ECON Flashcards
The measure of the responsiveness of the quantity demanded to a change in price, is defined as…?
The price elasticity of demand
What is the formula for Price Elasticity of Demand?
( PED = \frac{percentage\ change\ in\ quantity\ demanded}{percentage\ change\ in\ price} )
What does it mean if PED > 1?
When the quantity demanded is very responsive to a change in price (PED > 1), we say demand is elastic
What does it mean if PED < 1?
When the quantity demanded is not very responsive to a change in price (PED < 1), we say that demand is inelastic.
What does it mean if PED = 1?
When PED =1 we say demand is unit elastic
What does it mean if PED = 0?
When PED = 0 we say demand is perfectly inelastic
Does inelastic demand indicate good or poor avaliability of substitutes?
Poor avaliability of substitutes
Does elastic demand indicate good or poor avaliability of substitutes?
Good avaliability of substitutes
What are the three other additional factors that effect elasticity of quantity demanded other than price?
- Quality and closeness of available substitutes
- Quality and closeness of available substitutes
- Time
At what point along the demand curve is revenue maximised?
At unit elasticity
Explain how the price elasticity changes along a demand curve?
You tend to get high elasticity at the top of the curve, low elasticity at the bottom of curve
What is the difference between normal and inferior goods?
Normal Goods: the sign of income elasticity is positive — an increase in income leads to an increase in quantity demanded.
Inferior Goods: an increase in income leads to a decrease in quantity demanded. Goods for which this is true are termed inferior goods
What does it mean if IED > 0 or IED < 0?
Normal good: IED > 0
Inferior good: IED < 0
What is the formula for the income elasticity of demand?
( IED = \frac{Percentage\ change\ in\ quantity\ demanded}{Percentage\ change\ in\ income} )
The ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good, is known as the…?
Cross elasticity of demand
What type of good has an XED > 0?
A substitute good
What type of good has an XED < 0?
A complementary good
When the price of a good decreases, is the substitiution effect positive or negative?
The substitution effect is always positive
A good for which a higher price makes the good more desirable. The idea is that the consumer gets utility from being seen to consume a good that has high status, is known as what type of good?
A veblen good
A good where a higher price causes an increase in demand. A fall in price causes a fall in demand, is known as what type of good?
A Giffen good
What are the four factors of production?
Land
Labour
Physical Capital
Materials
The quantity of output that a firm can produce can be thought of as a function of the amounts of capital and labor employed, is what type of function?
The production function
What is the diminishing marginal productivity of labour?
The point at which beyond this quantity of labor, the additional output from each additional worker continues to decline
In economics what is defined as the short run?
The short run is the time period over which some factors of production are fixed
At what point should a firm shut down in the short and long run under perfect competition?
If AR ≥ ATC, the firm should stay in the market in both the short and long run.
If AR ≥ AVC, but AR < ATC, the firm should stay in the market in the short run but will exit the market in the long run.
If AR < AVC, the firm should shut down in the short run and exit the market in the long run.
At what point should a firm shut down in the short and long run under imperfect competition?
TC > TR > TVC: firm should continue to operate in the short run but shut down in the long run.
TR < TVC: firm should shut down in the short run and the long run.
What causes economies of scale?
Labor specialisation, mass production, and investment in more efficient equipment and technology
What causes diseconomies of scale?
Inefficiency, problems with motivating a larger workforce, and greater barriers to innovation and entrepreneurial activity.
Under perfect competition where must firms operate on the LRATC curve?
Firms must operate at minimum efficient scale in long-run equilibrium, and LRATC will equal the market price
Many firms, very low barriers to entry, very good availability of substitutes, compete on price, no pricing power, are the characteristics of which market structure?
Perfect competition
Many firms, low barriers to entry, very good availability of substitutes, compete through marketing, some pricing power, are characteristics of which market structure?
Monopolistic competition
Few firms, high barriers to entry, low availability of substitutes, compete through marketing and price, some pricing power, are characteristics of which market structure?
Oligopoly
One firm, high barriers to entry, no availability of substitutes, compete through advertising, significant pricing power, are characteristics of which market structure?
Monopoly
At what price level must perfect competition firms produce?
Price = MR
What is the profit maximising level for a perfect competition firm?
MC = MR
When does economic profit occur for a perfect competition firm?
Economic profit occurs at MR > MC
Is it possible for perfect competition firms to earn over economic profits over the long run?
Firms will not earn economic profits for any significant period of time. The assumption is that new firms will enter the industry to earn economic profits
Explain the marketing techniques monopolistic competition firms use to differentiate themselves?
