Inflation

- In microeconomics, the price of one product or service rises or falls with changes in demand and supply - Inflation is a rise in average level of all prices in an economy - General Statement: higher and unpredictable inflation is bad and lower predictable inflation is good

The 3 Key Macroeconomic Outcomes 2. Unemployment

- In order to buy products and services in output markets you must sell something you own to input markets Ex. Selling your labour (getting a job) - high unemployment is bad

Five ways to shift demand curve 3. Inome

- Increase in income for *normal* *goods*: products or services you buy more of when your income increases - Decrease in income for *inferior* *goods*: products or services you buy less of when your income increases (Ex. taking bus (inferior) instead of car (superior))

Chapter 4: What's a market?

- It is a process of interactions between buyer and sellers (not physical or virtual) - Markets connect competition between buyers, competition between sellers, and cooperation between buyers and sellers. - Government guarantees of property rights allow markets to function

Explain why they would benefit from Trade

- It will allows each of them to consume outside their PPF, which is impossible without trade - Even though Jill has the absolute advantage producing everything at a lower cos, differences in comparative advantage allow mutually beneficial gains from trade Ex. If Jill trades 20 logs for 20 loaves from Marie, they will both benefit by going outside PPF

Answer 1: Yes- Left Alone, Markets Self-Adjust- Hands off camp (What do they believe?)

- Macroeconomic and microeconomic outcomes are the same - External events or government policy cause business cycles - Government failure is more likely than market failure - Government should be hands-off - Composed of right wing politicians

The Macroeconomic connection between input and output markets

- Macroeconomics focuses on connections between input and output markets

Demand and Marginal cost/benefit

- Marginal benefit is the satisfaction you get - Marginal benefit decreases as you buy more - Marginal cost is measured in $ (the price you pay)

Supply and Marginal cost

- Marginal cost is the opportunity cost of time - Marginal cost increases as you supply more - Marginal benefit is measured in $ (wages you earn)

Say's Law

- Markets Self Adjust - Law claims supply creates its own demand

Five ways to shift demand curve 5. # of consumers

- More consumers will result in an increase in quantity demanded - Less consumers will decrease quantity demanded

What are market adjustments and who mainly makes them

- Price adjustments: when the price increases or decreases to meet demand/supply - Quantity adjustments: when the quantity increases or decreases to meet supply/supply (this is done more often)

Describe the "invisible hand"

- Price signals in markets create incentives, so that while each person acts only in own self-interest he frequently promotes that of the society more effectually than when he really intends to promote it - Result is the miracle of markets — continuous, ever-changing production of products and services we want

Increases in entrepreneurship

- Quantity and quality interrelated - Better management techniques, organization, worker/management relations

Increases in land and resources

- Quantity — bringing land and resources not connected to markets into the circular flow - Quality — due to increases in capital used with land

Increases in capital

- Quantity — more factories and equipment - Quality — technological change — improvements in quality of capital through innovation, research, development

Increases in labour

- Quantity — population growth, immigration, labour force participation rate - Quality — increases in *human* *capital* — increased earning potential from work experience, on-the-job training, education

Five ways to shift demand curve 2. Prices of Related Products

- Rise in price of a *substitute*:  products or services used in place of each other to satisfy the same want Ex. Coke is a substitute for Pepsi - Fall in price of a *complement*: products or services used together to satisfy the same want Ex. Milk complements coffee (used together to make it better) If coffee prices fall it will increase our willingness to pay for milk

Players in Macroeconomics 3. Government choices

- Set legal rules for the game - Choose to interact or not - Buying products and services - *Fiscal* *policy*: government purchases, taxes/ transfers to achieve the macroeconomic outcomes

Explain Frustrated Buyers

- Shortage, or excess demand: quantity demanded exceeds quantity supplied - Shortages create pressure for prices to rise - Rising prices provide signals and incentives for businesses to increase quantity supplied and for consumers to decrease quantity demanded, eliminating the shortage

Trade makes individuals better off when:

- Specializes in producing a product or service with comparative advantage (lower opportunity cost) - Trades for the other product or service (that they don't have)

Players in Macroeconomics 1. Consumers/Households

- Supply labour and other inputs in input market - Spend income or save: Buy Canadian products and services, or imports

Explain Frustrated Sellers

- Surplus, or excess supply : quantity supplied exceeds quantity demanded - Surpluses create pressure for prices to fall - Falling prices provide signals and incentives for businesses to decrease quantity supplied and for consumers to increase quantity demanded, eliminating the surplus

Why do marginal opportunity costs increase?

