CFAI 3- Economics Flashcards
theory of the consumer
deals with consumption (the demand for goods and services) by utility-maximizing individuals (i.e., individuals who make decisions that maximize the satisfaction received from present and future consumption).
theory of the firm
deals with the supply of goods and services by profit-maximizing firms. The theory of the consumer and the theory of the firm are important because they help us understand the foundations of demand and supply. Subsequent readings will focus on the theory of the consumer and the theory of the firm.
Os mercados podem dividir-se em :
Factor Markets are markets for the purchase and sale of factors of production. In capitalist private enterprise economies, households own the factors of production (the land, labor, physical capital, and materials used in production)
Good Markets are markets for the output of production. From an economics perspective, firms, which ultimately are owned by individuals either singly or in some corporate form, are organizations that buy the services of those factors. Firms then transform those services into intermediate or final goods and services.
If, at a given quantity, the highest price that buyers are willing to pay is equal to the lowest price that sellers are willing to accept
the quantity is at equilibrium
when the quantity that buyers are willing and able to purchase at a given price is just equal to the quantity that sellers are willing to offer at that same price, we say the market has discovered ….
the equilibrium price
Qdx=f(Px,I,Py,…)
o que representam as variáveis?
where Qdx
represents the quantity demanded of some good X (such as per household demand for gasoline in gallons per week), Px is the price per unit of good X (such as $ per gallon), I is consumers’ income (as in $1,000s per household annually), and Py is the price of another good, Y. (There can be many other goods, not just one, and they can be complements or substitutes.) Equation 1 may be read, “Quantity demanded of good X depends on (is a function of) the price of good X, consumers’ income, the price of good Y, and so on.”
Qdx=8.4−0.4Px+0.06I−0.01Py
Interpretar a função, sendo que Px é o preço da gasolina, Py é o preço do carro em milhares e I é o income anual em milhares
The signs of the coefficients on gasoline price (negative) and consumer’s income (positive) are intuitive, reflecting, respectively, an inverse and a positive relationship between those variables and quantity of gasoline consumed. The negative sign on average automobile price may indicate that if automobiles go up in price, fewer will be purchased and driven; hence less gasoline will be consumed. As will be discussed later, such a relationship would indicate that gasoline and automobiles have a negative cross-price elasticity of demand and are thus complements.
If we pretend to know how does the quantity demanded responds to one variable we have to fix the other variables with a value so we can study the function.
Qdx=8.4−0.4Px+0.06(50)−0.01(20)=11.2−0.4Px
Notice that income and the price of automobiles are not ignored; they are simply held constant, and they are “collected” in the new constant term, 11.2. Notice also that we can rearrange Equation 3, solving for Px in terms of Qx. This operation is called “inverting the demand function,” and gives us Equation 4. (You should be able to perform this algebraic exercise to verify the result.)
Equation (4)
Px=28−2.5Qx
Equation 4, which gives the per-gallon price of gasoline as a function of gasoline consumed per week, is referred to as the inverse demand function. We need to restrict Qx in Equation 4 to be less than or equal to 11.2 so price is not negative. Henceforward we assume that the reader can work out similar needed qualifications to the valid application of equations. The graph of the inverse demand function is called the demand curve, and is shown in
Supply Function and the Supply Curve
Qsx=f(Px,W,…)
where Qsx
is the quantity supplied of some good X, such as gasoline, Px is the price per unit of good X, and W is the wage rate of labor in, say, dollars per hour. It would be read, “The quantity supplied of good X depends on (is a function of) the price of X (its “own” price), the wage rate paid to labor, etc.”
Equation (8)
Qsx=−175+250Px−5W
Notice that this supply function says that for every increase in price of $1, this seller would be willing to supply an additional 250 units of the good. Additionally, for every $1 increase in wage rate that it must pay its laborers, this seller would experience an increase in marginal cost and would be willing to supply five fewer units of the good.
We might be interested in the relationship between only two of these variables, price and quantity supplied. Just as we did in the case of the demand function, we use the assumption of ceteris paribus and hold everything except own-price and quantity constant. In our example, we accomplish this by setting W to some value, say, $15. The result is Equation 9:
Equation (9)
Qsx=−175+250Px−5(15)=−250+250Px
(Institute 10)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A citação disponibilizada é um exemplo. Verifique a exactidão de cada citação antes de utilizar.
Determine the inverse supply function for an individual seller.
Ou inverse demand function
Quando pede a função inversa devemos resolver uma função do tipo
Qsx=−175+250Px−5W
ou
Qdx
em função do tempo com os outros elementos fixados.
o que nos dá o slope na curva de supply e demmand?
a slope de uma função preço/quantidade dá a variação do preço por cada unidade de diferença.
If the supply curve has negative slope like the demand curve we can say that…
Notice that in “Panel A” both demand (D) and supply (S) are negatively sloped, but S is steeper and intersects D from above. In this case, if price is above equilibrium, there will be excess supply and the market mechanism will adjust price downward toward equilibrium. In Panel B, D is steeper, which results in S intersecting D from below. In this case, at a price above equilibrium there will be excess demand, and the market mechanism will dictate that price should rise, thus leading away from equilibrium. This equilibrium would be considered unstable. If price were accidentally displayed above the equilibrium price, the mechanism would not cause price to converge to that equilibrium, but instead to soar above it because there would be excess demand at that price. In contrast, if price were accidentally displayed below equilibrium, the mechanism would force price even further below equilibrium because there would be excess supply.
Como é que se criam bolhas numa ótica de curva de supply and demand?
As a simple approach to understanding bubbles, consider a case in which buyers and sellers base their expectations of future prices on the rate of change of current prices: if price rises, they take that as a sign that price will rise even further. Under these circumstances, if buyers see an increase in price today, they might actually shift the demand curve to the right, desiring to buy more at each price today because they expect to have to pay more in the future. Alternately, if sellers see an increase in today’s price as evidence that price will be even higher in the future, they are reluctant to sell today as they hold out for higher prices tomorrow, and that would shift the supply curve to the left. With a rightward shift in demand and a leftward shift in supply, buyers’ and sellers’ expectations about price are confirmed and the process begins again. This scenario could result in a bubble that would inflate until someone decides that such high prices can no longer be sustained. The bubble bursts and price plunges.
Diferença entre:
common value auction
private value auction
common value auction in which there is some actual common value that will ultimately be revealed after the auction is settled. Prior to the auction’s settlement, however, bidders must estimate that true value. An example of a common value auction would be bidding on a jar containing many coins. Each bidder could estimate the value; but until someone buys the jar and actually counts the coins, no one knows with certainty the true value. In the second case, called a private value auction, each buyer places a subjective value on the item, and in general their values differ. An example might be an auction for a unique piece of art that buyers are hoping to purchase for their own personal enjoyment, not primarily as an investment to be sold later.
Outros tipos de Leilões:
Perhaps the most familiar auction mechanism is the ascending price auction
in which an auctioneer is selling a single item in a face-to-face arena where potential buyers openly reveal their willingness to buy the good at prices that are called out by an auctioneer. The auctioneer begins at a low price and easily elicits nods from buyers. He then raises the price incrementally. In a common value auction, buyers can sometimes learn something about the true value of the item being auctioned from observing other bidders. Ultimately bidders with different maximum amounts they are willing to pay for the item, called reservation prices, begin to drop out of the bidding as price rises above their respective reservation prices.4 Finally, only one bidder is left (who has outbid the bidder with the second highest valuation) and the item is sold to that bidder for his bid price.
Sometimes sellers offer a common value item, such as an oil or timber lease, in a sealed bid auction. In this case, bids are elicited from potential buyers, but there is no ability to observe bids by other buyers until the auction has ended.
In the first price sealed bid auction,
the envelopes containing bids are opened simultaneously and the item is sold to the highest bidder for the actual bid price. Consider an oil lease being auctioned by the government. The highest bidder will pay his bid price but does not know with certainty the profitability of the asset on which he is bidding. The profits that are ultimately realized will be learned only after a successful bidder buys and exploits the asset. Bidders each have some expected value they place on the oil lease, and those values can vary among bidders. Typically, some overly optimistic bidders will value the asset higher than its ultimate realizable value, and they might submit bids above that true value. Because the highest bidder wins the auction and must pay his full bid price, he may find that he has fallen prey to the winner’s curse of having bid more than the ultimate value of the asset. The “winner” in this case will lose money because he has paid more than the value of the asset being auctioned. In recognition of the possibility of being overly optimistic, bidders might bid very conservatively below their expectation of the true value. If all bidders react in this way, the seller might end up with a low sale price.
