Market System: Key Definitions

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Questions and Answers

A country imposes a tariff on imported steel. What is the most likely economic consequence of this policy?

  • Retaliatory tariffs from other countries on the imposing country's exports. (correct)
  • Lower prices for consumers purchasing goods made with steel.
  • Decreased government revenue, as tariffs reduce the volume of imports.
  • Increased efficiency of domestic steel production due to lower competition.

Which scenario best illustrates the concept of 'opportunity cost'?

  • A government increases taxes to fund public education, leading to a decrease in disposable income for households.
  • An individual chooses to attend a concert instead of working, foregoing potential earnings. (correct)
  • A company decides to invest in new machinery, leading to a temporary decrease in profits.
  • Rising inflation reduces consumers' purchasing power, affecting overall demand.

How do economists define 'market failure'?

  • When the government intervenes excessively in the economy.
  • When the market mechanism leads to an inefficient allocation of resources. (correct)
  • When a firm experiences diseconomies of scale.
  • When consumers do not act rationally due to imperfect information.

A country's central bank lowers interest rates to stimulate the economy. What is a likely short-term effect of this policy?

<p>Increased borrowing and spending by firms and consumers. (D)</p> Signup and view all the answers

A firm increases its scale of production and experiences lower average costs. This is an example of:

<p>Economies of scale. (C)</p> Signup and view all the answers

What distinguishes 'public goods' from 'private goods'?

<p>Public goods are non-excludable and non-rivalrous, while private goods are excludable and rivalrous. (C)</p> Signup and view all the answers

If the price elasticity of demand (PED) for a good is 0.2, what does this indicate?

<p>Demand is inelastic; a change in price will lead to a proportionally smaller change in quantity demanded. (B)</p> Signup and view all the answers

Which of the following is the best example of a 'supply-side policy'?

<p>A government investing in infrastructure and education. (A)</p> Signup and view all the answers

What is the primary goal of the World Trade Organization (WTO)?

<p>To promote and facilitate free trade among member countries. (A)</p> Signup and view all the answers

A multinational corporation (MNC) invests in a new factory in a developing country. What is one potential drawback of this foreign direct investment (FDI) for the host country?

<p>Potential exploitation of local resources and labor. (B)</p> Signup and view all the answers

Flashcards

Scarcity

The fundamental economic problem of unlimited wants exceeding limited resources.

Opportunity Cost

Next best alternative given up when making a choice.

Factors of Production

Inputs such as land, labor, capital, and enterprise used to produce goods/services.

Demand

Quantity of a good/service consumers will buy at a specific price/time.

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Price Elasticity of Demand (PED)

Responsiveness of quantity demanded to a change in price.

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Market Failure

A situation where the market fails to allocate resources efficiently.

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Externalities

Costs/benefits impacting third parties not directly involved in a transaction.

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Total Revenue

The total amount earned from selling goods or services.

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Economies of Scale

Cost advantages from increasing the scale of production.

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Fiscal Policy

Government use of taxes and spending to influence the economy.

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Study Notes

The Market System - Key Definitions

  • Scarcity is economics' fundamental problem, where limitless needs/wants meet limited resources.
  • Opportunity cost means giving up the next best alternative when making a choice.
  • Factors of production are inputs like land, labor, capital, and enterprise used in production.
  • Demand refers to the quantity of goods/services consumers will buy at a specific price/period.
  • Supply refers to the quantity of goods/services producers offer at a specific price/period.
  • Market equilibrium occurs when quantity demanded equals quantity supplied, stabilizing price.
  • Price Elasticity of Demand (PED) measures demand's responsiveness to price changes. PED = (% change in quantity demanded) / (% change in price).
  • Price Elasticity of Supply (PES) measures supply's responsiveness to price changes. PES = (% change in quantity supplied) / (% change in price).
  • Income Elasticity of Demand (YED) measures demand's responsiveness to income changes. YED = (% change in quantity demanded) / (% change in income).
  • Public goods are non-rivalrous (one person's use doesn't reduce availability) and non-excludable (difficult to prevent access), like street lighting.
  • Market failure happens when markets don't allocate resources efficiently due to externalities, public goods, or information asymmetry.
  • Externalities refer to costs/benefits affecting third parties not directly in a transaction, like pollution/education.

