CH5 Flashcards
AN INCREASE (SHIFT RIGHT) IN AGGREGATE DEMAND CAUSES:
AN INCREASE IN THE PRICE LEVEL AND AN INCREASE IN REAL GDP.
-AN INCREASE IN AGGREGATE DEMAND CAUSES THE EQUILIBRIUM PRICE LEVEL TO RISE AND EQUILIBRIUM OUTPUT (REAL GDP) TO INCREASE.
A THROUGH OF A BUSINESS CYCLE IS????
- UNUSED PRODUCTIVE CAPACITY AND AN UNWILLINGNESS TO RISK INVESTMENT
- THE TROUGH OF A BUSINESS CYCLE IS AN ECONOMIC LOW POINT WITH NO POSITIVE INDICATORS FOR THE FUTURE. IT IS CHARACTERIZED BY UNUSED PRODUCTIVE CAPACITY AND AN UNWILLINGNESS TO RISK NEW INVESTMENTS.
- FIRMS ARE ALSO LIKELY TO EXPERIENCE SIGNIFICANT EXCESS PRODUCTION CAPACITY, LEADING THEM TO REDUCE THE SIZE OF THEIR WORKFORCE AND CUTS COTS.
- A THROUGH IS A LOW POINT OF ECONOMIC ACTIVITY. AT THIS POINT OF THE BUSINESS CYCLE, FIRM PROFITS ARE LIKELY TO BE AT THEIR LOWEST LEVEL.
RECESSION
POTENTIAL OUTPUT WILL EXCEED ACTUAL OUTPUT.
- DURING A RECESSION, POTENTIAL OUTPUT (REAL GDP) WILL EXCEED ACTUAL OUTPUT (REAL GDP)
- OCCURS WHEN THE ECONOMY EXPERIENCES NEGATIVE REAL ECONOMIC GROWTH (DECLINES IN NATIONAL OUTPUT).
- ALSO DEFINED AS TWO CONSECUTIVE QUARTERS OF FALLING NATIONAL OUTPUT. .
- DURING A RECESSION, FIRMS TEND TO FALL AND MANY FIRMS INCUR LOSSES. FIRMS ARE ALSO LIKELY TO HAVE EXCESS CAPACITY. RESOURCES ARE LIKELY TO BE UNDERUTILIZED AND UNEMPLOYMENT IS LIKELY TO BE HIGH.
A RECESSION CAN BE CAUSED BY
- AN DECREASE IN AGREGATE SUPPLY AND A DECREASE IN AGREGATE DEMAND.
- A RECESSION IS DEFINED AS A PERIOD OF FALLING GDP AND RISING UNEMPLOYMENT.
- GDP WILL FALL IF THERE IS A DECREASE IN AD OR DECREASE IN AS
EXPANSION
IS A PERIOD DURING WHICH REAL GDP IS RISING AND UNEMPLOYMENT IS FALLING
- AN EXPANSIONARY PHASE IS CHARACTERIZED BY RISING ECONOMIC ACTIVITY REAL GDP AND GROWTH. .
- DURING AN EXP PHASE, ECONOMIC ACTIVITY IS RISING ABOVE ITS LONG-TERM GROWTH TREND.
- FIRMS PROFITS ARE LIKELY TO BE RISING DURIGN AN EXP PHASE AND DEMAND FOR GOODS AND SERVICES INCREASES.
- FIRMS ARE ALSO LIKELY TO INCREASE THE SIZE OF THE WORKFORCE DURING AN EXPANSION, AND THE PRICE OF GOODS AND SERVICES ARE LIKELY TO BE RISING.
WHAT WOULD BE CONSIDERED THE MOST EXPANSIONARY SET OF FISCAL POLICIES
-INCREASE IN GOVERNMENT PURCHASES AND DECREASE IN TAXES.
MONETARY POLICY
IS AN INCREASE IN THE MONEY SUPPLY
FISCAL POLICY
IS THE USE OF GOVERNMENT SPENDING AND TAXATION POLICIES TO PROMOTE:
- PRICE STABILITY
- FULL EMPLOYMENT
- ECONOMIC GROWHT.
MONETARY POLICY
IS THE SETTING OF THE MONEY SUPPLY BY THE FED THROUGH THE USE OF MONETARY POLICY TOOLS TO PROMOTE:
- FULL EMPLOYMENT
- PRICE STABILITY
CONTRACTIONARY MONETARY POLICY
IS THE REDUCTION OF MONEY SUPPLY BY THE FED.
EXAPANSIONARY MONETARY POLICY
IS THE EXPANSION OF MONEY SUPPLY BY THE FED.
AN INCREASE IN GOVERNMENT SPENDING WILL TEND TO CAUSE
- REAL GDP TO INCREASE AND UNEMPLOYMENT TO DECREASE.
- AN INCREASE IN GOVT SPENDING CAUSES AN INCREASE IN AD SHIFTS TO THE RIGHT. AS A RESULT IN GOVT SPENDING CAUSES REAL GDP TO RISE AND UNEMPLOYMENT TO FALL.
AN INCREASE IN PERSONAL INCOME TAX WILL TEND TO CAUSE–
REAL GDP TO FALL AND UNEMPLOYMENT TO RISE
NORMAL SEQUENCE OF A BUSINESS CYCLE
- EXPANSION
- PEAK
- CONTRACTION
- TROUGH
WITHIN THE FRAMEWORK OF THE AD AND AS , AN INCREASE IN SHORT RUN AGGREGATE SUPPLY WILL CAUSE
-REAL OUTPUT TO EXPAND AND PRICE LEVEL TO FALL.
IF AN ECONOMY IS CURRENTLY EXPERIENCING BOTH FULL EMPLOYMENT AND PRICE STABILITY, A MAJOR TAX REDUCTION WILL PROBABLY CAUSE:
- AN ACCELERATION IN THE INFLATION RATE, UNLESS GOVERNMENT EXPENDITURES ARE ALSO REDUCED.
- A TAX CUT SHIFTS THE AD CURVE TO THE RIGHT CAUSING THE PRICE LEVEL AND THEREFORE INFLATION RATE TO RISE.
IF US DOLLARS INCREASES IN VALUE RELATIVE TO THE OTHER MAJOR CURRENCIES, AGGREGATE DEMAND SHOULD…..
- DECREASE AS US GOODS BECOME LESS ATTRACTIVE OVERSEAS.
- IF THE DOLLAR GAINS IN VALUE, NET EXPORTS WILL SUFFER AS US GOODS BECOME MORE EXP OVERSEAS; HENSE AD WILL DECREASE. THE SUPPLY FOR FOREIGN GOODS DOMESTICALLY SHOULD INCREASE AS IMPORTS BECOME CHEAPER.
A LARGE INCREASE IN NOMINAL WAGES, PERHAPS ORCHESTRATED BY UNIONS, WOULD MOST LIKELY RESULT IN:
- A DECREASE IN REAL GDP AND AN INCREASE IN THE PRICE LEVEL.
- AN INCREASE IN NOMAL WAGES REPRESENT AN INCREASE IN INPUT COSTS. THIS WOULD SHIFT AD TO THE LEFT RESULTING IN A DECREASE IN REAL GDP AND AN INCREASE IN THE OVERALL PRICE LEVEL.
ECONOMIC FLUCTUATIONS OR BUSINESS CYCLES ARE BEST DESCRIBED AS:
FLUCTUATIONS IN THE LEVEL OF ECONOMIC ACTIVITY, RELATIVE TO A LONG TERM GROTH TREND.
ECONOMIC GROWTH
LONG RUN INCREASES IN A NATIONS STANDARD LIVING.
WHAT WOULD CAUSE REAL GDP TO INCREASE???
A DECLINE IN INTEREST RATES AND A FALL IN INPUT COSTS.
-A DECLINE IN INTEREST RATES WOULD CAUSE THE AD CURVE TO SHIFT TO THE RIGHT WHICH INCREASE REAL GDP. SIMILARLY, A DECLINE IN INPUT COSTS WOULD CAUSE AS TO SHIFT RIGHT WHICH ALSO INCREASES REAL GDP
DECLINE IN GOVERNMENT SPENDING
CAUSES REAL GDP TO DECREASE.