If the item being auctioned is a private value item, then there is no danger of the winner’s curse (no one would bid more than their own true valuation). But bidders try to guess the reservation prices of other bidders, so the most successful winning bidder would bid a price just above the reservation price of the second-highest bidder. This bid will be below the true reservation price of the highest bidder, resulting in a “bargain” for the highest bidder. To induce each bidder to reveal their true reservation price, sellers can use the second price sealed bid mechanism (also known as a Vickery auction). In this mechanism, the bids are submitted in sealed envelopes and opened simultaneously. The winning buyer is the one who submitted the highest bid, but the price she pays is not equal to her own bid. She pays a price equal to the second-highest bid. The optimal strategy for any bidder in such an auction is to bid her actual reservation price, so the second price sealed bid auction induces buyers to reveal their true valuation of the item. It is also true that if the bidding increments are small, the second price sealed bid auction will yield the same ultimate price as the ascending price auction.
Yet another type of auction is called a descending price auction or Dutch auction in which the auctioneer begins at a very high price—a price so high that no bidder is believed to be willing to pay it.5 The auctioneer then lowers the called price in increments until there is a willing buyer of the item being sold. If there are many bidders, each with a different reservation price and a unit demand, then each has a perfectly vertical demand curve at one unit and a height equal to his reservation price. For example, suppose the highest reservation price is equal to $100. That person would be willing to buy one unit of the good at a price no higher than $100. Suppose each subsequent bidder also has a unit demand and a reservation price that falls, respectively, in increments of $1. The market demand curve would be a negatively sloped step function; that is, it would look like a stair step, with the width of each step being one unit and the height of each step being $1 lower than the preceding step. For example, at a price equal to $90, 11 people would be willing to buy one unit of the good. If the price were to fall to $89, then the quantity demanded would be 12, and so on.
consumer surplus
To get an intuitive feel for this concept, consider the last thing you purchased. Maybe it was a cup of coffee, a new pair of shoes, or a new car. Whatever it was, think of how much you actually paid for it. Now contrast that price with the maximum amount you would have been willing to pay for it instead of going without it altogether. If those two numbers are different, we say you received some consumer surplus from your purchase. You received a “bargain” because you were willing to pay more than you had to pay.
Perceber como identificar o consumer surplus dentro da linha de procura
Total Surplus, como é que podemos ver pelas curvas de procura e oferta se é o produtor ou o consumidor que mais beneficia do total surplus?
QUando é maximizado?
Tudo depende da inclinação da curva da procura e da oferta, quanto mais inclinada for a curva maior é a parcela que a entidade à qual se refere a curva adquire do total surplus.
É maximizado quando estamos no preço de equilibrio.
No mercado em que o preço está em equilíbrio este pode dizer-se que é
o custo marginal da unidade do produto.
Price Ceiling e Price Floor, como funcionam e quais os problemas?
Como afetam os impostos aplicados ao consumidor e ao produtor?
Os Price Ceiling, Price Floor e impostos criam Deadweight Loss é perdido total surplus.
Quando os impostos incidem sobre o vendedor p.e. como é que calculamos o impacto e quem sai mais afetado?
Para calcular o impacto tempos que ver a variação do preço no lado do Vendedor e calcular o novo preço de equilibrio. Com esse preço de equilibrio podemos observar qual a parcela que é imputada ao comprador Peq novo-Peq antigo. Ao vendedor é imputado o remanescente.
A curva com maior inclinação é a que tem o maior surplus, mas também é a que sofre o maior impacto no caso de aumento de impostos. Na teoria é indiferente em quem é imputada a taxa.
No caso de a taxa ser aplicada sobre os vendedores devemos somar a taxa à intercepção na formula visto que os vendedores agora querem mais X para vender.
No caso da taxa ser aplicada aos compradores devemos subtrair a taxa na fórmula porque agora os compradores querem um produto X mais barato visto que vão pagar a taxa.
O que é o conceito de elasticidade nas curvas de procura e oferta?
Que conclusões podemos tirar de diferntes valores de Elasticidade?
Recall that when we introduced the concept of a demand function with Equation 1 earlier, we were simply theorizing that quantity demanded of some good, such as gasoline, is dependent on several other variables, one of which is the price of gasoline itself. We referred to the law of demand that simply states the inverse relationship between the quantity demanded and the price. Although that observation is useful, we might want to dig a little deeper and ask, Just how sensitive is quantity demanded to changes in the price of gasoline? Is it highly sensitive, so that a very small rise in price is associated with an enormous fall in quantity, or is the sensitivity only minimal? It might be helpful if we had a convenient measure of this sensitivity.
Exemplo da elasticidade do preço na curva da procura:
Edpx=%ΔQdx%ΔPx
elasticidade é a variação da quantidade procurada de um ativo devido à variação do seu preço, neste caso. (ambos em percentagem)
1) If Ep > 1, Demand is elastic. The percentage change in price will produce a greater percentage in quantity demanded. If the price goes up, then total revenues will go down. If the price goes down, then total revenues willincrease.
2) If Ep
Numa reta de procura a procura é elástica…. inelástica… e unitáriamente elástica
Uma recta de procura vertical tem ….
Uma recta de procura horizontal tem …
acima do ponto médio, abaixo do ponto médio e no ponto médio.
vertical… tem 0 elasticidade perfectly inelastic
Horizontal tem elasticidade infinita é perfeitamente elástica.
A procura é menos elástica quanto mais dificil for arranjar um substituto para o produto em questão.
For a market, the total expenditure by buyers becomes the total revenue to sellers in that market. It follows, then, that if market demand is elastic, a fall in price will result in an increase in total revenue to sellers as a whole, and if demand is inelastic, a fall in price will result in a decrease in total revenue to sellers. Clearly, if the demand faced by any given seller were inelastic at the current price, that seller could increase revenue by increasing its price. Moreover, because demand is negatively sloped, the increase in price would decrease total units sold, which would almost certainly decrease total cost. So no one-product seller would ever knowingly choose to set price in the inelastic range of its demand.
income elasticity can be negative, positive, or zero
why? não devia ser sempre positiva?
Any good with a positive income of elasticity of demand is said to be a normal good. Luxury goods have high income elasticity (greater than one). The proportionate amount of spending for those goods will go up as incomes increase.
The amount spent on some goods decrease as incomes goes up. Such goods are referred to as inferior goods. Examples of inferior goods include margarine (inferior to butter) and bus travel (inferior to owning a vehicle).
Elasticity of demand Cross-price
Substitutes and complements
Cross elasticity of demand relates the percentage change in quantity demanded of a good to the percentage change in price of a substitute or complementary good. Examples of complementary goods would include peanut butter and jelly, and large SUVs and gasoline. The cross elasticity of demand will be positive for a substitute, and negative for a complement; i.e. demand for a substitute (complement) will go up (down), if the price of the substitute (complement) goes up.
Substitutes are defined empirically. If the cross-price elasticity of two goods is positive, they are substitutes, irrespective of whether someone would consider them “similar.”
For substitute goods, an increase in the price of one good would shift the demand curve for the other good upward and to the right. For complements, however, the impact is in the other direction: When the price of one good rises, the quantity demanded of the other good shifts downward and to the left.
Consumer Theory
Consumer choice theory begins with a fundamental model of how consumer preferences and tastes might be represented. It explores consumers’ willingness to trade off between two goods (or two baskets of goods), both of which the consumer finds beneficial. Consumer choice theory then recognizes that to consume a set of goods and services, consumers must purchase them at given market prices and with a limited income. In effect, consumer choice theory first models what the consumer would like to consume, and then it examines what the consumer can consume with limited income. Finally, by superimposing what the consumer would like to do onto what the consumer can do, we arrive at a model of what the consumer would do under various circumstances. Then by changing prices and income, the model develops consumer demand as a logical extension of consumer choice theory.
