B5 - Economic Concepts and Analysis

Question 1

What makes demand curve shift?

Answer 1

Changes other than the good price.

Question 2

What does the an increase in supply do to qty demanded?

Answer 2

Increase. Ex. Sodas in Colombia. Companies started introducing 2L and 3L bottles, and people kept wanting more.

Question 3

What’s the basic rule of market equilibrium?

Answer 3

Ceiling = Shortages
Floor = Surplus

Question 4

In terms of market equilibrium, what happens when both supply and demand increase?

Answer 4

Equilibrium qty = Increase.
Price = Unknown impact.

Question 5

What’s the impact of the increase of minimum wage?

Answer 5

More unemployment. Businesses will hire less people because it implies an increase in wages.

Question 5

What’s the impact of the increase of minimum wage?

Answer 5

More unemployment. Businesses will hire less people because it implies an increase in wages.

Question 6

What is collusive pricing?

Answer 6

When you charge a higher price to external customer because you think competitors will conspire against you to keep the market.

Question 7

What is Dual Pricing?

Answer 7

Different prices for the same product in different market settings. Ex. Airlines!

Question 8

What is predatory pricing?

Answer 8

The opposite of collusive pricing! Pricing below market or cost to get competitors out of the way!

Question 9

When is demand inelastic?

Answer 9

When elastiity is < 1

Question 10

When is demand elastic?

Answer 10

When elastiity is > 1

Question 11

What are the characteristics of a perfectly competitive market?

Answer 11

1. A large number of firms.
2. Very little product differentiation.
3. No barriers to market enty.

Question 12

When will a firm maximize profits?

Answer 12

When Marginal Costs = Marginal Revenue

Question 13

What does a kinked demand curve indicate?

Answer 13

Oligopoly.

Question 14

What are the characteristics of monopolistic competition?

Answer 14

1. Single firm in the market.
2. No substitute products.
3. Ability of a firm to set production and prices.
4. Demand is highly elastic.

Question 15

How do you differentiate the business cycles?

Answer 15

Peak and Through = The highest and lowest.
Expansionary and Contraction = Growing and falling economic activity.
Recovery = Similar to expansionary but this time is LT.

Question 16

What are Leading Indicators?

Answer 16

Those that predict economic activity.
1. Orders for goods.
2. Money Supply.
3. Average New Unemployment Claims.

Question 17

What are Lagging Indicators?

Answer 17

Those that follow economic activity.
1. Consumer Price Index.
2. Prime Rate Charged by Banks.
3. Average Duration of Unemployment.

Question 18

What are Coincident Indicators?

Answer 18

Those that change at the same time as the whole economy.
1. Industrial GDP.

Question 19

What is Cross Elasticity?

Answer 19

Also Quiet, Please!
Cross elasticity is the % change in Qty demanded on prod A, caused by a change in price in prod B.

Question 20

What does the sign of Cross Elasticity indicate?

Answer 20

+ = It indicates that the goods are substitutes. If colgate goes up, I buy Kolynos.
- = It indicates that the goods are complementary. If printers go up, I don’t buy ink.

Question 21

What is Income Elasticity?

Answer 21

Income elasticity is the % change in Qty demanded given a % change in income.

Question 22

What does the sign of Income Elasticity indicate?

Answer 22

+ = It indicates that the good is a normal good. Demand goes up, when income goes up. Ex: Clothes.
- = It indicates that the good is an inferior good. Demand goes down, when income goes up. Ex: Ground Beef & Rib-Eye.

Question 23

What are the Porter’s Five Forces?

Answer 23

1. Barriers to Market Entry.
2. Existence of Substitute Products.
3. Market Competitiveness.
4. Bargaining Power of Customers.
5. Bargaining Power of Suppliers.

Question 24

What is the Required Rate of Return formula?

Answer 24

RF + Inflation Premium + Financial Risks.

Question 25

What is the effect on elasticity on revenue?

Answer 25

Elasticity = 1 = No effect in revenue.
Inelastic = <1 = Increase in price, Increase in revenue.
Elastic = >1 = Decrease in price, Increase in revenue.

Question 26

What makes competition impact profitability of a firm?

Answer 26

1. The market is not growing fast.
2. There are several equal-sized firms in the market.
3. Customers do not have strong brand preferences.
4. The costs of exiting the market exceed the costs of continuing to operate.
5. Some firms profit from making certain moves to increase market share.
6. The various firms in the market use different types of strategic plans.