- Branding
- Innovation and differentiation
- Advertising
What are the 4 profit models for an oligopoly?
Kinked demand curve
Cournot duopoly model
Nash equilibrium model (prisoners dilemma)
Stackelberg dominant firm model
An increase in a firm’s product price will not be followed by its competitors, but a decrease in price will, describes what oligopoly model?
Kinked demand model
The model considers an oligopoly with only two firms competing?
Cournot duopoly model
The choices of all firms are such that there is no other choice that makes any firm better off, is known as…?
Nash equilibrium
A single firm in an oligopily that has a significantly large market share because of its greater scale and economies of scale, is known as what type of model?
Dominant firm model
What barriers to entry are usually established by a monopoly?
Economies of scale, very high initial setup costs, legal barriers and resource control
The practice of charging different consumers different prices for the same product or service, is known as…?
Price discrimination
What is perfect price discrimination?
Perfect price discrimination is charging each respective consumer group the maximum the consumer is willing to pay for each unit
A type of monopoly that exists due to the high start-up costs or powerful economies of scale of conducting a business in a specific industry, is known as…?
A natural monopoly
What is the N-firm concentration ratio?
The sum or the percentage market shares of the largest N firms in a market
What are the issues of using the N-firm concentration ratio?
It is relatively insensitive to mergers of two firms with large market shares & Ignores barriers to entry
How do you calculate the Herfindahl-Hirschman Index?
The sum of the squares of the market shares of the largest firms in the market
What are the issues assoicated with using the Herfindahl-Hirschman Index?
Ignores barriers to entry & ignores elasticity of demand
What is the difference between gross national product and gross domestic product?
Gross National product (GNP): Market value of the goods and services of the citizens of a country, regardless of where it is produced
Gross domestic product (GDP) is the total market value of the goods and services physically produced within the borders of a country within a certain time period
Which notable items are not included in GDP?
Resale goods / WIP goods
Transfer payments made by the government
Which notable items are included in GDP?
Rental value from properties actually owned
Value of owner occupied housing
Goods and services provided by government
Explain the difference between the expenditure and income approach to calculating GDP?
Expenditure approach, GDP is calculated by summing the amounts spent on goods and services produced during the period
Income approach = Household income + Business Income + Government Income (Taxation)
What is the difference between the sum of value added approach and value of final output method of calculating GDP?
Sum-of-value-added method, GDP is calculated by summing the additions to value created at each stage of production and distribution process
Value-of-final output method: The value of all the final goods and services produced
Does the GDP for the value added approach = final output method of calculating GDP?
Yes
What is the difference between nominal and real GDP?
Nominal GDP: Sum of all current year goods at current year prices.
Real GDP: Sum of all current year goods at base year prices
What is the formula for the GDP deflator?
( GDP\ Deflator = 100 \times \frac{Nominal\ GDP}{Real\ GDP} )
What is GDP per capita?
Real GDP divided by population
What are the components of the expenditure approach to GDP?
C = Consumer consumption I = Business investment G = Government spending X = Exports M = Imports
What are the 2 components of government spending in G of the expenditure approach to calculating GDP?
- Government consumption: Spending on public sector goods such as health care, education, defence etc
- Government investment: Government capital investment e.g. roads, infrastructure etc.
What is the capital consumption allowance made up of?
The depreciation (i.e., wear) of physical capital from the production of goods and services over a period
What is the difference between personal income and personal disposable income?
Personal income is a measure of the pretax income received by households
Personal disposable income is personal income after taxes
What is the formula for the fundamental relationship?
S = I +(G – T) + (X-M)
What is the fiscal balance?
The difference between government spending and tax receipts
What is the trade balance?
The difference between exports and imports
How would a government deficit be financed?
A government deficit (G – T > 0) must be financed by some combination of a trade deficit (X – M < 0) or an excess of private saving over private investment (S – I > 0).
What is the difference marginal propensity to consume and the marginal propensity to save?
The marginal propensity to consume (MPC) is the increase in consumer spending due to an increase in income.
The marginal propensity to save (MPS) is the increase in consumer saving due to an increase in income.
What causes movements along the AD curve?
Change in the price level
What causes shifts in the AD curve?
Increase in consumers’ wealth Business expectations Consumer expectations of future income High capacity utilisation Expansionary monetary policy Expansionary fiscal policy Exchange rates Global economic growth
What causes shifts in the SRAS?
Labor productivity Input prices Expectations of future output prices Taxes and government subsidies Exchange rates
What causes shifts in LRAS?
Increase in the supply and quality of labor
Increase in the supply of natural resources
Increase in the stock of physical capital
Technology
What is full employment GDP?