Axioms of the Theory of Consumer Choice
Quais são e o que significam? 3
Complete Preferences
Given this understanding of consumption bundles, the first assumption we make about a given consumer’s preferences is simply that she is able to make a comparison between any two possible bundles. That is, given bundles A and B, she must be able to say either that she prefers A to B, or she prefers B to A, or she is indifferent between the two. This is the assumption of complete preferences
Transitive Preferences
Second, we assume that when comparing any three distinct bundles, A, B, and C, if A is preferred to B, and simultaneously B is preferred to C, then it must be true that A is preferred to C. This assumption is referred to as the assumption of transitive preferences
Non Satiation
Finally, we usually assume that in at least one of the goods, the consumer could never have so much that she would refuse any more, even if it were free. This assumption is sometimes referred to as the “more is better” assumption or the assumption of non-satiation
.
What is the Utility Function?
utility function of that particular consumer. The single task of that utility function is to translate each basket of goods and services into a number that rank orders the baskets according to our particular consumer’s preferences. The number itself is referred to as the utility of that basket and is measured in utils, which are just quantities of happiness, or well-being, or whatever comes to mind such that more of it is better than less of it.
Indifference curves what are they?
represent our consumer’s preferences graphically, not just mathematically.
Marginal rate of substitution MRSxy
We capture this willingness to give up one good to obtain a little more of the other
p.e. só aceito trocar uma unidade de vinho por 2 de pão, se continuar a ter cada vez menos vinho e mais pão acaba por só trocar 1 vinho por p.e. 10 pães
is the negative of the slope of the tangent to the indifference curve at any given bundle. If, at some point, the slope of the indifference curve had value –2.5, it means that, starting at that particular bundle, our consumer would be willing to sacrifice wine to obtain bread at the rate of 2.5 ounces of wine per slice of bread
MRSxy =2 - por cada 1 x está disposto a dar 2y.
why does indifference curves of the same individual cannot cross?
Two indifference curves for a given individual cannot cross because the transitivity assumption would be violated.
And although for any given individual two indifference curves cannot cross, there is no reason why two indifference curves for two different consumers cannot intersect.
We can represent this income constraint (or budget constraint) with the following expression:
Pode ser representada graficamente.
The budget constraint shows all the combinations of bread and wine that the consumer could purchase with a fixed amount of income, I, paying prices PB and PW, respectively.
Notice that the slope of the budget constraint is equal to –PB /PW, and it shows the amount of wine that Warren would have to give up if he were to purchase another slice of bread. If the price of bread were to rise, the budget constraint would become steeper, pivoting through the vertical intercept. Alternatively, if the price of wine were to rise, the budget constraint would become less steep, pivoting downward through the horizontal intercept. If income were to rise, the entire budget constraint would shift outward, parallel to the original constraint
PBQB+PWQW≤I
PB preço de B
QB quantidade de B
I = inome do agente economico
Determining the Consumer’s Equilibrium Bundle of Goods
How do we determine consumer equilibrium?
Ao intersectar as indiference curves com a recta de Budget constraint podemos seleccionar o ponto onde obtemos o máximo de satisfação. (quanto mais afastada a curva de indiferença melhor)
Two-Part Tariff Pricing
o que é?
The club could extract all of Johnson’s consumer surplus by charging her a monthly membership fee of €18 plus a per-visit price of €2. This is called a two-part tariff because it assesses one price per unit of the item purchased plus a per-month fee (sometimes called an “entry fee”) equal to the buyer’s consumer surplus evaluated at the per-unit price.
Nestes casos o vendedor sabe qual é o consumer surplus e pode vender o bem ao consumidor pelo marginal cost, acrescentando uma tarifa no valor do consumer surplus. Embora esteja a pagar o marginal cost pelo bem já perdeu a margem toda.
Income and Substitution Effects for an Inferior Good
and normal good
When we apply the income adjustment to isolate substitution effect from income effect, we shift the budget constraint back to constraint 3, reducing income sufficiently to place the consumer back on the original indifference curve. As before, the substitution effect is shown as a movement along the original indifference curve from point a to point b. The income effect is, as before, a movement from one indifference curve to the other, as shown by the movement from point b to point c. In this case, however, the income effect partially offsets the substitution effect, causing demand to be less elastic than if the two effects reinforced each other.
We see that for inferior goods, the income effect and the substitution effect are in opposite directions: The decrease in price causes the consumer to buy more, but the income effect tends to mitigate that effect. It’s still true that a decrease in the price of bread represents an increase in real income. But in the case of an inferior good, the increased income causes the consumer to want to buy less of the good, not more. As long as the income effect has a lower magnitude than the substitution effect, the consumer still ends up buying more at the lower price. However, she buys a little less than she would if the good were normal. It is possible, though highly unlikely, for the income effect to have greater magnitude than the substitution effect.
What are Giffen Goods?
Those inferior goods whose income effect is negative and greater in magnitude than the substitution effect are known as Giffen goods.
Economic profit vs accounting profit
Economic Profit
Economic profit is equal to total revenues less both implicit and explicit costs. For a firm to stay in business, both implicit and explicit costs must be covered. If firms are receiving a negative economic profit in a market, they will leave that market. A normal profitrate exactly covers wage costs and the competitive rate of return on capital.
Accounting Profits
Accounting profits are generally higher than economic profits, as they omit certain costs, such as the value of owner-provided labor and the firm’s equity capital.
When calculating “economic profit”, explicit and opportunity costs are taken into account.
Example:
Suppose someone owns and runs a candy store that grosses $20,000 per month and has operating expenses of $14,000 per month. The store owner particularly enjoys socializing with the customers; this aspect of the business provides a comfort to the owner which is worth $2,000 a month to her. The owner could receive $3,000 a month in interest with the capital that is tied up in the store’s inventory. She could earn $5,000 a month at a different job.
An income statement would show an accounting profit of $6,000 a month:
Explicit Revenues $20,000
Accounting Profit $ 6,000
Answer:
The economic profit, which should determine the economic decision, would be calculated as follows:
Explicit Revenues $20,000
Implicit Revenue (value of socialization) $ 2,000 - - - - - - Economic Revenues $22,000 Explicit Costs $14,000
Implicit Costs: Value of owner's labor $5,000 Required rate of return on inventory investment $3,000 - - - - - - Economic Profit ($2,000)
From an economic viewpoint, keeping the candy store open does not make sense. The implicit value of enjoying being with the customers is not of sufficient value in comparison to the fact that the store owner could make more money by working elsewhere and employing the capital elsewhere.
, normal profit is the level of accounting profit needed to just cover the implicit opportunity costs ignored in accounting costs.
Technological vs. Economic Efficiency
Technological efficiency relates quantities of inputs to the quantity of output, while economic efficiency relates the dollar value of inputs to the dollar value of output. A firm would be operating with technological efficiency when it produces a certain level of output with the least amount of input. Economic efficiency would be achieved when a certain level of output is produced with the lowest cost of inputs.
Wall Mart vs Continente
Suppose there are two available methods to produce widgets, one that is highly automated with industrial robots, and a mostly manual one that requires significantly more workers. The automated method costs $50,000 per month to produce 1,000 widgets over a monthly period, using three robots and one worker. The manual method costs $40,000 per month to produce 1,000 widgets over the same time period, with 10 workers that have a minimal amount of tools. We can’t say that either method is technologically inefficient - the automated method requires fewer workers, while the manual method requires less capital for the same quantity of output. However, we can say that the manual method is economically efficient, since it produces 1,000 widgets at the lower cost.
Major factors promoting cost efficiency and customer service within the corporate world include:
- The threat of takeover - Inefficient corporate management can attract the interest of outsiders, who will try to take over of the corporation with the intent of running the corporation more efficiently, so as to increase shareholder value. The takeover company most likely would remove the current management. The threat of such a takeover gives management an incentive to serve the interests of corporate shareholders.
- Competition for capital and customers - Poor management will tend to drive the price of a company’s stock down, which will tend to make raising more capital difficult. An efficient and/or innovative management will tend to cause the price of a company’s stock to go up, which will make raising additional capital easier. The corporation’s products must be competitive, in terms of both price and quality, in order to attract customers. The production of inferior goods will tend to drive customers away, which will decrease corporate revenues. Therefore, competitive forces tend to limit the ability of management to serve their own needs in lieu of stockholder and customer needs.
- Management compensation - Compensation can be set up so that management incentives are in line with those of the corporation. For example, a significant amount of executive compensation can be in the form of stock options, which are of value only when a certain stock price is met.
