B5- Economic Concepts Flashcards
What are Business Cycles?
Business cycles refer to the risk and fall of economic activity relative to LT avg growth.
What is the most common measure of economic activity/output?
GDP (Gross Domestic Product)
What is GDP (Gross Domestic Product)?
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
What is Nominal GDP?
Measures goods/services in current prices.
What does Real GDP measure?
Measures goods/services in base year prices.
For what is a GDP Deflator (Price Index) used?
Used to convert GDP to Real GDP
What is the formula for Real GDP?
Nominal GDP / GDP Deflator x 100
What is the formula for Real GDP per capita?
Real GDP per capita = Real GDP/Population
What ise Real GDP per capita used for?
Used to compare standards of living across countries or over time.
What is economic growth
the increase in Real GDP per capita over time
What are the stages of the Economic Cycle?
(Every Peak Contracts Through Recovery) = Expansionary Phase (increasing) Peak (highest) Contractionary Phase (decreasing) Trough (lowest) Recovery Phase (increasing)
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
What are reasons for fluctuations in the economy?
1) Change in P causes change in QD & QS, 2) Change in AD & AS causes change in P
What is the Aggregate Demand (AD) curve?
Demand= Downward sloping, P Inc, QD Dec
What is the Short Run Aggregate Supply (SRAS) curve?
Supply = to the Sky, P Inc, QS Inc
What is the Long Run Aggregate Supply (LRAS) curve (Potential GDP)?
Independent on Price. Dependent on Resources available to produce
What Factors cause a positive (right) shift in AD?
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.
What Factors cause a negative (left) shift in AD?
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.
What Factors cause a positive (right) shift in AS?
Input Prices go down, Supplies go up
What Factors cause a negative (left) shift in AS?
Input Prices go up, Supplies go down
What is the Marginal Propensity to Consume?
How much you spend when your income increases . Calculate: Change in Spending / Change in Income
What is the Marginal Propensity to Save?
How much you save when income increases . Calculate: Change in Savings / Change in Income. Also equals 1 - Marginal Propensity to Consume
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
How does government change fiscal policy (FP) to prevent depression during a recession?
(Current output < LRAS)… Thus govt spend more/tax less “expansionary”
How does government change fiscal policy (FP) to prevent high inflation in an overheated economy?
(Current output > LRAS)… Thus govt spend less/tax more “restrictive”
What is included under the Expenditure Approach for calculating GDP?
(GICE = flow of product) GCP = Government Purchases + GDP Investment + Individual Consumption + Net Exports
What is included under the income approach for calculating GDP?
(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
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
How is disposable income calculated?
Personal Income - Personal Taxes
What is Net Domestic Product (NDP)?
GDP - Depreciation
How is the unemployment rate calculated?
People looking for jobs/Total Labor Force (seeking & working)
What is Frictional Unemployment?
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
What is Structural Unemployment?
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
What is Seasonal Unemployment?
Seasonal changes in demand
What is Cyclical Unemployment?
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
What is the Natural Rate of Unemployment?
Frictional + Structural + Seasonal Unemployment
What is full employment?
is when unemployment rate = natural rate; there is no cyclical unemployment
What happens to AD & AS during inflation?
AD goes up and/or AS goes down
What happens to AD & AS during deflation?
AD goes down and/or AS goes up
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 10… ((CPI Current - CPI Last) / CPI Last) * 100
Compare CPI to PPI (producer Price Index).
CPI = price of basket of goods/services purchased by average household. PPI = Price of basket of goods/services purchased by firm
What happens under Demand-Pull inflation?
Overall spending increases Demand increases (shifts right) Market equilibrium price increases
What causes Demand-Pull inflation?
Govt spending goes up Taxes go down Wealth goe sup MS goes up
What happens under Cost-Push inflation?
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
What causes Cost-Push inflation?
Oil prices and/or wages go up
How does inflation affect holding monetary assets?
P goes up. Value goes down “BAD”
How does inflation affect holding nonmonetary assets?
