Basic Economics Concepts
Links: GDP VS standard of living, why trade is a positive-sum game
38 flashcards · Economics · by lakesare
Income VS wealth inequality?
It's important to distinguish these too. Wealth is a net worth of properties a person has. Income as calculated as an annual income.
What is a marginal analysis?
Evaluation of the additional benefits of an activity contrasted to the additional costs of that activity. Thinking in terms of 'how do I spend the next dollar'.
Give an example of marginal analysis.
Sally likes riding on the roller coaster, but with each ride she's having less and less fun. Applying marginal analysis, she evaluates the 3rd ride against the 5-dollar cost. To mitigate this effect seller can offer the 3rd rife for half the price.
What is a paradox of value (or diamond-water paradox)?
Apparent contradiction that, although water is more useful in terms of survival, than diamonds, diamonds command a higher price in the market. This paradox was proposed by Adam Smith, he proposed a Labor Theory Of Value solution, but it's considered wrong now.
What's an instalment?
A sum of money due as one of several equal payments for something, spread over an agreed period of time. Opposite of a set of instalments is a lump-sum.
What is a mortgage?
A legal agreement by which a bank lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.
What is authorization hold in banking industry?
When a merchant places a hold on a certain amount of funds on your card in order to verify that you have sufficient funds to pay for the transaction. Due to this, your funds may be unavailable to you for several days even if the merchant declines the transaction.
What does dollar-cost averaging investment technique entail?
Buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. DCA is a safe strategy to ensure an overall favorable average price per share.
What is disposable income?
total personal income - personal current taxes
Consider you own a farm. What's considered a capital there?
Land, energy, equipment. Labour is not a capital.
You own a farm. Your capital costs $20. This month you: paid your employees $10, and sold food for $15. What if your return on capital this month?
return on capital = (your income - employee salary) / your capital return on capital = ($15 - $10) / $20 = 25%.
Consider you own a farm. What's considered factors of production there?
Capital and labour.
What is GDP?
Gross domestic product is a market value of all final goods and services from a nation in a given year.
What is a market value?
Theoret ical price on the date of valuation if the parties had each acted knowledgeably and without compulsion.
GPD is a market value of all final goods and services produced within a country in a given year. What's meant by final goods?
Consider production of jeans: Contribution to GDP is $50, because only final goods are counted.
GDP is an indicator of a society’s standard of living, but it is only a rough indicator.
Because it does not directly account for leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the—positive or negative—value that society may place on certain types of output.
Give 2 examples when rised GDP didn't rise standard of living for a country.
City is wrecked by a hurricane and then experiences a surge of rebuilding construction activity. When wealth inequality rised at the same rate.
What is GDP per capita?
GDP of country / population
Real VS nominal price?
Real: price from the past after adjustment for inflation Nominal: price without adjustment.
How [approximately] is inflation measured?
We select goods an average consumer buys in a year (consumer basket: 200 loafs of bread, 2 movie tickets), and calculate its price. Then do the same the next year. This method is called Consumer Price Index (CPI).
What's meant by economic growth?
Usually increase in real GDP.
Name 4 types of market structures.
Perfect competition - low barriers to entry, identical products. Monopoly - only one provider of a product. Monopolistic competition - large number of independent firms selling slightly different products. Oligopoly - small number of firms that together control the majority of the market share. Links: youtube explanation + game theory
Give examples for these market structures: Perfect competition Monopoly Monopolistic competition Oligopoly
cucumbers government medicine Burger-King VS McDonalds Airline industry
What is a cartel?
Cartel is a group of formally independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, etc.
Are cartels legal? What are the workarounds?
In most countries cartels are prohibited by Competition law (or Anti-monopoly/Anti-trust). However there are a few workarounds, for example price leading. When some airline started taking money for baggage, other airlines followed. It was not an explicit cartel, but the effect was similar.
What is Post-scarcity economy?
Economic theory in which most goods can be produced in great abundance with minimal human labor needed, so that they become available to all very cheaply or even freely.
What is Crony capitalism?
Capitalist society that's based on the close relationships between business people and the state. Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favoritism that is shown to it by the government in the form of tax breaks, government grants and other incentives.
Name 2 cases when monopoly is good.
patent laws: patent essentially guarantees the right for monopoly for 20 years. Pharmaceutical companies spend large amount of money developing new drugs, and patent laws allow them to recover. natural monopoly: when it's more cost-effective to have one firm than several competing ones. If there were 3 competing electric companies in one city, we'd need 3 sets of power lines running through the streets.
What's a bailout?
When a someone offers money to a failing business or country to prevent the consequences that arise from the business's downfall. Bailouts can take the form of loans, bonds, stocks or cash. A bailout could be done: for mere profit (a predatory investor resurrects a floundering company by buying its shares at fire-sale prices) for social improvement (wealthy philanthropist reinvents an unprofitable fast food company into a non-profit food distribution network) or the bailout of a company might b…
What's welfare state?
Government oversees healthcare, education, employment, social security and other resources that help maintain the standard of living of the state's citizens.
What's a welfare trap?
When people keep being on social insurance because the withdrawal of benefits that comes with entering low-paid work causes there to be no significant increase in total income.
What is money laundering?
When you create the appearance that large amounts of money from, e.g., drug trafficking, originates from legitimate source. The money from the illicit activity is considered dirty, and the process "launders" the money to make it look clean.
What are 2 signs of a Ponzi scheme?
Operator generates returns for older investors through revenue paid by new investors. no market value is created. no more new investors - scheme collapses.
How is a price not adjusted for inflation called?
Nominal.
Susan is supposed to earn $30 per hour, paid to the nearest minute. She works 47 minutes. What is her prorated compensation?
Take her hourly rate of $30 and divide it by 60 to find her rate per minute. Multiple her rate per minute by 47 to arrive at the answer: = ($30 / 60) x 47 = $23.50
What's efficient market?
A market that knows everything you know, - whose average price movement can't be predicted by you. A market that knows everything you know is a market where prices are "efficient" in the conventional economic sense — one where you can’t predict the net direction in which the price will change. Market efficiency refers to the degree to which market prices reflect all available, relevant information.
What does IBAN stand for?
International Bank Account Number The International Bank Account Number is an internationally agreed system of identifying bank accounts across national borders.
What does BIC stand for?
Bank Identifier Code A bank identifier code (BIC) is a unique identifier for a specific financial institution. A BIC is composed of a 4-character bank code, a 2-character country code, a 2-character location code and an optional 3-character branch code.