What is Concentration within an industry
Concentration within an industry refers to the degree to which a small number of firms provide a major portion of the industry’s total production. If concentration is low, then the industry is considered to be competitive. If the concentration is high, then the industry will be viewed as oligopolistic or monopolistic. Government agencies such as the U.S. Department of Justice examine concentration within an industry when deciding to approve potential mergers between industry firms.
The most common measure of concentration is the four-firm concentration ratio, which is defined as the percentage of the industry’s output sold by the four largest firms. An industry with a four-firm concentration ratio of forty percent is generally considered to be competitive.
The Herfindahl-Hirschman Index (HHI) calculates concentration ratios by squaring the market share of the fifty largest firms in an industry. The formula can be expressed as follows:
Formula 3.4
HHI = s12 + s22 + s32 + … + sn2
(where sn is the market share of the ith firm).
A monopoly would have the largest possible value - 1002 = 10000. The HHI for a highly fragmented industry would be close to zero. The Justice Department generally considers an industry with an HHI above 1800 to be highly concentrated.
Modifying Output ( Short Run vs Long Run)
The “Short Run”
The short run is a time period so short that the firm cannot alter some production factors (typically these factors include the size and/or number of plants, the technology used, equipment and the management organization). Those factors are sometimes referred to collectively as the “plant”. The firm usually can increase output in the short run by adding variable inputs. Labor is the most common variable input.
The “Long Run”
In the long run, firms have sufficient time to adjust to any and all production factors. Factories can be expanded, shrunk, demolished or built. The firm can leave or enter an industry.
Suppose a car manufacture decides to build a new plant to build SUVs. This would be an example of a decision made in the long run. If that manufacturer decided to expand output by having employees work overtime, then that would be an example of a short-run decision.
Read more: http://www.investopedia.com/exam-guide/cfa-level-1/microeconomics/modifying-output.asp#ixzz3dGwst6AQ
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The economic profit of a firm can be due to:
- competitive advantage;
- exceptional managerial efficiency or skill;
- difficult to copy technology or innovation (e.g., patents, trademarks, and copyrights);
- exclusive access to less-expensive inputs;
- fixed supply of an output, commodity, or resource;
- preferential treatment under governmental policy;
- large increases in demand where supply is unable to respond fully over time;
- exertion of monopoly power (price control) in the market; and
- market barriers to entry that limit competition
Economic Rent
When a good as a fixed supply and the market price is above the marginal cost of that good, you have an Economic Rent.
The firm has not done anything internally to merit this special reward: It benefits from an increase in demand in conjunction with a supply curve that does not fully adjust with an increase in quantity when price rises.
It happens with innelastic goods (vertical supply line) mainly commodities or land.
Accounting Profit= ??
normal profit + economic profit
Perfect competition market vs Imperfect competition
In perfect competition market the demand curve is horizontal, since we can offer any quantity and the price taken will be always the same, in the imperfect competition the demand curve is negatively sloped, to a greater quantity the price goes down.
production function
Q = f (K, L)
where Q is the quantity of output, K is capital, and L is labor. The inputs are subject to the constraint that K ≥ 0 and L ≥ 0. A more general production function is stated as:
Profit maximization occurs when
- the difference between total revenue (TR) and total costs (TC) is the greatest;
- marginal revenue (MR) equals marginal cost (MC); and
- the revenue value of the output from the last unit of input employed equals the cost of employing that input unit (as later developed in Equation 12).
long run/short run concepts and implications on real business
The time required for long-run adjustments varies by industry. For example, the long run for a small business using very little in the way of technology and physical capital may be less than a year. On the other hand, for a capital-intensive firm, the long run may be more than a decade. However, given enough time, all production factors are variable, which allows the firm to choose an operating size or plant capacity based on different technologies and physical capital. In this regard, costs and profits will differ between the short run and long run.
The factors that can lead to diseconomies of scale, inefficiencies, and rising costs when a firm increases in size include:
- So large that it cannot be properly managed.
- Overlap and duplication of business functions and product lines.
- Higher resource prices because of supply constraints when buying inputs in large quantities.
incresing cost industry
decreasing cost industry
constant cost industry
The cost of production increases with the quantity produced example :oil
The cost of production decreases with the ammount produced
The cost of production is constant with variable quantitites
produtivity and bennefits?
average output per unit of input
The benefits from increased productivity are as follows:
◾Lower business costs, which translate into increased profitability.
◾An increase in the market value of equity and shareholders’ wealth resulting from an increase in profit.
◾An increase in worker rewards, which motivates further productivity increases from labor.
Important! Market structure can be broken down into four distinct categories …..????
We start with the most competitive environment, perfect competition. Unlike some economic concepts, perfect competition is not merely an ideal based on assumptions. Perfect competition is a reality—for example, in several commodities markets, where sellers and buyers have a strictly homogeneous product and no single producer is large enough to influence market prices. Perfect competition’s characteristics are well recognized and its long-run outcome unavoidable. Profits under the conditions of perfect competition are driven to the required rate of return paid by the entrepreneur to borrow capital from investors (so-called normal profit or rental cost of capital). This does not mean that all perfectly competitive industries are doomed to extinction by a lack of profits. On the contrary, millions of businesses that do very well are living under the pressures of perfect competition.
Monopolistic competition is also highly competitive; however, it is considered a form of imperfect competition. Two economists, Edward H. Chamberlin (US) and Joan Robinson (UK), identified this hybrid market and came up with the term because there are strong elements of competition in this market structure and also some monopoly-like conditions. The competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation. That is, if the seller can convince consumers that its product is uniquely different from other, similar products, then the seller can exercise some degree of pricing power over the market. A good example is the brand loyalty associated with soft drinks such as Coca-Cola. Many of Coca-Cola’s customers believe that their beverages are truly different from and better than all other soft drinks. The same is true for fashion creations and cosmetics.
The oligopoly market structure is based on a relatively small number of firms supplying the market. The small number of firms in the market means that each firm must consider what retaliatory strategies the other firms will pursue when prices and production levels change. Consider the pricing behavior of commercial airline companies. Pricing strategies and route scheduling are based on the expected reaction of the other carriers in similar markets. For any given route—say, from Paris, France, to Chennai, India—only a few carriers are in competition. If one of the carriers changes its pricing package, others will likely retaliate. Understanding the market structure of oligopoly markets can help in identifying a logical pattern of strategic price changes for the competing firms.
Finally, the least competitive market structure is monopoly. In pure monopoly markets, there are no other good substitutes for the given product or service. There is a single seller, which, if allowed to operate without constraint, exercises considerable power over pricing and output decisions. In most market-based economies around the globe, pure monopolies are regulated by a governmental authority. The most common example of a regulated monopoly is the local electrical power provider. In most cases, the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return.
elasticidade do preço
εP = –(% change in QD) ÷ (% change in P)
εP > 1 Demand is elastic
εP = 1 Demand is unitary elastic
εP
In a monopoly what is the relation between Marginal Revenue and Elasticity
For a monopoly, MR = P[1 – 1/Ep].
Num mercado competitivo, a longo prazo qual é a relação entre o MC e o AC???
São iguais! Se o MC for maior que o AC vão entrar novas empresas a competir até se baixar o MC para valores de AC.
Se uma empresa tenta tirar market share a uma líder via redução de preço o mais provavel de acontecer é…?
Que a market share da empresa dominante continue a aumentar, isto porque é a que à partida terá maior capacidade de aguentar preços baixos, sendo que empresas mais pequenas vão sair do mercado primeiro.
Oligopoly Nash Model
In the Nash model, each company considers the other’s reaction in selecting its strategy. In equilibrium, neither company has an incentive to change its strategy. ThetaTech is better off with open architecture regardless of what SigmaSoft decides. Given this choice, SigmaSoft is better off with a proprietary platform. Neither company will change its decision unilaterally.
Type of market demand curve on oligopolist market??
The oligopolist faces two different demand structures, one for price increases and another for price decreases. Competitors will lower prices to match a price reduction, but will not match a price increase. The result is a kinked demand curve.
Herfindahl-Hirschmann Index =?
Sum ( Parcela de mercado ^2 * nº de empresas)
p.e. o mercado tem 2 empresas com 10% market share e uma com 20% o resto tem menos o HHI do top 3 é
0,1^2*2+0,2^2
Desvantagens deste modelo
The Herfindahl-Hirschmann Index does not reflect low barriers to entry that may restrict the market power of companies currently in the market
CCI Desvantagens
não reflete as mergers corretamente
GDP Expenditure Approach
Consumption (C) - These are personal consumption expenditures. They are typically broken down into the following categories: durable goods, non-durable goods, and services.
Investment (I) - This is gross private investment; it is generally broken down into fixed investment and changes in business inventories.
Government (G) - This category includes government spending on items that are “consumed” in the current period, such as office supplies and gasoline; and also capital goods, such as highways, missiles, and dams. Note that transfer payments are not included in GDP, as they are not part of current production.
Net Exports - This is calculated by subtracting a nations imports (M)from exports (X). Imports are goods and services produced outside the country and consumed within, and exports are goods and services produced domestically and sold to foreigners. Note that this number may be negative, which has occurred in the U.S. for the last several years. Net exports for the U.S. were minus $606 billion during calendar year 2004 (as per Bureau of Economic Analysis, U.S. Department of Commerce June 29, 2005 press release).
Formula 4.1
GDP = C + I + G + (X - M)
GDP Resource Cost/Income Approach
Resource Cost/Income Approach
To calculate Gross Domestic Income (GDI), first consider how revenues received for products and services are used:
- Pay for the labor used (wages + income of self-employed proprietors)
- Pay for the use of fixed resources, such as land and buildings (rent);
- Pay a return to capital employed (interest);
- Pay for the replenishment of raw material used.
Remaining revenues go to business owners as a residual cash flow, which is used to replenish capital (depreciation), or it becomes a business profit. So with the resource cost/income approach, GDP (or GDI) is calculated as wages, rent, interest and cash flow paid to business owners or organizers of production.
So GDP by resource cost/income approach = wages + self-employment income + Rent + Interest + profits + indirect business taxes + depreciation + net income of foreigners.
Formula 4.2
GDI = wages + self-employment income + Rent + Interest + profits
+ indirect business taxes + depreciation + net income of foreigners
The above formula is probably hard to memorize, so at least try to remember this relationship - GDI = wages + rent + interest + business cash flow
Total GDP figures should be the same by either method of calculation. But in real life, things don’t always work out this way. Official figures usually have a category called “statistical discrepancy”, which is needed to balance out the two approaches.
The GDP Deflator
The GDP deflator is an economic metric that converts output measured at current prices into constant-dollar GDP. This includes prices for business and government goods and services, as well as those purchased by consumers. This calculation shows how much a change in the base year’s GDP relies upon changes in the price level.
If we wish to analyze the impact of price changes throughout an economy, then the GDP deflator is the preferred price index. This is because it does not focus on a fixed basket of goods and services and automatically reflects changes in consumption patterns and/or the introduction of new goods and services.
Real GDP for a given year, in relation to a “base” year, is computed by multiplying the nominal GDP for a given year by the ratio of the GDP price deflator in the base year to the GDP price deflator for the given year.
Example:
Suppose we wish to calculate the real GDP for the year 2001 in terms of 1996 dollars. The value for (note that these values are for illustration purposes only) 1996 price deflator is 100 and the 2001 price deflator is 115. The 2001 GDP in nominal terms is $10 trillion dollars.
Then: Real GDP year 2001 in 1996 dollars =$10 trillion × (100 / 115) = $8.6 trillion
Alternative Measures of Domestic Income
Other than GDP and GNP, there are alternative measures of domestic income, such as national income, personal income and disposable personal income.
National Income
National income is computed by subtracting indirect business taxes, the net income of foreigners, and depreciation from GDP. It represents the income earned by a country’s citizens. National income can also be computed by summing interest, rents, employee compensation (wages and benefits), proprietors’ income and corporate profits.
·Personal income represents income available for personal use. It is computed by making various adjustments to national income. Social insurance taxes and corporate profits are subtracted from national income, while net interest, corporate dividends and transfer payments are added.
·Disposable personal income (or disposable income) is income available to people after taxes; i.e., it is personal income less individual taxes.
Key labor market indicators include:
The Labor Force Participation Rate - This rate is calculated by dividing the number of people in the civilian labor force by the total civilian population of those 16 years old or older.
The Unemployment Rate - This is computed by dividing the number of unemployed by the number of people in the civilian labor force. That number is multiplied by 100 and expressed as a percentage. Part-time workers are considered to be employed.
The Employment/Population Ratio - This ratio is calculated by dividing the number of job-holding civilians who are at least 16 years old by the total number of people in the civilian population within the same age group. This ratio will tend to go higher during economic booms and lower during recessions.
Changes in real wage rates can be calculate by
dividing nominal wages by the GDP deflator. Data for real wages in the United States is also maintained by the Bureau of Labor Statistics.
Types of unemployment are often broken down as follows:
Structural Unemployment - Changes occur in market economies such that demand increases for some jobs skills while other job skills become outmoded and are no longer in demand. For example, the invention of the automobile increased demand for automobile mechanics and decreased demand for farriers (people who shoe horses).
·Frictional Unemployment - This type of unemployment occurs because of workers who are voluntarily between jobs. Some are looking for better jobs. Due to a lack of perfect information, it takes times to search for the better job. Others may be moving to a different geographical location for personal reasons and time must be spent searching for a new position.
·Cyclical Unemployment - This occurs due to downturns in overall business activity.
As previously noted, full employment does not equate to zero unemployment. Some unemployment is normal in a market economy and is actually expected as part of an efficient labor market. Full employment is defined as the level of employment that occurs when unemployment is normal, taking into account structural and frictional factors.
The natural rate of unemployment is that amount of unemployment that occurs naturally due to imperfect information and job shopping. It is the rate of unemployment that is expected when an economy is operating at full capacity. At this time in the U.S., the natural rate of unemployment is considered to be about 5%.
CPI
Consumer Price Index (CPI)
The CPI represents prices paid by consumers (or households). Prices for a basket of goods are compiled for a certain base period. Price data for the same basket of goods is then collected on a monthly basis. This data is used to compare the prices for a particular month with the prices from a different time period.
Example:
The inflation rate is computed by subtracting the CPI of last year’s prices from the CPI value for this year, dividing that difference by last year’s CPI value and then multiplying by 100.
So if the value of the price index for the current year is equal to 165, and last year’s value was 150, the rate would be calculated as:
Inflation rate = ((165 - 150)/150) X100= 10%
CPI Sources of Bias
The CPI is not a perfect measure of inflation. Sources of bias include:
·Quality adjustments - quality of many goods (e.g., cars, computers, and televisions) goes up every year. Although the Bureau of Labor Statistics is now making adjustments for quality improvements, some price increases may reflect quality adjustments that are still counted entirely as inflation.
·New goods - new goods may be introduced that will be hard to compare to older substitutes.
·Substitution - if the price goes up for one good, consumers may substitute another good that provides similar utility. A common example is beef vs. pork. If the price goes up, and the price of pork stays the same, consumers might easily switch to pork. Although the CPI will go higher due to the price increase in beef, many consumers may not be worse off. Also, when prices go up, consumers may effectively not pay the higher prices by switching to discount stores. The CPI surveys do not check to see if consumers are substituting discount or outlet stores.
Aggregate Output and Income
Aggregate Expenditure
The aggregate output of an economy is the value of all the goods and services produced in a specified period of time. The aggregate income of an economy is the value of all the payments earned by the suppliers of factors used in the production of goods and services. Because the value of the output produced must accrue to the factors of production, aggregate output and aggregate income within an economy must be equal.
Aggregate expenditure, the total amount spent on the goods and services produced in the (domestic) economy during the period, must also be equal to aggregate output and aggregate income. However, some of this expenditure may come from foreigners in the form of net exports.1 Thus, aggregate output, aggregate income, and aggregate expenditure all refer to different ways of decomposing the same quantity.
real gdp calculus with deflator
and inflation with deflators
Real GDP = [Nominal GDP/(GDP deflator/100)]
inflation =( current year deflator/past year deflator)-1
How to calculate Personal income using the national income?