Economic output at its highest potential
Real GDP being less than full employment GDP, is known as…?
The recessionary gap
The amount by which the actual gross domestic product exceeds potential full-employment GDP, is known as…?
Inflationary gap
What is stagflation?
Stagnant economy with persistant inflation
What impact does an increase in AD have on GDP, unemployment and inflation?
Increases GDP, decreases unemployment, increases the price level
What impact does an decrease in AD have on GDP, unemployment and inflation?
Decreases GDP, increases unemployment, decreases the price level
What impact does an increase in AS have on GDP, unemployment and inflation?
Increases GDP, decreases unemployment, decreases the price level
What impact does a decrease in AS have on GDP, unemployment and inflation?
Decrease GDP, increases unemployment, increases the price level
Explain what happens if both AS & AD increase together?
Real GDP increases but the effect on the price level depends on the relative magnitudes of the changes because their price effects are in opposite directions
Explain what happens if both AS/AD decrease together?
Real GDP decreases but the effect on the price level depends on the relative magnitudes of the changes because their price effects are in opposite directions
Outline the 5 sources of long term economic growth?
Labor supply Human capital Physical capital stock Technology Natural resources
What is the formula for the growth in potential GDP?
Growth in potential GDP = Growth in labour force + Growth in labour productivity
What are the four phases of the business cycle in order?
Recession: Real GDP is decreasing
Trough: Real GDP stops decreasing and begins to increase
Expansion: Real GDP is increasing
Peak: Real GDP stops increasing and begins to decrease
How often do business cycles recur?
Business cycles do recur, but not at regular intervals
How is a contraction / recession defined in economic theory?
Two consecutive quarters of growth in real GDP
What happens to inventory levels as the economy reaches a peak?
When an expansion is approaching its peak, sales growth begins to slow, and unsold inventories accumulate
What happens to inventory levels as the economy reaches a trough?
Having reduced their production levels to adjust for lower sales demand, firms find their inventories becoming depleted more quickly once sales growth begins to accelerate
What are the four important determinants of the level of economic activity in the housing sector?
Mortgage rates
Housing costs relative to income
Speculative activity
Demographic factors
How does our economic performance impact imports and exports at a high level?
Our economic performance determines level of imports
Our economic performance does not determine the level of exports – we have no control over this is is determined by the world economy performance
How does an increase in a countries currency impact its imports and exports?
An increase in the value of a country’s currency makes its goods more expensive to foreign buyers and foreign goods less expensive to domestic buyers, which tends to decrease exports and increase imports
What do Neoclassical economists believe is the cause of business cycles and what is their recommended policies in reaction to such changes in the cycle?
Cause of cycle: economists believe business cycles are temporary and driven by changes in technology,
Recommended policy: adjustments of wages and other input prices cause the economy to move to full-employment equilibrium.
What do Keynesian economists believe is the cause of business cycles and what is their recommended policies in reaction to such changes in the cycle?
Causes: economists believe excessive optimism or pessimism among business managers causes business cycles and that contractions can persist because wages are slow to move downward.
Recommended policy: Use fiscal or monetary policy to restore full employment
What do New Keynesian economists believe is the cause of business cycles and what is their recommended policies in reaction to such changes in the cycle?
Same as Keynesian apart from: believe input prices other than wages are also slow to move downward.
What do Monetarists economists believe is the cause of business cycles and what is their recommended policies in reaction to such changes in the cycle?
Cause: believe inappropriate changes in the rate of money supply growth cause business cycles,
Recommendation: and that money supply growth should be maintained at a moderate and predictable rate to support the growth of real GDP.
What do Austrian school economists believe is the cause of business cycles and what is their recommended policies in reaction to such changes in the cycle?
Cause: government intervention
Recommendation: DON’T drives interest rates to artificially low levels.
What do Real business cycle economists believe is the cause of business cycles and what is their recommended policies in reaction to such changes in the cycle?
Cause: utility-maximizing actors responding to real economic forces such as external shocks and changes in technology,
Recommendation: and that policymakers should not intervene in business cycles.
What is the definition of an individual who is unemployed and long-term unemployed?
Unemployed if he is actively searching for work. One who has been seeking work unsuccessfully for several months is referred to as long-term unemployed
Who are part of the”labour force”?
Labour force: all people who are either employed or unemployed.
How would you calculate the unemployment rate?
Unemployment rate = unemployed divided by labour force
Who are the voluntarily unemployed?
People who choose not to be in the labor force are said to be voluntarily unemployed
Who are the underemployed?
