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Series 86 > Chapter 1 > Flashcards

Chapter 1 Flashcards

1
Q

What is a market?

A

Something that brings together buyers and sellers

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2
Q

Characteristics of a perfectly competitive market

A
  • Large # of buyers and sellers
  • No barriers to entry/exit
  • A standardized product
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3
Q

Demand

A

A schedule showing the amount of an item that buyers can and will purchase at various price levels during a given period of time.

  • A demand curve has a negative slope due to the inverse relationship between prices and quantity demanded. As prices rise, quantity demanded decreases. This is called the law of demand.
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4
Q

Non-price determinants that affect demand

A
  • The income of buyers
  • The # of buyers
  • Preferances of buyers
  • Buyers’ expectations about future events
  • Prices of related items
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5
Q

True or false: Substitutes have a direct relationship w/ the other goods?

A

True. (Ex: if the price of airfare increases, the demand for railway travel increases).

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6
Q

True or false: Complimentary goods/services have a direct relationship w/ the other goods?

A

False, inverse relationship. (ex: If the price of peanut butter increases, the demand for jelly decreases).

  • Independent goods have no relationship. (ex: An increase in the price of peanut butter has no affect on the price of golf balls).
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7
Q

Supply

A

A schedule showing the amount of an item that sellers can and will supply at various price levels during a given period of time.

  • The supply curve has a positive slope indicating that at higher prices, more will be supplied - the law of supply.
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8
Q

Non-price determinants that affect supply

A
  • The # of sellers
  • The price of inputs
  • Tech
  • Taxes/subsidies
  • Sellers’ expectations of future events
  • Prices of related items
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9
Q

Elasticity of demand

A

The degree to which the Qd would change for a given change in price.

Formula: Ed = % ▵ Qd ÷ % ▵ price

In the formula, use the absolute value. Also, use the midpoint value.

  • If elasticity is greater than 1 (100%), it’s referred to as being elastic or relatively elastic. This means the Qd will change by a larger % than the price change. In this case, a price decrease will increase total revenue and vice versa.
  • If elasticity is less than 1, demand is inelastic or relatively elastic. This means the Qd will change by a smaller % than the price change. In this case, a price decrease will decrease total revenue and vice versa.
  • If elasticity = 1, it’s called unit elastic, meaning the % change in demand = the % change in price.
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10
Q

Elasticity of demand example:
Suppose a demand schedule shows a $10 unit price corresponds to Qd of 5,000 units. A $8 unit price corresponds to Qd of 6,000 units. What is the elasticity of demand?

A
  1. (6,000 - 5,000) ÷ 5,500 = 0.1818 or 18%
  2. ($10 - $8) ÷ $9 = 0.22 or 22%
  3. 18% ÷ 22% = 81.81%

  • Use 5,500 because it’s the midpoint between 6,000 and 5,000. Similarly, we use $9 since it’s the midpoint between $10 and $9
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11
Q

True or false: Demand for an item tends to be elastic at lower prices and inelastic at higher prices?

A

False, demand for items tends to be elastic at higher prices and inelastic at lower prices.

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12
Q

Factors that affect elasticity of demand:

A
  • Time: The longer the time period examined, the more elastic demand tends to be
  • Availability of substitutes: The larger # of substitute products available, the greater the elasticity.
  • Proportion of a budget devoted to the item: The larger the % of a budget devoted to a particular good, the more elastic the demand will be.
  • Whether an item is a necessity or not
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13
Q

Supply elasticity

A

The degree to which the Qs would change for a given change in price.

  • The main factor affecting elasticity of supply is time- how quickly a producer can change production to increase or decrease the supply of a product.
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14
Q

How to calculate the % increase in sales required to maintain the same revenue:

A

Price decline % ÷ complement of the price decrease

Ex: If you lowered the price of a product by 5% but wanted to maintain the same revenue, you would need to increase sales by: 0.05 ÷ 0.95 = 5.26%

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15
Q

How to calculate the % increase in sales required to increase revenue:

A

[ (1 + revenue increase %) - complement of the price decrease ] ÷ complement of the price decrease

Ex: If you lowered the price of a product by 5% and want to increase revenue by 8%, you need to increase sales by: [ (1.08) - 0.95 ] ÷ 0.95 = 0.137

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16
Q

Price system

A

While supply and demand curves reveal the relationship between price, supply, and demand for a specific item, consideration must be given to how prices in the overall economy are set.

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17
Q

Economic costs

A

Payments that a business must make to secure the required amount of productive resources

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18
Q

Capital

A

Capital refers to man-made resources that are used to produce other goods and services (ex: machinery).

