B5 - Economic Concepts and Analysis Flashcards
What are the business cycles?
- Peak
- Recession (contraction)
- Trough
- Recovery (expansion)
What is a peak?
- The high point of economic activity.
- Firms’ profits are likely to be at the highest levels
- Firms are likely to phase capacity constraints and input shortages (raw material and labor) leading to higher costs and prices levels.
What is a trough?
- The low point of economic activity.
- Firms’ profits are likely to be at their lowest levels.
- Firms experience significant excess production capacity, leading them to reduce their workforce and cut costs.
- Unwillingness to risk investment.
What is an expansionary phase?
- It is characterized by rising economic activity (GDP) and growth.
- Firms are likely to invest and increase their workforce.
- Prices and goods are likely to be rising.
What is a recession?
When the economy experience negative economic growth (decline in national output). Potential output exceeds actual output. Real GDP is falling for at least 2 consecutive quarters.
When does a natural monopoly exists?
- A natural monopoly exists when economic and technical conditions permit only one efficient supplier.
- Unsurmountable barrier to entry (e.g., patent)
- Focus on maximizing profits, don’t worry about price.
- Single firm controls the entire market.
What is a tarrif?
- A tax assessed on imported goods.
- Generate revenue for domestic governments and help protect domestic producers by making imported goods more expensive and less attractive.
What is dumping?
Dumping occurs when the price charged to foreign customers on exported goods is less than either the price charged in the domestic market or less than the production cost.
What is the effect of the supply side inputs in the long-run?
In micro-economic analysis, in the long run all supply inputs are variable. In accounting terms, this means that in the long run all costs are variable (e.g., fixed costs of depreciation of a factory building becomes a variable cost when a secondary factory building is added).
When does a surplus result in a competitive model?
A surplus results when the quantity demanded will be less than the quantity supplied (e.g., government price support programs). A surplus results when minimum price is set above equilibrium.
When does a shortage result in a competitive model?
A shortage results when the quantity demanded will exceed the quantity supplied. A shortage results when maximum prices is set below equilibrium.
What is collusive pricing?
- Collusive pricing anticipates that competitors will collude or conspire to maintain prices and mutual profitability.
- Collusive pricing maintains prices to external customers at levels higher than they would be in a competitive market place.
What is dual pricing?
- Dual pricing involves assigning different prices to the same product in different market settings.
- Extension of competitive prices.
- results in higher prices than would be experienced in competitive markets.
What is predatory pricing?
- Predatory pricing typically result in lower prices to external customers than competitive pricing.
- It is undertaken by larger organizations that can absorb losses and deliberately do so in an attempt to drive smaller, less capitalized, competitors from the market place.
What is transfer pricing?
- Transfer pricing is the change made between affiliates for products or services.
- It may be at any level including cost and market and do no relate to the establishment of prices to external customers.
- The goal is to transfer as much cost as possible to the subsidiary with the highest tax rate.
What is elasticity of demand or supply?
it is a measure of how sensitive the demand for or the supply of a product is to change in its price.
What is the formula to compute price elasticity of demand?
- % change in Quantity demanded = new quantity - old quantity/old quantity
- % change in price = new price - old price/old price
- Price elasticity of demand = % change in quantity demanded/% change in price
If elasticity of demand is > 1.0 - it is elastic
if elasticity of demand is < 1.0 - it is inelastic.
What is the formula to compute price elasticity of supply?
- % change in Quantity supplied = new quantity - old quantity/old quantity
- % change in price = new price - old price/old price
- Price elasticity of supply = % change in quantity supplied/% change in price
If elasticity of supply is > 1.0 - it is elastic
if elasticity of supply is < 1.0 - it is inelastic.
If there is an increase in price, what is the impact in total revenue if there is a unit elastic demand?
If price increase and a unit elastic demand is used, there is no effect in total revenue.
What is an inferior good?
An inferior good is a product whose demand is inversely related to income (opposite of a normal good).
As income goes up, the demand for inferior goods decrease (e.g., hamburgers) - negative income elasticity.
What is hyperinflation?
Hyperinflation occurs when a country sees very high (and often accelerating) price level increases.
What is inflation?
Inflation is an increase in price over time.
What is deflation?
Deflation is a sustained decrease in the general price of goods and services. It occurs when prices on average are falling over time.
What is the formula to adjust an initial cost for inflation?
Real cost = initial cost before increase * (1+inflation rate)n