A person who is employed part-time but would prefer to work full time or is employed at a low-paying job despite being qualified for a significantly higher-paying one
What is the formula for the participation ratio?
participation ratio = employed or actively seeking employment divided by working age population
Workers who are available for work but are neither employed nor actively seeking employment, are defined as…?
Discouraged workers
Do employment metrics tend to be a leading or lagging indicator of economic perform
Firms tend to be slow to hire or lay off workers at business cycle turning points. This also causes the unemployment rate to lag the business cycle
A persistent increase in the price level over time, is defined as…?
Inflation
Inflation that accelerates out of control is referred to as…?
Hyperinflation
An inflation rate that is decreasing over time but remains greater than zero is known as…?
Disinflation
Inflation rate that is less than 0% is known as…?
Deflation
What is the formula for the consumer price index?
( CPI = 100 \times \frac{basket\ cost\ at\ current\ prices}{basket\ cost\ at\ base\ period\ prices} )
What is the difference between headline and core inflation?
Headline inflation: refers to price indexes for all goods.
Core inflation: refers to price indexes that exclude food and energy.
What are 2 alternatives to the CPI?
Producer price index (PPI) or wholesale price index (WPI)
What is a Laspeyres index?
Laspeyres index: An index which uses a constant basket of goods and services. For example the CPI
What are the weaknesses of inflation measures causing them to be biased upwards?
New goods
Quality changes
Hedonic pricing
Substitution
What are Fisher index’s and Paasche index’s?
A Fisher index is the geometric mean of a Laspeyres index and a Paasche index.
Paasche index: Ie current basket of goods weightings at base prices
What should analysts be aware of when comparing 2 countries price index’s?
Differences in their composition Purchasing patterns across countries and regions.
Differences in data collection
Inflation caused from a decrease in aggregate supply, is called?
Cost-push inflation
What is wage-push inflation?
Because labor is the most important cost of production, wage pressure can be a source of cost-push inflation
What is NAIRU?
NAIRU: The lowest rate of unemployment that will not induce wage-push inflation
Inflation resulting from an increase in aggregate demand, is known as…?
Demand-pull inflation
What are leading, coincidental and lagging indicators?
leading indicators change direction before peaks or troughs in the business cycle
Coincident indicators that change direction at roughly the same time as peaks or troughs
lagging indicators that don’t tend to change direction until after expansions or contractions are already underway.
Government’s use of spending and taxation to influence economic activity, is known as what type of policy?
Fiscal policy
Central bank’s actions that affect the quantity of money and credit in an economy in order to influence economic activity, is known as what type of policy?
Monetary policy
What are the three primary functions of money?
a medium of exchange or means of payment
a unit of account
a store of value
What is the difference between narrow and broad money?
Narrow money is the amount of notes and coins in circulation in an economy plus balances in checkable bank deposits.
Broad money includes narrow money plus any amount available in liquid assets, which can be used to make purchases
The % of total deposits made to the bank that must be held as a capital reserve, is known as the…?
Required reserve ratio
How do we calculate the money multiplier?
( Money multiplier = \frac{1}{Reserve\ Ratio} )
What is the formula for the quantity equation of exchange under the quantity theory of money?
( Money\ Supply \times Velocity = Price \times Real\ Output\ (MV = PY) )
Define the fisher effect?
Nominal interest rate = Real interest rate + Expected inflation
What are the roles of central banks?
Sole supplier of currency
Banker to the government and other banks
Regulator and supervisor of payments system
Lender of last resort
Holder of gold and foreign exchange reserves
Conductor of monetary policy
What is the primary objective of a central bank?
The primary objective of a central bank is to control inflation so as to promote price stability. Usually 2-3%
Why is the inflation target not 0%?
A target of zero inflation is not used because that increases the risk of deflation, which can be very disruptive for an economy
What are menu costs and shoe leather costs caused by high inflation?
menu costs (i.e., cost to businesses of constantly having to change their prices) and shoe leather costs (i.e., costs to individuals of making frequent trips to the bank so as to minimize their holdings of cash that are depreciating in value due to inflation).
What is the difference between expected and unexpected inflation?
Unexpected inflation is bad as it is typically not built into models whereas expected inflation is built in
What are the three tools central banks use to influence monetary policy?
Policy rate
Reserve requirements
Open market operations
What is the impact of monetary policy on price of financial assets?
An increase in interest rates decreases demand and therefore the price of financial assets
What are the three essential qualities of an effective central bank?
Independence – Free from political interference
Credible: Bank follows through on intentions and policies
Transparent: Bank discloses reports, indicators and how they use them
What is the difference between expansionary and contractionary fiscal policy?