- The law of increasing opportunity cost is the concept that as you continue to increase production of one good, the opportunity cost of producing that next unit increases. This comes about as you reallocate resources to produce one good that was better suited to produce the original good.

Marginal Opportunity cost

- The minimum price you are willing to accept for a certain quantity supplied - As the quantity supplied increases, price increases - All opportunity costs are marginal costs; all marginal costs are opportunity costs

Summary of shortage and surplus

- When there are shortages, competition between buyers drives prices up. When there are surpluses, competition between sellers drives prices down.

What happens to a person when they voluntarily trade?

- With voluntary trade, each person feels that what they get is of greater value than what they give up

Money, Banks, and Expectations

- are part of macro focus on whole economy - Money serves the whole economy

Factors that affect supply: 3. Fall in price of an input

- businesses must pay a price for inputs matching best opportunity cost of input owner Right Shift: if those opportunity costs and inputs fall, costs decrease and profits of business increase, so businesses will want to increase supply Left Shift: Increase in input prices lower profits of business, so they will supply less

Supply

- businesses' willingness to produce a particular product or service because price covers all opportunity costs

Consumers Choices

- choose to spend or save - The income consumers can spend or save is called *disposable* *income* (Aggregate income - net taxes)

Where do prices come from?

- come from supply and demand - Prices are the outcome of a market process of competing bids (from buyers) and offers (from sellers)

Quantity supplied

- the quantity you actually plan to supply at a given price, taking into account everything that affects your willingness to supply work hours

The 3 Key Macroeconomic Outcomes 1. Gross Domestic Product (GDP)

- the value of all products and services produced annually in a country

Efficient market outcome

- total surplus is the​ largest, ​- prices just cover all opportunity costs of​ production, ​- consumers' marginal benefit equals​ business's marginal​ cost, ​- product and services are produced at lowest cost.

Real GDP

- value at constant prices of all final products and services produced annually in a country. Ex. used due to the price of one thing (gas) doesn't stay constant through time. Used to eliminate the effects of inflation

Nominal GDP

- value at current prices of all final products and services produced annually in a country - (Includes price inflation)

Ch5: Fallacy of Composition

- what is true for one (micro) is not true for all (macro);the whole is greater than the sum of the individual parts Ex 1. (different) A single farmer plants more crops and harvests more. He gets more money (micro) but his slight increase in product has no effect on the world economy (macro) for wheat Ex 2.(same) All farmers plant a lot and harvest a lot. High amount of products causes saturation leading to decreasing of price of wheat

Paradox Thrift

-It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth. Such a situation is harmful for everybody as investments give lower returns than normal. Ex. If you save more, your savings will increase and your spending will decrease. BUt if many people spend less, businesses experience falling sales, and cut back on production, and lay off workers - Paradoxically, the result may be less saving, because without employment income, people withdraw from savings rather than increase them.

Language Business Cycles 1. Expansion 2. Peak 3. Contraction 4. Trough 5. Recession

1. *Expansion*: period during which real GDP increases 2. *Peak*: highest point of an expansion 3. *Contraction*: period during which real GDP decreases 4. *Trough*: lowest point of a contraction 5. *Recession*: 2+ successive quarters contraction of real GDP

WHY YOU SHOULD THINK LIKE A MACROECONOMIST? (Your personal economic success is affected by..)

1. *GDP*: higher GDP per person allows higher living standards 2. *Unemployment*: affects odds of finding a job 3. *Inflation*: reduces living standards if income does not rise as fast as the prices of what you buy Interest rates, exchange rates, and government taxes and transfer payments

Factors that affect supply (6)

1. Improvement in technology 2. Environmental change helping production 3. Fall in price of an input 4. fall in price of related product or service 5. Fall in expected future price 6. Increase in number of businesses

Define Preferences and Demand

1. Preference(wants): your wants and their intensities; varies from person to person 2. Demand: consumers' willingness and ability to pay for a particular product or service

What are the two ways to read a Demand Curve?

