CIA EXAM REVIEW

Market # Of Type of Ease of Sellers Example

Sellers Product Entry control
over price
Perfect Numerou Identical Easy None Commoditi
competition s es
Monopolistic Many Differentiat Easy Low Convenient
ed store
Oligopoly: Few Identical Difficult Moderate Oil refining
Undifferentiat
ed
Oligopoly: Few Differentiat Difficult Substanti Automobile
Differentiated ed al s
Monopoly One Unique Very Substanti Public
difficult al utilities

Perfect Competition
- Many sellers of identical product
- A market in which all buyers and sellers are price takers
- Suppliers DO NOT set price, market does
- No single producer or consumer can affect price or quantity
- Can only occur when 4 conditions are fulfilled:
1) Many small buyers and sellers are price takers
2) No preference shown by consumers
3) Easy entry and exit by both buyers and sellers
4) Same market info. Is available to all

Monopolistic ( monopoly= 1 company industry)

- All small firms with similar products
- Product differentiation is key to success

Oligopoly
- Few dominant firms
- Do not compete on price
- Product diff. and ads are key
 For Individual Company
- 1st part of graph rep. demand curve if you raise price and competitors do not
- 2nd part is demand curve if you reduce price and comp. Do not

Elastic Supply: a given % change in price will cause a greater % change in quantity
supplied

Inelastic Supply: A given % change in price will cause a smaller % change in quantity
supplied

Equilibrium or Market Price:

- When supply and demand are equal
- At this point, the allocation of goods is the most efficient
- Shortages cause prices to rise
- Surpluses cause prices to fall
Elastic Demand:

Inelastic Demand:

Change in Demand: a change in the quantities demanded at every price, caused by a

change in the determinants of demand
- As demand increases, there is increase in quantities demanded at each price

The Bank of Canada

Canadas central bank- government owned institution
Directors and governor are appointed by the federal cabinet
Finance Minister is elected and has power over those we are appointed.

Functions of the Bank of Canada

Issuer of currency
Government bank and manager of foreign currency reserves
Bankers bank (only lend to banks) and lender of last resort (if banks reserve falls
below target).
Auditor and inspector of commercial banks
Regulator of money supply
Characteristics of Money
1. Portable/ easy to use
2. Durable
3. Dividable into units
4. Readily recognizable
5. Anti-Counterfeit features
6. Retain value over time

Function of Money
1) Medium of Exchange:
Allows people the freedom to specialize in producing goods and services in exchange
for money.
Can obtain other goods they need through spending own money.
2) Measure of Value
Standard comparison of goods.
3) Store of Value
Allow people to produce goods and services while storing the value until a future time.

Money Flow
Just as blood circulates through our bodies, money circulates through our economy.
If our blood stops flowing, we die. If money stops flowing, economy collapses.
Money must continuously flow from businesses to households and back.
This is known as the inner flow circle, the most important flow.
The government has little control over this flow. (Government doesn't tell you where to
spend your money)
The government can inject money into the inner flow by increasing wages, office
supplies, and public capital goods (schools, hospitals etc.)
The Gov. can remove (leak out) money from the inner flow by increasing taxes.
The Gov. can encourage people and business to save money by increasing the
interest rates at banks.
The Gov. can encourage people to spend money by decreasing interest rates at
banks.
When spending money in other countries, it leaves Canadas flow.
Gov. can increase the flow by increasing exports, encourage Canadian businesses to
be multi- national, negotiate free trade agreements.
 Canadian Banking System
- Few major banks
- Many branches
- Huge land not a lot of people

US Banking System
- Huge population huge land
- Many banks w/ few branches
- Can be independently owned

Business Cycle
- Balanced budget: taxes = spending
- Surplus Budget: taxes > spending
- Deficit Budget: taxes < spending
- National Debt: Accumulated deficit budget

- Inflation
Persistent rise in general level of prices
Measured using a price index
Most widely used: CPI and GDP deflator
- CPI
Measurement of avg. level of prices of the goods + services that a typical
Canadian family consumes
Cost of basket in given year/ cost of basket in base year X 100%
Explicit index using a constructed bundle of goods
Bundle of goods remains constant
 Does not include capital or government goods/services
Includes imported goods

- Inflation Rate
(Index Year 1 Index Year 2 / Index Year 1) 100%
- Core Inflation
Excludes items w/ highly volatile prices
Ex: Fruit, vegetables, gas, fuel oil, mortgage, tobacco
Gives indication of underlying long term inflation rate

Unemployment and Inflation

- Unemployment: People 15+ who are looking for work
- Working age population: total pop. Excluding those under 15, in armed forces
and aboriginals in territori
Types of Definition Example
Unemployment
Structural Skills/location of Fishing industry
workers no longer in Atlantic
matches pattern provinces due to
of society lack of cod
industry
A) Technological Technology and Bulldozer can
equipment replace 30
replace human people digging
labour
B) Replacement Moving jobs to Canada loosing
countries with jobs to China
lower labour rates
Frictional People changing Students
jobs graduating and
looking for work
Cyclical Results from After 9/11 people
lower consumer did not fly as
spending, thus much
companies
produce less and
need less
employees
Seasonal Variation in Farming, fishing,
climate Wonderland
- esLabour force: members of WAP both employed and unemployed
- Those not in LF: retired, financially independent, stay @ home parents, military,
mental hospital, 1st nations
- 5 Questions To Ask About Who Is In the Labour Force
Currently employed for 1 hour per week or self employed?
Employed but not on job because of illness or vacation?
Laid off, but expected to be recalled?
Employed but starting a new job in 30 days?

