Study Guides (248,566)
Canada (121,626)
Economics (330)
ECO1102 (91)
David Gray (37)
Final

ECO 1102 Exam Review.docx

21 Pages
207 Views
Unlock Document

Department
Economics
Course
ECO1102
Professor
David Gray
Semester
Winter

Description
ECO 1102 Ch. 1 • Scarcity: the limited nature of society’s resources • Society’s resources: people, land, buildings, machinery) • Economics: the study of how society manages these scarce resources • Efficiency: the property of society getting the most it can from its scarce resources • Equity: the property of distributing economic prosperity fairly among the members of society. • Opportunity cost: whatever you give up to obtain some item • Rational people: people who systematically and purposefully do the best they can to achieve their objectives • Marginal changes: small incremental adjustments to a plan of action • Incentive: something that induces a person to act • Market economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services • Property rights: the ability of an individual to own and exercise control over scarce resources • Market failure: a situation in which a market left on its own fails to allocate resources efficiently • Externality: the impact of one person’s actions on the well-being of a bystander • Market power: the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices • Productivity: the quantity of goods and services produced from each hour of a worker’s time • Inflation: an increase in the overall level of prices in the economy • Business cycle: fluctuations in economic activity, such as employment and production • How people make decisions: o People face trade offs o The cost of something is what you give up to get it o Rational people think at the margin o People respond to incentives • How people interact: o Trade can make everyone better off o Markets are usually a good way to organize economic activity o Governments can sometimes improve market outcomes • How the economy as a whole works: o A country’s standard of living depends on its ability to produce goods and services o Prices rise when the government prints too much money o Society faces a short-run tradeoff between inflation and unemployment Ch. 2 • Circular flow model: a visual model of the economy that shows how dollars flow through markets among households and firms • Productions possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology • Economist as a scientist o The scientific method: observation, theory, and more observation  Experiments more difficult o The role of assumptions  To simplify complex stuff o Economic models  do not include all details, simplify to aide our understanding o first model: circular-flow diagram  p. 25 o second model: production possibilities frontier  points on the frontier represent efficient outcomes o micro and macro  microeconomics: the study of how households and firms make decisions and how they interact in markets  macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth • the economist as a policy advisor o when economists try to explain the world=scientists o when economists try to improve it=policy advisors o positive vs normative analysis:  positive statements: claims that attempt to describe the world as it is  normative statements: claims that attempt to prescribe how the world should be. o Economists in Ottawa • Why economists disagree o Disagree about validity of alternative positive theories o Have different values and therefore different normative views o Differences in scientific judgments o Differences in values o Perception vs reality Ch. 4 • Markets and competition o What is a market?  Market: a group of buyers and sellers of a particular good or service o What is competition?  Competitive market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market price • Normal good: a good for which, other things equal, an increase in income leads to an increase in demand • Inferior good: a good which, other things equal, an increase in income leads to a decrease in demand • Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other • Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other • Demand: o The demand curve: the relationship between price and quantity demanded  Quantity demanded: the amount of a good that buyers are willing and able to purchase  Law of demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises  Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded  Demand curve: a graph of the relationship between the price of a good and the quantity demanded o Market demand vs individual demand  Sum of all individual demands = market demand o Shifts in the demand curve  Income: shift demand curve  Prices of related goods: shift demand curve  Tastes: shift demand curve  Expectations: shift demand curve  Number of buyers: shift demand curve  Price: movement along demand curve • Supply: o Supply curve: relationship between price and quantity supplied  Quantity supplied: amount of a good or service that sellers are willing and able to sell  Law of supply: the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises  Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied  Supply curve: a graph of the relationship between the price of a good and the quantity supplied o Market supply vs individual supply  Sum of all supplies of individuals = market supplied o Shifts in the supply curve  Input prices: shift supply curve  Technology: shift supply curve  Expectations: shift supply curve  Number of sellers: shift supply curve  Price: movement along supply curve • Supply and demand together o Equilibrium  Equilibrium: a situation in which the price has reached the level where quantity supplied equals quantity demanded  Equilibrium price: the price that balances quantity supplied and quantity demanded  Equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price  Surplus: a situation in which quantity supplied is greater than quantity demanded  Shortage: a situation in which quantity demanded is greater than quantity supplied  Law of supply and demand: the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance o Three steps to analyzing changes in equilibrium  1. Shift supply, demand, or both  2. Shifts right or left  3. Compare initial equilibrium with new one Ch. 5 • the economy’s income and expenditure o income and expenditure are always equal because there is always a buyer and a seller • the measurement of gross domestic product o gross domestic product (GDP): the market value of all final goods and services produced within a country in a given period of time o “GDP is the market value…” prices o “… of all…” all items sold legally, can underestimate o “… final…” does not include intermediate goods (things used to make final goods) o “… goods and services…” includes tangible and intangible things o “… produced…” when GM sells a car it is included, if the car is later sold used it is not included o “…Within a country…” regardless of nationality if it is done within Canadian borders it is included o “… in a given period of time.” Usually quarterly or yearly • the components of GDP o GDP=consumption+investment+government puchases+net exports o Consumption  Consumption: spending by households on goods and services, with the exception of purchases of new housing o Investment  Investment: spending on capital equipment, inventories, and structures, including household purchases of new housing o Government purchases  Government purchases: spending on goods and services by local, territorial, provincial, and federal governments o Net exports  Net exports: the value of a nation’s exports minus the value of its imports; also called the trade balance • Real vs nominal GDP o A numerical example  Nominal GDP: the production of goods and services valued at current prices  Real GDP: the production of goods and services valued at constant prices o The GDP deflator  GDP deflator: a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 (nominal/real)*100  Inflation rate in year 2=(GDP deflator in year 2-GDP deflator in year 1)/(GDP deflator in year 1)*100 • GDP and economic well-being Ch. 6 • Consumer price index o Consumer price index (CPI): a measure of the overall cost of the goods and services bought by a typical consumer o How the CPI is calculated  The quantity of the goods and services (determine the basket)  Find the prices  Compute the basket’s cost  Choose a base year  CPI=[(price of basket of goods or services in the current year)/price of basket in base year]*100  Compute the inflation rate  Inflation rate: the percentage change in the price index from the preceding period  Inflation rate in year 2=CPI in year 2-CPI in year 1/CPI in year 1*100  Core inflation: the measure of the underlying trend of inflation o Problems in measuring the cost of living  Commodity substitution bias: price changes do not change proportionally, therefore overestimates  Introduction of new goods  Unmeasured quality change o The GDP deflator vs the CPI  Gdp deflator monitors goods and services produced domestically, cpi monitors goods and services baught by consumers  Cpi keeps a fixed basket, gdp changes constantly • Correcting economic variables for the effects of inflation o Dollar figures from different times  Older time price in newer time dollars=older time price*(CPI in newer time/CPI in older time) o Indexation  Indexation: the automatic correction of a dollar amount for the effects of inflation by law or contract o Real and nominal interest rates  Nominal interest rate: the interest rate as usually reported without a correction for the effects of inflation  Real interest rate: the interest rate corrected for the effects of inflation  Real interest rate=nominal interest rate-inflation rate Ch. 7 • Economic growth around the world • Productivity: its role and determinants o Why is productivity so important?  In a simple economy, your productivity at doing certain things determine your living standards (alone doing everything yourself) same for a nation o How productivity is determined  Physical capital per worker • Physical capital: the stock of equipment and structures that are used to produce goods and services  Human capital per worker • Human capital: the knowledge and skills that workers acquire through education, training, and experience  Natural resources per worker • Natural resources: the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits  Technological knowledge • Technological knowledge: society’s understanding of the best ways to produce goods and services • Economic growth and public policy o The importance of saving and investment  Accumulating capital now rewards with better productivity later o Diminishing returns and the catch-up effect  Diminishing returns: the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases  Catch-up effect: the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich o Investment from abroad  Foreign direct investment: a capital investment that is owned and operated by a foreign entity  Foreign portfolio investment: an investment that is financed with foreign money but operated by domestic residents  GNP: income earned domestically and abroad o Education  Investment in human capital  Brain drain: most educated people from poo countries move to rich countries o Health and nutrition  Healthier workers are more productive o Property rights and political stability  No worries about stealing  When there is political instability, there is worry about property rights being kept o Free trade  Inward-oriented policies: attempts to raise productivity and living standards