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CPA- BEC > B5- Economic Concepts > Flashcards

B5- Economic Concepts Flashcards

1
Q

What are Business Cycles?

A

Business cycles refer to the risk and fall of economic activity relative to LT avg growth.

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2
Q

What is the most common measure of economic activity/output?

A

GDP (Gross Domestic Product)

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3
Q

What is GDP (Gross Domestic Product)?

A

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign fact

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4
Q

What is Nominal GDP?

A

Measures goods/services in current prices.

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5
Q

What does Real GDP measure?

A

Measures goods/services in base year prices.

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6
Q

For what is a GDP Deflator (Price Index) used?

A

Used to convert GDP to Real GDP

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7
Q

What is the formula for Real GDP?

A

Nominal GDP / GDP Deflator x 100

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8
Q

What is the formula for Real GDP per capita?

A

Real GDP per capita = Real GDP/Population

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9
Q

What ise Real GDP per capita used for?

A

Used to compare standards of living across countries or over time.

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10
Q

What is economic growth

A

the increase in Real GDP per capita over time

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11
Q

What are the stages of the Economic Cycle?

A

(Every Peak Contracts Through Recovery) = Expansionary Phase (increasing) Peak (highest) Contractionary Phase (decreasing) Trough (lowest) Recovery Phase (increasing)

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12
Q

When is the economy in Recession?

A

When GDP growth is negative for two consecutive quarters.

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13
Q

What is a Depression?

A

A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression

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14
Q

What are leading indicators?

A

Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts

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15
Q

What are lagging indicators?

A

Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment

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16
Q

What are coincident indicators?

A

Conditions that occur during a recession or during a recovery Example: Manufacturing output

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17
Q

What are reasons for fluctuations in the economy?

A

1) Change in P causes change in QD & QS, 2) Change in AD & AS causes change in P

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18
Q

What is the Aggregate Demand (AD) curve?

A

Demand= Downward sloping, P Inc, QD Dec

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19
Q

What is the Short Run Aggregate Supply (SRAS) curve?

A

Supply = to the Sky, P Inc, QS Inc

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20
Q

What is the Long Run Aggregate Supply (LRAS) curve (Potential GDP)?

A

Independent on Price. Dependent on Resources available to produce

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21
Q

What Factors cause a positive (right) shift in AD?

A

TWICEG- Taxes (Income) go down, Wealth goes up, Interest Rate (IR) go down, Consumer confidence goes up, Exchange Rates go down, Government spending goes up.

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22
Q

What Factors cause a negative (left) shift in AD?

A

TWICEG- Taxes (Income) go up, Wealth goes down, Interest Rate (IR) go up, Consumer confidence goes down, Exchange Rates go up, Government spending goes down.

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23
Q

What Factors cause a positive (right) shift in AS?

A

Input Prices go down, Supplies go up

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24
Q

What Factors cause a negative (left) shift in AS?

A

Input Prices go up, Supplies go down

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25
Q

What is the Marginal Propensity to Consume?

A

How much you spend when your income increases . Calculate: Change in Spending / Change in Income

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26
Q

What is the Marginal Propensity to Save?

A

How much you save when income increases . Calculate: Change in Savings / Change in Income. Also equals 1 - Marginal Propensity to Consume

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27
Q

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

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28
Q

How does government change fiscal policy (FP) to prevent depression during a recession?

A

(Current output < LRAS)… Thus govt spend more/tax less “expansionary”

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29
Q

How does government change fiscal policy (FP) to prevent high inflation in an overheated economy?

A

(Current output > LRAS)… Thus govt spend less/tax more “restrictive”

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30
Q

What is included under the Expenditure Approach for calculating GDP?

A

(GICE = flow of product) GCP = Government Purchases + GDP Investment + Individual Consumption + Net Exports

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31
Q

What is included under the income approach for calculating GDP?

A

(I PIRATED = earnings & costs) GDP/GDI = Income of Proprietors + Profits of Corp +Interest + Rental Income + Adj for foreign net income/Misc + Taxes (indirect bus) + Employee wages + Depreciation

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32
Q

What is Gross National Product (GNP)?

A

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included

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33
Q

How is disposable income calculated?

A

Personal Income - Personal Taxes

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34
Q

What is Net Domestic Product (NDP)?

A

GDP - Depreciation

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35
Q

How is the unemployment rate calculated?