Personal income is a broad measure of household income and measures the ability of consumers to make purchases. As such, it is one of the key determinants of consumption spending. Personal income includes all income received by households, whether earned or unearned. It differs from national income in that some of the income earned by the factors of production (indirect business taxes, corporate income taxes, retained earnings) is not received by households and instead goes to the government or business sectors. Similarly, households receive some income from governments (transfer payments, such as social insurance payments, unemployment compensation, and disability payments) that is not earned. Thus, the following adjustments are made to national income in order to derive personal income:
Personalincome=Nationalincome− Indirectbusinesstaxes− Corporateincometaxes− Undistributedcorporateprofits+ Transferpayments
.
Personal disposable income (PDI)
and
household saving calculation
It is the personal income less personal taxes
household saving is equal to PDI less three items: consumption expenditures, interest paid by consumers to business, and personal transfer payments to foreigners. The corresponding measure of saving for the business sector equals undistributed corporate profits plus the capital consumption allowance.
How can we calculete the total tax revenue if we have a deficit?
We have to check the Gov Total Spending and the tax revenue will be the total spendig less the deficit.
borrowing/lending by the business sector in 2009.
Para tal devemos somar o capital que pretende gastar + lucros não distribuidos, se a diferença com o CAPEX + variação d Inventórios for positiva o negócio é um lender.
domestic private saving is used or absorbed in one of three ways:
Private Saving
investment spending (I), financing government deficits (G – T), and building up financial claims against overseas economies [positive trade balance, (X – M) > 0]. If there is a trade deficit [(X – M) 0] implies that the private sector must save more than it invests [(S – I) > 0] or the country must run a trade deficit [(X – M)
The IS Curve
The final equation is the IS curve. It summarizes combinations of income and the real interest rate at which income and expenditure are equal. Equivalently, it reflects equilibrium in the goods market.
Y= C+I+G+(X-M)
resolver em ordem a Y income com um dado r interest rate e aí podemos saber qual é o valor para cada componente se tiverem Y.
The LM Curve
and IS curve intersection
The IS curve tells us what level of income is consistent with a given level of the real interest rate but does not address the appropriate level of interest rates, nor does it depend on the price level. In order to determine the interest rate and introduce a connection between output and the price level, we must consider supply and demand in the financial markets. To keep the model as simple as possible, we will deal explicitly with demand and supply for only one financial asset: money. All other assets (e.g., stocks and bonds) are implicitly treated as a composite alternative to holding money. In some of the subsequent discussion, however, we will note differential impacts on equity and fixed-income securities.
The final equation is the IS curve. It summarizes combinations of income and the real interest rate at which income and expenditure are equal. Equivalently, it reflects equilibrium in the goods market.
Para obter a curva LM Real money supply= Real Money Demand
Aggregate Demand Curve Characteristics
AD Curve = IS curve + LM curve = GDP
The AD curve will be flatter if
◾investment expenditure is highly sensitive to the interest rate;
◾saving is insensitive to income;
◾money demand is insensitive to interest rates; and
◾money demand is insensitive to income.
The first two conditions directly imply that income will have to move more to induce a large enough change in saving to match the change in investment spending. All else equal, each of the last two conditions implies that a larger change in the interest rate is required to bring money demand in line with money supply. This, in turn, implies a larger change in investment spending and a correspondingly larger change in saving and income.
Aggregate Demand Curve
The aggregate supply curve (AS curve) represents the level of domestic output that companies will produce at each price level. Unlike the demand side, we must distinguish between the short- and long-run AS curves, which differ with respect to how wages and other input prices respond to changes in final output prices. “Long run” and “short run” are relative terms and are necessarily imprecise with respect to calendar time. The “long run” is long enough that wages, prices, and expectations can adjust but not long enough that physical capital is a variable input. Capital and the available technology to use that capital remain fixed. This condition implies a period of at least a few years and perhaps a decade.
Impact of Factors Shifting Aggregate Demand
Stock pricesRightward: Increase in ADHigher consumption
Housing pricesRightward: Increase in ADHigher consumption
Consumer confidenceRightward: Increase in ADHigher consumption
Business confidenceRightward: Increase in ADHigher investment
Capacity utilizationRightward: Increase in ADHigher investment
Government spendingRightward: Increase in ADGovernment spending a component of AD
TaxesLeftward: Decrease in ADLower consumption and investment
Bank reservesRightward: Increase in ADLower interest rate, higher investment and possibly higher consumption
Exchange rate (foreign currency per unit domestic currency)Leftward: Decrease in ADLower exports and higher imports
Global growthRightward: Increase in ADHigher exports
.
It is important to understand that short-run macroeconomic equilibrium may occur at a level above or below full employment. We consider four possible types of macroeconomic equilibrium:
3.4.1. Long-Run Equilibrium
shows the long-run full employment equilibrium for an economy. In this case, equilibrium occurs where the AD curve intersects the SRAS curve at a point on the LRAS curve. Because equilibrium occurs at a point on the LRAS curve, the economy is at potential real GDP. Both labor and capital are fully employed, and everyone who wants a job has one. In the long run, equilibrium GDP is equal to potential GDP.
3.4.2. Recessionary Gap
Cyclical fluctuations in real GDP and prices are caused by shifts in both the AD and SRAS curves. A decline in AD or a leftward shift in the AD curve results in lower GDP and lower prices. Such declines in AD lead to economic contractions, and if such declines drive demand below the economy’s potential GDP, the economy goes into a recession. In Exhibit 22, when aggregate demand falls, the equilibrium shifts from Point A to Point B. Real GDP contracts from Y1 to Y2, and the aggregate price level falls from P1 to P2. Because of the decline in demand, companies reduce their workforce and the unemployment rate rises. The economy is in recession,15 and the recessionary gap is measured as the difference between Y2 and Y1 or the amount by which equilibrium output is below potential GDP.
If these statistics suggest that a recession is caused by a decline in AD, the following conditions are likely to occur: ◾Corporate profits will decline. ◾Commodity prices will decline. ◾Interest rates will decline. ◾Demand for credit will decline.
3.4.3. Inflationary Gap
Increases in AD lead to economic expansions as real GDP and employment increase. If the expansion drives the economy beyond its production capacity, however, inflation18 will occur. As summarized in Exhibit 18, higher government spending, lower taxes, a more optimistic outlook among consumers and businesses, a weaker domestic currency, rising equity and housing prices, and an increase in the money supply would each stimulate aggregate demand and shift the AD curve to the right. If aggregate supply does not increase to match the increase in AD, a rise in the overall level of prices will result.
In Exhibit 24, an increase in AD will shift the equilibrium level of GDP from Point A to Point B. Real output increases from Y1 to Y2, and the aggregate price level rises from P1 to P2. As a result of the increase in aggregate demand, companies increase their production and hire more workers. The unemployment rate declines. Once an economy reaches its potential GDP, however, companies must pay higher wages and other input prices to further increase production. The economy now faces an inflationary gap, measured by the difference between Y2 andY1 in Exhibit 24. An inflationary gap occurs when the economy’s short-run level of equilibrium GDP is above potential GDP, resulting in upward pressure on prices.
If economic statistics (consumer sentiment, factory orders for durable and nondurable goods, etc.) suggest that there is an expansion caused by an increase in AD, the following conditions are likely to occur: ◾Corporate profits will rise. ◾Commodity prices will increase. ◾Interest rates will rise. ◾Inflationary pressures will build.
3.4.4. Stagflation: Both High Inflation and High Unemployment
Structural fluctuations in real GDP are caused by fluctuations in SRAS. Declines in aggregate supply bring about stagflation—high unemployment and increased inflation. Increases in aggregate supply conversely give rise to high economic growth and low inflation.
Exhibit 25 shows the case of a decline in aggregate supply, perhaps caused by an unexpected increase in basic material and oil prices. The equilibrium level of GDP shifts from Point A to B. The economy experiences a recession as GDP falls from Y1 to Y2, but the price level, instead of falling, rises from P1 to P2. Over time, the reduction in output and employment should put downward pressure on wages and input prices and shift the SRAS curve back to the right, re-establishing full employment equilibrium at Point A. However, this mechanism may be painfully slow. Policymakers may use fiscal and monetary policy to shift the AD curve to the right, as previously discussed, but at the cost of a permanently higher price level at Point C.
On the other hand, an increase in AS (rightward shift of the SRAS curve) due to higher productivity growth or lower labor, raw material, and energy costs is favorable for most asset classes other than commodities.
