B5 Flashcards
Phases of the business cycle is
Expansion, Peak, Contraction (Recession), Trough, Recovery
Variations between business cycles most likely are attributable to
Duration and degree of peak or trough (INTENSITY)
Businesses increase capital investment means
the economy is in an expansionary phase
Gross domestic product is
final goods and services produced within a nation in one year
Economic fluctuations (or business cycles) are best described as
flucations in the level of economic activity bouncing up and down of making money (GDP), relative to long term growth trend (not predictable)
Trough
us unused productive capacity and an unwillingness to risk investments
Peak of cycle is
economy will be at the natural rate of unemployment which means its at 0% which is its highest potential
During a recession
potential output will exceed actual output
What are examples of economic recession
experienced a drop in purchases, rise in inventories, wages grew and unemployment increased, interest rate and stocks fell
Peaks have
capacity constraints and labor shortages are likely (because the demand is high during a peak
Features of monopolistic competition is
fairly elastic demand curve, faces few barriers to entry, influence prices, other companies produce similar products (NOT identical)
Keys to perfect competition customers are
indifferent about which firm to buy from, firms output is small relative to the industry’s total output, freedom of entry into and out of industry, prices have to be competitive not above industry price
Monopolistic competition has
FEW obstacles, Perfect Competition has NO obstacles, Oligopoly has SIGNIFICANT Obstacles
Monopolistic competition had
large sellers who produce differentiated products/ greater variety, relatively few sellers with differentiated products is oligopoly, relatively large group of sellers who produce homogeneous products is perfect competition
Any business that has ability to control prices sells a
downward sloping demand curve, only businesses in a perfectly competitive market face horizontal demand and supply curve
Pure competition focuses on
market share and being responsive to sales prices, Oligopoly include product differentiation and adapting to price and production volume
Kinked demand curve downward is the analysis of
oligopoly which is oligopolies lowers it price then other oligopolies lowers price but if they raise price the other firms ignore it
Oligopoly behavior understood by
game theory model study of conflict and cooperation between rational decision makers.
Under a monopoly their strategic plan focus’s on
profitability from production levels that maximize profits
Monopolist tends to
produce substantially less but charge a higher price
Monopolist set price at
marginal revenue equals marginal costs
Dumping is when the
selling it for less in china than your buying it in America thats dumping
If stock market boom causes a large increase in wealth the federal reserve want to counteract the effect they
sell government securities or increase the discount rate (to decrease money supply)
Federal Reserve wishes to conduct expansionary monetary policy by
purchase government securities and lower the discount rate because they actions increase money supply
Projections indicate the economy is entering a slow down the expect outcome is a
drop in interest rates in order to stimulate economy because this increases money supply
Federal Reserve use increase margin requirement (decreases money supply) to
reduce inflationary pressures
Increase money supply by
lowering the required reserve ratio, decrease the discount rate, but bonds in the open market
To decrease money supply Fed might
sell government securities on open market, increase discount rate, increase the required reserve ratio
Federal Reserve implement monetary policy by
purchasing additional US government securities and lower the discount rate
Economy is currently experiencing both full employment and price stability, a major tax reduction will cause an
acceleration in the inflation rate, unless government expenditures are also reduced
US government and Federal Reserve Bank are working to help the economy rebound by
increasing government spending, decreasing reserve ratio, lowering marginal income tax brackets, selling US treasury bills and notes wont help because that reduces the money supply
Considered the most expansionary set of fiscal policies is
increase government purchases, decrease in taxes
Price impacts demand by
by higher price lower demand, lower price higher demand
quantity demanded
The movement along the demand curve from one price quantity to another
Margarine and butter are
substitute goods, cameras and film are complementary goods.
