ECONOMICS
CH2: The Market System and the Circular Flow
Economic system is an organized way in which a state or nation allocates its
resources in the national community. Three types of systems include:
a. Laissez-faire capitalism allows transactions to be done without government
intervention.
b. Command system occurs when government owns most property resources and
makes all decisions.
c. Market/mixed economy balances both parties where private individuals are
allowed to make mutually agreeable transactions without government
intervention, but government can help allocating the economy during
inevitable market failures, related to freedom of enterprise.
Freedom of choice allows agents to allocate resources as they see fit motivated by
self-interest.
Consumer sovereignty determines what goods and services are to be produced.
“Invisible hand” is a metaphor referring to a free market where self-interested
individuals operate in a mutually interactive society generating positive income.
CH6: Elasticity
Price elasticity of demand is the responsiveness of consumers to price changes.
Midpoint formula averages two prices and quantities as reference points.
Formula = Ed = change in quantity/sum of quantities divided by 2 / change in
price/sum of prices divided by 2 OR % change in Q or % change in P
Price is elastic when a slight change in price increases quantity. Perfectly elastic
occurs when price change affects quantity drastically.
Price is inelastic when a change in price barely affects quantity. Perfectly inelastic
occurs when price change does not affect quantity at all.
Unit elasticity occurs when percentage change in price and resulting quantity are
equal.
Total-revenue test is used to infer whether demand is elastic or inelastic. If revenue
changes in opposite direction from price, demand is elastic. If revenue goes on the
same direction as price, demand is inelastic.
KZ 1
CH2: The Market System and the Circular Flow
Economic system is an organized way in which a state or nation allocates its
resources in the national community. Three types of systems include:
a. Laissez-faire capitalism allows transactions to be done without government
intervention.
b. Command system occurs when government owns most property resources and
makes all decisions.
c. Market/mixed economy balances both parties where private individuals are
allowed to make mutually agreeable transactions without government
intervention, but government can help allocating the economy during
inevitable market failures, related to freedom of enterprise.
Freedom of choice allows agents to allocate resources as they see fit motivated by
self-interest.
Consumer sovereignty determines what goods and services are to be produced.
“Invisible hand” is a metaphor referring to a free market where self-interested
individuals operate in a mutually interactive society generating positive income.
CH6: Elasticity
Price elasticity of demand is the responsiveness of consumers to price changes.
Midpoint formula averages two prices and quantities as reference points.
Formula = Ed = change in quantity/sum of quantities divided by 2 / change in
price/sum of prices divided by 2 OR % change in Q or % change in P
Price is elastic when a slight change in price increases quantity. Perfectly elastic
occurs when price change affects quantity drastically.
Price is inelastic when a change in price barely affects quantity. Perfectly inelastic
occurs when price change does not affect quantity at all.
Unit elasticity occurs when percentage change in price and resulting quantity are
equal.
Total-revenue test is used to infer whether demand is elastic or inelastic. If revenue
changes in opposite direction from price, demand is elastic. If revenue goes on the
same direction as price, demand is inelastic.
KZ 1