  • Money capital refers to currency and real capital refers to #18.
  • Interest is the cost of money capital, and since money capital is used to purchase/build real capital, interest rates ration the use of capital.
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19
Q

Normal profit

A

The cost of obtaining and retaining entrepreneurial ability. The entreprenuer is paid for the function of organizing the business and combining the proper resources into a sellable good or service.

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20
Q

Economic profit

A

Economic profits are excess earning over and above capital expenditures and normal profit.

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21
Q

Input-output analysis

A

In a perfectly competitive economy, capital is allocated to booming industries/companies and taken away from oversaturated markets. Economists use input-output analysis to investigate the consequences of such changes in an economy. Using this technique, the economy is divided into constituent industries and among these is divided into consumers and producers. For example, constituent A might have 10 units consumed by constituent A itself and 20 units consumed by constituent B.

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22
Q

Short-run

A

A period of time where fixed costs cannot be changed but variable costs can be changed

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23
Q

True or false: The law of diminishing marginal returns states that as more and more variable resources are combined w/ fixed resources, there will be a point that the marginal output will begin to level off?

A

True

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24
Q

Relationship between average cost and quantity produced

A

Avergage total cost: Declines initially but eventually reaches a inflection point and begins to increase

Average variable cost: Declines initially but eventually reaches a inflection point and begins to increase. Reaches inflection point quicker than ATC.

Average fixed cost: Declines as output rises

  • ATC = (Fixed costs + variable costs) ÷ Output
  • AFC = Fixed costs ÷ Output
  • AVC = Variable cost ÷ Output
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25
Q

Marginal cost

A

The additional cost of producing one more unit of output

Calculation: ▵ in total cost ÷ ▵ in output

26
Q

Relationship between MC and AVC

A

If MC < AVC, AVC will continue to fall. Once MC > AVC, AVC will begin to rise

* The relationship is the same for ATC.

27
Q

Long run

A

A period of time where all costs are variable.

  • The long-run ATC curve can be derived from a series of short-run ATC curves.
28
Q

Minimum efficient scale

A

The smallest level of output where a firm can achieve minimum ATC

29
Q

True or false: Initially, the ATC curve will decrease due to economies of scale, but the curve will reach a minimum and begin to rise as diseconomies of scale begin to have an effect?

A

True

  • The ATC curve will reflect the structure of the industry. In some industries, diseconomies of scale are encountered quickly and MES will occur at low levels of output. This occurs in industries w/ a large # of small producers.
30
Q

Economies of scope

A

Efficiencies formed by variety, not volume. Often companies will use M&A to have many different product lines sold under one name, this is an example of economies of scope.

31
Q

Gross national product (GNP)

A

GNP measures the total value of all goods and services produced by a national economy.

  • Ex: For the U.S., GNP includes all goods/services produced inside the U.S. and those produced overseas by a U.S. company
32
Q

Gross domestic product (GDP)

A

The value of all final goods/services produced within a country within a given period of time.

33
Q

GDP deflator

A

Measures how much of the change in GDP is based on inflation, rather than an actual increase in economic output.

Calculation: (Nominal GDP ÷ Real GDP) * 100

34
Q

Real interest rate

A

The rate an investor in fixed-income securities actually receives once inflation is taken into account.

Ex: A 10-year bond yields 7% and inflation is 3%, the real interest rate = 4%.

35
Q

True or false: Interest rates begin to rise during the expansion phase of the business cycle?

A

True, since consumers and businesses want to grow their business, they borrow money, causing interest rates to rise.

36
Q

True or false: Inflation is usually high during recessions?

A

False

37
Q

True or false: A depression occurs when real GDP declines for 6 months or more?

A

False, 2 years or more

38
Q

Examples of leading indicators

A
  1. Avg. workweek for production workers in manufacturing
  2. Avg. weekly initial claims for unemployment
  3. New order for consumer goods and materials
  4. Vendor performance (firms receiving slower deliveries from suppliers)
  5. Contracts/orders for plant and equipment
  6. New building permits for private housing units
  7. The prices for the S&P 500 common stocks
  8. The money supply
  9. Change in credit outstanding for business and consumer borrowing
  10. Interest rate spreads (10-year Treasuries minus Fed Funds)
  11. Index of consumer expectations
39
Q

Examples of coincident indicators

A
  1. Employees on non-ag payrolls
  2. Personal income less transfer payments
  3. The index of industrial production
  4. Manufacturing and trade sales
40
Q

Examples of lagging indicators:

A
  1. The avg. duration of unemployment
  2. The relationship of inventories to sales, manufacturing, and trade
  3. Labor cost per unit of output for manufactured goods
  4. The avg. prime rate charged by banks
  5. C&I loans outstanding
  6. The relationship of consumer installment credit to personal income
  7. The CPI for services
41
Q

True or false: Event risk is the same as exogenous risk?