A

People looking for jobs/Total Labor Force (seeking & working)

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36
Q

What is Frictional Unemployment?

A

People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job

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37
Q

What is Structural Unemployment?

A

A worker’s job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training

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38
Q

What is Seasonal Unemployment?

A

Seasonal changes in demand

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39
Q

What is Cyclical Unemployment?

A

GDP doesn’t grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren’t enough jobs available due to the economy

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40
Q

What is the Natural Rate of Unemployment?

A

Frictional + Structural + Seasonal Unemployment

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41
Q

What is full employment?

A

is when unemployment rate = natural rate; there is no cyclical unemployment

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42
Q

What happens to AD & AS during inflation?

A

AD goes up and/or AS goes down

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43
Q

What happens to AD & AS during deflation?

A

AD goes down and/or AS goes up

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44
Q

What is the Consumer Price Index (CPI)? How is it applied?

A

Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 10… ((CPI Current - CPI Last) / CPI Last) * 100

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45
Q

Compare CPI to PPI (producer Price Index).

A

CPI = price of basket of goods/services purchased by average household. PPI = Price of basket of goods/services purchased by firm

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46
Q

What happens under Demand-Pull inflation?

A

Overall spending increases Demand increases (shifts right) Market equilibrium price increases

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47
Q

What causes Demand-Pull inflation?

A

Govt spending goes up Taxes go down Wealth goe sup MS goes up

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48
Q

What happens under Cost-Push inflation?

A

Overall production costs increase Supply decreases (shifts left) Market equilibrium price increases Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

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49
Q

What causes Cost-Push inflation?

A

Oil prices and/or wages go up

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50
Q

How does inflation affect holding monetary assets?

A

P goes up. Value goes down “BAD”

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51
Q

How does inflation affect holding nonmonetary assets?

A

P goes up. Value goes up “GOOD”

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52
Q

How does inflation affect holding monetary liabilities?

A

P goes up. Value goes down “GOOD”

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53
Q

How does inflation relate to unemployment? (The Phillips Curve)

A

High Unemployment : Low Inflation (Vice Versa)

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54
Q

What is the government doing during during a budget deficit?

A

govt spend more/tax less to stimulate demand & prevent recession

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55
Q

What is the government doing during during a budget surplus?

A

govt spend less/tax more to reduce demand & prevent inflation

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56
Q

What is the Nominal Rate?

A

Rate that uses current prices

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57
Q

What is the Nominal Rate Formula?

A

Real RF + Expected Inflation

58
Q

What is the Real Interest Rate?

A

Inflation-adjusted interest rate. Supply/Demand for loanable funds

59
Q

What is the Risk-Free Rate?

A

Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.

60
Q

What is money?

A

liquid assets accepted in exchange for goods/services

61
Q

What is the money supply?

A

all liquid assets available for transactions

62
Q

What is included in the M1 money supply?

A

Currency- Coins- and Deposits

63
Q

What is included in the M2 money supply?

A

M1 and CD < 100k and money market and mutual fund and savings

64
Q

What is included in the M3 money supply?

A

M2 and CD > 100k

65
Q

What is monetary policy (MP)?

A

the use of money to stabilize the economy (Open market operations or change in discount rate or change in required reserve ratio)

66
Q

How does govt use Open Market Operations (OMO)?

A

OMO is buying & selling T-bills. Purchasing increases MS Decreases IR and increases AD

67
Q

What is the Discount Rate?

A

The rate a bank pays to borrow from the Fed.

68
Q

How does govt use changes in Discount Rate?

A

Decreasing Discount rate leads to increases MS Decreases IR and increases AD

69
Q

How does govt use changes in Required Reserve Ratio (RRR)?

A

Decreasing RRR leads to increases MS Decreases IR and increases AD

70
Q

How does govt use FP & MP to contract/slow economy?

A

FP: tax more/spend less. MP: decrease MS and increase IR

71
Q

How does govt use FP & MP to expand/stimulate economy?

A

FP: tax less/spend more. MP: increase MS and decrease IR

72
Q

What is the Demand Curve?

A

It dictates the price. The max Q of a specific good consumers will buy at P

73
Q

What is the Quantity Demanded (QD)?

A

it is dictated by price. Q purchased at P

74
Q

What is a change in QD?