1. Read Over and Down= Demand Curve - Tells you, for any given price the quantity demanded 2. Read Up and Over= Marginal Benefit Curve - For a given quantity, the marginal benefit curve tells you the max price people are willing to pay

Output gap (real GDP minus potential GDP) 1. Recessionary Gap 2. Inflationary Gap

1. Recessionary gap: real GDP below potential GDP; gap is a negative number 2. Inflationary gap: real GDP above potential GDP; gap is a positive number

How should you change a supply and demand curve

1. Start with one equilibrium situation (intersection of demand and supply, other things the same) 2. Change one other thing/variable 3. Compare resulting equilibrium situation (intersection of demand and supply after the change) in terms of price and quantity

What do all macroeconomists agree on?

1. There is some role for government (setting rules) 2. Prices and markets adjust, but differ on how long it takes 3. Business cycles happen even without government failure, but differ in focusing on relatively steady growth of market economies in the long-run (yes), or focusing on correcting the ups and downs of business cycles in short-run (no)

Define: 1. Quantity Demanded 2. Market Demand 3. Demand Curve

1. the amount you actually plan to buy at a given price Ex. You buy 1 pair of headphones. Quantity demanded= 1 2. The sum of demands of all individuals willing and able to buy a particular product or service 3. Shows the relationship between price and quantity demanded, other things remaining the same

What is the Diamond Pardox

= Willingness to pay depends on marginal benefit, not total benefit, determines what people are willing to pay - Water is abundant, marginal benefit is low - Diamonds are scarce, marginal benefit is high

Marginal Benefit

A marginal benefit is the additional satisfaction or utility that a person receives from consuming an additional unit of a good or service. A person's marginal benefit is the maximum amount he is willing to pay to consume that additional unit of a good or service.

Flow

Amount per unit of time Ex. GDP is a flow concept

The Three Keys Model to Smart Choices Key 3: Implicit costs and externalities count

Be sure to count all additional benefits and costs, including implicit costs and externalities *Implicit* *costs*: opportunity costs of investing your own money or time

What Causes Economic growth?

Caused by increases in the quantity or quality of a country's inputs, including technological change, labour, capital, land/resources and entrepreneurship

The Three Keys Model to Smart Choices Key 1: Opportunity Cost Rule (Page 20 for examples)

Choose only when additional benefits are greater than additional opportunity costs

Explain the example of Marie and Jill on comparative Advantage (Opportunity Cost= Give up/Get) (Page 10-11)

Comparative Adv (Jill): She can produce 100 logs of wood (or 50 loaves of bread) at an opportunity cost of the opposite one she chose Jill: 100 logs/50 loaves = 2 logs/1 loaf Jill: 50 loaves/100 logs = 0.5 loaves/1 log Comparative Adv (Marie): She can produce 20 logs of wood (or 40 loaves of bread) at an opportunity cost of the opposite one she chose Marie: 20 logs/40 loaves = 1 log/ 2 loaves Marie: 40 loaves/ 20 logs = 2 loaves/ 1 log

What are comparative statics?

Comparing two equilibrium outcomes to isolate the effect of changing one factor at a time

Marginal Benefit (Demand) Greater than marginal cost (Supply)

Consumers buy only products and services where marginal benefit is greater than marginal cost - both producer and consumer benefit

Circular Flow (ROW- Rest of the world) 1. Income (Y)

Consumers earn income by selling inputs to businesses

Marginal Cost Greater than marginal benefit

Consumers will not but anything when Marginal cost is better than marginal benefit - no one wins

Sunk Cost

Costs that you already payed for and cannot recovered. - It is not part of opportunity costs - Sunk costs do not influence smart, forward-looking decisions

The Three Keys Model to Smart Choices Key 2: Look forward only to additional benefits and opportunity costs

Count only marginal benefits and marginal opportunity costs *Marginal* *benefits*: additional benefits from the next choice *Marginal* *opportunity* *costs*: additional opportunity costs from the next choice

What is the difference between nominal GDP and years

Due to price changes or quantity changes

Circular-Flow Model of Economic Life

Focuses attention on what's important for understanding and shows how smart choices by households, businesses, and governments interact in markets.

Chapter 6: GDP

GDP concepts measure the value of all final products and services produced annually in a country

Who Controls the Economy?

Governments set rules of the game and can choose to interact in any aspect of the economy

Marginal Utility of Marginal Benefit

Having one extra unit of something you already purchased the same item. Marginal utility goes down with each purchase. Ex. you buy a cookie at $2.25. After the first purchase you want another one but aren't willing to pay willing to pay full price again so you buy it for $1.75. Marginal utility goes down.

When prices​ rise, individuals and businesses devote more of their time or resources to producing or supplying because?

Higher prices create incentives for increased production through higher profits and by covering higher marginal opportunity costs of production.

Economics

How individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets.

Law of Supply

If the price of a product or service rises, quantity supplied increases

What are the Inputs?

Inputs are productive resources — labour, natural resources, capital equipment, and entrepreneurial ability — used to produce products and services

Factors that affect supply: 2. Environmental change helping production

Left Shift: bad weather can reduce supply and increase cost Right Shift: good weather increase supply and decrease costs

Factors that affect supply: 4. fall in price of related product or service

Left Shift: when a certain product decreases in price businesses will create less of it (decrease in supply) - They will switch to other more profitable products and increase their production (right shift for that product)

The Microeconomic connection between input and output markets

Microeconomics focuses on interaction of demand and supply in input markets alone or output markets alone

What is the result of economic events?

Price and Quantity changes

Marginal cost curve

Read from the x-axis (Quantity) then up and to the left to find the y-axis (Price)- the min. price a business will accept to produce that amount

Supply Curve

Read from the y-axis (Price) then move right then down to find the x-axis (Quantity supplied)

Factors that affect supply: 5. Fall in expected future price

Right Shift: A fall in expected future prices increases supply today Left Shift: A rise in expected future prices decreases supply today

Factors that affect supply: 6. Increase in number of businesses

Right Shift: An increase in the number of businesses increases market supply Left Shift: A decrease in the number of businesses decreases market supply

Factors that affect supply: 1. Improvement in technology

Right shift: Improvement in tech will help a business be more productive and increase supply and decrease price - 100 items for $20 -> 300 items for $20 - new tech lowers marginal opportunity costs, so prices can be lowered while still covering all costs

Market Supply

Sum of supplies of all businesses willing to produce a particular product or service

Banks Choices

Take deposits and make loans

Net taxes

Taxes - transfer payments

Circular Flow 2. Consumer spending (C)

The consumption (spending) on products or service from businesses

Consumer Surplus

The difference between the amount a consumer is willing and able to pay, and the price actually paid - Basically the money you saved - The extra money all consumers were willing and able to pay for piercing but didn't have to

Producer Surplus

The difference between the amount a producer is willing to accept, and the price actually received - The revenues that are greater than marginal opportunity costs of production when selling at equilibrium price

Scarcity

The problem arises from our limited money, time, and energy - You can never satisfy your wants, therefore life requires smart choices on what to do, and what to give up

Five ways to shift demand curve

The willingness and ability to pay for product or serve depends on: 1. Preferences 2. Prices of related products (substitutes) 3. Income 4. Expected future prices 5. # of consumers

Value

The worth, in Canadian dollars, of all the products and services produced.

Business cycles

Up and down fluctuations of real GDP around potential GDP

Double Counting, how to avoid?

Use value added to distinguish final and intermediate products and services, and hows how aggregate spending = aggregate income (Y) in a circular flow diagram.

Value added

Value of output minus the value of intermediate products services bought from other business

Circular Flow 3. Business Investment Spending (I)

When businesses buy products (i.e machines, workers, factories) it is called investment spending

6. Imports (M)

When canadians buy materials from other countries (i.e. Iphone) those are called imports

What happens when demand and supply change?

When demand or supply change, equilibrium prices and quantities change. The price changes cause businesses and consumers to adjust their smart choices. Well-functioning markets supply the changed products and services demanded.

Circular Flow 5. Exports (X)

When other countries around the globe spend money on canadian products and services.

