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1) a) “Economics is the study of the principles governing the allocation of scarce means among competing ends, when the

objective of the allocation is to maximize the attainment of the ends.” Explain Resources are Land, labour, capital, entrepreneur Land – mineral, sand, oil and timber Labour – human resource productivity eg: gold miner etc Capital – financial resources and blant and building it can provide Entrepreneur – Person that takes the risk to set up a business, make decisions. Adam Smith - Wealth of nations - Consequence of economic freedom is summarized - Covered concepts like division of labour and the function of markets - Invisible hand which demonstrates how self interest guides the most efficient use of resources Karl Marx - Criticises everything and exercised communism. - Das Kapital - Marx & long life friend worked out theory for socialism and communism Keynes - Govt must help the economy during deficits and govt makes back money when things are good. - Balance budget in medium run but not in short run.

b) i)



at 1, cut taxes, boost govt spending at 4, increase taxes, cut govt spending iv) Ricardo - Concerned about population growth affecting economic resources (GDP)

.People earn income in the factor market.Households provide labour services to the factor markets . spend it on goods in the product market and firms use profit they earn to invest.Payment for goods and services flows from households to firms through product market .The firm’s production and input costs determine the supply conditions while consumer preferences and the ability to pay determine the demand conditions. Accounting uses monetary costs like rent.c) Explain the circular flow model in a market-oriented system of how firms and individual participate and interact in the resource and product market . Accounting:profit = revenue – expenses Economic: profit = revenue – (expenses + opportunity costs) Change accounting practices by implementing economic profit method while performing calculations because this includes implicit and explicit costs.Individuals and firms are the fundamental participants in the market economy. wages etc Economics use implicit and explicit costs. . (take into account opportunity costs that was forgone). .Payment for labour services flows from firms to households in the factor market . Product Market Goods and services Goods and services Household Economic resources Income Economic resources Firm Factor Market Factor Payments 2) a) Describe the difference between the accounting and the economic concept of profit Profits = revenue – costs Difference is in what “costs” is.Firms provide goods and services to households through the product market .

which has been in a bank account earning 7 percent interest per year.000 Supplies $5.000 Opportunity Cost Approach Total revenue = $107.000 + $3. Revenue in a new business during the first year was $107.000 = $42.000 of his own money.000 Taxes $5.000 per year to start his own business.000 .000 50000 * 0. He also plans to use a building he owns that has been rented for $1.500 = -$9.000 Rent $10.000 = $116.000 Net income = $107.000 --------------------------------------------------Prepare two income statements. while other expenses were Advertising $5.b) A recent engineering graduate turns down a job offer at $30.500 + $18.000 + $30.500 .000.000 Employees’ salaries $40.500 $1.$116. He will invest $50.500 Net Income = $107.000 .000 + Job Offer 7% interest p/a rent $30.$65.07 = $3. Accounting Approach Total revenue = $107.500 * 12 = $18.000 Total expenses = $65. one using the traditional accounting approach and one using the opportunity cost approach to determine profit.000 ∴ Total expenses = $65.000 Total expenses = $65.500 per month.

can store it in the form of land. of firms standardize d Monopolist ic Competitio n many differentiate d Oligopoly Pure Monopoly one Unique No close substitute Consderabl e amount Blocked Mostly public relations Local utilities few Standardize d or differentiate d Mutual understandi ng obstacle Product differentiati on Household applicances. Measure of value – Gives an item relative value e. shirt is $20 and not 2. condition of entry. non price competition and an example of industry. money is the most liquid. car.000) + MMMF + non checkable deposists M3 – M2 + large time deposits (>100. control over prices. safety deposit etc gain interest. not cows etc. with a narrow limit Relatively easy Considerabl e amount Retail trade 4) a) i) What are the functions of money? Medium of exchange – work in bagel factory. Characteristic s # of firms Type of product Pure Competiti on Very large No. What items contribute the M1 and M2 Money supply? M1 – currency and checkable deposits M2 – M1 + MMDA + small time deposits (<100. buy bonds.3) Explain the characteristic of the following market model i) Pure Competition ii) Monopolistic Competition iii) Oligopoly iv) Pure Monopoly For each market model identify the number of firms.5 cows etc.000) ii) iii) b) . Store of value – even though. type of product. steel Control over price Condition for entry Non price competition Example none Very easy No obstacle none Agriculture Some.g. expects money.