P goes up. Value goes up “GOOD”
How does inflation affect holding monetary liabilities?
P goes up. Value goes down “GOOD”
How does inflation relate to unemployment? (The Phillips Curve)
High Unemployment : Low Inflation (Vice Versa)
What is the government doing during during a budget deficit?
govt spend more/tax less to stimulate demand & prevent recession
What is the government doing during during a budget surplus?
govt spend less/tax more to reduce demand & prevent inflation
What is the Nominal Rate?
Rate that uses current prices
What is the Nominal Rate Formula?
Real RF + Expected Inflation
What is the Real Interest Rate?
Inflation-adjusted interest rate. Supply/Demand for loanable funds
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
What is money?
liquid assets accepted in exchange for goods/services
What is the money supply?
all liquid assets available for transactions
What is included in the M1 money supply?
Currency- Coins- and Deposits
What is included in the M2 money supply?
M1 and CD < 100k and money market and mutual fund and savings
What is included in the M3 money supply?
M2 and CD > 100k
What is monetary policy (MP)?
the use of money to stabilize the economy (Open market operations or change in discount rate or change in required reserve ratio)
How does govt use Open Market Operations (OMO)?
OMO is buying & selling T-bills. Purchasing increases MS Decreases IR and increases AD
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
How does govt use changes in Discount Rate?
Decreasing Discount rate leads to increases MS Decreases IR and increases AD
How does govt use changes in Required Reserve Ratio (RRR)?
Decreasing RRR leads to increases MS Decreases IR and increases AD
How does govt use FP & MP to contract/slow economy?
FP: tax more/spend less. MP: decrease MS and increase IR
How does govt use FP & MP to expand/stimulate economy?
FP: tax less/spend more. MP: increase MS and decrease IR
What is the Demand Curve?
It dictates the price. The max Q of a specific good consumers will buy at P
What is the Quantity Demanded (QD)?
it is dictated by price. Q purchased at P
What is a change in QD?
Slide. Resulted in change in P
What is the Fundamental Law of Demand?
P & Q are inversely related, negative slope
What is the Substitution Effect?
people will buy more hotdogs when price of hamburgers rises
How does price affect the demand for an item?
When the prices of an item increases- demand for it decreases.
What is a Demand Curve Shift?
When demand changes due to something other than price.
What is a Positive Demand Curve Shift (Shift Right)?
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.
What is a Negative Demand Curve Shift (Shift Left)?
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.
What is the Supply Curve?
It dictates the price. The max Q of a specific good sellers will sell at P
What is the Quantity Supplied (QS)?
it is dictated by price. Q purchased at P
What is a change in QS?
Slide. Resulted in change in P
What is the Fundamental Law of Supply?
P & Q are directly related, positive slope
How does a price increase affect supply?
When the prices of an item increases supply increases- because more sellers are willing to sell.
What is a supply curve shift?
When supply changes due to something other than price.
What are the characteristics of a positive supply curve shift (shift right)?
Supply increases at each price point. ECOST- Expectation P goes up. Costs go down. Other goods go down. Subsidiaries/Taxes go down. Technology improves.
What are the characteristics of a negative supply curve shift (shift left)?
Supply decreases at each price point. ECOST- Expectation P goes down. Costs go up. Other goods go up. Subsidiaries/Taxes go up. Technology deproves.
What is the Equilibrium Price?
The price where Quantity Supplied : Quantity Demanded
What is the result of a Price Floor?
Causes a surplus if above equilibrium price. QD < QS. Minimum Wage
What is the result of a Price Ceiling?
Causes a shortage if below equilibrium price. QS < QD. Rent Control
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
What is Price Inelasticity?
E < 1. not sensitive
How does revenue react to price under Inelastic Demand?
Price increases- Revenue increases Price decreases- Revenue decreases
What conditions would indicate Inelastic Demand?
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
What is Price Elasticity?
E > 1. sensitive
Under elastic demand- how does price affect revenues?
Price increases- Revenue decreases . Price decreases- Revenue increases
What conditions would indicate Elastic Demand?