A

True, at least for the sake of this exam

42
Q

Keynesian economics

A

Incorporates fiscal policy to stimulate economic growth and employment.

43
Q

Supply-side economics

A

Focuses on reducing taxes and the size of the government to stimulate the economy.

44
Q

Composition of the money supply

A

M1: Currency in circulation + DDAs + other checking accounts
M2: M1 + MMDAs + savings + balances at money funds + overnight repo agreements at banks
M3: M2 + large time deposits + term repo agreements at banks + Eurodollars

  • Eurodollars are no long published by the FRB.
45
Q

Tools the FRB uses to implement monetary policy:

A
  • Reserve requirement
  • Setting the discount rate: DW rate
  • Open market operations
  • Setting margin requirements
  • Moral suasion
46
Q

Excess reserves

A

The amount of money a bank has in excess of the Fed’s reserve requirement

47
Q

Multiplier effect

A

The rate at which banks create new money by relending deposits and in turn create new deposits.

48
Q

Open market operations

A

Involves the purchase and sale of U.S. government securities, primarily Treasury bills. The FRB, however, also trades government notes and bonds. These trades are executed through primary dealers, banks, and brokerages appointed by the FRB.

Ex: The FRB buys securities from primary dealers and pays for the securities, which are then deposited in a bank.

49
Q

Repurchase agreement (repo)

A

A contract where the FRB purhcases U.S. government securities from a primary dealer at a fixed price with a provision to sell them back to the dealer at the fixed price + interest.

Reverse repo is the opposite.

50
Q

Margin requirements

A

The Act of ‘34 gave the FRB the power to determine the amt of credit that can be extended to purchase securities. Reg T applies to brokerages. Reg U applies to banks and all other lenders. By increasing margin requirements, lendable money decreases, causing the money supply to tighten.

51
Q

Intermediation

A

The abilitiy of financial institutions to attract deposits and then extend credit

52
Q

Disintermediation

A

The process by which investors withdraw funds from banks and seek higher-yielding investments elsewhere.

53
Q

How do interest rates affect exchange rates?

A

If the U.S. has higher interest rates, foreign investors wishing to earn higher return wil invest in the U.S. In order for them to invest, they must convert their currency into dollars, and thus the demand for the dollar increases, and therefore the price of dollars (the exchange rate) will increase.

However, if interest rates are high and the dollar is strong, U.S. consumers can purchase more foreign goods, thus increasing imports. Conversely, foreign consumers w/ weaker currencies will be unable to purchase the relatively more expensive U.S. goods.

54
Q

Balance of payments

A

The method by which countries measure all of the international monetary transactions within a certain period.

(X- IM) = S - I + (T - G)

55
Q

Current account

A

The results for trade transactions completed in the current year.

56
Q

Capital account

A

Deals w/ long-term transactions, usually involving property or financial assets. Ex: A U.S. corporation investing in a factory in a foreign country is an outflow, while the purchase of U.S. common stock by a foreign investor is an inflow.

  • A current account deficit must be balanced by a capital account surplus and vice versa. The net of the two accounts must be zero.
57
Q

Interbank system

A

An open market trading system where conversion rates for currencies are set.

58
Q

True or false: Regular supply and demand curves are useful for determining the supply and demand for currencies?

A

True

59
Q

Nonprice determinants that alter supply and demand schedules for currencies:

A
  • Changes in income: As countries become wealthier, consumers, in general, purchase more goods, including imported goods.
  • Changes in preferences for goods of a particular country: If German cars become a status item, demand will increase.
  • Changes in real interest rates: If domestic prices are rising more rapidly than the prices of foreign goods, imports will increase.
  • Price changes: If domestic prices are rising more rapidly than the prices of foreign goods, imports will increase.
  • Speculation: Expectations of political or economic changes may result in the buying/selling of currency by speculators.
60
Q

True or false: Changes in currency rates can have a significant impact on revenue, COGS, and operating profit margins for companies?

A

True. Ex: If a U.S. firm receives revenue from Europe and the price of the dollar decreases against the Euro, the company will report higher revenues since the value of the Euro has increased. Similarly, if a U.S. firm manufactures products in Japan and the price of the dollar declines against the yen, the firm’s COGS will increase since the value of the yen has increased.

Series 86 (7 decks)

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