BEC 5 Flashcards
Trough of a business cycle
Is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.
Business cycles (economic fluctuations)
Business cycles are best described as fluctuations in the level of economic activity, relative to a long-term growth trend.
Change in GDP formula
Change in GDP= Spending/ (1- MPC)
MPC=Marginal propensity to consume
also: 1/ (1-MPC) X Spending
Full employment
When there is full employment there is still some unemployment known as the natural rate of unemployment such as frictional, structural, and seasonal.
Frictional unemployment: time lag that individuals experience between jobs
Structural unemployment: mismatch of skills and jobs in the economy.
Seasonal unemployment: fluctuations in employment as a result of seasonal demand.
Cyclic unemployment
Is caused by the business cycle. It tends to rise during a recession and fall during an expansion.
Expenditure approach
GICE mnemonic
The expenditure approach to computing GDP includes “GICE”
Government expenditures
capital Investment
Consumption
net Exports
Expansionary monetary policies
Expansionary monetary policies affects the economy through the following chain of events:
1) an increase in the money supply causes interest rates to fall,
2) falling interest rates stimulate the desired levels of firm investment and household consumption
3) increases in desired investment and consumption cause an increase in aggregate demand
4) aggregate demand shifts to the right causing real GDP and the price level to rise.
Real interest rate
Real interest rate = Nominal interest rate - Inflation rate
Inflation rate calculation
Inflation rate = CPI (this period) - CPI (last period) / CPI (last period) X 100
Inflation rate
Inflation rate measures the rate of increase in the overall price level in the economy.
Stagflation
Stagflation occurs when the economy suffers a recession that is characterized by falling output, rising unemployment, and a rising price level.
Deflation
Deflation is defined as a continuous or sustained decline in the overall price level.
Personal income vs disposable income
Personal income represents income received by households and noncorporate businesses.
While disposable income is the entire amount of personal income minus personal taxes for households and noncorporate businesses.
Demand-pull inflation
can be caused by tax decreases
Cost-push inflation
can be caused by an increase in nominal wages.
Perfect competition
aka pure competition
Key assumptions:
1) customers are indifferent about which firm they buy from
2) the level of a firm’s output is small relative to the industry’s total output
3) there is freedom of entry into and exit out of the industry
4) firm is a price-taker
Monopolistic competition
Includes:
1) numerous firms with differentiated products
2) ease of entry- few barriers
3) firms exact some influence over price and market
4) non-price competition is frequent and critical
Oligopoly market conditions
Characterized by
1) few firms in the market
2) significant barriers to entry
3) differentiated products
4) fixed (or semi fixed) prices
5) kinked demand curves
The following are situations that would cause competition to be an even stronger force impacting the profitability of a firm
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) various firms in the market use different types of strategic plans
The following factors increase the bargaining power of the customer:
1) customers make up a large volume of a firm’s business
2) there is much information available to customers
3) the buyers have low switching costs
4) there are a high number of alternate suppliers
Supply Chain Operations Reference (SCOR) model
1) Plan -balance supply and demand goals and objectives
2) Source-how to the entity obtains its resources for production
3) Make- production process
4) Deliver- all activities of getting the finished products into the hands of the ultimate consumers
Elasticity of demand
Elasticity of demand= % change in qty demand/ % change in price
Elasticity of supply
Price elasticity of supply %= % change in quantity supplied/ change in price
Michael Porter’s five forces
Barriers to market entry Bargaining power of customers Existence of a substitute product Market competitiveness Bargaining power of suppliers
