BEC - Economic Concepts Flashcards
Microeconomics Defined
Economic activity at the level of individual decision-making unit.
Ex: individuals, households, firms, and other single entities making economic decisions to allocate their limited resources.
Macroeconomics Defined
Economic activity at the national level.
International Economics
Economic activity across national boundaries.
Graph definition
Diagram that shows relationship between two sets of values (variables)
Positive line slope (going up and out)
Indicating the two variables move in the same direction.
Negative line slope (down and out)
Indicating the two variables move in opposite directions.
Neutral line slope (straight line horizontal or vertical)
Indicating that one variable does not change with changes in the other variable.
Time series graph line slope
Showing the change in a variable over time (time = the x-axis // horizontal axis)
Economics Defined
The study of the allocation of scarce economic resources among alternative uses.
Command Economic System
Government determines the production, distribution and consumption of goods and services.
Market Economic System
Individuals, businesses and other distinct entities determine the production, distribution and consumption of goods and services.
Examples of economic resources
Labor, capital, natural resources
Demand Defined
Desire, willingness and ability to acquire a commodity.
Demand Schedule Defined
Shows the quantity of a good or service that will be demanded at various prices.
The quantity demanded and price are ________ related
INVERSELY
*More if a good or service will be demanded at a lower price than at a higher price.
Ceteris Paribus Defined
Other factors held constant
Demand is _________ sloped
NEGATIVELY (downward)
Lower price = More demand
Two factors that cause the negatively sloped demand curve:
(1) Income Effect - individuals can purchase more units at a lower price
(2) Substitution Effect - lower priced items will be purchased as substitutes for higher priced items.
Along a given demand curve, only ______ changes
PRICE.
all other factors are unchanged (size of market, wealth of buyers, price of their goods, etc. are all considered unchanged)
Change in demand =
Shift in demand curve.
Factors other than price change
Ex: price of substitute good, change in price of complementary commodity, buyers preferences change, size of market, wealth of buyers, etc.)
Demand Decreases = curve shifts left and down
Demand Increases = curve shifts right and up
Change in Quantity Demanded
Movement along a given demand curve as a result of a change in price ONLY.
Derived Demand
Demand for a good or service that results because it is an input needed in order to provide another good or service for which there is demand.
Supply Defined
The quantity of a good or service that will be provided at different prices.
*increasing output normally results in higher per unit cost, more goods will be provided only at higher sales prices. (Law of diminishing returns)
Supply is __________ sloped
POSITIVELY (upward)
Along a given supply curve, only ______ changes
PRICE.
As price increases, a larger qty will be provided.
Sum of individual supply curves =
Market supply curve
Change in supply =
Shift in the supply curve
Shift to the left = decrease in supply
Shift to the right = increase in supply
Shifts in supply curve result from changes in factors OTHER THAN price changes
Ex: # of providers, costs of inputs, technology, etc.
Change in quantity supplied Defined
Movement along a given supply curve as a result of change in price only.
Change in supply Defined
Shift in a supply curve caused by factors other than price
Market Equilibrium occurs where…
Market demand intersects market supply
*that intersection establishes equilibrium quantity and price.
At market equilibrium…
Demand …..
Supply …..
Demand in the market just takes the supply provided
Supply in the market just meets demand
At equilibrium price there is neither a _______ or a ________
Shortage nor a surplus
Market Shortages =
Actual price charged is less than equilibrium price
*lower actual price means demand will exceed supply. Ex: Rent Controls
Market Surpluses =
Actual price charged is more than equilibrium price.
*higher actual price means supply will exceed demand. Ex: minimum wage
Causes of a change in market equilibrium:
If DEMAND ONLY CHANGES –
Equilibrium quantity and price will change in the same direction as demand.
Causes of a change in market equilibrium:
If SUPPLY ONLY CHANGES –
Equilibrium quantity will change in the same direction as supply, but equilibrium price will change in opposite direction.
Causes of a change in market equilibrium:
If BOTH DEMAND AND SUPPLY CHANGE –
New equilibrium quantity and price will depend on direction and magnitude of each change
Elasticity of Demand =
Way of measuring the change of price on quantity demanded.
A measure of the extent to which quantity demanded charges as a result of a change in price.
