CHAPTER 12
FACTOR MARKETS
FACTOR MARKETS
What is the unique characteristic of the resource of land? (think elasticity).
What are the 4 economic resources?
Land
Labor
Capital
Entrepreneurship
Where does the government get its "money?"
Tax you for it
Print it.
Borrow it.
What are 3 of the 5 psychological factors effecting economics?
SUNK COST FALLACY
FRAMING BIAS
OVERCONFIDENCE
OVERVALUING THE PRESENT RELATIVE TO FUTURE
ALTRUISM
What is the Present Value Approach of evaluating investment opportunities?
Present value is the value of an investment (future stream of income) today.
The higher the interest rate, the lower the present value.
Law of Demand states what?
Price and quantity demanded are inversely related, that is the move in opposite directions.
What is monetary policy and who is responsible for it?
Controlling the amount of the money SUPPLY in an economy. Less money is a contractionary policy. Increased money supply is an expansionary policy.
The Federal Reserve is responsible for our monetary policy.
Society faces a short term trade off between what two economic realities?
Unemployment and Inflation
Describe the Rate of Return Approach of investment evaluation?
Rate of return uses the present value formula but subtracts costs.
Then solve the equation for the discount rate (i ) at which an investment would just break even.
We back into the "required rate" to make the investment work for our firm.
What historical event divided the discipline of economics into micro and macroeconomics?
The Great Depression
How do we define an "efficient market"?
MARKETS ARE EFFICIENT WHEN THEY GENERATE THE LARGEST POSSIBLE AMOUNT OF NET BENEFITS TO ALL PARTIES INVOLVED.
Adam Smith is associated with what economic school of thought?
Classical Economics
What are 2 of the 4 sources of financial capital?
Bonds
Stocks
Venture Capital
Private Equity
How do rational people think?
At the margin.
What is a price ceiling and what does it create in a market?
THE MAXIMUM PRICE ESTABLISHED BY GOVERNMENT FOR A PRODUCT OR SERVICE
Creates a shortage.
What is the definition of "comparative advantage?"
Doing what you are "good at" - where you have the lowest opportunity costs.
What are 3 of the types of intellectual property rights we have in our market system?
PATENT PROTECTS INVENTIONS.
COPYRIGHT PROTECTS WRITINGS, MUSIC, AND OTHER CREATIVE WORKS.
TRADEMARK PROTECTS COMPANY NAMES AND LOGOS.
INDUSTRIAL DESIGN PROTECTS DESIGN OF PRODUCTS (SUCH AS A CAR).
What are the 3 primary roles of government in a free market system?
1. Enforce private property rights
2. Promote efficiency
3. Promote equity
What is "total surplus" and how is it determined?
THE SUM OF CONSUMER SURPLUS AND PRODUCER SURPLUS THAT IS MAXIMIZED WHEN MARKETS ARE EFFICIENT
Consumer Surplus: THE DIFFERENCE BETWEEN WHAT CONSUMERS ARE WILLING AND ABLE TO PAY AND THE MARKET PRICE
Producer Surplus: THE DIFFERENCE BETWEEN MARKET PRICE AND THE PRICE AT WHICH FIRMS ARE WILLING TO SUPPLY IT.
What two market structures allow for economic profit? Which two do not?
PROFIT: Oligopoly and Monopoly
No PROFIT: Perfect competition and Monopolistic Competition