Expansionary policy - Increase government spending, decrease taxation
Contractionary policy - Decrease government spending, increase taxation
Built-in fiscal devices triggered automatically by the state of the economy are known as…?
Automatic Stabilisers
What are the objectives of fiscal policy?
Influencing the level of economic activity and aggregate demand.
Redistributing wealth and
Allocating resources among economic agents and sectors in the economy.
What is the difference between current spending and capital spending?
Current spending: Purchases of goods and services
Capital spending: Investment in infrastructure
What are direct and indirect taxes?
Direct taxes are levied on income or wealth.
Indirect taxes are levied on goods and services.
What is the formula for the fiscal multiplier?
( Fiscal\ multiplier = \frac{1}{1-MPC(1-t)} )
Consumers who save more upon a tax cut if they expect tax rises tomorrow to offset the tax cut today, is an example of…?
Ricardian equivalence
What is the countries debt ratio formula?
( Debt\ Ratio = \frac{Government\ debt}{GDP} )
What are the three types of fiscal policy lag?
Recognition lag
Action lag
Impact lag
What are imports and exports?
Imports: Goods and services that firms, individuals, and governments purchase from producers in other countries
Exports: Goods and services that firms, individuals, and governments from other countries purchase from domestic producers
A country that does not trade with other countries, is known as a…?
Autarky
A country with no restrictions or charges on import and export activity, is known a…?
Free trade economy
What is the difference between the world price and the domestic price?
World price: The price of a good or service in world markets for those to whom trade is not restricted.
Domestic price: The price of a good or service in the domestic country, which may be equal to the world price if free trade is permitted or different from the world price when the domestic country restricts trade.
What is the difference between a trade surplus and a trade deficit?
Trade surplus: Net exports are positive
Trade deficit: Net exports are negative
Ownership of productive resources (land, factories, natural resources) in a foreign country, is known as…?
Foreign direct investment
A firm that has made foreign direct investment in one or more foreign countries is known as a…?
Multinational corporation
Which type of domestic producers bare the cost of trade?
Producers that lack a competitive advantage
What is the difference between an absolute and comparative advantage?
absolute advantage A country who can produce the good at a lower resource cost than every other country in question
comparative advantage production of a good if it has a lower opportunity cost in the production of that good, expressed as the amount of another good that could have been produced instead
What is the only factor of production for the Ricardian model?
Labour
What are the factors of production for the Heckscher-Ohlin model?
Capital and labour
Taxes on imported good collected by the government are called…?
Tariffs
Quantity limits on the amount of imports allowed over some period, are known as…?
Quotas
Government payments to firms that export goods to boost exports are called?
Export subsidies
What is a voluntary export restraint?
A country voluntarily restricts the amount of a good that can be exported.
The amount generated from a quota imposed by a domestic government, is known as…?
Quota rents
What is a monetary union?
An economic union with a single currency
What is an economic union?
A common market with one centralised economic policy
What three accounts make up the balance of payments?
- Current account
- Capital account
- Financial account
What are the International Monetary Fund, World Bank and World Trade Organisation?
IMF: Promotes monetary cooperation and exchange rate stability between nations
WTO: Enforces global rules of trade and improves trade flow generally
World Bank: Helps charity efforts and helps fight against poverty
Given a rate of 1.31 USD / GBP, what is the difference between the base and price currency?
USD = Price currency, GBP = Base currency
What is the difference between nominal and real exchange rates?
Nominal exchange rate: Exchange rate quoted at any time
Real exchange rate: Exchange rate adjusted for the relative price levels in both countries
What is the difference between a spot and forward exchange rate?
Spot exchange rate is the currency exchange rate for immediate delivery
Forward exchange rate is the currency exchange rate for future delivery of the underlying
What is the difference between speculation and hedging?
Speculation involves trying to make a profit from a security’s price change, whereas
hedging attempts to reduce the amount of risk, or volatility, associated with a security’s price change.
Who are typical buyers of FX and FX forward contracts?
Governments, corporations, investment accounts, retail market etc
What is the formula for the no arbitrage FWD rate?
( FWD\ rate = spot\ rate \times \frac{1+interest\ rate_{foreign}}{1+ interest\ rate_{base}} )
What are the 2 techniques countries without their own currency can use to establish one?
Formal dollarisation
Monetary union
What are the seven exchange rate regimes for countries that do issue their own currencies?
Currency board Conventional fixed peg Target zone Crawling peg Crawling bands Managed floating Independently floating
What are the three types of unemployment?
Frictional unemployment
Structural unemployment
Cyclical unemployment