AT THE PEAK OF A BUSINESS CYCLE, WHICH OF THE FOLLOWING CONDITIONS IS MOST TRUE??
-CAPACITY CONSTRAINTS AND LABOR SHORTAGES ARE LIKELY TO PUT UPWARD PRESSURE ON THE OVERALL PRICE LEVEL. .
PEAK
- A PEAK IS A HIGH POINT OF ECONOMIC ACTIVITY. IT MARKS THE END OF AN EXPANSIONARY PHASE AND THE BEG OF A CONTRACTIONALY PHASE IN ECONOMIC ACTIVITY. AT THE PEAK OF A BUSINESS CYCLE, FIRM PROFIT ARE LIKELY TO BE AT THEIR HIGHEST LEVEL.
- FIRMS AREA ALSO LIKELY TO FACE CAPACITY CONSTRAINTS AND INPUT SHORTAGES RAW MATERIAL AND LABOR, LEADING TO HIGHER COSTS AND HIGUER OVERALL PRICE LEVEL.
REAL GDP PER CAPITA
- THE MEASUREMENT MOST OFTEN USED TO COMPARE STANDARDS OF LIVING ACROSS COUNTRIES.
- REAL GDP PER CAPITA IS REAL GDP DIVIDED BY POPULATION.
- REAL GDP PER CAPITA IS TYPICALLY USED TO COMPARE STANDARS OF LIVING ACRROS COUNTRIES OR ACROSS TIME. BY DIVIDING REAL GDP BY POPULATION THIS MEASURE ADJUSTS FOR DIFFERENCES IN THE SIZE OF COUNTRY AND FOR DIFFERENCES IN POPULATION OVER TIME.
GDP PER CAPITA
IS USED TO COMPARE STANDARDS OF LIVING.
VARIATIONS BETWEEN BUSINESS CYCLES MOST LIKELY ARE ATTRIBUTABLE TO WHICH OF THE FOLLOWING FACTORS?
-VARIATIONS IN BUSINESS CYCLE ARE ATTRIBUTED OR DESCRIBED IN TERSM OF HOW LONG THEY LAST AND THE DEGREE OF PEAK OR TROUGH INTENSITY.
WHICH OF THE FOLLOWING INDICATES THAT THE ECONOMY IS AN A RECESSIONARY PHASE
- POTENTIAL NATIONAL INCOME > ACTUAL NATIONAL INCOME.
- WHEN POTENTIAL NATIONAL INCOME (POTENTIAL GDP ALSO REFERRED TO AS THE LONG RUN AGGREGATE SUPPLY IS GREATER THAN THE ACHIEVED NATIONAL INCOME. THE SHORT RUN AGGREGATE SUPLY CURVE IS SHIFTING TO THE LEFT INDICATION A CONTRACTION OR RECESSION.
INCREASES IN THE PRICE LEVEL, A PERIOD OF INFLATION
- INCREASES IN THE PRICE LEVEL IS NEGATIVELY RELATED TO THE PURCHASING POWER OF MONEY.
- A PERIOD OF INFLATION INCREASES THE PRICE LEVEL WHICH IS INVERSELY RELATED TO THE PURCHASING POWER OF MONEY INFLATION ERODES THE VALUE OF MONEY.
WHICH OF THE FOLLOWING WOULD LEAD TO THE MOST INFLATION
-AGGREGATE DEMAND INCREASES AND AGGREGATE DEMAND SUPPLY DECREASES.
CAUSES OF INFLATION AND DEFLATION
- INFLATION AND DEFLATION ARE CAUSED BY SHIFTS IN THE AGGREGATE DEMAND AD AND SHORT RUN AGGREGATE SUPPLY CURVES.
- A RIGHTWARD IN THE AD CURVE WILL CAUSE PRICE LEVE TO RISE, LEADING TO INFLATION. SIMILARLY A LEFTWARD SHIFT IN THE SHORT RUN AGGREGATE SUPPLY CURVE WILL ALSO CAUSE THE PRICE LEVEL TO RISE LEDING TO INFLATION.
INFLATION
A SUSTAINED INCREASE IN THE GENERAL PRICES OF GOODS AND SERVICES. IT OCCURS WHEN PRICES ON AVERAGE ARE INCREASING OVER TIME.
DEFLATION
- A SUSTAINED DECREASE IN THE GENERAL PRICES OF GOODS AND SERVICES. IT OCCURS WHEN PRICES ON AVERAGE ARE FALLING OVER TIME.
- MOST ECONOMISTS BELIEVE DEFLATION IS A MUCH BIGGER PROBLEM THAN INFLATION.
- DURING A PERIOD OF DEFLATION FIRMS ARE LIKELY TO EXPERIENCE SIGNIFICANT EXCESS PRODUCTION CAPACITY.
INFLATION/DEFLATION FORMULA
-THE DEFLATION/INFLATION IS MEASURED AS THE PERCENTAGE OF CHANGE IN CPI FROM ONE PERIOD TO THE NEXT.
WHICH IS CYCLE OF UNEMPLOYMENT IS NOT CONSISTENT WITH FULL EMPLOYMENT
- CYCLICAL UNEMPLOYMENT
- WHEN THE ECONOMY IS OPERATING AT FULL EMPLOYMENT, THERE IS NO CYCLICAL UNEMPLOYMENT.
- WHEN THE ECONOMY IS OPERATING AT FULL EMPLOYMENT, THERE IS STILL SOME UNEMPLOYMENT KNOWN AS THE NATURAL RATE OF UNEMPLOYMENT, WHICH DOES NOT INCLUDE CYCLICAL UNEMPLOYMENT
NATURAL RATE OF UNEMPLOYMENT
NATURAL RATE OF UNEMPLOYMENT IS THE NORMAL RATE OF UNEMPLOYMENT AROUND WHICH THE UNEMPLOYMENT RATE FLUCTUATES DUE TO CYCLICAL UNEMPLOYMENT.
- THUS THE NATURAL RATE OF UNEMPLOYMENT IS THE SUM OF:
- FRICTIONAL
- STRUCTURAL
- SEASONAL
FULL EMPLOYMENT
FULL EMPLOYMENT IS DEFINED AS THE LEVEL OF UNEMPLOYMENT WHERE THERE IS NO CYCLICAL UNEMPLOYMENT.
-FULL EMPLOYMENT DOES NOT MEAN ZERO UNEMPLOYMENT. WHEN THE ECONOMY IS OPERATING AT FULL, THERE IS STILL FRICTIONAL, STRUCTURAL, AND SEASONAL UNEMPLOYMENT.
CYCLICAL UNEMPLOYMENT RESULTS FROM??
A RECESSION IN THE ECONOMY.
-CYCLICAL UNEMPLOYMENT IS CAUSED BY THE BUSINESS CYCLE. IT TENDS TO RISE DURING A RECESSION AND FALL DURING AN EXPANSION.
A SHARP RISE IN PRICE OF OIL AN MAJOR INPUT WOULD RESULT IN:
A COST PUSH INFLATION.
- A COST PUSH INFLATION IS CAUSED BY REDUCTIONS IN SHORT RUN AGGREGATE SUPPLY. THUS CUST PUSH INFLATION COULD BE CAUSED BY FACTORS SUCH AS:
- AN INCREASE IN OIL PRICES
- AN INCREASE IN NOMINAL WAGES
- A COST PUSH INFLATION IS INFLATION CAUSED BY A SHIFT LEFT AN AGGREGATE SUPPLY. AN INCREASE IN INPUT COSTS, SUCH AS SHARP INCREASE IN PRICE OF OIL WILL CASUE SRAS CURVE TO SHIFT LEFT AND INCREASE THE AGGREGATE PRICE LEVEL CAUSING INFLATION.
DURING A PERIOD OF HIGH INFLATION, WHO WOULD MOST LIKELY TO GAIN?
-THOSE WITH A FIXED AMOUNT OF DEBT.