- Participation Rate: % of those in WAP who are in labour force

(Labour force / working force population) 100%
- Unemployed Rate: % of those in labour force who do not hold paid employment
(# Of unemployed/ labour force) X 100%
- Discouraged Worker: individual who wants work but is no longer actively
searching because of belief that no opportunities exist

- Population Groupings for Employment

Group 1: WAP
Group 2: Eligible to work but choose not to
Group 3: Labour Force (NOT PART TIME)

Sole Partnership Corporation

Proprietorship
Owners 1 2 1 or more
shareholders
Ability to raise Low Low-medium High-issue
capital Must add new or additional sales
limited partner
Partnership must
be dissolved and
restarted again
Legal Business and Partners do not Shareholders are
Obligations personal assets have to share limited to
may be takes liability evenly invested funds
Legal Rights None Limited Separate entity
 Advantages Keep all profits Share duties Limited liability
Own boss Raise funds BOD
Easy to start More expertise
Shared duties
Easy to raise
funds
Disadvantages Unlimited Shared profit More fees
liability Disagreements Legal
requirements

Price Ceiling: Gov. regulation stipulating the maximum price that can be
charged for a product
- Cause shortages
Price Floor: a Gov. regulation that sets a minimum price that can be
charged
- Causes a surplus
- Above equilibrium
- Assists producers, such as farmers

Three Fundamental Economic Questions:

1. What to produce: consumers make decisions (wants)
- government/ consumers (needs)
2. How to Produce: Company decides: a) labour
b) capital ($)
c) raw materials
3. How to Distribute: decided based on money!
- need (other methods)- medical

Opportunity Costs: The value at the next best value alternative that is
given up as a result of making a particular decision.

Why is the Demand Curve Downward Sloping?

- When prices are lower, people will buy more, which increases the
demand.

Shifting of Demand Curve:

- Shifts left or right due to non-price factors
- Shift left= decrease in demand
- Shift right= increase in demand
Why do Curves Shift?
1) Substitute products/ Price of competitive products
2) Complementary products
3) Preferences
4) Income

Reasons for supply Curve shifting:

1) Price of resources
2) Business taxes
3) Technological advances
4) Substitutes in technology
5) Future expectations

Change in Demand: a change in the quantities demanded at every price,

caused by a change in the determinants of demand
- As demand increases, there is increase in quantities demanded at each
price

Determinants of a change in demand:

1) Preference
2) Income
3) Prices of related products
4) Expectations of the future

Normal Products: products for which demand will increase as a result of an

increase in income, and decreases as a result of a decrease in income

Inferior Products: products for which demand will decrease as a result of

an increase in income, and increase as a result of a decrease in income.

Substitute Products: Any products for which demand varies directly in

relation to change in price of a similar product

Shortage: quantity supplied is smaller than quantity demanded

Surplus: the quantity demanded is smaller than the quantity supplied

A surplus occurs when

 - Decrease in preference
- Decrease in price of substitute product
- Increase in price of complementary product
- Expectation that future incomes will lower
- Decrease in population

Change in Supply: a change in the quantities supplied, caused by a change

in the determinants of supply

Determinants of a change in supply:

1) Price of resources: decrease in price of resources= increase in supply
2) Availability of resources: poor harvest will increase the price
3) Business taxes: increase In taxes= decrease in supply
4) Technology: increase in technology= increase in supply
5) Price of substitutes in production: increase in price of a product will
cause a decrease in supply of substitute products

Number of Suppliers:
- Increase in supply will cause an increase in market supply
- Firms are in business to make profit

Effects of an Increase in Supply:

- Decrease in resources
- Decrease in business taxes
- Improvement in technology
- Increase in number of suppliers

Tangible Resources: Real, physical resources. Ex. land

Intangible Resources: no real physical value

TSX Market and TSX Composite Index

- The largest stock exchange in Canada.
- Toronto Stock Exchange

- The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest
companies on the Toronto Stock Exchange (TSX) as measured by market
capitalization.
Recession: a period of temporary economic decline during which trade and industrial
activity are reduced, generally identified by a fall in GDP in two successive quarters.
Product Differentiation: the process of distinguishing a product or service from
others, to make it more attractive to a particular target market. This involves
differentiating it from competitors' products as well as a firm's own products.
Market System
- Perfectly competitive market system is referred to as market economy or free
enterprise
- Implies competition, trade and specialization
- There are 4 things needed for the market system to work effectively:
1) Extensive specialization and trade
2) Perfect competition
3) Private ownership of productive resources
4) A legal and social foundation

Fiscal Policy
Governments approach towards its own spending and taxation.
Minister of finance brings down annual budget each spring- contains estimate
of revenues and expenditures.
Revenues are governments total receipts.
Largest source of income= personal income tax.
Non-tax revenues= income form government, crown corporation and Bank of
Canada Revenue.
Public Debt charges on the interest payments on government national debt.
Net Tax Revenue- Total tax revenue received by government less transfer
payments.
= Tax Revenue- transfer payments.
Budget Balance- the difference between net tax revenues and government
spending.
Budget Balance= NTR- G
Budget Surplus- Net tax revenue in excess of government spending on goods/
services. (Positive)
Budget Deficit- Government spending on goods/ services in excess of net tax
revenues. (Negative)
National Debt- sum of federal governments budget deficits less its surpluses.
Changes in economy have impact on government revenue.
NTR and GDP= related.
Government spending is independent from GDP
Balanced Budget- Equality of net tax revenues and government spending on
goods and services.
 State of governments budget depends on level of GDP in the
economy as well as tax rates/ its own spending.
Monetizing the debt: when government borrows money from its central bank to
finance increased spending.

Prime Minister

Minister of Governor of Bank Minister of

Finance of Canada Foreign Affairs
- Fiscal policy - Moneytary and Int'l Trade
- Taxes policy - Appointed
-Elected by - Appointed by M
people of F