Circular Flow 4. Government Spending on Products (G)

When they buy new roads or buildings, services of accounting firms, those are purchases of products and services in output markets

Chapter 2: How does a person weigh benefits, costs, and substitutes

Your willingness to buy a product or service depends on your ability to pay, comparative benefits and costs, and the availability of substitutes Ex. you forget your $3 gatorade at home while at the gym. You really want the gatorade but the gym doesn't sell it. A friend is willing to sell it to you. Since you really want it your willingness to pay goes up and you offer him $4 since he probably wouldn't take $3.

Negative (or positive) externalities

a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved, such as the pollination of surrounding crops by bees kept for honey.

For any choice, what are you willing to pay and give up depends on (2 things)

a. cost b. availability of substitutes

The Law of Demand

all else being equal, as the price of a product increases (↑), quantity demanded falls (↓); likewise, as the price of a product decreases (↓), quantity demanded increases (↑)

Microeconomics

analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets

Macroeconimics

analyzes performance of the whole Canadian economy and global economy, the combined outcomes of all individual microeconomic choices

Economic Growth Rate

annual % change in real GDP/person

Creative Destruction

competitive business innovations generate profits for winners, improving living standards for all, but destroy less productive or less desirable products and production methods Ex. Computer replacing type writter

Total surplus

consumer surplus + producer surplus - largest total surplus= best - Invisible hand leads smart consumers and businesses o outcomes with largest total surplus

Stock

fixed amount at a moment in time Ex. Capital is a stock concept

Economics and Politics: 2. Government Failure

government policy fails to serve the public interest Reasons for Failing: - Policy makers lack info for making good decisions. Easy for them to make "honest mistakes" due to complexity of economy - Lobbying - Campaign contributions - Political Pressure - Bad Policies

Production Possibilities Frontier (PPF)

graph showing maximum combinations of products or services that can be produced with existing inputs

Inputs

labor, capital, land and raw materials that are used by a firm to make a finished product.

What are property rights?

legally enforceable guarantees of ownership of physical, financial, and intellectual property Ex. Land, vehicle, bonds - They protect you against theft

How does United nations Human Development Index measure quality of life?

life by combining life expectancy, educational achievement, and income

Economics and Politics: 1. Market Failure

market outcomes are inefficient or inequitable and fail to serve the public interest - When it fails, government policy that "acts" in public interest can improve market outcomes Reasons for Failing: - Large businesses monopolize a market

Rule 70

number of years it takes for initial amount to double is roughly 70 divided by annual percentage growth rate - Because of compounding, small differences in annual growth rates have large consequences over time

Potential GDP/Person

potential GDP divided by the population - Short-run maximum possible living standards for an economy

Productivity

quantity of real GDP produced by an hour of labour - Increases in productivity increase living standards - More can be produced - Reduced amount of work time required to buy products and services

Real GDP/Person

real GDP divided by population - Real GDP per person is the best measure of material standard of living

Potential GDP

real GDP when all inputs --- labour, capital, land/resources, entrepreneurship --- are fully employed. Short- run gal for economic performance if adam smith's invisible hand works perfectly

What does the Circular Flow model do?

reduces complexity of the Canadian economy to three sets of players who interact in markets: households, businesses, and governments - In input markets, households are sellers, businesses are buyers - In output markets, households are buyers, businesses are sellers

Absolute Advantage

the ability to produce a product or service at a lower absolute cost than another producer

Comparative Advantage

the ability to produce a product or service at a lower opportunity cost than another producer - Key to mutually beneficial gains from trade

Deadweight loss

the decrease in total surplus compared to an economically efficient outcome - For an inefficient outcome, deadweight loss is subtracted, so total surplus is less than for an economically efficient outcome

What is "Equilibrium price? (note this is the second name for prices that sit)

the price that balances forces of competition and cooperation, so that there is no tendency for change

What is "market clearing price"? (note this is the first name for prices that sit still)

the price that equalizes quantity demanded and quantity supplied - at market clearing price no one is frustrated

What does real GDP use for a constant

uses constant prices for one year (Base year) to value quantities produced in different years - Differences in real GDP between years show only changes in quantities