by avoiding contact with other countries  Outward-oriented policies o Research and development  Knowledge is a public good, once one has it anyone can learn about it  Patents allow public goods to become private goods for a period of time o Population growth  Stretching natural resources  Diluting the capital stock  Promoting technological progress Ch. 8 • Financial system: the group of institutions in the economy that help to match one person’s saving with another person’s investment • Financial institutions in the Canadian economy o Move’s the economy’s scarce resources from savers to borrowers o Financial markets  Financial markets: financial institutions through which savers can directly provide funds to borrowers  The bond market • Bond: a certificate of indebtedness • Bond’s term is the length of time until the bond matures • Credit risk is the probability that the borrower will fail to pay some of the interest or principal  The stock market • Stock: a claim to partial ownership in a firm • Sale of stocks to raise money is called finance equity • Sale of bonds to raise money is called debt finance o Financial intermediaries  Financial intermediaries: financial institutions through which savers can indirectly provide funds to borrowers  Banks • Deposits are used for loans • Interest on loans are higher than deposits to cover the banks’ costs and returns some profit to the owners of the bank • Medium of exchange (cheques)  Mutual funds • Mutual fund: an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds • Managers in the institutions automatically buy in stocks that may be profitable and sell those that are not • Index funds buy and sell less often and you don’t need to pay a money manager’s salary • Saving and investment in the national income accounts o Some important identities  Recall GDP=C+I+G+NX  In closed economy GDP=C+I+G • GDP-C-G=I • National saving (saving): the total income in the economy that remains after paying for consumption and government purchases • Saving=GDP-C-G=I • S=I • S=GDP-C-G OR S=(GDP-T-C)+(T-G) • T is the amount the government collects from households in taxes minus the amount it pays back the households in the form of transfer payments  Private saving: the income that households have left after paying for taxes and consumption • Households receive income of GDP, pay taxes of T, and spend C, private saving is GDP-T-C  Public saving: the tax revenue that the government has left after paying for its spending • Government receives T in tax revenue and spends G on goods and services.  Budget surplus: an excess of tax revenue over government spending  T-G is public saving  Budget deficit: a shortfall of tax revenue from government spending o The meaning of saving and investment • The market for loanable funds o Market for loanable funds: the market in which those who want to save supply funds and those who want to borrow to invest demand funds o Supply and demand for loanable funds  Saving is the source of the supply of loanable funds  Investment is the source of the demand for loanable funds  Model is on page 176 o Policy 1: Saving Incentives o Policy 2: Investment Incentives o Policy 3: Government Budget Deficits and Surpluses  Government debt: the sum of all budget deficits and surpluses  Crowding out: a decrease in investment that results from government borrowing  Vicious circle: cycle that results when deficits reduce the supply of loanable funds, increase interest rates, discourage investment, and result in slower economic growth; slower growth leads to lower tax revenue and higher spending on income-support programs, and the result can be even higher budget deficits  Virtuous circle: cycle that results when surpluses increase the supply of loanable funds, reduce interest rates, stimulate investment, and result in faster economic growth; faster growth leads to higher tax revenue and lower spending on income-support programs, and the result can be even higher budget surpluses Ch. 9 • Identifying unemployment o How is unemployment measured  Adults aged 15 and over: • Employed • Unemployed • Not in the labour force  Labour force: the total number of workers, including both the employed and the unemployed  Unemployment rate: the percentage of the labour force that is unemployed  Labour-force participation rate: the percentage of the adult population that is in the labour force o Does the unemployment rate measure what we want it to?  Discouraged searchers: individuals who would like to work but have given up looking for a job o How long are the unemployed without work? o Why are there always some people unemployed?  Natural rate of unemployment: the rate of unemployment to which the economy tends to return in the long run  Cyclical unemployment: the deviation of unemployment from its natural rate  Frictional unemployment: unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills  Structural unemployment: unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one • Job search o Job search: the process by which workers find appropriate jobs given their tastes and skills o Why some frictional unemployment is inevitable  Economy is always changing o Public policy and job search  Internet search, employment agencies o Employment insurance  Employment insurance (EI): a government program that partially protects workers’ incomes when they become unemployed • Minimum-wage laws • Unions and collective bargaining o Union: a worker association that bargains with employers over wages and working conditions o The economics of unions  Collective bargaining: the process by which unions and firms agree on the terms of employment  Strike: the organized withdrawal of labour from
More Less

Related notes for ECO1102

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit