Chapter 5 Flashcards
What condition occurs during a recession?
During a recession, potential output will exceed actual output. Actual unemployment will change with the cycle but natural rate of unemployment will not change
An increase in short run aggregate supply will cause GDP and prices to do what?
It will cause real output to expand (GDP increase) and prices to fall (inverse relationship)
A large increase in nominal wages, perhaps orchestrated by unions, would result in?
An increase in nominal wages represents an increase in input costs. This would shift the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall price level.
What is an example of when the economy is in a recessionary phase?
Potential national income exceeds actual national income. (potential gross domestic product, also referred to as Long Run Aggregate Supply).
What is one factor that would cause frictional unemployment to increase?
A reduction in the average age of the workforce (younger workers tend to move between jobs more frequently)
When the overall price level is rising, nominal interest rates tend to…
Rising. nominal interest rate = real interest rate + inflation
What is the best measure to combat a period of deflation?
Increase the money supply. It would cause the overall price level to rise.
What is the consumer price index CPI?
It measures 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
When markets are perfectly competitive, consumers…>
Have goods and services produced at the lowest cost in the long run. Since price is barley sufficient to give a firm a normal profit and stay in business, the consumer obtains the product at as low a price as is economically feasible.
What are some key assumptions of perfect competition?
- Customers are indifferent about which firm they buy their products from
- The level of one firms output is small relative to total industry output
- There is freedom of entry and exit into the market
What is an example of a natural monopoly?
A natural monopoly exists when the economic and technical conditions only allow one sufficient supplier
What is the effect on an increase in the minimum wage on supply?
There would be an excess supply (or surplus) of labor because it is now above the equilibrium point
What happens to revenue when the demand for a product is price in-elastic?
Total revenue increases (positive relationship)
What happens to revenue when the demand for a product is price elastic?
There will be a decrease in total revenue (an increase in price results in a decline in quantity demanded that is proportionately larger than an increase in price, thus the result is a decrease in total revenue)
What happens when the demand for a product is price unit elastic?
An increase in price will have no effect on total revenue (think medications)
What is the best description of the value chain analysis direction?
It 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 customers, and then ends with the disposal and recycling of materials
What is the vertical linkage analysis?
It is understanding the activities of suppliers and buyers of the product and determining where value can be created external to the firms operations
What are factors that increase the bargaining power of customers?
Customer’s make up a large volume of a firms business
There is much info available to the customer
The buyers have low switching costs
There is a high number of alternative suppliers
What does the best cost strategy do?
It strives to have the firm evaluate and change its value chain such that it can achieve the lowest cost among it’s closest competitors while matching them on features desired by consumers (differentiation)
Considering the SCOR Model of supply chain operations, which category does “collecting and processing vendor payments” fall under?
Source: Once demand has been planned, it is necessary to produce the resources required to meet it and to manage the infrastructure that exists for the sources
When does a perfectly inelastic supply curve in a competitive market exist?
It exists when firms cannot vary input usage. Price elasticity of supply = %change in supply/% change in price. Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price (the quantity supplied will not change as price changes)
The impact of a government price support system will most likely result in which of the following?
It will lead to surpluses. Govt. program acts as a subsidy that will encourage suppliers to increase supply beyond an equilibrium point where supply and demand meet
What are the Porters 5 Forces?
- Barriers to Entry
- Market Competitiveness
- Existence of substitute products
- Bargaining power of customers
- Bargaining power of supplier
What is collusive pricing?
It anticipates that competitors will collude or conspire to maintain 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
