Needs, Wants, and Competition

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Questions and Answers

How does increased competition typically affect consumers?

  • It enhances consumer purchasing power and choice. (correct)
  • It leads to decreased purchasing power due to fewer choices.
  • It has no significant impact on consumer purchasing power.
  • It results in higher prices as companies try to differentiate their products.

What is the most accurate definition of obsolescence in an economic context?

  • The state of being no longer used or produced because of new innovations. (correct)
  • A marketing strategy to increase demand for older products.
  • The process of making products more durable and long-lasting.
  • The cycle of reducing prices on outdated inventory to clear warehouse space.

How does competition primarily drive obsolescence in the marketplace?

  • By creating artificial shortages that make older products seem more valuable.
  • By leading to innovation and the introduction of new, improved products that replace older ones. (correct)
  • By encouraging companies to produce cheaper, lower-quality goods that wear out quickly.
  • By limiting choices and preventing consumers from accessing better alternatives.

Which scenario most accurately illustrates the difference between a need and a want?

<p>Choosing between a generic brand of medicine (need) and a designer handbag (want). (C)</p> Signup and view all the answers

If an individual experiences a significant reduction in income, which of the following expenses is MOST likely to be cut first based on the needs and wants spectrum?

<p>Travel and leisure activities. (C)</p> Signup and view all the answers

How do successful businesses typically utilize the concept of needs and wants to formulate new ideas?

<p>By researching how they can satisfy both fundamental needs and non-essential desires of consumers. (A)</p> Signup and view all the answers

What is the economic impact of businesses innovating to satisfy consumer needs and wants?

<p>It drives economic growth by creating new markets and satisfying consumer demands more effectively. (C)</p> Signup and view all the answers

Which of the following BEST represents the concept of 'economic resources' or 'factors of production'?

<p>Inputs such as land, labor, capital, and entrepreneurship used to produce goods and services. (B)</p> Signup and view all the answers

How is 'land' characterized as a factor of production in economics?

<p>All natural resources, including minerals, water, and forests, used in production. (A)</p> Signup and view all the answers

What distinguishes economic capital from financial capital in the factors of production?

<p>Economic capital is all resources used for production; financial capital is only monetary resources. (D)</p> Signup and view all the answers

How do entrepreneurs contribute to economic growth by organizing factors of production?

<p>By efficiently allocating land, labor, and capital to create new products or services. (A)</p> Signup and view all the answers

In the context of a car manufacturer, how is 'labor' accurately defined as a factor of production?

<p>The workers and their efforts involved in assembling the cars. (B)</p> Signup and view all the answers

For a ketchup manufacturing business, what constitutes 'capital' as a factor of production?

<p>Mixers, cookers, and bottling machines. (C)</p> Signup and view all the answers

When examining the economic resources required to produce a chocolate bar, which resources correctly fall under the category of 'land'?

<p>The cocoa plant and sugar cane used as raw materials. (A)</p> Signup and view all the answers

What does 'interdependence' mean in the context of economics and business?

<p>Dependence on other businesses and economies for survival and success. (A)</p> Signup and view all the answers

In the context of chocolate production, what is an example of economic interdependence?

<p>Chocolate companies depending on shipping companies to distribute their goods internationally. (D)</p> Signup and view all the answers

Competition between streaming services such as Hulu, Netflix and Disney+ most directly benefits?

<p>Consumers because they have options and purchasing power. (A)</p> Signup and view all the answers

How does the introduction of streaming services relate to older technologies like CD's and MP3 players?

<p>Streaming services replaced CD players and MP3 players. (C)</p> Signup and view all the answers

From an economics perspective, how is shelter categorized?

<p>A need because everyone requires it for survival. (C)</p> Signup and view all the answers

What is a key distinction between innovation and merely making an item 'new'?

<p>Innovation involves satisfying needs and wants in a better way. (D)</p> Signup and view all the answers

If a company uses minerals to produce energy, how is that classified as a factor of production?

