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BEC - Economic Concepts Flashcards

1
Q

Microeconomics Defined

A

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.

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2
Q

Macroeconomics Defined

A

Economic activity at the national level.

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3
Q

International Economics

A

Economic activity across national boundaries.

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4
Q

Graph definition

A

Diagram that shows relationship between two sets of values (variables)

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5
Q

Positive line slope (going up and out)

A

Indicating the two variables move in the same direction.

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6
Q

Negative line slope (down and out)

A

Indicating the two variables move in opposite directions.

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7
Q

Neutral line slope (straight line horizontal or vertical)

A

Indicating that one variable does not change with changes in the other variable.

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8
Q

Time series graph line slope

A

Showing the change in a variable over time (time = the x-axis // horizontal axis)

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9
Q

Economics Defined

A

The study of the allocation of scarce economic resources among alternative uses.

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10
Q

Command Economic System

A

Government determines the production, distribution and consumption of goods and services.

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11
Q

Market Economic System

A

Individuals, businesses and other distinct entities determine the production, distribution and consumption of goods and services.

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12
Q

Examples of economic resources

A

Labor, capital, natural resources

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13
Q

Demand Defined

A

Desire, willingness and ability to acquire a commodity.

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14
Q

Demand Schedule Defined

A

Shows the quantity of a good or service that will be demanded at various prices.

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15
Q

The quantity demanded and price are ________ related

A

INVERSELY

*More if a good or service will be demanded at a lower price than at a higher price.

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16
Q

Ceteris Paribus Defined

A

Other factors held constant

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17
Q

Demand is _________ sloped

A

NEGATIVELY (downward)

Lower price = More demand

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18
Q

Two factors that cause the negatively sloped demand curve:

A

(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.

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19
Q

Along a given demand curve, only ______ changes

A

PRICE.

all other factors are unchanged (size of market, wealth of buyers, price of their goods, etc. are all considered unchanged)

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20
Q

Change in demand =

A

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

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21
Q

Change in Quantity Demanded

A

Movement along a given demand curve as a result of a change in price ONLY.

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22
Q

Derived Demand

A

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.

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23
Q

Supply Defined

A

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)

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24
Q

Supply is __________ sloped

A

POSITIVELY (upward)

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25
Q

Along a given supply curve, only ______ changes

A

PRICE.

As price increases, a larger qty will be provided.

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26
Q

Sum of individual supply curves =

A

Market supply curve

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27
Q

Change in supply =

A

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.

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28
Q

Change in quantity supplied Defined

A

Movement along a given supply curve as a result of change in price only.

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29
Q

Change in supply Defined

A

Shift in a supply curve caused by factors other than price

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30
Q

Market Equilibrium occurs where…

A

Market demand intersects market supply

*that intersection establishes equilibrium quantity and price.

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31
Q

At market equilibrium…
Demand …..
Supply …..

A

Demand in the market just takes the supply provided

Supply in the market just meets demand

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32
Q

At equilibrium price there is neither a _______ or a ________

A

Shortage nor a surplus

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33
Q

Market Shortages =

A

Actual price charged is less than equilibrium price

*lower actual price means demand will exceed supply. Ex: Rent Controls

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34
Q

Market Surpluses =

A

Actual price charged is more than equilibrium price.

*higher actual price means supply will exceed demand. Ex: minimum wage

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35
Q

Causes of a change in market equilibrium:

If DEMAND ONLY CHANGES –

A

Equilibrium quantity and price will change in the same direction as demand.

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36
Q

Causes of a change in market equilibrium:

If SUPPLY ONLY CHANGES –

A

Equilibrium quantity will change in the same direction as supply, but equilibrium price will change in opposite direction.

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37
Q

Causes of a change in market equilibrium:

If BOTH DEMAND AND SUPPLY CHANGE –

A

New equilibrium quantity and price will depend on direction and magnitude of each change

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38
Q

Elasticity of Demand =

A

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.