Elasticity of Demand Formula
% change in quantity
/
% change in price
Elasticity > 1
Elastic
Meaning in % change
Q Demand > Price
Elasticity = 1
Unitary
Meaning in % change
Q Demand = Price
Elasticity < 1
Inelastic
Meaning in % change
Q Demand < Price
Elasticity of Demand and Total Revenue – elasticity of >1
Price increase = Total Revenue Decrease
price decrease = Total Revenue Increase
Elasticity of Demand and Total Revenue – elasticity of =1
Price increase = Total Revenues do not change
price decrease = Total Revenues do not change
Elasticity of Demand and Total Revenue – elasticity of <1
Price increase = Total Revenue Increase
price decrease = Total Revenue decrease
Elasticity of supply
Measures the effect of a change in price on quantity supplied.
Cross elasticity of Demand
Measures the effect of a change of price on one commodity on the quantity demanded on another commodity
“Utility” Defined
Satisfaction derived from the acquisition of a good or service.
Measurement is called Util
*highly theoretical.
Total utility ______ as quantity acquired ______
Increases. Increases.
Marginal utility ______ as more united are acquired
DECREASES.
The utility derived from the last acquired unit.
Decreases as the number of units are acquired.
(Law of diminishing marginal utility)
Maximize total utility
Where last dollar spent on every commodity acquired gives same marginal utility
Indifference curve
Quantities of two commodities give the same satisfaction
Define “Not Interdependent”
The value of one variable does not depend on the value of another variable. (Straight lines - one value remains constant)
Short-run analysis
Period during which at least one input to the production process cannot be varied.
Ex: size/capacity of a production line.
Long-run analysis
Period during which all inputs to the production process can be varied.
Ex: size/number of plants can be changed.
Total Fixed Costs
Does not change with changes in the level of output
Ex: RE taxes, insurance, contracted rent.
Total Variable Acosta
Varies directly with changes in the level of output
Ex: raw materials, direct labor, electricity, etc.
Total Cost (TC)
Total fixed costs (FC) + Total variable cost (VC)
Average fixed cost (AFC)
Per unit fixed cost
AFC = total fixed cost / united produced
Average Variable Cost (AVC)
Per unit variable cost
AVC = Total variable cost / units produced
Average Variable Cost is ___ shaped
“U” shaped - due to the law of diminishing returns
*think of the Subway Shop example
Law of Diminishing Returns
In a system with both fixed and variable cost inputs, adding more variable inputs will eventually result in less and less (diminishing) output per unit of input.
*variable inputs overwhelm fixed factors (think too many subway employees and not enough room)
Inefficiencies result & AVC begins to increase
Marginal Cost
Cost of last acquired unit of input
Computed as:
Change in successive variable costs, or
Change in successive total costs
Long-run average cost curve
Developed as minimum points on a series of short-run average cost curves for different size or number of plan facilities
Market Structure Defined
Economic environment within which a firm produces and distributes its goods/services
Primary Factors that distinguish different market structures:
- number of sellers/buyers in market
- nature of the commodity in the market
- difficulty of entry into the market
4 different market structures
- Perfect competition
- Perfect monopoly
- Monopolistic competition
- Oligopoly
Normal Profit
Measures as just the amount of profit necessary to cover operating costs and compensate owners for their capital investment and/or managerial skills. No amount of “excess” profit is included beyond the minimum amount needed to attract and retain the owners’ capital and/or managerial skills.
Economic Profit
Measures as any amount greater than that of normal profit. Unlike normal profit, the amount of economic profit is not constrained or of a limited amount. The amount of profit may be in excess of the minimum amount needed to attract and retain the owners’ investment. Consistent with “accounting Profit”.
Perfectly Competitive market or industry is characterized by:
- large number of independent buyers and sellers, each too small to affect price
- firms sell a homogeneous product
- market entry and exit are easy
- buyers and sellers have complete information
*such a market is virtually non-existent
Firms in a perfectly competitive market are considered price ______
TAKERS
They can not affect price.