<p>Land (A)</p> Signup and view all the answers

How do teachers educating students relate to the factors of production?

<p>Labor because teachers provide a service (B)</p> Signup and view all the answers

Which of the following is a better characterization of economic capital, versus financial capital?

<p>Hammers and tractors (C)</p> Signup and view all the answers

Which of the following describes the role of entrepreneurs?

<p>Organizing the other factors of production and drive economic growth. (A)</p> Signup and view all the answers

When discussing a car manufacturer, what is a good example of a 'land' factor of production?

<p>The factory where the cars are assembled. (D)</p> Signup and view all the answers

When producing Ketchup, what factor of production would the cookers fall under?

<p>Capital (B)</p> Signup and view all the answers

If the Cocoa plant is considered, which of the following factors of production does that fall under?

<p>Land (D)</p> Signup and view all the answers

What is required for a society to be considered interdependent?

<p>Economies and other businesses depend on each other to survive. (D)</p> Signup and view all the answers

In neoclassical economic models, what is the predicted long-run effect of expansionary monetary policy implemented during a trough?

<p>A short-term boost in output followed by a return to the original GDP level and a permanently higher price level. (A)</p> Signup and view all the answers

What critical assumption differentiates Keynesian and Austrian schools of thought regarding interventions during a recession?

<p>Whether market clearing prices are quickly and efficiently established without intervention. (A)</p> Signup and view all the answers

Which scenario most accurately describes a situation where fiscal policy might inadvertently exacerbate a recessionary trough?

<p>Government borrowing to finance infrastructure projects leads to crowding out of private investment due to increased interest rates. (B)</p> Signup and view all the answers

How does the rational expectations hypothesis challenge traditional Keynesian policy prescriptions for managing business cycle fluctuations?

<p>By suggesting that individuals will anticipate policy changes and adjust their behavior, neutralizing the intended effects. (D)</p> Signup and view all the answers

What would be the anticipated effect of quantitative easing (QE) implemented during a trough, assuming a liquidity trap scenario?

<p>Minimal impact on aggregate demand due to banks hoarding reserves instead of lending. (C)</p> Signup and view all the answers

In the context of real business cycle theory, how are fluctuations in total factor productivity (TFP) related to the business cycle?

<p>TFP shocks are exogenous and primary drivers, explaining expansions and contractions through shifts in the production function. (D)</p> Signup and view all the answers

What are hysteresis effects, and how might they transform a temporary recession into a persistent economic downturn?

<p>Hysteresis effects refer to the permanent loss of human capital due to prolonged unemployment, reducing the economy’s potential output. (D)</p> Signup and view all the answers

How does the concept of 'creative destruction,' as articulated by Joseph Schumpeter, relate to the expansion phase of the business cycle?

<p>Creative destruction is accelerated during expansions as innovative firms displace older technologies and business models. (D)</p> Signup and view all the answers

Given the limitations of GDP as a welfare measure, which alternative indicator might provide a more nuanced understanding of societal well-being throughout the business cycle?

<p>The Index of Sustainable Economic Welfare (ISEW) or the Genuine Progress Indicator (GPI). (B)</p> Signup and view all the answers

What implications does the presence of 'sticky wages' have for the effectiveness of monetary policy during a recessionary period?

<p>Sticky wages hinder the adjustment of labor markets, reducing the impact of monetary stimulus on output and employment. (B)</p> Signup and view all the answers

How might changes in global commodity prices, particularly oil, influence the domestic business cycle of a small, open economy?

<p>Higher oil prices can lead to cost-push inflation, reduced real income, and potentially trigger a recession. (D)</p> Signup and view all the answers

What is the role of expectations in determining the slope of the Phillips curve, and why is this significant for policymakers?

<p>When expectations are adaptive, the Phillips curve is downward sloping, offering a trade-off between inflation and unemployment. (A)</p> Signup and view all the answers

How does secular stagnation theory challenge conventional understanding of the business cycle, particularly during prolonged periods of low interest rates?

<p>Secular stagnation posits that the natural rate of interest is now structurally lower than in the past, making it difficult to stimulate demand even with near-zero rates. (D)</p> Signup and view all the answers

What would be the implications of a balance sheet recession, characterized by widespread debt overhang, for the effectiveness of fiscal stimulus?

<p>Fiscal stimulus may be less effective as individuals and firms prioritize debt reduction over consumption and investment, muting the multiplier effect. (B)</p> Signup and view all the answers

Considering the Diamond-Dybvig model of bank runs, what measures can a central bank take to mitigate the risk of systemic banking crises during a recessionary period?

<p>Providing unlimited deposit insurance and acting as a lender of last resort to prevent self-fulfilling prophecies of банк runs. (B)</p> Signup and view all the answers

What are the potential long-term consequences of zero lower bound (ZLB) episodes for income and wealth inequality?

<p>ZLB episodes exacerbate inequality as asset price inflation disproportionately benefits wealthier individuals, while savers suffer from low interest rates. (C)</p> Signup and view all the answers

How does hysteresis in labor markets interact with fiscal austerity measures implemented during the recovery phase of the business cycle?

<p>Fiscal austerity can exacerbate hysteresis by prolonging unemployment and accelerating the loss of skills among the long-term unemployed. (D)</p> Signup and view all the answers

What is the primary critique of using the Taylor Rule as a prescriptive tool for monetary policy during periods characterized by financial innovation and structural change?

<p>The Taylor Rule can become disconnected from the real economy if the 'neutral' real interest rate or the natural rate of unemployment are misspecified or change unpredictably. (C)</p> Signup and view all the answers

In the context of the Minsky moment, what chain of events typically leads to a financial crisis and subsequent recession?

<p>Prolonged periods of stability encourage excessive risk-taking, asset bubbles, and ultimately, a sudden collapse in asset prices and economic activity. (D)</p> Signup and view all the answers

How do demographic shifts, such as an aging population, influence the natural rate of interest and the effectiveness of expansionary monetary policy?

<p>An aging population can increase the supply of savings, lower the natural rate of interest, and reduce the effectiveness of monetary stimulus if the economy is already near the ZLB. (A)</p> Signup and view all the answers

Flashcards

Competition

Increased competition empowers consumers.

Obsolete

No longer produced or used.

Need

Something necessary for survival.

Want

Something adding pleasure or comfort.

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Innovate

Better ways to satisfy needs and wants.

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Economic Resources

Inputs for producing goods and services.

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Land (as a factor of production)

All natural resources in production.

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Labor

Human effort in producing goods and services.

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Capital

Tools, equipment, and buildings for production.

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Entrepreneurship

Taking risks to create new products/services.

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Interdependence

Dependence on other economies for survival.

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Business Cycle

Recurring periods of increased and decreased economic activity, characterized by recession, trough, expansion, and peak.

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Recession

A period of economic decline, marked by decreased consumer purchasing and rising unemployment.

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Depression

A deep and prolonged trough in the business cycle.

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Trough

The bottom of the business cycle; production and unemployment are at their lowest levels.

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Expansion

The stage where the economy starts to grow again; employment, wages, production, and profits expand.

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Peak

The highest point of the business cycle; the economy stops expanding and begins to contract.

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Leading Indicators

Economic indicators that adjust before the economy experiences a change, predicting future trends (e.g., housing sales).

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Lagging Indicators

Economic indicators that adjust after the economy experiences a change (e.g., employment rate).

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Coincident Indicators

Economic indicators that move in conjunction with the business cycle (e.g., international trade, real wage).

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Fiscal policy

Government's use of spending and taxation to influence the economy.

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Monetary Policy

Actions by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.

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Consumer Confidence

Overall attitude and expectations of consumers about the economy that affects their spending and saving decisions.

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Study Notes

  • The more competition, the more consumers gain through increased purchasing power.
  • Competition can lead to innovation, but it can also make older products obsolete, like audio tapes, CDs and MP3 players superseded by streaming.
  • A need is necessary for survival, like food and shelter, while a want is not necessary but adds comfort or pleasure.
  • Needs and wants exist on a spectrum; travel spending or a new car are examples of things that are given up when a person receives an unexpected pay-cut, whereas food and water are fundamental needs least likely to be sacrificed.
  • When developing a business idea, consider how it will meet consumers’ needs and wants.
  • Businesses innovate to better satisfy our needs and wants, this is an important aspect in economic foundations.
  • CDs provided digital audio and the ability to skip tracks, MP3 players stored thousands of songs in a small package, and streaming allows access to songs without downloading.
  • Economic resources, the inputs for goods and services production, are also known as the factors of production.

Factors of Production

  • Consists of land, labor, capital and entrepreneurship.

Land

  • Includes all natural resources used in production, such as wind, water, minerals, and forests, not just the land itself.
  • Land and water are used by farms to grow crops.
  • Land is used by construction firms to construct houses.
  • Minerals are used in factories to create energy.

Labor

  • Describes human effort used in producing goods and services.
  • Labor includes both physical and mental work.
  • Factory workers assembling products and teachers educating students are examples of labor.

Capital

  • Capital constitutes tools, equipment, and buildings for producing goods and services, increasing work productivity.
  • Hammers, tractors, assembly belts, computers, trucks and railroads are all considered capital.
  • Economic capital consists of all resources used for production, while financial capital refers to monetary resources like cash, stock, and bonds.

Entrepreneurship

  • The willingness to take risks and innovate for new products or services.
  • Entrepreneurs organize production factors and drive economic growth.

Factors for a Car Manufacturer

  • Land is used for the factory and raw materials like metal and rubber.
  • Labor consists of the workers assembling the cars.
  • Capital refers to the machinery and tools for production.
  • Entrepeneurship requires a business owner to create and sell cars

Factors for Ketchup Production

  • Land would be needed for the tomato, water, sugar cane, and a factory
  • Labor entails workers who package the ketchup, mix the ingredients, and operate the machinery
  • Capital includes cookers, mixers and bottling machines to produce ketchup
  • Entrepreneurship necessitates vision and leadership to operate or start a ketchup business
  • The economy is interdependent, and relies on other businesses and economies.
  • Chocolate businesses often depend on shipping firms and advertising companies.

Business Cycle

  • Involves recurring periods of increased and decreased economic activity, seen as expansions and contractions.
  • The economic cycle has four stages: recession, trough, expansion, and peak.

Recession/Contraction

  • Occurs after two consecutive quarters of GDP decline.
  • The economy slows, consumer purchasing declines, and unemployment increases, leading businesses to contract or close.
  • Less taxes are collected, reducing the government's ability to provide social services, like health care and education.
  • Exports and construction decreasing are economic indicators.

Trough/Slump

  • This is the bottom of the business cycle, a sustained trough is known as a depression.
  • Production and employment are at their lowest levels.

Expansion/Recovery

  • Sometimes referred to as recovery or prosperity.
  • The economy begins to grow again.
  • Employment, wages, production, and profits all expand.
  • Investment is strong.

Peak/Boom

  • Is the top of the business cycle.
  • The economy stops expanding and begins contracting.

Economic Indicators

  • These indicate how well the economy is performing.
  • Leading indicators adjust before economic changes, helping investors, businesses, and governments.
    • Example: housing and retail sales.
  • Lagging indicators adjust after economic changes, such as employment rate.
  • Coincident indicators move with the business cycle.
    • Example: international trade and real wage/buying power.

Causes of the Business Cycle

  • Include monetary policy, interest rates, and money supply.
  • Also, fiscal policy, government spending, and taxation.
  • Consumer confidence
  • Technological advancement.
  • Global events.
  • Market speculation.
  • Demographic changes.

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