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27 Cards in this Set

  • Front
  • Back
Define economics
The study of how people allocate their limited resources to satisfy their unlimited wants.
Describe the difference between microeconomics versus macroeconomics
Micro – the decision making undertaken by individuals and firms
Macro – the behaviour of the economy as a whole
Explain rational self-interest
We assume that individuals do not intentionally make decisions that would leave them worse off.

Incentives encourage us to engage in a particular activity.
discuss economic as a science
Economics is a social science that uses models or theories – simplified representations of the real world used as a basis for predictions or explanations.

Ceteris paribus – all other things being equal.

Economics is called an empirical science.
Differentiate between positive versus normative economics
Positive economics is a statement of “what is”

Normative economics is a statement of “what ought to be.”

a) The temperature today was 33 degrees.
b) It was very hot today.
c) The price level rose by 4.4% last year.
d) Inflation eroded living standards last year and should be reduced.
Canada’s socio-economic goals
1. Full employment

2. Efficiency – efficient allocation of resources

3. Economic growth

4. Price stability

5. Distribution of income
Give an example of the scarcity of resources
Factors of Production or resources:

1. Land – natural material
2. Labour – human resource
3. Productive (physical) capital – factories and equipment
4. Human capital – education and training of workers
5. Entrepreneurship – managing, organizing factor of production
Identify the opportunity cost associated with scarcity
Opportunity cost = amount given up over amount gained.

The value of the next best alternative (we only look at two alternatives at a time). Cost is always a forgone opportunity.
explain the production possibilities curve
Production possibilities curve is a curve representing all possible combinations of total output that can be produced assuming:
1. Fixed resources
2. Productive efficiency
3. Resources are fully employed (everyone is working)
4. Fixed time period
5. Fixed technology
6. Two products
Relate specialization to productivity
increase capital goods, economic growth, increase production of everything, shifts the production possibilities curve outward

Capital goods - produce other goods more efficiently "future goods"
Consumption (consumer) goods decrease consume directly "present goods"

Specialization decrease working at a well-defined activity
- usually leads to an increase in productivity

Absolute advantage decrease being more productive at doing something than anyone else.

Comparative advantage decrease.lowest opportunity cost

Productive efficiency - produce a good using the least cost.

Allocative efficiency - produce products most wanted by society.
Identify the basic economic questions
1. What and how much will be produced?
2. How will it be produced?
3. For whom will it be produced?
Classify economies
A.) Pure Command Economy:
• public ownership of resources
• central authority decides the 3 basic questions


Pure Capitalist Economy:
• private ownership of resources
• many people decide the 3 basic questions (circular flow model)
Key Features of pure capitalism:
1. Private ownership of resources
2. Self interest
3. Consumer sovereignty
4. Market and prices
5. Competition
6. Limited Government
Describe how a pure capitalist system answers the three basic economic questions.
1. What and how much will be produced?

2. How will it be produced?

3. For whom will it be produced?

In Canada, does the government play a role?
Canada is a Mixed Economy

Specify the law of demand
A market refers to all the Law of demand -
As prices fall the corresponding quantity demanded rises (inverse relationship)
Distinguish between a change in quantity demanded and a change in demand
A change in quantity demanded is a movement along the demand curve. Usually happens when price changes.
A change in demand is a shift to a whole new demand curve.

Other determinants are:

– normal goods
- inferior goods

Tastes or preferences

Prices of related goods
- Substitutes can satisfy a similar want or need
- Complements are used together

Consumer expectations with respect to future prices


Changes in demand - shifts to the left or right

Changes in quantity demanded – movement up & down the demand curve
Specify the law of supply
Law of supply
As prices rise the corresponding quantity supplied rises (positive or direct relationship)

Market supply - horizontally sum all the individual firm's supply
Distinguish between a change in quantity supplied and a change in supply.
A change in quantity supplied is a movement along the supply curve. Usually this occurs when price changes.

A change in supply is a whole new supply curve.

Other major determinants:

Costs of inputs used to produce the product.

Technology and productivity

Taxes and subsidies
increase taxes
increase subsides

Price expectations

Number of firms in the industry

Change in supply - shifts to the left or right

Change in quantity supplied - movement up & down supply curve
where is the equilibruim
Equilibrium is where quantity demanded and quantity supplied are equal.
Explain how goods are rationed
In the pure price system, price rations goods.

Other methods might be:
-First come, first served
-Political power
-Physical force
-Culture, religion, physical differences
explain price ceilings
Price controls are usually government-mandated minimum or maximum prices that may be charged for goods or services.

Price ceiling is a legal maximum price that may be charged for a good or service.

Shortages lead to black markets.

When controls are used, the rationing ability of the free market will be rendered ineffective.
explain price floor
Price supports are minimum prices fixed by government that are above equilibrium prices. (minimum wage)
what is scarcity
Scarcity is the situation where the ingredients for producing the things that people desire are insufficient to satisfy all wants.
what is a trade-off
Trade-off – to produce more of one product we will have to produce less of another.
what is the law of increasing relative cost
Law of Increasing Relative Cost - is caused by resources not being perfectly adaptable
what does demand mean
Demand is a schedule of how much of a good or service people will purchase at any price during a specified time period, other things being equal.
define supply
Supply is a schedule showing the relationship between price and quantity supplied for a specified period of time, other things being equal.