Grow in potential GDP factors
GrowthinpotentialGDP=Growthintechnology+WL(Growthinlabor)+ WC(Growthincapital
where WL and WC are the relative shares of capital and labor in national income. The capital share is the sum of corporate profits, net interest income, net rental income, and depreciation divided by GDP. The labor share is employee compensation divided by GDP. For the United States, WL and WC are roughly 0.7 and 0.3, respectively.
The growth accounting equation highlights a key point: The contribution of labor and capital to long-term growth depends on their respective shares of national income. For the United States, because labor’s share is higher, an increase in the growth rate of labor will have a significantly larger impact (roughly double) on potential GDP growth than will an equivalent increase in the growth rate of capital.
Outra maneira de medir o crescimento potencial do GDP:
The problem with this approach is that there are no observed data on potential GDP or on total factor productivity and both must be estimated. In addition, data on the capital stock and the labor and capital shares of national income are not available for many countries, especially the developing countries.
As an alternative, we can focus on the productivity of the labor force, where we generally have more reliable data. Labor productivity is defined as the quantity of goods and services (real GDP) that a worker can produce in one hour of work. Our standard of living improves if we produce more goods and services for each hour of work. Labor productivity is calculated as real GDP for a given year divided by the total number of hours worked in that year, counting all workers. We use total hours, rather than the number of workers, to adjust for the fact that not everyone works the same number of hours.
Labor productivity = Real GDP/Aggregate hours
Therefore, we need to understand the forces that make labor more productive. Productivity is determined by the factors that we examined in the preceding section: education and skill of workers (human capital), investments in physical capital, and improvements in technology. An increase in any of these factors will increase the productivity of the labor force. The factors determining labor productivity can be derived from the production functions under the assumption of constant returns to scale, where a doubling of inputs causes output to double as well.
Sources of grow •Labor supply; •Human capital; •Physical capital; •Technology; and •Natural resources.
Total Factor Productivity
Total factor productivity (TFP) is the component of productivity that proxies technological progress and organizational innovation. TFP is the amount by which output would rise because of improvements in the production process. It is calculated as a residual, the difference between the growth rate of potential output and the weighted average growth rate of capital and labor. Specifically,
TFPgrowth=GrowthinpotentialGDP− [WL(Growthinlabor)+WC(Growthincapital)]
Rate of sustainable Growth of the Economy
Labor productivity data can be used to estimate the rate of sustainable growth of the economy. A useful way to describe potential GDP is as a combination of aggregate hours worked and the productivity of those workers:
Potential GDP = Aggregate hours worked × Labor productivity
Transforming the above equation into growth rates, we get the following:
Potentialgrowthrate=Long-termgrowthrateoflaborforce+ Long-termlaborproductivitygrowthrate
Thus, potential growth is a combination of the long-term growth rate of the labor force and the long-term growth rate of labor productivity. Therefore, if the labor force is growing at 1 percent per year and productivity per worker is rising at 2 percent per year, then potential GDP (adjusted for inflation) is rising at 3 percent per year.
The sustainable growth rate is best estimated as:
growth in the labor force plus growth of labor productivity.
TFP Total Factor Productivity = Potencial GDP -WL -WC
parcela do potencial gdp que depende da tecnologia
Business Cycle phases
A business cycle consists of four phases: trough, expansion, peak, contraction. The period of expansion occurs after the trough (lowest point) of a business cycle and before its peak (highest point), and contraction is the period after the peak and before the trough.1 During the expansion phase, aggregate economic activity is increasing (aggregate is used because some individual economic sectors may not be growing). The contraction—often called a recession, but may be called a depression when exceptionally severe—is a period in which aggregate economic activity is declining (although some individual sectors may be growing). Business cycles are usually viewed as fluctuations around the trend growth of an economy, so such points as peaks and troughs are relative to the individual cycle.
Capital Spending Phases
1- Cortes acima do necessário, começam por equipamentos mais leves, contratações etc os mais pesados vêm no fim porque demoram mais a cancelar.
2-Começam a haver melhorias nas ordens e alguns investimentos que tinham sido cancelados em excesso começam a ser reatados
3-A procura é forte e as fábricas começam a fazer grandes investimentos em novas instalações, etc…
Though a small part of the overall economy, inventories can reflect growth significantly because they:
tend to move forcefully up or down
Quando há uma depressão inicialmente os inventários vão crescer enquanto a empresa faz scale back dos inventórios, posteriormente numa segunda fase em que as vendas são superiores aos inventórios para decrescer os inventórios, quando chegamos ao nível ideal e começam a fazer pick up as vendas a empresa começa a aumentar de novo os inventários.
Os inventários geralmente não refletem bem o estado da economia, as vendas são melhores visto que os inventários são controlados
Importações e exportações como refletem a economia nacional / global
As importações refletem mais a economia nacional, maior GDP mais importações.
As exportações não são tão dependentes da economia nacional e dependem mais da economia global.
Theories of the Business Cycle
Neoclassical analysis relied on the concept of general equilibrium—that is, all markets will reach equilibrium because of the “invisible hand, or free market,” and the price will be found for every good at which supply equals demand. All resources are used efficiently based on the principle of marginal cost equaling marginal revenue, and no involuntary unemployment of labor or capital takes place. In practice, because the neoclassical school provides that the invisible hand will reallocate capital and labor so that they will be used to produce whatever consumers want, it does not allow for “fluctuations found in the aggregate economic activity.” If a shock of any origin shifts either the aggregate demand or aggregate supply curve, the economy will quickly readjust and reach its equilibrium via lower interest rates and lower wages.
But Keynes thought that even if workers agreed to accept lower salaries, this situation might exacerbate the crisis by reducing aggregate demand rather than solving it because lower salary expectations would shift aggregate demand left. For example, if wages fell, workers would need to cut back on their spending. This response would cause a further contraction in the demand for all sorts of goods and services, starting from the more expensive items, such as durable goods, and move in a “domino effect” through the economy (the downward spiral of the AD curve continuously shifting left, as mentioned earlier).
Further, Keynes believed there could be circumstances in which lower interest rates would not reignite growth because business confidence or “animal spirit” was too low. As a consequence, Keynes advocated government intervention in the form of fiscal policy. While he accepted the possibility that markets would reach the equilibrium envisioned by Neoclassical and Austrian economists over the long run, he famously quipped that “in the long run, we are all dead;” that is, the human suffering is excessive while waiting for all shocks to be absorbed and for the economy to return to equilibrium.
When crises occur, the government should intervene to keep capital and labor employed by deliberately running a larger fiscal deficit. This intervention would limit the damages of major recessions. Although this concept continues to be a highly politically charged debate, many economists agree that government expenditure can limit the negative effect of major economic crises in the short term. The practical criticisms that are often expressed about Keynesian fiscal policy are:
1.Fiscal deficits mean higher government debt that needs to be serviced and repaid eventually. There is a danger that government finances could move out of control.
2.Keynesian cyclical policies are focused on the short term. In the long run, the economy may come back and the presence of the expansionary policy may cause it to “overheat”—that is, to have unsustainably fast economic growth, which causes inflation and other problems. This result is because of the typical lags involved in expansionary policy taking effect on the economy.
3.Fiscal policy takes time to implement. Quite often, by the time stimulatory fiscal policy kicks in, the economy is already recovering. (Monetary policy determines the available quantities of money and loans in an economy.)
Keynes’ writings did not advocate a continuous presence of the government in the economy, nor did he suggest using economic policy to “fine tune” the business cycle. He only advocated decisive action in case of a serious economic crisis, such as the Great Depression.
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Minsky Moment
The term Minsky moment has been coined for a point in business cycle when, after individuals become overextended in borrowing to finance speculative investments, people start realizing that something is likely to go wrong and a panic ensues leading to asset sell-offs. The subprime crisis that affected many industrialized countries starting in 2008 has been represented as a “Minsky moment”4 because it came after years in which risk premiums (e.g., the differentials, or spreads, between very risky bonds and very safe bonds) were at historically low levels. Typically, low risk premiums suggest that no adverse events are expected—in other words, investors believe that because the economy and the markets have been enjoying a protracted expansion, there is no reason to worry about the future. As a consequence, many market observers suggest that business cycles are being tamed. This kind of view of the world leads people to underestimate risk, for example, by not doing the appropriate diligent research before granting a loan or before purchasing a security—in a word, complacency.