The demand curve for a commodity (like eggs) shifted left
could be caused by a rise in the price of a complementary commodity (bc price of tofu eggs cheaper customer switches)
An increase in the market supply of beef would result in an
increase in the quantity of beef demanded
Competitive model of supply and demand creates a surplus by
if minimum price is above equilibrium price
A maximum or ceiling price set below the equilibrium price will cause a
shortage to be created
If demand increases and supply decreases
equilibrium price will increase
An equal increase in both demand and supply can be expected to increase
market clearing quantity there would be no affect on price in this situation
Government price support program would result in
surpluses because it encourages supplier to increase supply beyond equilibrium
An increase in effective minimum wage will
increase unemployment
A increase in minimum wage will move employers up the
labor demand curve causing the quantity of labor demanded to fall and leads to decrease in quantity demanded and increase in quantity supplied
Product demand is more
elastic when more substitutes are available and inelastic when less substitutes are available (medical)
If a product has a price elasticity of 2.0 it is
relatively elastic (perfectly elastic doesn’t exist)
Product demands become more elastic the greater
the number of substitute products available
Assuming demand for product is price elastic an increase in price will
result in a decline in total revenue
Demand for a product is PRICE UNIT ELASTIC an increase in price will
have no effect on total revenue
Demand for a normal good is inelastic, then the sales price of the product would
increase following a decrease in the supply of the product
Demand for a product is inelastic, a decrease in price has an effect on the
number of units sold and revenue by the percentage change in price being greater than the percentage change in quantity and total revenue will fall
An item sold would have a high price elasticity of demand if
the item has a similar substitute
A family always ate burgers and now earns more money therefore they now eats steaks this is an example of
a inferior good
losing purchasing power by
Individuals holding monetary assets/ cash will be at a disadvantage during inflation periods
hyperinflation
Prices generally increase the fastest
Corporation issued a 5 year debt with coupon rate of 4.25 with inflation impact on debt issuance the real cost of the principal owed at maturity is below
future value
Real Cost = Future Value
—————————–
(1 + Inflation rate)^n
If high inflation is expected CPA would suggest to client to invest in
precious metals
Inflation distorts reported income by
depreciation not reflective of current fixed assets replacement costs
An entity invests in 1 year maturity yield higher than those of 10 year maturities this means investors are expecting
reduced inflation in the future as reflected in the lower long term returns
Period of high inflation would likely to gain is those with
fixed amount of debt
Price elasticity is greater than one that is considered price elastic which means
revenues will decrease for both products because the quantity is greater than price
Strategic plans are
various levels of organization will implement them differently
SWOT analysis is
identifying their mission, overall strategy, and critical success
Strategic planning establishes
the general direction of the organization
Factors of internal to the organization that impact strategy and are sources of strengths and weaknesses are
marketing effectiveness, competence of management, innovation of product lines
Michael Porter identified five forces that affect profitability which are
existence of substitute, bargaining power of customers, barriers to market entry
In the long run a firm may experience increasing return due
to economies of scale (large number of units produced)
Patents are granted in order to
encourage firms to invest in research and development of new products. Patents are an example of barriers to entry
External factors that directly affects the competitive environment of the firm barriers is
market entry, bargaining power of suppliers, existence of substitute products
Price discrimination is accomplished most effectively in
markets with fairly distinct segments of customers
Cost leadership strategies fail when
buyers become less price sensitive and start to have brand loyalty
When competition not become an even stronger force impacting the profitability of a firm by
market not growing fast, several equal sized firms in the market, customers do not have strong brand preference, cost of existing the market exceed the cost of continuing to operate, firms profit from making certain moves to increase market share, various firms in the market use different types of strategic plans
Increasing bargaining power of the customer by
customers make up a large volume of a firms business, much information available to customers, buyers have low switching costs, high number of alternate suppliers
Competitive advantage
have two major forms is differentiation and cost leadership, TOTAL costs of a firm are less than those of close rivals that’s competitive advantage, cost leadership advantage may best be obtained by a firm when it builds market share or decrease its price, differentiation advantage may best be obtained by a firm when the firm builds market share or increase its price
The manufacturer of a high priced car emphasizes the prestige, performance, and safety of the vehicle. The strategy pursued by the manufacturer is
best characterized as differentiation focused on broad range of buyers
Differentiation strategies fail when
the value of the firms differentiation premium does not exceed it costs
Cost provider strategies
the overall lowest cost in the industry is not a viable option in best cost strategies because the firm could not complete profit wise with its differentiation strategy component, the best cost strategy is a combination of the benefits of the cost leadership and differentiation strategies, when generic products are not acceptable to buyers, yet they still remain price sensitive to the value they are receiving for their money, the best cost strategy may work well
Discount Rate
the rate federal reserve charges banks for a short term loan
