Economic Terms and Market Interactions

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Questions and Answers

What is the primary function of markets in an economy?

To ensure equal distribution of wealth among individuals

To regulate prices through government intervention

To eliminate the need for competition

To facilitate interaction between buyers and sellers (correct)

In a factor market, which of the following is typically bought and sold?

Factors of production like land, labor, and capital (correct)

Employment contracts and job offers

Finished goods and services

Consumer preferences and market trends

According to the law of demand, what happens to the quantity demanded when the price of a good increases?

It decreases (correct)

It remains unchanged

It fluctuates randomly

It increases

What characterizes the relationship defined by the law of supply?

Quantity supplied increases as price increases Signup and view all the answers

Which market specifically deals with funds necessary for production?

Capital market Signup and view all the answers

What is the term used to describe the situation where demand meets supply?

Market Equilibrium Signup and view all the answers

If the price of a good rises significantly and the quantity supplied also rises by a larger percentage, how is the supply characterized?

Elastic Supply Signup and view all the answers

Which of the following describes a price ceiling?

A maximum price set below equilibrium Signup and view all the answers

What does 'Ceteris Paribus' mean in economic terms?

All other influences are held constant Signup and view all the answers

In what situation is there a surplus in the market?

When supply exceeds demand Signup and view all the answers

What characterizes a monopoly in a market structure?

Only one seller with no close substitutes Signup and view all the answers

What best describes the barriers to entry in monopolistic competition?

Low, allowing many firms to compete easily Signup and view all the answers

Which of the following is NOT a characteristic of perfect competition?

Producers have significant price influence Signup and view all the answers

What does the Labour Force Participation Rate (LFPR) measure?

The proportion of the working age population that is either employed or actively seeking work Signup and view all the answers

In an oligopoly, what do firms compete on?

On price and non-price factors Signup and view all the answers

What is defined as derived demand in the context of labor markets?

Demand for resources derived from the demand for final goods Signup and view all the answers

What is true about the unemployment rate calculation?

It reflects the total number of unemployed individuals as a percentage of the labor force Signup and view all the answers

What is a natural monopoly?

A single seller that the government may support due to the nature of their services Signup and view all the answers

What does price stability refer to in the context of RBA objectives?

Inflation between 2-3% Signup and view all the answers

What is the primary purpose of Commonwealth Government Securities (CGS)?

To raise funds by the government and maintain cash supply Signup and view all the answers

What is the Consumer Price Index (CPI) used to measure?

Inflation through a weighted basket of goods Signup and view all the answers

Which of the following is true regarding aggregate demand?

AD is calculated as AD = C + I + G + X - M Signup and view all the answers

What characterizes a public good?

Nonexcludable and non-rival in consumption Signup and view all the answers

What is the essence of market failure?

Inefficient outcomes due to failure to reflect social costs Signup and view all the answers

What is the cash rate associated with?

Interest on overnight loans Signup and view all the answers

Which term refers to the proportional change in money demanded in relation to interest rates?

Interest rate elasticity Signup and view all the answers

What type of unemployment occurs when changes in technology lead to job obsolescence?

Structural Signup and view all the answers

Which type of unemployment is characterized by workers being briefly without jobs due to changing employment?

Frictional Signup and view all the answers

What is underemployment?

Workers who want to work more hours than they do Signup and view all the answers

Which type of unemployment is NOT officially counted in the unemployment rate?

Hidden Signup and view all the answers

What defines cyclical unemployment?

It occurs due to fluctuations in economic activity Signup and view all the answers

What institution represents a body that acts on behalf of employers?

Employer Associations Signup and view all the answers

Which policies are aimed at minimizing fluctuations in the business cycle?

Expansionary Fiscal and Monetary Policies Signup and view all the answers

Who is classified as hardcore unemployed?

Long-term unemployed labeled as unemployable Signup and view all the answers

Study Notes

Economic Terms

Aggregate Demand (AD): The total demand for goods and services in an economy, calculated as AD = C + I + G + X - M.
Aggregate Supply (AS): The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Markets

Definition: Interaction points between buyers and sellers where goods, services, and resources are exchanged.
Role of Markets: Price mechanism ensures allocative efficiency by balancing supply and demand.

