BEC 5: Economic Concepts

Question 1

What is the difference between nominal and real GDP?

Answer 1

Nominal = "today's" prices
Real = "base year" prices - adj. for changing levels/inflation

Question 2

What is the GDP deflator and its formula?

Answer 2

Price index used to calculate GDP

Real GDP = (Nominal GDP/GDP deflator) * 100

Question 3

What are the summary components of business cycles?

Answer 3

“Every Peak Contracts Through Recovery”

1. Expansionary phase
2. Peak
3. Contractionary phase
4. Trough
5. Recovery phase

Question 4

What are leading indicators? Name 8.

Answer 4

“Before the fact” - predict economic activity - subject to change

1. Avg. new unemployment claims
2. Building permits for residences
3. Avg. length of the workweek
4. Money supply
5. Prices of selected stock
6. Orders for goods
7. Price changes of materials
8. Index of consumer expectations

Question 5

What are lagging indicators? Name 3

Answer 5

Follow economic activity - give signals after the fact

1. Prime rate charged by banks
2. Avg. duration of unemployment
3. Bank loans outstanding

Question 6

What are coincident indicators? Name 2

Answer 6

Occur coincident to economic activity - at the same time

1. Industrial production
2. Manufacture and trade sales

Question 7

What is the multiplier effect and its formula?

Answer 7

“Ripple effect” - refers to fact that an increase in consumer, firm, or gov’t spending produces a multiplied increase in the level of economic activity - results from the marginal propensity to consume (MPC). (the change in consumption due to $1 increase in income.)

Multiplier = 1/(1 - MPC) = MPS
Change in real GDP = multiplier = change in spending
“1 - MPC” = marginal propensity to save

Question 8

What are the factors (not change in price level) that shift aggregate demand? SRAS?

Answer 8

TWICE Government
Taxes
Wealth
Interest rates
Consumer confidence
Exchange rates
Government spending

Changes in input (resources) prices and supply shocks

Question 9

What are the components of the expenditure and income approaches to measuring GDP?

Answer 9

GICE (“flow of products”)

1. Gov’t purchases of goods and services
2. gross private domestic Investment
3. personal Consumption expenditures
4. net Exports

IPIRATED (“flow of earnings and costs”)

1. Income of proprietors
2. Profits of corporations
3. Interest (net)
4. Rental income
5. Adj. for net foreign income and misc. items
6. Taxes (indirect business taxes)
7. Employee compensation (wages)
8. Depreciation (aka. capital consumption allowance)

Question 10

What is the unemployment rate, labor force, and corresponding formula?

Answer 10

Ratio of number of people classified as unemployed (16 yrs. or older, available for work, sought employment in previous 4 weeks) to the total labor force - all non-institutionalized individuals 16 yrs. or older who are working or looking for work

Unemployment rate = (# of unemployed/total labor force) * 100

Question 11

What are the four types of unemployment?

Answer 11

1. Frictional - from routine changing of jobs or temporary lay-offs
2. Structural - jobs not corresponding with skills and unemployed do not live where jobs are located
3. Seasonal - seasonal changes in demand and supply of labor
   (1-3 independent of economic performance “normal”)
4. Cyclical - results from declines in GDP or when the economy fails to operate at potential - no cyclical - full employment

Question 12

Using the CPI, how is the inflation rate calculate?

Answer 12

[(CPI this period - CPI last period)/CPI last period] * 100

Question 13

What is demand-pull inflation? Factors?

Answer 13

Caused by an increase in AD

a. Inc. in gov’t spending
b. Dec. in taxes (D up)
c. Inc. in wealth
d. Inc. in money supply (thus IR down and AD up)

Question 14

What is cost-push inflation? Factors?

Answer 14

Caused by reductions in SRAS

a. Inc. in oil prices (profits and AS down)
b. Inc. in nominal wages (profits and AS down)

Question 15

What are the three measures of money supply?

Answer 15

MI - used for purchases of goods and services - coins, currency, checkable deposits, and traveler’s checks

M2 - M1 + liquid assets that can’t be used as a medium of exchange, but can be easily converted into components of MI - M1, time certificates of deposits less than $100,000, money market deposit accounts at banks, mutual funds accounts, and savings accounts.

M3 - M2 + time certificates of deposit in excess of $100,000

Question 16

What factors, other than price, shift demand curves?

Answer 16

WRITEN

a. changes in Wealth
b. changes in price of Related goods
c. changes in consumer Income
d. changes in consumer Tastes or preferences for a product
e. changes in consumer Expectations
f. changes in the Number of buyers served by the market

Question 17

What factors shift supply curves, other than changes in price?