FRICTIONAL UNEMPLOYMENT
- THE TIME NEEDED TO MATCH QUALIFIED JOB SEEKERS WITH AVAILABLE JOBS.
- FRICTIONAL UNEMPLOYMENT IS THE UNEMPLOYMENT THAT ARISES FROM WORKERS ROUTINELY CHANGING JOBS OR FROM WORKERS BEING TEMP LAID OFF.
GDP BY THE EXPENDITURE APPROACH INCLUDES
GICE
- GOVERNMENT EXPENDITURES
- CAPITAL INVESTMENTS
- CONSUMPTION
- NET EXPORTS
THE DISCOUNT RATE SET BY THE FEDERAL RESERVE IS THE
- RATE THAT THE CENTRAL BANK CHARGES FOR LOANS TO COMMERCIAL BANKS.
- THE DISCOUNT RATE REFERS TO THE RATE ESTABLISHED BY THE FEDERAL RESERVE FOR SHORT TERM OFTEN OVERNIGHT LOANS IT MAKES TO MEMBER BANKS.
THE FEDERAL RESERVER MUST INCREASE THE MONEY SUPPLY THROUGH
- FEDERAL OPEN MARKET COMMITTEE PURCHASING OR SELLING GOVERNMENT SECURITIES.
- RAISING OR LOWERING THE DISCOUNT RATE
- CHANGING THE RESERVE RATIO.
IF THE FEDERAL RESERVE WANTED TO IMPLEMENT AN EXP MONETARY POLICY, WHICH OF THE FOLLOWING WOULD THE FEDERAL RESERVE TAKE?
-PURCHASE ADDITIONAL US. GOVERNMENT SECURITIES AND LOWER THE DISCOUNT RATE.
TO DECREASE THE MONEY SUPPLY, THE FED CAN
- SELL GOVERNMENT SECURITIES IN THE OPEN MARKET
- INCREASE THE DISCOUNT RATE
- INCREASE THE REQUIRED RESERVE RATION
AN INCREASE IN THE MONEY SUPPLY LEADS TO??
-A DECLINE IN INTEREST RATES, AN INCREASE IN INVESTMENT AND AN INCREASE IN AGGREGATE DEMAND.
-EXPANSIONARY MONETARY POLICY RESULTS WHEN THE FED INCREASES THE MONEY SUPPLY.
-EXPANSIONARY MONETARY POLICY AFFECTS THE ECONOMY THROUGH THE FOLLOWING CHAIN EFFECTS.
1. AN INCREASE IN THE MONEY SUPPLY CAUSES INTEREST TO FALL
2 FALLING INTEREST STIMULATE THE DESIRED LEVELS OF FIRM INVESTMENT AND HOUSEHOLD CONSUMPTION.
3. INCREASES IN DESIRED INVESTMENT AND CONSUMPTION CAUSE AN INCREASE IN AGGREGATE DEMAND.
4. AGGREGATE DEMAND SHIFTS TO THE RIGHT CAUSING REAL GDP AND THE PRICE LEVEL TO RISE.
WHICH OF THE FOLLOWING IS MOST LIKELY TO CAUSE AN INCREASE IN THE AMOUNT OF FRICTIONAL UNEMPLOYMENT IN AN ECONOMY
- A REDUCTION IN THE AVERAGE AGE OF THE WORK FORCE.
- YOUNGER WORKERS TEND TO MOVE BETWEEN JOBS MORE FREQUENTLY.
WHICH OF THE FOLLOWING WOULD LEAD TO A REDUCTION IN INFLATION?
-DECREASE IN AGGREGATE DEMAND AND INCREASE IN AGGREGATE SUPPLY.
STRUCTURAL
IS SHOWN WHEN INDIVIDUALS DO NOT HAVE THE QUALIFICATIONS OR SKILLS NECESSARY TO FILL AVAILABLE JOBS.
-STRUCTURAL UNEMPLOYMENT OCCURS WHEN THE JOBS AVAILABLE DO NOT MATCH THE SKILLS OF THE UNEMPLOYED INDIVIDUALS OR WHEN THE INDIVIDUALS DO NOT LIVE WHERE JOBS ARE AVAILABLE WITH THEIR SKILLS.
FRICTIONAL
-EXISTS WHEN WORKERS ARE IN THE PROCESS OF CHANGING JOBS OR ARE TEMPORARILY LAID OFF FROM THEIR JOBS.
INITIALLY THE NOMINAL INTEREST RATE IS 8% AND THE INFLATION RATE IS 6%. ONE YEAR LATER, THE NOMINAL INTEREST RATE RISES TO 12% WHILE THE INFLATION RATE RISES TO 10%. IT FOLLOWS THAT THE REAL RATE OF INTEREST.
-HAS REMAINED THE SAME
-REAL INTEREST FORMULA
-NOMINAL INTEREST RATE-INFLATION RATE.
THEREFORE,
8%-6%=2
12%-10%=2
INFLATION RATE MEASURES:
- THE RATE AT WHICH THE OVERALL PRICE LEVEL INCREASES.
- THE INFLATION RATE MEASURES THE RATE INCREASE IN THE OVERALL PRICE LEVEL IN THE ECONOMY.
- THE INFLATION RATE IS ASSOCIATED WITH PRICE LEVEL CHANGES NOT CHANGES IN THE NOMINAL VALUE OUTPUT.
- INFLATION REFERS TO A SUSTAINED INCREASE IN THE OVERALL PRICE LEVEL. NOT A PRICE OF A PARTICULAR GOOD.
- INFLATION RATE IS ASSOCIATED WITH PRICE LEVEL CHANGES NOT INTEREST RATE CHANGES.
STAGFLATION
IS THE COMBINATION OF FALLING NATIONAL OUTPUT AND A RISING PRICE LEVEL.
- STAGNATION IS A COMBO OF RISING UNEMPLOYMENT AND RISING PRICE LEVEL.
- STAGFLATION OCCURS WHEN THE ECONOMY SUFFERS A RECESSION THAT IS CHARACTERIZED BY FALLING OUTPUT, RISING UNEMPLOYMENT AND RAISING PRICE LEVEL.
DEFLATION IS BEST DEFINED AS:
- A CONTINUOUS DECLINE IN THE OVERALL PRICE LEVEL.
- DEFLATION IS DEFINED AS A CONTINUOUS OR SUSTAINED DECLINE IN THE OVERALL PRICE LEVEL.
WHEN THE OVERALL PRICE LEVEL IS RISING, NOMINAL RATES TEND TO BE:
RISING
-THE RELATIONSHIP BETWEEN NOMINAL INTEREST RATES AND INFLATION RATES CAN BE SEEN BY REARRANGING THE EQUATION FOR REAL INTEREST RATE.
NOMINAL INTEREST RATE=REAL INTEREST RATE+INFLATION.
INFLATION CAN BE CAUSED BY:
-INCREASE IN AGGREGATE DEMAND AND DECREASE IN AGGREGATE SUPPLY.
DURING A RECESSION
REAL GDP HAS FALLEN AND UNEMPLOYMENT HAS RISEN.
-TO STIMULATE THE ECONOMY, THE FEDERAL RESERVE CAN LOWER THE DISCOUNT RATE. THIS CAUSES THE MONEY SUPPLY TO INCREASE, WHICH IN TURN CAUSES AD TO SHIFT RIGHT. AS A RESULT, REAL GDP WOULD INCREASE AND UNEMPLOYMENT WOULD DECREASE.
WHICH OF THE FOLLOWING ACTIONS IS ACKNOWLEDGED PREVENTIVE MEASURE FOR A PERIOD OF DEFLATION:
- INCREASING THE MONEY SUPPLY.
- DEFLATION IS A GENERAL DECLINE IN THE OVERALL PRICE LEVEL. WHEN THE INFLATION RATE IS NEGATIVE.
- INCREASING THE MONEY SUPPLY CAUSES THE OVERALL PRICE LEVEL TO RISE. AS A RESULT IT HELPS ELIMINATE DEFLATION.