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
What is Unit Elasticity?
Total revenue will remain the same if price is increased . Considered unitary if coefficient of elasticity : 1
How is Price Elasticity of Supply calculated?
% Change in Quantity Supply / % Change in Price
How is Income Elasticity of Demand calculated?
% 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)
What is Total Product (TP)?
Q (total Output)
What is Marginal Product (MP)?
change in TP/change in input
What is average product (AP)?
TP/input
What is the Law of Diminishing Returns?
when more and more units of an input are combined with a fixed amount of other inputs… output increases at a diminishing rate
What is the Marginal Cost (MC)?
change in TC/change in Q. dependent on VC not FC. Keeo producing if MR > MC
What causes economies of scale (decreasing costs)?
specialization. advanced technology. Mass production
What causes diseconomies of scale (increasing costs)?
bottlenecks. Difficulty of supervision
What are the 4 different market structures?
Perfect (Pure) Competition. Monopolistic Competition. Oligopoly. Monopoly.
What is Perfect (Pure) Competition?
Many small suppliers. Homogeneous good. No barrier to entry. Market sets P. Demand is perfectly elastic. Economic profits are zero in LR.
What is the Strategy for Pure Competition?
maintain market share & responsive sale price to market conditions
What is Monopolistic Competition?
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.
What is the Strategy for Monopolistic Competition?
maintain market share & enhanced differentation & more advertising
What is an Oligopoly?
Few large suppliers. Differentiated good. Significant barriers to entry. Firms can control P&Q. Demand is kinked. Economic profits are positive in LR.
What is the Strategy for an Oligopoly?
maintain market share & advertising & adapt to price changes
What is a Monopoly?
ONE large suppliers. Unique good. Insurmountable barriers to entry. Price setter can control P&Q. Demand is inelastic. Economic profits are positive in LR.
What is the Strategy for a Monopoly?
max profits
What is Optimal Production (maximum profits)?
When Marginal Revenue : Marginal Cost
What are Factors of Production?
Inputs. Land labor and capital.
What are complimentary inputs?
as # factories goes up # of workers goes up
What are substitute inputs?
as # machines goes up # of workers goes down
What is derived demand?
Demand for factors of production. Derived from demand for FG
What is SWOT?
Internal (Strengths & Weaknesses) External (Opportunities & Threats)
What are the external factors that affect the overall industry?
economy. Regulation. Demographics. Technology. Society. Politics
What are the external factors that affect the competitive environment?
Porter’s 5 Forces
What are Porter’s 5 Forces?
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
What are the 2 types of competitive strategies?
cost leadership or differentiation
When does the cost leadership strategy succeed or fail?
Succeed- inferior goods. Fail- too low value
When does the differentiation strategy succeed or fail?
Succeed- superior goods. Fail- cost > benefit
When does the best cost (combination) strategy succeed or fail?
Succeed- generic products are not acceptable. Fail- too much in the middle
When does the focus/niche strategy succeed or fail?
Succeed- large enough demand without competition. Fail- copy cats
What are the major strategies for Value Chain Analysis?
1) Core competencies 2) industry structure 3)segmentation analysis
What are the 3 approaches to Value Chain Analysis?
internal cost analysis. Internal differentiation analysis. Vertical linkage analysis (external)
What is the internal cost analysis?
variance analysis
What is the differentiation analysis
benefit > cost
What is the vertical linkage analysis (external)?
supplier then firm then supplier
What are the 4 steps in Value Chain Analysis?
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
What effects the Global Competitive Advantage?
Conditions of factors of production. Conditions of domestic demand. Related and supporting industries. Firm strategy structure and rivalry.
What is Integrated Supply Chain Management (ISCM)?
when firm and entire supply chain work together to predict and meet demand
What is the goal of ISCM?
to understand needs and preferences of customers
What are the steps in the Supply Chain Operations Reference (SCOR) Model?
Plan. Source. Make. Deliver.
What is the main benefit of SCM?
reduced costs