Types of Markets

Factor Markets: Exchange of factors of production such as labor, land, and capital.
Labour Market: A specific factor market focused on employment; determines wage rates through demand and supply of labor.
Capital Market: Facilitates access to funds for production by connecting savers and borrowers.
Product Market: Trade of finished goods and services.

Law of Demand and Supply

Demand: Quantity of a good or service that consumers are willing to buy at a given price.
Supply: Quantity of a good or service that producers are willing to sell at a given price.
Law of Demand: Inverse relationship between price and quantity demanded.
Law of Supply: Direct relationship between price and quantity supplied.

Price Elasticity

Price Elasticity of Demand: Measures responsiveness of quantity demanded to price changes.
Price Elasticity of Supply: Measures responsiveness of quantity supplied to price changes.
Elasticity Types: Elastic (>1), Inelastic (<1), Unit Elastic (=1).

Market Equilibrium

Description: Point where demand equals supply.
Surplus: Occurs when supply exceeds demand.
Shortage: Occurs when demand exceeds supply.

Price Control Schemes

Price Ceiling: Maximum legal price set below equilibrium.
Price Floor: Minimum legal price set above equilibrium.

Market Structures

Perfect Competition: Many firms, similar products, free market entry, no price control.
Monopoly: Single producer, no close substitutes, high barriers to entry, price maker.
Natural Monopoly: Often government-provided services due to unique characteristics.
Monopolistic Competition: Numerous small firms with slightly different products and low barriers to entry.
Oligopoly: Few large firms dominating the market, competing on price and non-price factors.

Labour Markets

Derived Demand: Demand for labor based on the necessity to produce goods and services.
Labour Force Definitions:
- Employed (E): Individuals working over 1 hour a week.
- Unemployed (UE): Individuals actively seeking work but unable to find employment.
- Labour Force (LF): Total of employed and unemployed individuals.
Labour Force Participation Rate (LFPR): Proportion of working age population in the labor force, calculated as LF/WAP x 100.
Unemployment Rate: Percentage of the labor force that is unemployed, calculated as UE/LF x 100.

Types of Unemployment

Cyclical: Linked to the economic cycle; occurs during downturns.
Structural: Resulting from technological advances and demand shifts causing job obsolescence.
Frictional: Temporary unemployment while transitioning between jobs.
Seasonal: Fluctuations in employment due to seasonal industries.
Long-term: Individuals unemployed for over 12 months.
Hardcore: Long-term unemployable due to circumstances.
Regional: Unemployment due to regional industry layoffs.
Hidden: Individuals not counted in official unemployment statistics due to discouragement.
Underemployment: Individuals working less than they desire to.

Labour Market Institutions

Unions: Organizations focused on improving conditions for workers.
Employer Associations: Advocate for employer interests, including lobbying for regulations.
Fair Work Commission: Established by the Fair Work Act 2009, independent body overseeing employment standards.

Government Policies

Macroeconomic Policies: Aim to stabilize the economy; include fiscal and monetary policies.
Microeconomic Policies: Target individual industries to enhance aggregate supply and productivity.
Price Stability: Goal of the RBA to maintain inflation within 2-3%.

Financial Instruments

Commonwealth Government Securities (CGS): Used for managing overnight cash supply and government funding.
Government Bonds: Instruments issued to raise funds for government deficits.
Consumer Price Index (CPI): Measures inflation through a weighted basket of goods.
Cash Rate: The interest rate on overnight loans in the short-term money market.

Exchange Rates and Interest Rates

Exchange Rate: Represents the value of one currency against another.
Interest Rate: Annual cost of borrowing money expressed as a percentage.

Role of Government in Economics

Market Failure: Inefficiencies when market pricing does not reflect social costs or benefits.
Private Goods: Require purchase to gain consumption benefits.
Public Goods: Non-excludable and non-rival goods; often not supplied by the market.
Free Rider Problem: Benefits obtained without payment from public goods.
Merit Goods: Underproduced due to low perceived value among consumers.

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Description

This quiz explores key economic terms such as Aggregate Demand and Aggregate Supply, as well as the dynamics of markets where buyers and sellers engage. Understand the role of the price mechanism in achieving allocative efficiency in a market economy. Test your knowledge of various types of markets and their functions.