GDP INCLUDES THE FOLLOWING MEASURES
-GDP IS THE TOTAL DOLLAR MONETARY VALUE OF AL LNEW FINAL PRODUCTS AND SERVICES PRODUCED WITHIN THE EONOMY IN A GIVEN TIME PERIOD. THE EMPHASIS IS ON THE FINAL GOODS AND SERVICES.
WHICH OF THE FOLLOWING IS CORRECT REGARDING THE CPI FOR MEASURING THE ESTIMATED DECREASE IN A COMPANY’S BUYING POWER.
- THE PRODUCTS A COMPANY BUYS SHOULD DIFFERER FROM WHAT A CONSUMER BUYS
- THE CONSUMER PRICE INDEX CPI MEASURE THE COSTS OF A MARKET BASKET OF SPECIFIC GOODS COMMONLY PURCHASED BY CONSUMERS. IT MEASURES CONSUMER BUYING POWER AND IS NOT DISTORTED BY ITEMS GENERALLY BOUGHT BY INDUSTRY.
- THE CPI REPRESENTS MONTHLY DATA ON CHANGES IN PRICES PAID BY URBAN CONSUMERS FOR A REPRESENTATIVE BASKET OF GOODS AND SERVICES.
- THE CPI MEASURES WHAT HAS BEEN PAID BY CONSUMERS NOT WHAT CONSUMERS WILL PAY FOR ITEMS.
- THE CPI MEASURES WHAT HAS BEEN PAID BY CONSUMERS IN OVER 80 URBAN IN THE US. THE AMOUNTS PAID ARE DENOMINATED IN US DOLLARS AND WOULD NOT BE SKEWED BY FOREIGN CURRENCY TRANSLATIONS.
WHAT DOES CPI MEASURE?
- RATE OF INFLATION
- THE CONSUMER PRICE INDEX IS A MEASURE OF INFLATION RATE. THE PERCENTAGE CHANGE OF THE CPI FROM ONE PERIOD TO THE NEXT.
- WACC MEASURES COST OF CAPITAL
THE PRIMARY PURPOSE OF CPI IS TO:
COMPARE RELATIVE PRICE CHANGES OVER TIME.
CPI IS A MEASURE OF THE OVERALL COST OS A FIXED BASKET OF GOODS AND SERVICES PURCHASED BY AN AVERAGE HOUSEHOLD. IT IS PRIMARILY USED TO COMPARE RELATIVE PRICE CHANGES OVER TIME.
AS A MEASURE OF NATIONAL INCOME THE RELATIONSHIP BETWEEN PERSONAL INCOME AND DISPOSABLE INCOME IS BEST DESCRIBED AS FOLLOWS:
- DISPOSABLE INCOME IS LESS THAN PERSONAL INCOME AS ADJUSTED FOR PERSONAL TAXES.
- DISPOSABLE INCOME IS COMPUTED AS PERSONAL INCOME THE INCOME RECEIVED BY HOUSEHOLD AND NON-CORPORATE BUSINESS) NET OF PERSONAL TAXES. DISPOSABLE INCOME IS THE AMOUNT LEFT OVER FROM PERSONAL INCOME THAT IS AVAILABLE EITHER TO SPEND OR SAVE.
DISPOSABLE INCOME
PERSONAL INCOME MINUS PERSONAL TAXES
IF A CLIENT IS EXPECTING HIGH INFLATION IN THE FUTURE, THE CPA WOULD SUGGEST TO THE CLIENT WHICH OF THE FOLLOWING TYPES OF INVESTMENTS?
-PRECIOUS METALS
PRECIOUS METALS ARE NON MONETARY ASSETS WHOSE VALUE INCREASES WITH INFLATION. THEREFORE, PRECIOUS METALS WOULD LIKELY SERVE AS BETTER HEDGE AGAINST INFLATION THAN CS OR FIXED INCOME SECURITIES.
HOW DOES INFLATION DISTORT REPORTED INCOME
DEPRECIATION IS NOT REFLECTIVE OF CURRENT FIXED ASSET REPLACEMENT COSTS.
- DEPRECIATION REPRESENTS A METHOD OF REASONABLE AND RATIONAL ALLOCATION OF THE HISTORICAL COST OF FIXED ASSETS TO BENEFITING ACCOUNTING PERIODS. DEPRECIATION IS A METHOD OF ALLOCATION, NOT VALUATION.
- INFLATION WILL CAUSE THE CONSUMPTION OF NON-MONETARY ASSETS ACCOUNTED FOR AS DEPRECIATION TO BE UNDERVALUED SINCE THE TOTAL VALUE USED AS THE BASIS FOR DEPRECIATION IS THE ASSETS HISTORICAL COST, NOT AN INFLATION ADJUSTED AMOUNT.
WHEN MARKETS ARE PERFECTLY COMPETITIVE CONSUMERS
HAVE PRODUCTS AND SERVICES PRODUCED AT THE LOWEST COST IN THE LONG RUN.
-SINCE PRICE IS BARELY SUFFICIENT TO GIVE A FIRM PROFIT AND STAY IN BUSINESS, THE CONSUMER OBTAINS THE PRODUCT AT AS LOWER PRICE AS IS ECONOMICALLY FEASIBLE. IN ADDITION, EVERY FIRM IS FORCED TO PRODUCE AT THE MOST EFFICIENT OUTPUT RATE.
PERFECT COMPETITION
- A KEY ASSUMPTION OF PERFECT COMPETITION IS THAT THE FIRM IS A PRICE TAKER. THAT IS IT CANNOT FIX THE PRICE. KEY ASSUMPTIONS INCLUDE:
- CUSTOMERS ARE INDIFFERENT ABOUT WHICH FIRM THEY BUY FROM
- THE LEVEL OF A FIRMS OUTPUT IS SMALL RELATIVE TO THE INDUSTRYS TOTAL OUTPUT
- THERE’S FREEDOM OF ENTRY INTO AND EXIT OUT OF THE INDUSTRY
IN ORDER TO SELL AT THE RATE OF OUTPUT IN MARKETS CONTROLLED BY MONOPOLISTS, PRICE IS SET WHERE???
MR=MC
NO MATTER WHICH MODEL IS REPRESENTATIVE OF THE INDUSTRY IN WHICH THE FIRM OPERATES, THE FIRM WILL MAXIMIZE PROFITS BY PRODUCING AT MR=MC. THE MONOPOLIST’S PRICE WILL BE HIGHER THAN MR RESULTING IN LARGE PROFITS.
A NATURAL MONOPOLY EXISTS BECAUSE
- ECONOMIC AND TECHNICAL CONDITIONS PERMIT ONLY ONE EFFICIENT SUPPLIER.
- A NATURAL MONOPOLY EXISTS WHEN ECONOMIC AND TECHNICAL CONDITIONS PERMIT ONLY ONE EFFICIENT SUPPLIER.
EXTERNAL COST
-IS A COST THAT THE COMPANY DOES NOT ACCOUNT FOR, BUT PASSES ON TO THE DETRIMENT OF SOCIETY.
MONOPOLISTIC COMPETITION
- THE CHARACTERISTICS OF MONOPOLISTIC COMPETITION INCLUDE:
- NUMEROUS FIRMS WITH DIFFERENTIATED PRODUCTS
- EASE OF ENTRY-FEW BARRIERS
- FIRMS EXACT SOME INFLUENCE OVER THE MARKET
- NON PRICE COMPETITION IS FREQUENT AND CRITICAL.
IN MARKETS THAT ARE IMPERFECTLY COMPETITVE SUCH AS MONOPOLY AND MONOPOLISTIC COMPETITION, FIRMS PRODUCE AT AN OUTPUT WHERE:
-FIRMS PRODUCE UP TO THE POINT WHERE MC=MR WHETHER THE MARKETS ARE PERFECTLY COMPETITIVE OR IMPERFECTLY COMPETITIVE.
MONOPOLISTIC COMPETITION IS CHARACTERIZED BY
- A RELATIVELY LARGE GROUP OF SELLERS WHO PRODUCE DIFFERENTIATED PRODUCTS.
