1. To define the following terms. Giving examples of each:
Absolute Advantage – absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.
Capital- capital generally refers to financial wealth especially that used to start or maintain a business. In classical economics, capital is one of the three factors of production; the others are land and labor.
Cyclical- A cyclical industry is a type of industry that is sensitive to the business cycle, such that revenues are generally higher in periods of economic prosperity and expansion and lower in periods of economic downturn and contraction.
Demand Curve- The market demand curve is the summation of all the individual demand curves in a given market. It shows the quantity demanded of the good by all individuals at varying price points
Discouraged Workers- a discouraged worker is a person of legal employment age who is not actively seeking employment or who does not find employment after long-term unemployment
Planned System- A centrally planned economy is an economic system in which the state or government makes economic decisions rather than the interaction between consumers and businesses.
Public Goods – In economics, a public good is a good that is both non-excludable and non-rivalrous in that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.
Recession – Period of general economic decline, defined usually as a contraction in the GDP for six months (two consecutive quarters) or longer
Dishonest workers – Any false act by an employee that causes a loss to the employer
Elastic Demand – When the price elasticity of demand for a good is relatively inelastic (-1 < Ed < 0), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue increases, and vice versa.
Entrepreneurship – The capacity and willingness to develop, organize and manage a business venture along with any of its risks in order to make a profit.
Federal Reserve – The central bank of the United States and the most powerful financial institution in the world. The Federal Reserve Bank was founded by the U.S. Congress in 1913 to provide the nation with a safe, flexible and stable monetary and financial system.
Frictional- Frictional unemployment is another type of unemployment within an economy. It is the time period between jobs when a worker is searching for or transitioning from one job to another. Frictional unemployment is always present to some degree in an economy. It occurs when there is a mismatch between the workers and jobs.
Resources- resources are the goods or services available to individuals and businesses used to produce valuable consumer products. The classic economic resources include land, labor and capital.
Scarcity – the limited nature of society’s resources
Substitute Goods- Substitute goods are goods which, as a result of changed conditions, may replace each other in use (or consumption). A substitute good, in contrast to a complementary good, is a good with a positive cross elasticity of demand.
Monopoly – A market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. … He enjoys the power of setting the price for his goods.
Oligopoly – a state of limited competition, in which a market is shared by a small number of producers or sellers.
Induced- inelastic demand definition. Demand whose percentage change is less than a percentage change in price. For example, if the price of a commodity rises twenty-five percent and demand decreases by only two percent, demand is said to be inelastic.
Inelastic Demand – inelastic demand definition. Demand whose percentage change is less than a percentage change in price. For example, if the price of a commodity rises twenty-five percent and demand decreases by only two percent, demand is said to be inelastic.
Inflation- an increase in the overall level of prices in the economy
Law of Comparative Advantage- Comparative advantage is an economic law referring to the ability of any given economic actor to produce goods and services at a lower opportunity cost than other economic actors.
Law of Diminishing Demand- The law of diminishing marginal utility is a law of economics stating that as a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
Market Equilibrium Point – When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied is equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity.
Market system – A market economy is an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country’s individual citizens and businesses. There is little government intervention or central planning.
2. Compare and contrast Macroeconomics and Microeconomics. Give specific details and examples.
|The branch of economics that studies the behavior of the whole economy, (both national and international) is known as Macroeconomics||The branch of economics that studies the behavior of an individual consumer, firm, family is known as Microeconomics.|
|Aggregate economic variables||Individual economic variables|
|Environment and external issues||Applied to operational or internal issues|
|Covers various issues like, national income, general price level, distribution, employment, money etc.||covers various issues like demand, supply, product pricing, factor pricing, production, consumption, economic welfare, etc.|
|Maintains stability in the general price level and resolves the major problems of the economy like inflation, deflation, reflation, unemployment and poverty as a whole.||Helpful in determining the prices of a product along with the prices of factors of production (land, labor, capital, entrepreneur etc.) within the economy.|
|It has been analyzed that ‘Fallacy of Composition’ involves, which sometimes doesn’t proves true because it is possible that what is true for aggregate may not be true for individuals too.||It is based on unrealistic assumptions, i.e. In microeconomics it is assumed that there is a full employment in the society which is not at all possible|
3. Describe the economic cycle. Give specific details and examples
An economic cycle, also referred to as the business cycle, has four stages: expansion, peak, contraction and trough.
Expansion is between the trough and the peak.
That’s when the economy is growing. Gross domestic product, which measures economic output, is increasing. The GDP growth rate is in the healthy 2-3 percent range. Unemployment reaches its natural rate of 4.5 to 5.0 percent. Inflation is near its 2 percent target. The stock market is in a bull market. A well-managed economy can remain in the expansion phase for years. That’s called a Goldilocks economy.
The expansion phase nears its end when the economy overheats. That’s when the GDP growth rate is greater than 3 percent. Inflation is greater than 2 percent and may reach the double digits. Investors are in a state of “irrational exuberance.” That’s when they create asset bubbles.
The peak is the second phase. It is the month when the expansion transitions into the contraction phase.
The third phase is contraction. It starts at the peak and ends at the trough. Economic growth weakens. GDP growth falls below 2 percent.
When it turns negative, that is what economists call a recession. Mass layoffs make headline news. The unemployment rate begins to rise. It doesn’t happen until toward the end of the contraction phase because it’s a lagging indicator. Businesses wait to hire new workers until they are sure the recession is over.
Stocks enter a bear market as investors sell.
The trough is the fourth phase. That’s the month when the economy transitions from the contraction phase to the expansion phase. It’s when the economy hits bottom
The business cycle’s four phases can be so severe that they’re also called the boom and bust cycle.