Monetarist School
Therefore, Monetarists advocate a focus on maintaining steady growth of the money supply, and otherwise a very limited role for government in the economy. Fiscal and monetary policy should be clear and consistent over time, so all economic agents can forecast government actions. In this way, the uncertainty of economic fluctuations would not be increased by any uncertainty about the timing and magnitude of economic policies and their lagged effects.
According to the Monetarist school, business cycles may occur both because of exogenous shocks and because of government intervention. It is better to let aggregate demand and supply find their own equilibrium than to risk causing further economic fluctuations. However, a key part of monetarist thought is that the money supply needs to continue to grow at a moderate rate. If it falls, as occurred in the 1930s, the economic downturn could be severe, whereas if money grows too fast, inflation will follow.
Real Business Cycle Theory
Because, just like the neoclassical models, the initial New Classical models did not include money, they were called real business cycle models (often abbreviated as RBC). Cycles have real causes, such as the aforementioned changes in technology, whereas monetary variables, such as inflation, are assumed to have no effect on GDP and unemployment.7
RBC models of the business cycle conclude that expansions and contractions represent efficient operation of the economy in response to external real shocks. Because the level of economic activity at any time is consistent with maximizing expected utility, the policy recommendation of RBC theory is for government not to intervene in the economy with discretionary fiscal and monetary policy.
Critics of RBC models often focus on the labor market. Because RBC models rely on efficient markets, it follows that unemployment can only be short term: apart from frictional unemployment,8 if markets are efficient, a person who does not have a job can only be a person who does not want to work. If a person is unemployed, in the context of efficient markets, he just needs to lower his wage rate until he finds an employer who hires him. This assumption is logical because if markets are perfectly flexible, all markets must find equilibrium and full employment.
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Simple criteria for the financial analyst wondering if a government’s expenditure is excessive
- Does the government always have a deficit no matter the cyclical phase, or does it have surpluses during economic booms?
- Does the government have a deficit because of a defined series of necessary investments that will improve the productivity of the country, or is it spending most of its money in salaries for patronage employees and on infrastructure of questionable uses?
- Is the growth rate of debt (government budget deficit as a percentage of GDP) higher than GDP growth? If so, the debt level will not likely be sustainable.
When government expenditures are excessive, inflation often follows. After that, a recession may occur because the central bank takes necessary measures to slow down an overheated economy. That is, if government purchases increase aggregate demand too much, thus causing inflation (expansionary fiscal policy), the central bank will intervene to stop prices from increasing too quickly (tightening or contractionary monetary policy).
Unemployment frequently lags the cycle because:
Choose
- it takes time to compile the employment data.
- businesses are reluctant to dismiss and hire workers.
- workers must give notice to employers before quitting jobs.
•businesses are reluctant to dismiss and hire workers
In stagflation what should the central bank do?
the economy will typically be left to correct itself because no short-term economic policy is thought to be effective.
price index
Laspeyres index
Paasche index
FisherIndex
Laspeyres index
Nº de bens a comparar são constantes no tempo
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Preço a que obtenho X bens hoje/ Preço a que obtinha X bens no mes passado (exemplo)
Paasche index
Com a diferença que o nº de bens a comparar é o atual, os preços é que se alteram.
preço a que obtenho os bens hoje / preço que custavam no mês passado
P.e. 112/100 =1,12 =12% inflação
FisherIndex
(LI*PI )^0,5 média geométrica dos 2 índices
CPI and PPI usos possíveis para um e para outro?
The PPI reflects the price changes experienced by domestic producers in a country. Because price increases may eventually pass through to consumers, the PPI can influence the future CPI. The items in the PPI include fuels, farm products (such as grains and meat), machinery and equipment, chemical products (such as drugs and paints), transportation equipment, metals, pulp and paper, and so on. These products are usually further grouped by stage-of-processing categories: crude materials, intermediate materials, and finished goods. Similar to the CPI, scope and weights vary among countries. The differences in the weights can be much more dramatic for the PPI than for the CPI because different countries may specialize in different industries. In some countries, the PPI is called the wholesale price index (WPI).
Headline and Core Inflation
Headline inflation refers to the inflation rate calculated based on the price index that includes all goods and services in an economy. Core inflation usually refers to the inflation rate calculated based on a price index of goods and services except food and energy. Policymakers often choose to focus on the core inflation rate when reading the trend in the economy and making economic policies. The reason is that policymakers are trying to avoid overreaction to short-term fluctuations in food and energy prices that may not have a significant impact on future headline inflation.
Explaining Inflation
Há duas causas principais para a inflação …
Economists describe two types of inflation: cost-push, in which rising costs, usually wages, compel businesses to raise prices generally; and demand-pull, in which increasing demand raise prices generally, which then are reflected in a business’s costs as workers demand wage hikes to catch up with the rising cost of living. Whatever the sequence by which prices and costs rise in an economy, the fundamental cause is the same: excessive demands—either for raw materials, finished goods, or labor—that outstrip the economy’s ability to respond. The initial signs appear in the areas with the greatest constraints: the labor market, the commodity market, or in some area of final output. Even before examining particular cost and price measures, practitioners, when considering inflation, look to indicators that might reveal when the economy faces such constraints.
Velocity of money
Some practitioners view the likelihood of inflationary pressure from the vantage point of the ratio of nominal GDP to money supply, commonly called the “velocity of money.” If this ratio remains stable around a constant or a historical trend, they see reason to look for relative price stability. If velocity falls, it could suggest a surplus of money that might have inflationary potential, but much depends on why it has declined. If velocity has fallen because a cyclical correction has brought down the GDP numerator relative to the money denominator, then practitioners view prospects as more likely to lead to a cyclical upswing to reestablish the former relationship than inflationary pressure. If velocity has fallen, however, because of an increase in the money denominator, then inflationary pressure becomes more likely. If velocity rises, financial analysts might be concerned about a shortage of money in the economy and disinflation or deflation.
The 2008–2009 global recession and financial crisis offers an extreme example of these velocity ambiguities. As the global economy slipped into recession, which held back the GDP numerator in velocity measures, central banks, most notably the Federal Reserve in the United States, tried to help financial institutions cope by injecting huge amounts of money into their respective financial systems, raising the velocity denominator. Velocity measures plummeted accordingly. The expectation is that subsequent GDP growth as economies and financial markets heal will bring velocity back to a more normal level and trend. That said, the fear is that the monetary surge will, over the very long run, lead to inflation. For policy makers, this situation has created a very difficult policy choice. On the one side, they need to sustain the supply of money to help their respective economies cope with the after effects of the financial crisis. On the other side, they need ultimately to withdraw any monetary excess to preclude potential inflationary pressures.
A diffusion index:
- measures growth.
- reflects the consensus change in economic indicators.
- is roughly analogous to the indices used to measure industrial production
•reflects the consensus change in economic indicators.
atribui valor de 1 para os indicadores que sobem 0,5 os que ficam estáveis e 0 para os que descem.
Divide pelo nº de indicadores e multiplica por 100
P.e. Michigan Consumer index
Based on typical labor utilization patterns across the business cycle, productivity (output per hours worked) is most likely to be highest:
- at the peak of a boom.
- into a maturing expansion
- at the bottom of a recession.
•at the bottom of a recession.
What is the most important effect of labor productivity in a cost-push inflation scenario?
A.Rising productivity indicates a strong economy and a bias towards inflation.
B.The productivity level determines the economy’s status relative to its “natural rate of unemployment.”
C.As productivity growth proportionately exceeds wage increases, product price increases are less likely.
B.The productivity level determines the economy’s status relative to its “natural rate of unemployment.”
Which of the following statements best describes fiscal policy? Fiscal policy:
A.is used by governments to redistribute wealth and incomes.
B.is the attempt by governments to balance their budgets from one year to the next.
C.involves the use of government spending and taxation to influence economy activity.
C is correct. Note that governments may wish to use fiscal policy to redistribute incomes and balance their budgets, but the overriding goal of fiscal policy is usually to influence a broader range of economic activity.
In summary, money fulfills three important functions, it:
- acts as a medium of exchange;
- provides individuals with a way of storing wealth; and
- provides society with a convenient measure of value and unit of account.