- MONOPOLISTIC COMPETITION IS CHARACTERIZED BY A RELATIVELY LARGE NUMBER OF SELLERS WHO PRODUCE DIFFERENTIATED PRODUCTS. THERE ARE FEW BARRIERS TO ENTRY AND FIRMS EXERT SOME INFLUENCE OVER THE PRICE AND MARKET. BEST EXAMPLE ARE BRAND NAME CONSUMER PRODUCTS.
AN INDUSTRY THAT IS OLIGOPOLISTIC WOULD BE BEST CHARACTERIZED BY:
- FEW FRIMS IN THE MARKET
- SIGNIFICANT BARRIERS TO ENTRY
- DIFFERENTIATE PRODUCTS
- FIXED OR SEMI FIXED PRICES
- KINKED DEMAND CURVES
PERFECTLY COMPETITIVE MARKET DEMAND
-HORIZONTAL DEMAND CURVE
PERFECT COMPETITION CHARACTERISTIC
- THE ABSENCE OF SIGNIFICANT ECONOMIES OF SCALE
- NO BARRIERS TO ENTRY, SIZE DOESNT MATTER IN PERFECT COMPETITION.
KINKED DEMAND CURVE IN OLIGOPOLY
-IS KINDLY SHARPLY DOWNWARD. THIS OCCURS BECAUSE IN OLIGOPOLY MARKET CONDITIONS, THE OTHER FIRSM IN THE MARKET WILL MATCH ANY PRICE REDUCTION SO THEY DO NOT LOSE MARKET SHARE BUT WILL NOT MATCH ANY PRICE INCREASE OF AN INDIVIDUAL FIRM.
THEREFORE, FOR THE INDIVIDUAL FIRM ATTEMPTING TO RAISE ITS PRICES BEYOND EQUILIBRIUM, CONSUMERS QUICKLY BUY FROM OTHER FRIMS IN THE MARKET AND DEMAND WILL DROP OFF SARPLY BY CREATING A KINKED DEMAND CURVE.
ANY BUSINESS FIRM THAT HAS THE ABILITY TO CONTROL THE PRICE OF THE PRODUCT IT SELS..
- FACES DOWNWARD SLOPPING DEMAND CURVE.
- ANY BUSINESS FIRM THAT HAS THE ABILITY TO CONTROL THE PRICE OF THE PRODUCT IT SELLS FACES A DOWNWARD SLOPING DEMAND CURVE FOR THE FIRM. ONLY THE FIRM IN A COMPETITIVE MARKET IS A PRICE TAKER FACING A HORIZONTAL DEMAND CURVE AT THE MARKET EQUILIBRIUM PRICE.
IN COMPETITIVE MARKETS, AN INCREASE IN AN EFFECTIVE MINIMUM WAGE WILL…
- DECREASE UNEMPLOYMENT.
- WHEN THE MINIMUM WAGES ARE INCREASE, EMPLOYERS MAY ELECT TO HIRE FEWER EMPLOYEES THEREBY INCREASING UNEMPLOYMENT.
IN A COMPETITIVE LABOR MARKET, A MINIMUM WAGE THAT IS SET ABOVE EQUILIBRIUM WAGE WILL RESULT IN
- A DECREASE IN THE QUANTITY DEMANDED.
- A DECREASE IN TOTAL EMPLOYMENT
- AN INCREASE IN THE QUANTITY SUPPLIED OF LABOR.
WHICH OF THE FOLLOWING IS NOT TRUE REGARDING STRATEGIC PLANS?
- THE PROCESS OF STRATEGIC PLANNING BEGINS WITH THE CREATION OF THE PLAN.
- THE PROCESS OF STRATEGIC PLANNING ACTUALLY BEGINS WITH THE DEFINING OF THE FIRMS VISION AND MISSION STATEMENT AND THE MOVES TO SETTING THE GOALS AND OBJECTIVES OF THE FIRM BEFORE IT CONSIDERS THE CREATION OF THE STRATEGIC PLAN.
UNDER PURE COMPETITION, STRATEGIC PLAN FOCUS ON
- -MAINTAINING MARKET SHARE AND BEING RESPONSIVE TO MARKET CONDITIONS RELATED TO SALES PRICE.
- UNDER PURE OR PERFECT COMPETITION, STRATEGIC PLANS INCLUDE MAINTAINING THE MARKET SHARE AND RESPONSIVENESS OF TEH SALES PRICE TO MARKET CONDITIONS.
UNDER OLIGOPOLY STRUCTURE, STRATEGIC PLANS FOCUS ON
- MAINTAINING THE MARKET SHARE, ENSURING PRODUCT DIFFERENTIATION, AND ADAPTION TO CHANGES IN PRICE AND OR PRODUCTION VOLUME.
- UNDER OLIGOPOLY, STRATIGIC PLAN FOCUS ON MAININGITN THE MARKET SHARE AND CALL FOR THE PROPER AMOUNT OF ADVERTISING TO ENSURE PRODUCT DIFFERENTIATION AND WAYS TO PROPERLY ADAPT TO PRICE CHANGES OR REQUIRED CHANGES IN PRODUCTION VOLUME.
ELASTICITY OF DEMAND OR SUPPLY..
IS A MEASURE OF HOW SENSITIVE THE DEMAND FOR OR THE SUPPLY OF A PRODUCT IS TO CHANGE IN ITS PRICE.
WHEN A DEMAND FOR A PRODUCT IS PRICE INELASTIC
- IF DEMAND IS PRICE INELASTIC, AN INCREASE IN PRICE WILL RESULT IN AN INCREASE IN TOTAL REVENUE POSITIVE RELATIONSHIP.
- WHEN DEMAND IS PRICE INELASTIC, AN INCREASE IN PRICE RESULTS IN A DECREASE IN QUANTITY DEMANDED THAT IS PROPORTIONATELY SMALLER THAN THE DECREASE IN PRICE, THUS HAVING THE RESULT IN AN INCREASE IN TOTAL REVENUE (PRICE MULTIPLIED BY QUANTITY).
PRICE UNIT ELASTIC
- AN INCREASE IN PRICE WILL HAVE NO EFFECT ON TOTAL REVENUE.
- IF DEMAND IS UNIT ELASTIC, A CHANGE IN PRICE WILL HAVE NO EFFECT ON TOTAL REVENUE.
GOVERNMENT IN MARKET OPERATIONS
- GOVERNMENT MAY CREATE A PRICE DIFFERENT FROM MARKET PRICE, THUS CAUSING EITHER A SURPLUS OR A SHORTAGE..
- PRICE FLOORS ARE MINIMUM PRICES ESTABLISHED BY LAW SUCH AS MINIMUM WAGES AND AGRICULTURAL PRICE SUPPORTS.
- RATIONING LIMITS THE AVAILABILITY OF CERTAIN GOODS TO A SPECIFIED LEVEL, WHICH LOWERS DEMAND AND PRICES FOR A GIVEN SUPPLY.
VALUE CHAIN ANALYSIS
- VALUE STARTS WITH THE SUPPLIERS WHO PROVIDE THE RAW MATERIALS FOR A PRODUCTION PROCESS, CONTINUES WITH THE FIRM AND ITS STRATEGIC PLAN, CONTINUES WITH THE VALUE CREATED BY THE CUSTOMER, AND THEN ENDS WITH THE DISPOSAL AND RECYCLING OF THE MATERIALS.
- VALUE CHAING ANALYSIS MUST BE USED IN CONJUNCTION WITH THE STRATEGIC PLAN OF THE ORGANIZATION.
- VALUE CHAIN ANALYSIS IS A STRATEGIC TOOL THAT ASSITS THE FIRM IN DETERMINING HOW IMPORTANT THE PERCEIVE VALUE OF THE BUYERS IS WITH RESPECT TO THE MARKET THE FIRM OPERATES IN.
- VALUE CHAIN ANALYSIS IS CRITICAL TO THE ASSESSING THE COMPETITIVE ADVANTAGE OF A FIRM.