The owner of M&M’s estimates that monthly total cost. how much economic profits will the business earn each month? MC = 2 + 0.000 ii) 5) a) Explain the concept of equilibrium price in a perfectly competitive market? . utilities cost etc.price vs qty . implicit costs are 20.000 – 26.000 = 29.01Q2 1) To maximize total profit. 1.price vs qty .02Q Q = 400 units TR = PQ = 10 x 400 = 4000 profit = TR – TC = 4000 – ( 1000 + 2(400) + 0.01(4002) ) = 4000 – 3400 = $600 6) a) Explain the principal agent problem .Draw surplus/shortage diagram . including a normal profit will be TC = 1000 + 2Q + 0.000 and 5. giving examples of each Explicit – expenses – cost of goods sold.02Q P = MC 10 = 2 + 0.000 = 26.Keep quantity fixed c) A new pizza place. this price will not be affected by the new entrant in the market. how many pizzas should be produced each month? 2) In the short run.000.Keep price fixed b) Explain the concept of equilibrium output in a perfectly competitive market? .Draw surplus/shortage diagram . forgone rent etc.000 … 55. Implicit – forgone costs – forgone equilibrium price/quantity .show equilibrium price/quantity . M&M’s open in New Kingston. The average price of a medium pizza in Neww Kingston is $10 and because of the large number of pizza sellers.i) Distinguish between explicit and implicit costs.

MR = MC 309.4) / 3 Q = 3. What is the long run equilibrium price and quantity and how much economic profit will the firm earn? TC = 400Q – 20Q2 + Q3 P = 309.75Q – Q2 MC = 400 – 40Q + 3Q2 MR = 309. Profit.4 3Q = 19 ± 16. Explain in relation to the major factors in determining the short-run and long-run profit maximization effect base on three types of market structures. Explain the role of profit in a free-market economic system Profit acts as a signal to change the rate of output.75 – Q and the long run total cost equation is TC = 400Q – 20Q2 + Q3.75 3Q – 19 = √ 270.9 or Q = 0.25 – 38Q = 3Q2 3Q2 – 38Q + (-19)2 = 90.25 + (-19)2 (3Q – 19)2 = 270.b) - Shareholders hire managers to maximize profits Shareholders do not monitor managers constantly Managers have goals other than profit maximizing.75 – Q TR = PQ TR = 309.75 3Q – 19 = ± 16.4 Q = (19 ± 16.9 Q = 3.9. =-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-==-=-=- . none is more critical to the success of a firm than setting the price of output”. or to enter or leave an industry Profit is a reward that encourages entrepreneurs to organize factors of production to take risk Funeral Home Service monopolistically competitive business in Chicago.75 – 3.9 = $305. The manager of Brown’s Funeral Home has determined that the firms demand equation is given by P = 309. price = 309.75 – 2Q = 400 – 40Q + 3Q2 90. econ. where Q is the number of funerals per month. Only way to improve this is by providing incentives to executives like stock options based on performance etc.90 c) 7) “Of the decision made by manager.75 – 2Q At equilibrium.

the economy’s production capacity expands. Difference between GDP and GNP consists of net foreign factor income earned GDP = C + Ig + G + Xn C – personal consumption expenditure Ig – gross private domestic investment G – government purchases Xn – Net export Declining. GDP includes GNP (Gross National Product) GNP consists of total output produced by land. static and expanding economy . GDP consists of total goods and services within the boundaries of the company. Banks borrow and lend temporary excess reserves on an overnight basis in the Federal funds market. capital and entrepreneurial talents.2) 3) What is GDP? Gross domestic product (GDP) measures total market value of all final goods and services produced within an economy in a specific year.Static economy – Gross investment = Depreciation . On return of loan. Interest rate on these loans is the Federal funds rate. Interest paid is the money that is created. MONETARY POLICIES 4) 6) Social accounting concepts from GDP Net Domestic Product (NDP) – Market value of annual output net of consumption of fixed capital National Income (NI) – income earned by the supplied factor of production for their current contributions to production Personal Income (PI) – income received by households which is before personal taxes Disposable Income (DI) – income received by households less personal taxes How banks create money? Banks create money when they make loans.When investment is negative. public pays back principal + interest. economy’s production capacity erodes.Expanding economy – Gross investment > Net Investment Depreciation . New money is created when banks buy government bonds from the public. labour. Money disappears when banks sell government bonds to the public. . 8) Cause effect of using monetary instruments to control inflation and money supply Easy money policy is increasing money supply Tight money policy is decreasing money supply Easy Money Policy Tight Money Policy .When net investment is positive. Money vanishes when loans are repaid.

marginal cost. increase discount rate. . Tight money policy – Sell government bonds. or lowers the discount rate Money supply rises Interest rate falls Investment spending increases Aggregate demand increases Real GDP rises by a multiple if the increase in investment - Problem: inflation Federal reserve sells bonds. quantity output. increases reserve ratio. decrease reserve ratio.Problem: unemployment and recession Federal reserve buys bonds. lowers reserve ratio. decrease discount rate. Equilibrium prices/quantity and shut-down. increase reserve ratio. PRICING POLICIES 10) 11) Profit maximization. or increases the discount rate Money supply falls Interest rate rises Investment spending Decreases Aggregate demand Decreases Inflation declines Easy money policy – Buy government bonds.