A

Slide. Resulted in change in P

75
Q

What is the Fundamental Law of Demand?

A

P & Q are inversely related, negative slope

76
Q

What is the Substitution Effect?

A

people will buy more hotdogs when price of hamburgers rises

77
Q

How does price affect the demand for an item?

A

When the prices of an item increases- demand for it decreases.

78
Q

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

79
Q

What is a Positive Demand Curve Shift (Shift Right)?

A

WRITEN- When demand increases at each price point . Wealth goes up. Substitute P goes up Compliment P goesdown. Consumer Income goes up. Change in Taste. Epect future P goes up. Number of Buyers goes up.

80
Q

What is a Negative Demand Curve Shift (Shift Left)?

A

WRITEN- When demand decreases at each price point . Wealth goes down. Substitute P goes down Compliment P goes up. Consumer Income goes down. Change in Taste. Epect future P goes down. Number of Buyers goes down.

81
Q

What is the Supply Curve?

A

It dictates the price. The max Q of a specific good sellers will sell at P

82
Q

What is the Quantity Supplied (QS)?

A

it is dictated by price. Q purchased at P

83
Q

What is a change in QS?

A

Slide. Resulted in change in P

84
Q

What is the Fundamental Law of Supply?

A

P & Q are directly related, positive slope

85
Q

How does a price increase affect supply?

A

When the prices of an item increases supply increases- because more sellers are willing to sell.

86
Q

What is a supply curve shift?

A

When supply changes due to something other than price.

87
Q

What are the characteristics of a positive supply curve shift (shift right)?

A

Supply increases at each price point. ECOST- Expectation P goes up. Costs go down. Other goods go down. Subsidiaries/Taxes go down. Technology improves.

88
Q

What are the characteristics of a negative supply curve shift (shift left)?

A

Supply decreases at each price point. ECOST- Expectation P goes down. Costs go up. Other goods go up. Subsidiaries/Taxes go up. Technology deproves.

89
Q

What is the Equilibrium Price?

A

The price where Quantity Supplied : Quantity Demanded

90
Q

What is the result of a Price Floor?

A

Causes a surplus if above equilibrium price. QD < QS. Minimum Wage

91
Q

What is the result of a Price Ceiling?

A

Causes a shortage if below equilibrium price. QS < QD. Rent Control

92
Q

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

93
Q

What is Price Inelasticity?

A

E < 1. not sensitive

94
Q

How does revenue react to price under Inelastic Demand?

A

Price increases- Revenue increases Price decreases- Revenue decreases

95
Q

What conditions would indicate Inelastic Demand?

A

Few substitutes (groceries- gasoline) Considered inelastic if coefficient of elasticity is less than 1 5% drop in demand / 10% increase in price : .5 (inelastic) Price increases- Revenue increases Price decreases- Revenue decreases

96
Q

What is Price Elasticity?

A

E > 1. sensitive

97
Q

Under elastic demand- how does price affect revenues?

A

Price increases- Revenue decreases . Price decreases- Revenue increases

98
Q

What conditions would indicate Elastic Demand?

A

Many substitutes (luxury items) Considered elastic if elasticity is greater than 1 10% drop in demand / 8% increase in price : 1.25 (Elastic) Price increases- Revenue decreases Price decreases- Revenue increases

99
Q

What is Unit Elasticity?

A

Total revenue will remain the same if price is increased . Considered unitary if coefficient of elasticity : 1

100
Q

How is Price Elasticity of Supply calculated?

A

% Change in Quantity Supply / % Change in Price

101
Q

How is Income Elasticity of Demand calculated?

A

% Change Quantity Demanded / % Change in Income Normal goods greater than 1 (demand increases more than income) Inferior goods less than 1 (demand increases less than income)

102
Q

What is Total Product (TP)?

A

Q (total Output)

103
Q

What is Marginal Product (MP)?

A

change in TP/change in input

104
Q

What is average product (AP)?

A

TP/input

105
Q

What is the Law of Diminishing Returns?

A

when more and more units of an input are combined with a fixed amount of other inputs… output increases at a diminishing rate

106
Q

What is the Marginal Cost (MC)?

A

change in TC/change in Q. dependent on VC not FC. Keeo producing if MR > MC

107
Q

What causes economies of scale (decreasing costs)?

A

specialization. advanced technology. Mass production

108
Q

What causes diseconomies of scale (increasing costs)?