VERTICAL LINKAGE ANALYSIS
ANALYZING THE VERTICAL LINKAGE OF A FIRM MEANS UNDERSTANDING TEH ACTIVITIES OF SUPPLIERS AND BUYERS OF THE PRODUCT AND DETERMINING WHERE VALUE CAN BE CREATED EXTERNAL TO THE FIRMS OPERATIONS. THE PRODUCTION MANAGERS VISIT TO THE SUPPLIERS LOCATION IS VERTICAL LINKAGE ANALYSIS.
IF A NATION HAS SUPERIOR CONDITIONS IN WHICH TO GROW COFFEE BEANS AND FIRMS ARE ABLE TO GROW THEM AT VERY LOW COSTS, WHICH OF THE 4 MAJOR FACTOS THAT MICHAEL PORTER HAS INDICATED IMPACT THE GLOBAL COMPETITIVE ENVIRONMENT WOULD ALLOW THIS NATION TO FARE BETTER WITH RESPECT TO COMPETITIVE ADVANTAGE?
- CONDITIONS OF THE FACTOS OF PRODUCTION.
- IF NATION HAS A STRONG SET OF FACTORS OR PRODUCTION (SUCH AS LOW COST, HIGH QUALITY RAW MATERIAL INPUTS) THAT ARE REQUIRED IN A GIVEN INDUSTRY, IT WILL FARE BETTER WITH REGARD TO COMPETITIVE ADVANTAGE.
FACTORS INTERNAL TO THE ORGANIZATION THAT IMPACT STRATEGY AND ARE RESOURCES OF STRENGTHS AND WEAKNESSES INCLUDE ALL OF THE FOLLOWING
- MARKETING EFFECTIVENESS
- COMPETENCE OF MANAGEMENT
- INNOVATION OF PRODUCT LINES
MARKET COMPETITIVENESS
-IS OFTEN THE MOST SIGNIFICANT OF THE 5 FORCES FACING A FIRM.
FIRMS NEED TO BE ABLE TO ANTICIPATE THE STRATEGIC MOVES OF RIVAL FIRMS. IF A FIRM IS IN COMPETITION WITH OTHER FIRMS WHO ARE ABLE TO RESPOND TO CHANGES IN VARIOUS COMPONENTS AFFECTING BUSINESS, THE FIRM FACES A STRONG COMPETITIVE FORCE OF INTENSITY OF COMPETITION (MARKET COMPETITIVENESS)
WHEN DOES COMPETITION NOT BECOME AN EVEN STRONGER FORCE IMPACTING THE PROFITABILITY OF A FIRM?
-THE MARKET IS FAST-GROWING.
MARKET FAST GROWING WOULD CAUSE MARKET COMPETITIVENESS TO BE EVEN STRONGER.
SITUATIONS THAT WOULD CAUSE COMPETITION TO BE AN EVEN STRONGER FORCE IMPACTING THE PROFITABILITY OF A FIRM
- MAKET IS NOT GROWING FAST
- THERE ARE SEVERAL EQUAL SIZE FIRMS IN THE MARKET
- CUSTOMERS DO NOT HAVE STRONG BRAND PREFERENCES
- COST OF EXITING THE MARKET>COSTS OF CONTINUING TO OPERATE
- SOME FIRMS PROFIT FROM MAKING CERTAIN MOVES TO INCREASE MARKET SHARE
- VARIOUS FRIMS IN THE MAKER USE DIFFERENT TYPES OF STRATEGIC PLANS.
AN INCREASE IN THE QUANTITY DEMANDED FOR A PRODUCT WOULD BE ASSOCIATED WITH
- DECREASE IN PRICE OF THAT PRODUCT.
- THE FUNDAMENTAL LAW OF DEMAND HOLDS THAT THERE IS AN INVERSE RELATIONSHIP BETWEEN PRICE OF THAT PRODUCT AND THE QUANTITY DEMANDED.WE MOVE ALONG THE DEMAND CURVE.
IN THE LONG RUN A FIRM MAY EXPERIENCE INCREASING RETURNS DUE TO
- ECONOMIES OF SCALE.
- IN THE LONG RUN, A FIRM MAY EXPERIENCE INCREASING RETURNS DUE TO ECONOMIES OF SCALE WHICH COME INTO FULL PLAY ONLY IF A LARGE ENOUGH NUMBER OF UNITS IS BEING PRODUCE TO MAKE IT WORTH WHILE TO SET UP A FAIRLY ELABORATE PRODUCTIVE ORGANIZATION.
THE LAW OF DIMINISHING RETURNS
-IT STATES THAT AN INCREASE IN LABOR OR CAPITAL BEYOND A CERTAIN POINT CAUSES A LESS-THAN PROPORTIONATE INCREASE IN PRODUCTION.
THE LAW OF COMPARATIVE ADVANTAGE
-IT STATES THAT EVEN IF ONE OR TWO REGIONS IS ABOSOLUTELY MORE EFFICIENT IN THE PRODUCTION OF EVERY GOOD THAT IS THE OTHER, IF EACH REGION SPECIALIZES IN THE PRODUCTS IN WHICH IT HAS COMPARATIVE ADVANTAGE (GREATEST RELATIVE EFFICIENCY), TRADE WILL BE MUTUALLY PROFITABLE TO BOTH REGIONS. REAL WAGES OF PRODUCTIVE FACTSO WILL RISE IN BOTH PLACES. THIS PRINCIPLE IS THE BASIS FOR INTERNATIONAL TRADE.
IN MICROECONOMICS, THE DISTINGUISHING CHARACTERISTIC OF THE LONG RUN ON THE SUPPLY SIDE IS THAT
- IN MACROECONOMIC ANALYSIS, IN THE LONG RUN ALL SUPPLY SIDE INPUTS ARE VARIABLE.
- IN ACCOUNTING TERMS THIS MEANS THAT IN THE LONG RUN ALL COSTS ARE VARIABLE, (FC OF DEPRECIATION OF A FACTORY BUILDING BECOMES A VC WHEN A SECOND FACTORY BUILDING IS ADDED).
WHAT WILL CAUSE THE DEMAND CURVE FOR GASOLINE TO SHIFT TO THE LEFT?
THE PRICE OF CARS INCREASES.
-A SHIFT LEFT IN ANY DEMAND CURVE REPRESENTS A DECREASE IN DEMAND (AT ALL PRICE LEVELS) FOR THAT PRODUCT.
BECAUSE GASOLINE AND CARS ARE CONSIDERED COMPLEMENTARY GOODS THE DEMAND FOR GASOLINE IS DIRECTLY IMPACTED BY THE DEMAND FOR CARS. IF THE DEMAND FOR CARS WILL DECREASE, CAUSING THE DEMAND FOR GASOLINE TO DECREASE, AND THE GASOLINE DEMAND CURVE TO SHIFT LEF.
FACORS CONTRIBUTING TO ECONOMIES OF SCALE??
- LABOR SPECIALIZATION
- UTILIZATION OF BY PRODUCTS
- EFFICIENT UTILIZATION OF CAPITAL EQUIPMENT
- MANAGERIAL SPECIALIZATION
- VOLUME DISCOUNT PURCHASING
-THE THEORY OF ECONOMIES OF SCALE STATES THAT, AS A PRODUCTION PROCESS GETS LARGER, THE PROCESS BECOMES MORE EFFICIENT AND PRODUCTIVITY INCREASES.
THEORY OF DIMINISHING RETURNS
-THIS THEORY IS THE OPPOSITE OF ECONOMIES OF SCARE IN THAT IT HOLDS THAT AS MORE PRODUCT IS PRODUCED, THE FACTORY GETS LESS PRODUCTIVITY OUT OF ITS WORKFORCE AND MACHINERY.
THE COMPETITIVE MODEL OF SUPPLY AND DEMAND PREDICTS THAT A SURPLUS CAN ONLY ARISE IF THERE IS A:
-MINIMUM PRICE ABOVE THE EQUILIBRIUM PRICE.
THE COMPETITIVE MODEL PREDICTS A SURPLUS IS CREATED WHEN SUPPLY>QUANTITY DEMANDED AT THAT PRICE. HEMCE, A SURPLUS OCCURS WHEN MINIMUM PRICE IS SET ABOVE EQUILIBRIUM.