Answer 17

ECOST

a. changes in price Expectations of the supplying firm
b. changes in production Costs (p of inputs)
c. changes in price or demand for Other goods
d. changes in Subsidies or taxes
e. changes in production Technology

Question 18

What are the two ways the price elasticity of demand can be measured?

Answer 18

Point method - at particular point on D curve
Ep = % change in QD/% change in price
% change in QD = (new D - old D)/old D
% change in P = (new P - old P)/old P

Midpoint method - b/w only 2 points on D curve
Ep = [(Q2 - Q1)/(Q2 + Q1)] / [(P2 - P1)/(P2 + P1)]

Question 19

How do you measure the price elasticity of supply?

Answer 19

Ep = % change in QS / % change in P

Question 20

How do you measure cross elasticity?

Answer 20

Ce = % change in QD or QS of one good caused by the price change of another good

Ce = (% change in # of units of x demanded or supplied) / (% change of price of y)

Question 21

How do you measure income elasticity?

Answer 21

Ie = % change of QD for a product for a given % change in income

Ie = (% change in # of units of x demanded) / (% change in income)

Question 22

What are the three main production concepts?

Answer 22

1. Total Product (TP) - output - total amt. of output (Q) produced
2. Marginal Product (MP) = change in TP resulting from a one-unit increase in the quantity of an input employed - ex.) labor - MP L = Change in TP/Change in L
3. Average Product (AP) = the TP divided by the quantity of an input - ex.) Labor - AP L = TP/L

Question 23

What are the four major cost functions?

Answer 23

1. Avg. FC = FC/Q
2. Avg. VC = VC/Q
3. Avg. TC = TC/Q
4. Marginal Cost (“Incremental Cost”) = Change in TC, resulting from a one-unit increase in Q -> MC = change in TC/change in Q -> depends solely on VC - FC do not influence - produce another as long as, MR > MC

Question 24

What are four market structures in which firms may operate?

Answer 24

1. Perfect (pure) competition - no individual firm can influence the market price of its product, nor shift the market supply sufficiently to make a good more scarce or abundant.
2. Monopolistic competition - many sellers compete to sell “diff.” product in a mkt. into which entry of new sellers is possible.
3. Oligopoly - “few sellers” dominate the sales of a product and entry of new sellers is difficult or impossible.
4. Monopoly - represents concentration of supply in the hands of a single firm.
   * Know chart on pages 41-42!

Question 25

What are sources of internal strengths and weaknesses?

Answer 25

a. Innovation of product lines b. Competence of mngt. c. Core competencies d. Influence of high level managers e. Capital improvements f. Leadership in R&D g. Cohesiveness of the values of the organization h. Marketing effectiveness i. Effectiveness of communication j. Clarity of the strategic mission

Question 26

For external opportunities and threats, what are the factors that affect the overall industry and competitive environment of the industry, and what are the factors that affect the competitive environment of the firm?

Answer 26

1. a. The economy b. Regulations and laws c. Demographics of the population d. Technological advances and existing technology e. Social values f. Political issues 2. "Porter's 5 Forces" a. Barriers to mkt. entry b. Mkt. competitiveness c. Existence of substitute products d. Bargaining power of customers e. Bargaining power of suppliers

Question 27

What are the major strategies for value chain analysis, and what are the three major forms of analysis for VCA?

Answer 27

1. Core competencies 2. Industry structure 3. Segmentation analysis 1. Internal cost analysis - determine internal value creating ability - analyze sources of profits and costs of internal activities - variance analysis 2. Internal differentiation analysis - analyze ability to create value through differentiation - benefit > cost 3. Vertical linkage analysis - understanding the activities of suppliers and buyers and determine where value can be created external to operations.

Question 28

What are the steps for VCA?

Answer 28

1. Identify value activities 2. Identify cost drivers associated with each activity. 3. Develop a comparative advantage by reducing costs or adding value. a. Identify comp. adv. b. Identify opp. for added value c. Identify opp. for reduced costs 4. Exploit linkages among activities in the value chain - "segment analysis"

Question 29

What are the four major factors that impact global competitive advantage?

Answer 29

1. Conditions of the factors of production (raw material/labor) 2. Conditions of domestic demand 3. Related and supporting industries ("suppliers") 4. Firm strategy, structure, and rivalry (laws and regulations)

Question 30

What is the SCOR model and its 4 key mngt. processes?

Answer 30

Supply Chain Operations Reference model - developed by the supply chain council to attempt to create a generic model for supply chain analysis. 1. Plan 2. Source 3. Make 4. Deliver