A

bottlenecks. Difficulty of supervision

109
Q

What are the 4 different market structures?

A

Perfect (Pure) Competition. Monopolistic Competition. Oligopoly. Monopoly.

110
Q

What is Perfect (Pure) Competition?

A

Many small suppliers. Homogeneous good. No barrier to entry. Market sets P. Demand is perfectly elastic. Economic profits are zero in LR.

111
Q

What is the Strategy for Pure Competition?

A

maintain market share & responsive sale price to market conditions

112
Q

What is Monopolistic Competition?

A

Many small suppliers. Differentiated good. Few barriers to entry. Firms can control Q more than P. Demand is highly elastic. Economic profits are zero in LR.

113
Q

What is the Strategy for Monopolistic Competition?

A

maintain market share & enhanced differentation & more advertising

114
Q

What is an Oligopoly?

A

Few large suppliers. Differentiated good. Significant barriers to entry. Firms can control P&Q. Demand is kinked. Economic profits are positive in LR.

115
Q

What is the Strategy for an Oligopoly?

A

maintain market share & advertising & adapt to price changes

116
Q

What is a Monopoly?

A

ONE large suppliers. Unique good. Insurmountable barriers to entry. Price setter can control P&Q. Demand is inelastic. Economic profits are positive in LR.

117
Q

What is the Strategy for a Monopoly?

A

max profits

118
Q

What is Optimal Production (maximum profits)?

A

When Marginal Revenue : Marginal Cost

119
Q

What are Factors of Production?

A

Inputs. Land labor and capital.

120
Q

What are complimentary inputs?

A

as # factories goes up # of workers goes up

121
Q

What are substitute inputs?

A

as # machines goes up # of workers goes down

122
Q

What is derived demand?

A

Demand for factors of production. Derived from demand for FG

123
Q

What is SWOT?

A

Internal (Strengths & Weaknesses) External (Opportunities & Threats)

124
Q

What are the external factors that affect the overall industry?

A

economy. Regulation. Demographics. Technology. Society. Politics

125
Q

What are the external factors that affect the competitive environment?

A

Porter’s 5 Forces

126
Q

What are Porter’s 5 Forces?

A

1) Barriers to Entry 2) Market Competitiveness between existing competitors 3) Existence of Substitute Products 4) Bargaining Power of Customers 5) Bargaining Power of Suppliers

127
Q

What are the 2 types of competitive strategies?

A

cost leadership or differentiation

128
Q

When does the cost leadership strategy succeed or fail?

A

Succeed- inferior goods. Fail- too low value

129
Q

When does the differentiation strategy succeed or fail?

A

Succeed- superior goods. Fail- cost > benefit

130
Q

When does the best cost (combination) strategy succeed or fail?

A

Succeed- generic products are not acceptable. Fail- too much in the middle

131
Q

When does the focus/niche strategy succeed or fail?

A

Succeed- large enough demand without competition. Fail- copy cats

132
Q

What are the major strategies for Value Chain Analysis?

A

1) Core competencies 2) industry structure 3)segmentation analysis

133
Q

What are the 3 approaches to Value Chain Analysis?

A

internal cost analysis. Internal differentiation analysis. Vertical linkage analysis (external)

134
Q

What is the internal cost analysis?

A

variance analysis

135
Q

What is the differentiation analysis

A

benefit > cost

136
Q

What is the vertical linkage analysis (external)?

A

supplier then firm then supplier

137
Q

What are the 4 steps in Value Chain Analysis?

A

1) Identify Value Activities 2) Identify Cost Drivers Associated with Activities 3) Develop a Competitive Adv by reducing costs or adding value 4) Exploit Linkages Among Activities

138
Q

What effects the Global Competitive Advantage?

A

Conditions of factors of production. Conditions of domestic demand. Related and supporting industries. Firm strategy structure and rivalry.

139
Q

What is Integrated Supply Chain Management (ISCM)?

A

when firm and entire supply chain work together to predict and meet demand

140
Q

What is the goal of ISCM?

A

to understand needs and preferences of customers

141
Q

What are the steps in the Supply Chain Operations Reference (SCOR) Model?

A

Plan. Source. Make. Deliver.

142
Q

What is the main benefit of SCM?

A

reduced costs

CPA- BEC (6 decks)

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