Perfect Competition - where is profit maximized
Where marginal cost = marginal revenue
Perfect monopoly market or industry is characterized by:
- single seller
- good or service for which there are no close substitutes
- market entry is restricted
Single firm = market
Two basic reasons monopolies exist
- Economies of scale - a single producer can produce at a lower cost than multiple producers
Ex: public utilities “natural monopoly” - increasing returns to scale - Legal authority or control - a single producer has sole legal authority or sole control of resources
Ex: holding a patent
Monopolistic competition is characterized by:
- large number of sellers
- firms sell differentiated product, or one that is similar, but not identical.
- products sold has close substitutes
- market entry and exit are easy
Long run analysis in monopolistic competition
Firms making profit = firms enter market (ease of entry) = less demand for each firm
Firms have loss = firms leave market = more demand for each
Equilibrium = al firms just break even; no long-run excess profits
Oligopoly is characterized by:
- few sellers (means interdependence among sellers / actions of each seller affects others)
- firms sell either homogeneous or differentiated products
- market entry is restricted
In an Oligopoly ______ tends not to change
PRICE.
Could result in “price war”.
Firms tend to compete on factors other than price. Ex: advertising/promotion, packaging, service
Overt collusion Defined
Conspiring to set outputs, prices or profits among firms - illegal in US.
This goes by the term a cartel.
Tacit Collusion Defined
Involves firms following prices set by market leader
Collusive pricing Defined
Occurs when the few firms in an oligopolistic market (or industry) conspired to set the price at which a good or service will be provided.
What market feature is likely to cause a surplus of a particular product
A price floor
What market feature is likely to cause underproduction and shortages
A price ceiling
Macroeconomics Defined
Study of economic activity and outcomes for an entire economy.
Injections Defined
Additions to domestic production not from individuals’ expenditures
Ex: investment expenditures, government spending/subsidies, exports.
Aggregate Demand Defined
Total spending in economy
Sum of all market demand curves in an economy (consumption spending, investment, govt spending and net exports (net imports would be subtracted))
Consumption Spending Defined
Spending by individuals on goods and services.
Does not include purchases of new housing (that is investment)
Consumption function defined
Measures the relationship between disposable income (PDI) and consumption spending (CS)
Average Propensity to Consume (APC)
Measures the percent of disposable income (PDI) spent on consumption (CS)
Reciprocal of APC IS Average Propensity to Save (APS) – the two = 100% of PDI
Marginal Propensity to Consume (MPC)
Measures the change in consumption spending as a percent of the change in disposable income.
Investment Spending Defined
Spending on capital items
Ex: residential construction, non-residential construction, business PP&E and business inventory.
Tends to fluctuate more than CS
Factors Influencing Investment Spending
Interest rates ** most significant
Demographics, consumer confidence, consumer income and wealth, level of capacity utilization, technological advances, vacancy rates, current and expected levels of sales, etc.
Government Spending Defined
Purchases of goods and services by all levels of government.
- Excludes transfer payments (Social Security)
- changes in govt Spending impact taxes, which impact PDI, which change personal consumption.
Government directly affects aggregate demand by changes to:
Government spending and government taxes
Discretionary Fiscal Policy
Government changes to spending or taxation to impact aggregate demand.
Exports Defined
Amount of foreign spending on U.S. goods
Imports Defined
Amount of U.S. spending on foreign goods.
Net exports Defined
Exports - Imports
- positive = exports > imports: increases aggregate demand
- negative = imports > exports: decreases aggregate demand (domestic production)
Primary factors influencing a country’s relative imports/exports include:
- relative levels of income and wealth
- relative currency exchange rates
- relative price levels
- relative inflationary rates
- import/export restrictions and tariffs
Change in Aggregate Demand
Shift in aggregate demand curve
(Factors other than price changes)
Ex for outward shift (increase in aggregate demand) reduction in personal taxes or corp taxes, improved consumer confidence, new technology resulting in increased investment, interest rate declines, govt spending increases, exports increase/imports decrease, increases in wealth (stock market gains)
Multiplier Effect Defined
Ripple effect of a change in demand on total change in demand
Ex: increased investment spending = more personal income = more consumption spending
Aggregate supply Defined
Total output of goods and services produced in the economy at different price levels
Three theories for the aggregate supply curve slope
- Classical
- Keynesian
- Conventional
Classical aggregate supply curve
Completely vertical supply curve
- no change in output as price increases at full employment
- it may be associated with the very short-term
Keynesian aggregate supply curve
Horizontal up to the output at full employment, then slopes upward
-increasing supply at a price until full employment, then increased supply ONLY with increased price.