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39
Q

Elasticity of Demand Formula

A

% change in quantity
/
% change in price

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40
Q

Elasticity > 1

A

Elastic

Meaning in % change
Q Demand > Price

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41
Q

Elasticity = 1

A

Unitary

Meaning in % change
Q Demand = Price

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42
Q

Elasticity < 1

A

Inelastic

Meaning in % change
Q Demand < Price

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43
Q

Elasticity of Demand and Total Revenue – elasticity of >1

A

Price increase = Total Revenue Decrease

price decrease = Total Revenue Increase

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44
Q

Elasticity of Demand and Total Revenue – elasticity of =1

A

Price increase = Total Revenues do not change

price decrease = Total Revenues do not change

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45
Q

Elasticity of Demand and Total Revenue – elasticity of <1

A

Price increase = Total Revenue Increase

price decrease = Total Revenue decrease

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46
Q

Elasticity of supply

A

Measures the effect of a change in price on quantity supplied.

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47
Q

Cross elasticity of Demand

A

Measures the effect of a change of price on one commodity on the quantity demanded on another commodity

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48
Q

“Utility” Defined

A

Satisfaction derived from the acquisition of a good or service.

Measurement is called Util
*highly theoretical.

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49
Q

Total utility ______ as quantity acquired ______

A

Increases. Increases.

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50
Q

Marginal utility ______ as more united are acquired

A

DECREASES.

The utility derived from the last acquired unit.

Decreases as the number of units are acquired.
(Law of diminishing marginal utility)

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51
Q

Maximize total utility

A

Where last dollar spent on every commodity acquired gives same marginal utility

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52
Q

Indifference curve

A

Quantities of two commodities give the same satisfaction

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53
Q

Define “Not Interdependent”

A

The value of one variable does not depend on the value of another variable. (Straight lines - one value remains constant)

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54
Q

Short-run analysis

A

Period during which at least one input to the production process cannot be varied.
Ex: size/capacity of a production line.

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55
Q

Long-run analysis

A

Period during which all inputs to the production process can be varied.
Ex: size/number of plants can be changed.

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56
Q

Total Fixed Costs

A

Does not change with changes in the level of output

Ex: RE taxes, insurance, contracted rent.

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57
Q

Total Variable Acosta

A

Varies directly with changes in the level of output

Ex: raw materials, direct labor, electricity, etc.

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58
Q

Total Cost (TC)

A

Total fixed costs (FC) + Total variable cost (VC)

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59
Q

Average fixed cost (AFC)

A

Per unit fixed cost

AFC = total fixed cost / united produced

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60
Q

Average Variable Cost (AVC)

A

Per unit variable cost

AVC = Total variable cost / units produced

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61
Q

Average Variable Cost is ___ shaped

A

“U” shaped - due to the law of diminishing returns

*think of the Subway Shop example

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62
Q

Law of Diminishing Returns

A

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

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63
Q

Marginal Cost

A

Cost of last acquired unit of input

Computed as:
Change in successive variable costs, or
Change in successive total costs

64
Q

Long-run average cost curve

A

Developed as minimum points on a series of short-run average cost curves for different size or number of plan facilities

65
Q

Market Structure Defined

A

Economic environment within which a firm produces and distributes its goods/services

66
Q

Primary Factors that distinguish different market structures:

A
  • number of sellers/buyers in market
  • nature of the commodity in the market
  • difficulty of entry into the market
67
Q

4 different market structures

A
  1. Perfect competition
  2. Perfect monopoly
  3. Monopolistic competition
  4. Oligopoly
68
Q

Normal Profit

A

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.

69
Q

Economic Profit

A

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”.

70
Q

Perfectly Competitive market or industry is characterized by:

A
  • 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

71
Q

Firms in a perfectly competitive market are considered price ______

A

TAKERS

They can not affect price.

72
Q

Perfect Competition - where is profit maximized

A

Where marginal cost = marginal revenue

73
Q

Perfect monopoly market or industry is characterized by:

A
  • single seller
  • good or service for which there are no close substitutes
  • market entry is restricted

Single firm = market

74
Q

Two basic reasons monopolies exist

A
  1. Economies of scale - a single producer can produce at a lower cost than multiple producers
    Ex: public utilities “natural monopoly” - increasing returns to scale
  2. Legal authority or control - a single producer has sole legal authority or sole control of resources
    Ex: holding a patent
75
Q

Monopolistic competition is characterized by:

A
  • 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
76
Q

Long run analysis in monopolistic competition

A

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

77
Q

Oligopoly is characterized by:

A
  • few sellers (means interdependence among sellers / actions of each seller affects others)
  • firms sell either homogeneous or differentiated products
  • market entry is restricted
78
Q

In an Oligopoly ______ tends not to change

A

PRICE.

Could result in “price war”.

Firms tend to compete on factors other than price. Ex: advertising/promotion, packaging, service

79
Q

Overt collusion Defined

A

Conspiring to set outputs, prices or profits among firms - illegal in US.

This goes by the term a cartel.

80
Q

Tacit Collusion Defined

A

Involves firms following prices set by market leader

81
Q

Collusive pricing Defined

A

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.

82
Q

What market feature is likely to cause a surplus of a particular product

A

A price floor

83
Q

What market feature is likely to cause underproduction and shortages

A

A price ceiling

84
Q

Macroeconomics Defined

A

Study of economic activity and outcomes for an entire economy.

85
Q

Injections Defined

A

Additions to domestic production not from individuals’ expenditures

Ex: investment expenditures, government spending/subsidies, exports.

86
Q

Aggregate Demand Defined

A

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))

87
Q

Consumption Spending Defined

A

Spending by individuals on goods and services.

Does not include purchases of new housing (that is investment)

88
Q

Consumption function defined

A

Measures the relationship between disposable income (PDI) and consumption spending (CS)

89
Q

Average Propensity to Consume (APC)

A

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

90
Q

Marginal Propensity to Consume (MPC)

A

Measures the change in consumption spending as a percent of the change in disposable income.

91
Q

Investment Spending Defined

A

Spending on capital items
Ex: residential construction, non-residential construction, business PP&E and business inventory.

Tends to fluctuate more than CS

92
Q

Factors Influencing Investment Spending

A

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.

93
Q

Government Spending Defined

A

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.
94
Q

Government directly affects aggregate demand by changes to:

A

Government spending and government taxes

95
Q

Discretionary Fiscal Policy

A

Government changes to spending or taxation to impact aggregate demand.

96
Q

Exports Defined

A

Amount of foreign spending on U.S. goods

97
Q

Imports Defined

A

Amount of U.S. spending on foreign goods.

98
Q

Net exports Defined

A

Exports - Imports

  • positive = exports > imports: increases aggregate demand
  • negative = imports > exports: decreases aggregate demand (domestic production)
99
Q

Primary factors influencing a country’s relative imports/exports include:

A
  • relative levels of income and wealth
  • relative currency exchange rates
  • relative price levels
  • relative inflationary rates
  • import/export restrictions and tariffs
100
Q

Change in Aggregate Demand

A

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)

101
Q

Multiplier Effect Defined

A

Ripple effect of a change in demand on total change in demand
Ex: increased investment spending = more personal income = more consumption spending

102
Q

Aggregate supply Defined

A

Total output of goods and services produced in the economy at different price levels

103
Q

Three theories for the aggregate supply curve slope

A
  1. Classical
  2. Keynesian
  3. Conventional
104
Q

Classical aggregate supply curve

A

Completely vertical supply curve

  • no change in output as price increases at full employment
  • it may be associated with the very short-term
105
Q

Keynesian aggregate supply curve

A

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.

106
Q

Conventional aggregate supply curve

A

Continuous positive slope that is steeper for output after full employment
-at full employment, prices increase proportionately faster than output supplied

107
Q

Changes in aggregate supply

A

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

108
Q

Do exports impact supply or demand?

A

DEMAND

109
Q

Aggregate equilibrium

A

Aggregate demand = aggregate supply

Where they intersect.

110
Q

Nominal Gross Domestic Product Defined

A

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
111
Q

Expenditure approach for measuring GDP

A

Measures GPD using final sales/purchases; the sum of spending by individuals, businesses, governments, and foreign buyers (exports).

112
Q

Income approach for measuring GDP

A

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.

113
Q

Real Gross Domestic Product Defined

A

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

114
Q

Net Gross Domestic Product Defined

A

Measures GDP less capital consumption during the period. (GDP - Depreciation)

115
Q

Potential GDP Defend

A

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
116
Q

Gross Domestic Product Gap Defined

A

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.
117
Q

Gross National Product Defined

A

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.

118
Q

Net National Product Defined

A

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

119
Q

National Income Defined

A

Measures the total payment for economic resources included in the production of all goods and services, includes payments for: wages, rents, interest and profits.

120
Q

Personal Income Defined

A

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

121
Q

Personal Disposable Income Defined

A

Measures the amount of income individuals have to spend

PDI = PI - Income Taxes

122
Q

Gross Domestic Product Defined

A

Measures the total output of FINAL GOODS AND SERVICES PRODUCED in the domestic market for exchange during a period.

123
Q

Frictional unemployment Defined

A

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.

124
Q

Structural unemployment Defined

A

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

125
Q

Seasonal unemployment Defined

A

Those out of work because their jobs regularly and predictably vary by the season of the year.
Ex: school bus drivers

126
Q

Cyclical unemployment Defined

A

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

127
Q

Unemployment rate Defined

A

Percentage of the LABOR FORCE not employed

*NOT percentage of population not employed.

128
Q

Natural unemployment rate Defined

A

Those unemployed due to frictional, structural and seasonal reasons.

129
Q

Full employment Defined

A

Only when there is no cyclical unemployment

*frictional, structural and seasonal are not considered when measuring full employment

130
Q

Business cycles Defined

A

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
131
Q

Change in _______ ______ seem to be the primary cause for changes of business cycles

A

INTEREST RATES

affects investment in durable goods by individuals and firms.

132
Q

Business cycle indicators Defined

A

Hanged in specific measures of economic activity that are associated with changes in overall business cycle.

133
Q

Two types of economic indicators

A

(1) leading economic indicators

(2) lagging economic indicators

134
Q

Leading economic indicator Defined

A

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

135
Q

Lagging economic indicators Defined

A

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.

136
Q

Define inflation

A

The purchasing power of money declines.

137
Q

Price ________ neutralize the effects of changing prices on such measures

A

INDEXES

138
Q

Consumer Price Index (CPI) defined

A

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.

139
Q

Most common CPI index

A

CPI-U = consumer price index for all urban consumers.

Base period for CPI-U is average prices for 36-month period 1982-1984

140
Q

Producer Price Index Defined

A

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

141
Q

Primary purpose of PPI

A

Used to deflate revenue streams in order to measure real growth in output.

142
Q

Gross Domestic Product Deflator

A

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
143
Q

Inflation Defined

A

Rate of increase in the price level

144
Q

Deflation Defined

A

Rate of decrease in the price level

145
Q

Two fundamental causes of inflation:

A

(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)

146
Q

Consequences of inflation

A

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.

147
Q

M1 measure of money Defined

A

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

148
Q

M2 measure of money Defined

A

Includes all items in M1, plus savings deposits, money-market deposits, certificates of deposit less than $100k, individual-owned money-market mutual funds

149
Q

M3 measure of money Defined

A

Includes items in M2, plus certificates of deposits greater than $100k, institutional-owned money-market mutual funds

150
Q

Federal reserve system: federal board of governors

A

Seven-member policy making body of the federal reserve system. Appointed by the president with approval by the senate.

151
Q

Federal reserve system: federal open-market committee

A

12 member body responsible for implementing monetary policy to effect money supply through open-market operations.

152
Q

Federal reserve system: federal reserve bank

A

12 district banks each responsible for a geographical area.

Owned by member institutions in the area.

153
Q

Monetary Policy Defined

A

The managing of the money supply to achieve national economic objectives.

154
Q

Federal reserve requirement Defined

A

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.

155
Q

Federal open market operations

A

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.

156
Q

Federal discount rate

A

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

BEC (6 decks)

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