AN INCREASE IN THE MARKET SUPPLY OF A PRODUCT WOULD RESULT IN:
-AN INCREASE IN THE QUANTITY DEMANDED OF THAT PRODUCT.
A SHIFT OUTWARD IN SUPPLY, INCREASES QUANTITY DEMANDED AT EQUILIBRIUM, ACCOMPANIED BY A DECLINE IN PRICE. THUS, AN INCREASE IN THE MARKET SUPPLY OF BEEF WOULD RESULT IN AN INCREASE IN THE QUANTITY OF BEEF DEMANDED.
IN COMPETITIVE MARKETS, AN INCREASE IN DEMAND FOR A PRODUCT CAUSES
- AN INCREASE IN THE PRICE OF THE PRODUCT.
- WHEN DEMAND INCREASES AND SUPPLY HAS NOT INCREASED. SUPPLIERS WILL RAISE THE PRICE OF THE PRODUCT AND MORE PRODUCT WILL BE BOUGHT BUT THE SUPPLY CURVE DOES NOT CHANGE. BECAUSE CONSUMERS ARE DEMANDING MORE PRODUCT THAN IS AVAILABLE THE ARE WILLING TO PAY A HIGHER PRICE.
SUPPLY AND DEMAND
IF DEMAND INCREASES AND SUPPLY DECREASES, EQUILIBRIUM PRICE WILL INCREASE.
-IF QUANTITY DEMANDED FOR A PRODUCT GOES UP, THIS DRIVES PRICE UP. ADDITIONALLY, IF SUPPLY DECREASES, THIS WILL ALSO DRIVE PRICES UP. THEREFORE, IT IS CERTAINTY THAT PRICE WILL BE DRIVEN UP, GIVEN AN INCREASE IN DEMAND AND DECREASE IN SUPPLY.
INCREASE IN SUPPLY
-WILL REDUCE PRICES ASSUMING DEMAND REMAINS CONSTANT.
INCREASE DEMAND
WILL INCREASE PRICES WHILE INCREASE SUPPLY WILL REDUCE THEM.
INCREASE DEMAND
-WILL INCREASE PRICE, ASSUMING SUPPLY REMAINS CONSTANT.
THE LOCAL VIDEO STORE’S BUSINESS INCREASED BY 12% AFTER THE MOVIE THEATER RAISED ITS PRICES FROM 9,50 TO 11 THIS IS AN EXAMPLE OF
SUBSTITUTE GOODS.
-FOR SUBSTITUTE GOODS, AS THE PRICE OF ONE GOES UP, THE DEMAND FOR ANOTHER, SUBSTITUTE GOOD INCREASES AS CONSUMERS DESIRE THE LOWER PRICED SUBSTITUTE GOOD.
WHEN THE SUPPLY OF AND DEMAND FOR A GOOD BOTH INCREASE
-EQUILIBRIUM PRICE MAY INCREASE, DECREASE OR REMAIN UNCHANGED.
WHEN THE SUPPLY OF AND DEMAND FOR A GOOD BOTH INCREASE, EQUILIBRIUM QUANTITY INCREASES. HOWEVER, THE IMPACT ON ITS PRICE IS INDETERMINABLE.
IF DEMAND AND SUPPLY INCREASE BY THE SAME AMOUNT, PRICE WILL REMAIN UNCHANGED. HOWEVER, IF DEMAND INCREASE BY MORE THAN SUPPLY PRICE WILL INCREASE. IF SUPPLY INCREASES BY MORE THAN DEMAND PRICE WILL DECREASE.
A PERFECTLY INELASTIC SUPPLY CURVE IN A COMPETITIVE MARKET:
EXISTS WHEN FIRMS CANNO VARY INPUT USAGE.
-PRICE ELASTICICTY OF SUPPLY IS CALCULATED THE SAME WAY AS DEMAND EXCEPT THAT QUANTITY IS MEASURED.
PRICE ELASTICITY OF SUPPLY FORMULA:
% CHANGE IN QUANTITY SUPPLIED/CHANGE IN PRICE
-PERFECT INELASTIC SUPPLY CURVES ARE ALSO VERTICAL REPRESENTING THAT SUPPLY IS INSENSITIVE TO CHANES IN PRICE. THE QUANTITY SUPPLIED WILL NOT CHANGE AS PRICE CHANGES.
DEMAND FOR A PRODUCT TENDS TO BE PRICE INELASTIC IF:
-FEW GOOD SUBSTITUTES ARE AVAILABLE FOR THE PRODUCT. DEMAND FOR A PRODUCT TENDS TO BE PRICE INELASTIC IF FEW GOODS SUBSTITUTES ARE AVAILABLE FOR THE PRODUCT. EVEN IF PRICE INCREASES, CONSUMERS ARE UNABLE TO SWITCH TO SUBSTITUTE GOODS, BECAUSE THE DONTS EXISTS.
THE IMPACT OF GOVERNMENT PRICE SUPPORT PROGRAM WOULD MOST LIKELY RESULT IN WHICH OF THE FOLLOWING??
-LEAD TO SURPLUSES.
A GOVERNMENT PRICE SUPPORT PROGRAM ACTS AS A SUBSIDY THAT WILL ENCOURAGE SUPPLIERS TO INCREASE SUPPLY BEYOND AN EQUILIBRIUM POINT (THE POINT WHERE SUPPLY AND DEMAND CURVE INTERSECT). THIS EXCESS OF SUPPLY OVER DEMAND WILL CREATE SURPLUSES IN THE MARKET.
MICHAEL PORTER IDENTIFIED 5 FORCES THAT AFFECT PROFITABILITY. WHAT ARE THOSE FORCES??
- EXISTENCE OF A SUBSTITUTE PRODUCT
- BARRIERS TO MARKET ENTRY
- BARGAIN POWER OF CUSTOMERS
- MARKET COMPETITIVENESS
- BARGAINING POWER OF SUPPLIERS.
STRATEGIC PLANNING
- IT ESTABLISHES THE GENERAL DIRECTION OF THE ORGANIZATION.
- STRATEGIC PLANNING IS THE CREATING OF AN OVERALL STRATEGIC PLAN FOR AN ORGANIZATION TO ACHIEVE ITS OVERALL BUSINESS OBJECTIVES. THE STRATEGIC PLAN WILL ESTABLISH THE GENERAL DIRECTION OF THE ORGANIZATION.
SCOR MODEL, A COMPANY WOULD INCLUDE IN THE PLANNING STAGE THE FOLLOWING
- DEVELOPING A WAY TO PROPERTY BALANCE AGGREGATE DEMAND AND AGGREGATE SUPPLY WITHIN THE GOALS AND OBJECTIVES OF THE FIRM AND PLAN FOR THE NECESSARY INFRASTRUCTURE. STEPS IN THE PLANNING STAGE INCLUDE:
- DETERMINING DEMAND REQUIREMENTS
- ASSESING CAPACITY CONCERNS AND CAPABILITIES
- MAKING MAKE/BUY DECISIONS
COLLUSIVE PRICING
COLLUSIVE PRICING ANTICIPATES THAT COMPETITORS WILL COLLUDE OR CONSPIRE TO MAINTAING PRICES AND MUTUAL PROFITABILITY. COLLUSIVE PRICING UNDERMINES COMPETITIVE PRICING AND MAINTAINS PRICES TO EXTERNAL CUSTOMERS AT LEVELS HIGHER THAN THEY WOULD BE IN A COMPETITIVE MARKET PLACE.
THE MOVEMENT ALONG THE DEMAND CURVE FROM ONE PRICE QUANTITY COMBINATION TO ANOTHER IS CALLED??
- CHANGE IN THE QUANTITY DEMANDED
- REFERENCES TO THE CHANGE IN QUANTITY DEMANDED REFER TO A SINGLE DEMAND CURVE, WHICH IS DOWNWARD SLOPING TO THE RIGHT.