Conventional aggregate supply curve
Continuous positive slope that is steeper for output after full employment
-at full employment, prices increase proportionately faster than output supplied
Changes in aggregate supply
A change in supply is a shift in the aggregate supply curve (factors other than price)
Ex: resources available increase, cost of resources decrease, technological advances occur - would cause the shift outward.
If you just have a change in price it is a movement on the supply curve
Do exports impact supply or demand?
DEMAND
Aggregate equilibrium
Aggregate demand = aggregate supply
Where they intersect.
Nominal Gross Domestic Product Defined
Measures the total output of FINAL GOODS and services produced for exchange IN THE DOMESTIC MARKET during a period.
Nominal = Not adjusted for changing prices.
- Does not include goods/services which require additional processing
- doesn’t include volunteer activities
- does not include goods produced in foreign countries by US owned entities
Expenditure approach for measuring GDP
Measures GPD using final sales/purchases; the sum of spending by individuals, businesses, governments, and foreign buyers (exports).
Income approach for measuring GDP
Measures GPD as the value of income and resources’ costs; the sum of: compensation, rental income, proprietors’ and corporate income, net interest, taxes on production and inputs, and depreciation and misc. other items.
Real Gross Domestic Product Defined
Measures the total output of final goods and services produced for exchange in the domestic market during a period at content prices.
Real GDP = Nominal GDP adjusted for changing prices
Real GDP per capita = real GDP per individual
Computer as Real GDP / the population
Net Gross Domestic Product Defined
Measures GDP less capital consumption during the period. (GDP - Depreciation)
Potential GDP Defend
Measures maximum output that can occur in domestic economy at a point in time without creating upward pressure on general level of prices.
- theoretical measure
- assumes full use of available technology and current resources
- commonly estimated by adjusting actual GDP
Gross Domestic Product Gap Defined
Difference between Real GDP and potential GDP.
- Real GDP < Potential GDP = negative GDP Gap - inefficiency in the economy.
- Real GDP > Potential GDP = positive GDP Gap-creates upward pressure on prices.
Gross National Product Defined
Measures the total output of all goods and services produced WORLD-WIDE USING US RESOURCES.
Includes goods and services produced in foreign countries by US owned entities.
Net National Product Defined
Measures the total output of all goods and services produced world-wide using US resources, but does not include a value for depreciation.
NNP = GNP - Depreciation Factor
National Income Defined
Measures the total payment for economic resources included in the production of all goods and services, includes payments for: wages, rents, interest and profits.
Personal Income Defined
Measures total payments for economic resources received by individuals.
PI = NI - Corp profits - SS deductions + dividends and interest received by individuals + government transfer payments to individuals
Personal Disposable Income Defined
Measures the amount of income individuals have to spend
PDI = PI - Income Taxes
Gross Domestic Product Defined
Measures the total output of FINAL GOODS AND SERVICES PRODUCED in the domestic market for exchange during a period.
Frictional unemployment Defined
Those in labor force not employed because they
(A) are in transition between jobs
(B) don’t have information needed to get matched up with an employer
Ex: those moving to seek employment, those looking for a job they believe meets their education or experience.
Structural unemployment Defined
Those not employed because
(A) the need for their prior types of jobs ah e been greatly reduced or eliminated
(B) they lack the skills for currently available jobs
Ex: technological advances that make certain jobs obsolete
Seasonal unemployment Defined
Those out of work because their jobs regularly and predictably vary by the season of the year.
Ex: school bus drivers
Cyclical unemployment Defined
Those not employed because of a downturn in the business cycle
Ex: an economic downturn (recession) reduced the current demand for employees (labor)
*this is the most important
Unemployment rate Defined
Percentage of the LABOR FORCE not employed
*NOT percentage of population not employed.
Natural unemployment rate Defined
Those unemployed due to frictional, structural and seasonal reasons.
Full employment Defined
Only when there is no cyclical unemployment
*frictional, structural and seasonal are not considered when measuring full employment
Business cycles Defined
Cumulative fluctuation up and down in aggregate real gross Domestic Product
- measures in terms of real GDP (constant price level)
- recur over time
- no consistent pattern of length or magnitude
Change in _______ ______ seem to be the primary cause for changes of business cycles
INTEREST RATES
affects investment in durable goods by individuals and firms.
Business cycle indicators Defined
Hanged in specific measures of economic activity that are associated with changes in overall business cycle.
Two types of economic indicators
(1) leading economic indicators
(2) lagging economic indicators
Leading economic indicator Defined
Changes in measures that occur before changes in business cycles.
Ex: Consumer expectations, initial unemployment claims, weekly manufacturing hours, stock prices, building permits issued, new orders for consumer goods, level of real money supply.
May indicate future changes in the business cycle
Lagging economic indicators Defined
Changes in measures that occur after changes in business cycle
Ex: changes in labor cost per unit of output, relationship between inventory and sales, length of unemployment, amount of commercial loans outstanding, relationship between consumer installment credit and personal income.
Help to confirm the timing and magnitude of a business cycle.
Define inflation
The purchasing power of money declines.
Price ________ neutralize the effects of changing prices on such measures
INDEXES
Consumer Price Index (CPI) defined
Relates price of a basket of goods and services during a period to price of the basket of consumer goods and services in a prior base period.
Most common CPI index
CPI-U = consumer price index for all urban consumers.
Base period for CPI-U is average prices for 36-month period 1982-1984
Producer Price Index Defined
Measures the average change over time in the selling prices received (Revenue received) by domestic producers for their output.
-greater set of goods and services that CPI-U, spanning the entire range of output by US producers
Primary purpose of PPI
Used to deflate revenue streams in order to measure real growth in output.
Gross Domestic Product Deflator
Relates nominal GDP to real GDP.
- attempts to include all Spending in GDP
- more comprehensive than CPI-U or PPI
- composition of “basket” changes more frequently than CPI or PPI
Inflation Defined
Rate of increase in the price level
Deflation Defined
Rate of decrease in the price level
Two fundamental causes of inflation:
(1) DEMAND INDUCED (demand-pull) inflation–aggregate spending for goods and services exceeds productive capacity of the economy at full employment. (Excess Demand pulls up prices)
(2) SUPPLY INUCED (cost-push) inflation–increases in the cost of inputs result in higher prices passed on to end user. (Increase in input prices does not always cause inflation. Sometimes sellers accept a lower profit margin and do not pass on inflation)
Consequences of inflation
Results in lower current wealth & real income, which results in reduced aggregate demand
Results in higher interest rates as lenders seek to keep up with inflation, which results in reduced investment in capital goods.
Generally leads to uncertainty in the economy.
M1 measure of money Defined
Narrowest measure of money.
Includes: paper and coin currency (held outside of banks), check writing deposits in banks–funds that can be accessed using checks
M2 measure of money Defined
Includes all items in M1, plus savings deposits, money-market deposits, certificates of deposit less than $100k, individual-owned money-market mutual funds
M3 measure of money Defined
Includes items in M2, plus certificates of deposits greater than $100k, institutional-owned money-market mutual funds
Federal reserve system: federal board of governors
Seven-member policy making body of the federal reserve system. Appointed by the president with approval by the senate.
Federal reserve system: federal open-market committee
12 member body responsible for implementing monetary policy to effect money supply through open-market operations.
Federal reserve system: federal reserve bank
12 district banks each responsible for a geographical area.
Owned by member institutions in the area.
Monetary Policy Defined
The managing of the money supply to achieve national economic objectives.
Federal reserve requirement Defined
Percent of loans made by banks that must be held in reserve.
Ex: 10% reserve requirement = $10 held in reserve for every $100 in loans.
Increasing reserve requirement = decreases loans and money supply.
Federal open market operations
Federal buying and selling US treasury debt with member banks.
Ex: buying US treasury debt from member banks = increases funds available to banks for loans.
*most important means by which the money supply is controlled.
Federal discount rate
Interest rates that member banks pay when borrowing from the Fed
Increasing discount rate = reduced borrowing and reduced money supply
Decreasing discount rate = increased borrowing and increased money supply