Topics Covered

  • Economic problem basics are scarcity, choice, and opportunity cost.
  • A Production Possibility Curve (PPC) shows maximum output combinations of two goods with given resources/technology.
  • Economic growth shifts the PPC outward, indicating increased productive capacity.
  • Economic assumptions include rational decision-making, though imperfect information can cause irrationality.
  • Demand, supply, and market equilibrium are affected by factors such as income, production costs and technology.
  • Elasticity calculations, including PED, PES and YED, indicate how prices are affected.
  • Mixed economy and market failure topics covered are private vs public sectors, government intervention, and public goods.
  • Externalities are covered, including negative (pollution) and positive (education) and how they affect society.

Business Economics - Key Definitions

  • Productivity measures output per unit of input, like labor or total factor productivity.
  • Division of labor is specializing in production to boost efficiency.
  • Total revenue is the amount earned from sales and is price multiplied by quantity sold.
  • Total costs equal the sum of fixed costs (unchanged with output) and variable costs (change with output).
  • Profit describes the difference between total revenue and total costs.
  • Economies of scale are advantages achieved by firms increasing production (lower average costs).
  • Diseconomies of scale are increased costs that occur when a firm grows too large, resulting in inefficiencies.
  • A monopoly is a market structure where one firm supplies the entire market and has high barriers to entry.
  • An oligopoly is a market where a few large firms dominate, with potential for collusion.

Topics Covered

  • Production & Productivity and how firms improve efficiency are covered.
  • Business Costs, Revenues, and Profit including Types of costs, revenue, and profit calculations are described.
  • Market Structures are covered including perfect competition, monopoly, oligopoly, and their characteristics.
  • The Labour Market and how factors affect supply and demand for labor is covered.
  • Government Intervention in Markets is covered, including taxes, subsidies and price controls.

Government and the Economy - Key Definitions

  • Economic growth results from increased national output, usually measured by GDP growth.
  • Inflation refers to a general rise in the price level of goods and services over time, measured by CPI.
  • Deflation refers to a decrease in the general price level of goods and services over time.
  • Unemployment describes people actively seeking work but without a job.
  • Balance of payments records a country's trade, including imports, exports, and financial transactions.
  • Fiscal policy refers to government policies on taxation/public expenditure to influence economic activity.
  • Monetary policy refers to central banks' actions to control the money supply/interest rates.
  • Supply-side policy aims to improve efficiency/productivity, such as education/infrastructure investments.

Topics Covered

  • Macroeconomic Objectives are the focus.
  • Economic Growth: measured by GDP growth, increases output, living standards, and employment is described.
  • Inflation: demand-pull and cost-push factors erode purchasing power and affect savings.
  • Unemployment: cyclical, structural, and frictional types can cause social and economic costs.
  • Balance of Payments: Current account balance affects economic stability and currency value.
  • Government Policies are covered, including Fiscal and Monetary policies.
  • Fiscal Policy: involves government spending and taxation to influence aggregate demand, and can stimulate the economy.
  • Monetary Policy: how Central banks use interest rates and money supply to control inflation.
  • Supply-side Policies and how they aim to improve productivity and efficiency is described.
  • Relationships Between Objectives like Inflation vs. Unemployment is an important consideration.
  • Economic Growth vs. Environmental Protection are policy objectives that must be balanced.

The Global Economy - Key Definitions

  • Globalisation describes increasing integration of economies through trade, investment, and technology.
  • Free trade describes commerce without barriers like tariffs/quotas.
  • Protectionism refers to policies restricting imports to protect domestic industries.
  • A tariff involves a tax on imported goods.
  • A quota describes a limit on the quantity of imported goods.
  • A subsidy involves financial support to reduce production costs.
  • An exchange rate describes the value of one currency in terms of another.
  • Appreciation describes an increase in a currency's value relative to others.
  • Depreciation describes a decrease in a currency's value relative to others.
  • A multinational corporation (MNC) operates in multiple countries.

Topics Covered

  • Globalisation and International Trade are the focus
  • Benefits of Globalisation and increased trade are covered.
  • Drawbacks of Globalisation include potential job losses and environmental concerns.
  • The Role of MNCs and Foreign Direct Investment (FDI) is discussed.
  • Protectionism and Trade Policies are covered, including Arguments for and against Tariffs, Quotas, and Subsidies.
  • The Role of the World Trade Organization (WTO) in promoting free trade.
  • Exchange Rates and Their Effects are discussed.
  • Factors Affecting Exchange Rates such as interest rates and inflation rates, are covered.
  • The Impact of Currency Fluctuations on trade balances and economic stability is described.

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