A RISE IN THE PRICE OF A COMPLEMENTARY COMMODITY WOULD CAUSE WHAT KIND OF SHIFT TO THE DEMAND CURVE???
- THE RISE IN THE PRICE OF A COMPLEMENTARY COMMODITY WOULD CAUSE A SHIFT TO THE LEFT IN ANY DEMAND CURVE (REPRESENTING A DECREASE IN DEMAND, AT ALL PRICE LEVELS FOR THAT PRODUCT).
- WITH RESPECT TO COMPLEMENTARY GOODS, THE DEMAND FOR THE PRIMARY PRODUCT IS DIRECTLY IMPACTED BY THE DEMAND AND HENCE THE PRICE CHANGES. FOR INSTANCE IF THE PRICE OF GASOLINE GOES UP, THE DEMAND FOR CARS WILL DECREASE, CAUSEING THE DEMAND CURVE TO SHIFT TO THE LEFT.
IN A COMPETITIVE MARKET, AN EQUAL INCREASE IN BOTH DEMAND AND SUPPLY CAN BE EXPECTED TO ALWAYS
-INCREASE MARKET-CLEARING QUANTITY.
A SHIFT OUTWARD INCREASE IN SUPPLY INCREASES QUANTITY SUPPLIED AT EQUILIBRIUM.
WHEN THE FEDERAL GOVERNMENT IMPOSES HEALTH AND SAFETY REGULATIONS ON CERTAIN PRODUCTS, ONE OF THE MOST LIKELY RESULTS IS::
- HIGHER PRICES FOR THE PRODUCT.
- ONE OF THE CONSEQUENCES OF GREATER GOVERNMENT REGULATION OF CERTAIN PRODUCTS IS THE RESULTING HIGHER COST TO THE CONSUMERS WHEN THE GOVERNMENT IMPOSES HEALTH AND SAFETY REGULATIONS ON CERTAIN PRODUCTS IT IS LIKELY THAT EXPENSES WILL INCREASE AND THAT THE ADDED COSTS WILL BE PASSED ON TO CONSUMERS IN TERMS OF HIGHER PRICES. THE TOTAL OUTPUT MAY DECREASE.
SUBSTITUTIVE GOODS
AS THE PRICE OF ONE OF THE GOOD INCREASES, THE OTHER GOOD EXPERIENCES AN INCREASE IN THE DEMAND AS IT IS SUBSTITUTED FOR THE FIRST GOOD.
-AN EX;
APPLE JUICE AND ORANGE JUICE
COMFORTABLE LIFE-STYLE
-GOODS THAT ARE IMPORTANT FOR A COMFORTABLE LIFE-STYLE WOULD BE RELATIVELY PRICE INSENSITIVE OR INELASTIC.
HOWEVER, THEY ARE NOT AN ABSOLUTE NECESSITY THEREFORE THEY ARE NOT PERFECTLY INELASTIC ONLY RELATIVELY INELASTIC.
IF A PRODUCTS DEMAND IS ELASTI AND THERE IS A DECREASE IN PRICE, THE EFFECT WILL BE:
-AN INCREASE IN TOTAL REVENUE
IF DEMAND IS RELATIVELY ELASTIC THEN THE REDUCTION IN PRICE WILL BY DEFINITION, PRODUCE A PROPORTIONATELY GREATER INCREASE IN QUANTITY DEMANDED. HENCE, TOTAL REVENUE WILL INCREASE.
IF A PRODUCT HAS A PRICE ELASTICITY OF DEMAND OF 2.0 THE DEMAND IS SAID TO BE:
-RELATIVELY ELASTIC.
A PRICE ELASTICITY OF DEMAND OF 2.0 MEANS DEMAND WILL CHANGE BY 2X AS A PERCENTAGE FOR ANY CHANGE IN PRICE. THIS IS CALLED ELASTIC.
-PERFECTLY ELASTIC DEMAND DOES NOT EXIST.
INELASTIC DEMAND RESPOND LESS THAN 1% AS A PERCENTAGE FOR A CHANGE PRICE.
IF IN A COMPETITIVE MARKET, A PRICE CEILING IS IMPOSED ESTABLISHING A MAXIMUM PRICE BELOW THE MARKET EQUILIBRIUM PRICE, THIS PRICE CEILING WOULD RESULT IN…
-SHORTAGES BECAUSE THE QUANTITY DEMANDED WOULD EXCEED THE QUANTITY SUPPLIED.
SETTING A CEILING PRICE BELOW THE PRICE DICTATED BY THE MARKET AS ESTABLISHED BY THE EQUILIBRIUM PRICE) WOULD CREATE EXCESS DEMANDED AND A SHORTAGE.
WHEN APPLYING VALUE CHAIN ANALYSIS, A FIRM ASKS ITS ACCOUNTING DEPARTMENT TO PERFORMA AN ANALYSIS OF THE SOURCES OF PROFITS AND COSTS OF ACTIVITIES THAT EXIST WITHIN THE FIRM. THE FIRM IS PERFORMING WHICH FORM OF THE VALUE CHAIN ANALYSIS??
-INTERNAL COST ANALYSIS
INTERNAL COSTS ANALYSIS INCLUDES ANALYZING THE INTERNAL VALUE-CREATING ABILITY OF A FIRM, SO THAT SOURCES OF PROFIT AND COSTS OF THE INTERNAL ACTIVITIES OF THE FIRM MUST BE ANALYZED.
IF A NATION HAS MANY RIVAL DOMESTIC FIRMS WHICH ARE ALL COMPETITIVE IN THE GLOBAL MARKETPLACE FOR A PRODUCT, WHICH OF THE 4 MAJOR FACTOS THAT MICHAEL PORTER HAS INDICATED IMPACT THE GLOBAL COMPETITIVE ENVIRONMENT WOULD ALLOW THIS NATION TO FARE BETTER WITH RESPECT TO GLOBAL COMPETITIVE ADVANTAGE.
-RELATED AND SUPPORTING INDUSTRIES.
THE FACTOR RELATED AND SUPPORTING INDUSTRIES DEALS WITHT WHETHER THERE ARE SUPPLIERS OF MATERIAL INPUTS THAT EXIST WITHIN A NATION OR WHETHER THRE ARE RIVAL FIRMS WHO ARE COMPETITIVE IN INTERNATIONAL ENVIRONMENT, BOTH OF WHICH WOULD INCREASE THE NATIONS COMPETITIVE ADVANTAGE.
GLOBAL AND COMPETITIVE ADVANTAGE
ALONG WITH HIS 5 FORCES THAT IMPACT THE PROFITS AND COMPETITIVE ENVIRONMENTS OF AN INDUSTRY, IN HIS WORK IN 1990 MICHAEL PORTER FOCUSED ON THE COMPETITIVE FORCES THAT EXIST GLOBALLY IN AN EFFORT TO STUDY THE ABILITY OF A NATION TO ATTAIN AN SUSTAIN WORLDWIDE COMPETITIVE ADVANTAGE.
MICHAEL PORTER IDENTIFIED FOUR FACTORS THAT IMPACT GLOABL COMPETITIVE ADVANTAGE
- CONDITIONS OF THE FACTORS OF PRODUCTION
- CONDITIONS OF DOMESTIC DEMAND.
- RELATED AND SUPPORTING INDUSTRIES
- FIRM STRATEGY, STRUCTURE AND RIVALRY.
SITUATIONS THAT WOULD CAUSE COMPETITION TO BE AN EVNE STRONGER FORCE IMPACTING THE PROFITABILITY OF A FIRM.
- THE MARKET IS NOT GROWING FAST
- THERE ARE SERVERAL EQUAL-SIZED FIRMS IN THE MARKET
- CUSTOMERS DO NOT HAVE STRONG BRAND PREFERENCES.
- THE COSTS OF EXITING THE MARKET>THAN THE COSTS OF CONTINUING TO OPERATE
- SOME FIRMS PROFIT FROM MAKING CERTAIN MOVES TO INCREASE MARKET SHARE
- VARIOUS FIRMS IN THE MARKET USE DIFFERENT TYPES OF STRATEGIC PLANS.
