Economic Concepts Flashcards
Law of Supply
increase in market price = increase in quantity supplied
decrease in market price = decrease in quantity supplied
Law of Demand
price goes down = demand goes up
price goes up = demand goes down
what causes a Shift in supply curve
FACTORS OTHER THAN PRICE like technology, price of related goods and special influences
Equilibrium price
where supply curve intersects demand curve - shift in supply or demand sets new equilibrium price - bad news for a stock - same supply of shares but price drops
Elastic price
think luxury goods
Inelastic Prices
think food water consumer staples
Fiscal Policy
Government’s tax and spending policy
How can the government spur economic activity?
tax less and spend more
How does the Treasury “borrow”
By issuing bonds that are purchased by banks and investors
How do banks pay for bonds?
Crediting the checking account of the US Treasury, which increases the money supply
What is Monetizing the debt?
When banks buy bonds from the US Treasury
What has an immediate effect on the economy?
Government spending. Taxes increases have a delayed effect
Government spending has an immediate effect but tax increases have what
Delayed effect
Economy in a recession means what for tax revenue?
Less income to be taxed on
Inflation often picks up when the economy is doing what
expanding
Automatic Stabilizers
revenue and expenditure items in the federal budget that automatically change with the state of the economy and tend to stabilize GDP
Economists make budget projections based on what
the economy producing at full employment level of output
3 Ways Fed Influence economic activity
- Setting short term interest rates
- buying/selling treasury securities to increase/decrease money supply
- Setting bank reserve requirements to increase/decrease funds available for loans
3 Primary Monetary Policy tools to regulate money supply
- Manipulate the Required Reserve Ratio
- Manipulation of the Discount Rate
- Engaging in open market operations
Required Reserve Ratio
amount of TOTAL deposits member BANKS must KEEP with THE FED at the end of the day
Bank Discount Rate
interest rate that banks pay the fed
Federal Funds Rate
rate banks charge other banks on overnight loans - this is set by the FOMC
Open market operations
Feds preferred means of controlling the money supply
Increase supply = buy treasuries (pay banks $)
Decrease supply = sell treasuries (banks pay $)
What Fed uses to measure overall inflation
CPI
GDP
total market value of all final goods and services produced within a given period of time
Business Cycle
short run fluctuations in the economy as influenced by the forces of supply and demand
Recession
2 quarters of declining GDP
Business cycle trough to peak
expansion or boom
Business cycle peak to trough
contraction, recession, slump
Inflation
increase in prices, low unemployment, high wages
Stagflation
Inflation but no economic growth
Upward sloping yield curve
Longterm is higher
think about what this looks like - draw a chart
Flat yield curve
Flat - short and long term rates are the same
Downward sloping
short term rates higher than long term
Contractionary policy means the government does what re: borrowing?
Government borrowing will DECREASE in contractionary policy
Contractionary Policy
Taxes go UP
Public Spending goes DOWN
Borrowing goes DOWN
Expansionary Policy
Taxes go DOWN
Public Spending goes UP
Borrowing goes UP
Taxes go up - expansionary or contractionary?
Contractionary
Does the law of demand have an inverse relationship?
Yes - law of demand demonstrates an inverse relationship between the price consumers are willing to pay and the amount they are willing to purchase
Are consumers more responsive to price when a substitute is available?
Yes - if I can get a substitute item then price is going to play a big factor. Which one is cheaper for the same thing?
Demand curve slopes how
Down and to the right - as price decreases demand increases
Higher the price what does supply do?
Supply goes up
Lower prices means what supply?
Lower supply
Supply goes up price does what
Supply goes down price does what
Supply goes up price goes up
Supply goes down price goes down
When the price of a product increases, consumers will reduce their consumption more when? (long run or short run)
in the long run than the short run.
When is demand for products more elastic
in the long run
What causes change in the demand curve? (who would cause that change?)
Changes in INCOME
Changes in PRICE of COMPLEMENT and SUBSTITUTE goods
Changes in EXPECTATIONS
Changes in TASTE and PREFERENCES
A change in quantity supplied is identified as what on the supply curve
MOVEMENT along the supply curve. Willingness of producers to offer the same product at different prices
Change in consumer sentiment is leading or lagging?
Leading
Avg prime rate charged by banks is leading or lagging?
Lagging
Change in CPI is leading or lagging?
lagging
Orders for durable goods, leading or lagging?
Leading
Avg duration of unemployment leading or laggging
lagging
Change in money supply leading or lagging?
leading
Housing starts leading or lagging indicator?
Leading
Which of the following would cause a shift in the SUPPLY curve:
Change in resource price
change in technology
natural disaster
political disruption
All of the above can cause a shift in the supply curve
Quantity Demanded
amount of a product a household would buy if it could buy all it wanted at current market price
Price rises quantity demanded does what
falls
Price falls quantity demanded does what
Goes up
what creates movement along the demand curve
change in quantity demanded
Changes in demand
a shift in the demand - rumor re:mad cow disease may decrease demand for beef and increase for substitute like chicken
excess demand
quantity demanded exceeds quantity supplied - INCREASE in price- think taylor swift tickets
excess supply
quantity supplied exceeds demand - PRICE DROPS
Shift in demand or supply sets a what
new equilibrium price
availability of substitutes
more substitutes means an increase in price would cause a drop in demand - consumers would buy the other cheaper option
relevance to budget
if product is small part of budget, small price increase may not change quantity demanded
Short run
in short run a change in price may not effect quantity demanded bc consumers will still buy it. In the LONG RUN they may be able to find a substitute so demand would fall in the long run
price elasticity of demand
measures buyers responsiveness or sensitivity to change in price
inelastic product price change
won’t have effect on demand bc consumers need it
elastic product price change effects demand how
it will effect demand because consumers don’t necessarily need to buy it
perfect inelasticity
demand does not change with price - think insulin people would still need it
inelasticity
percentage demanded changes somewhat, but not much compared to price
unitary elasticity
% change in demand = % change in price
Elastic
% demand change > % in price change
-think increase iceberg lettuce price people will just buy romaine
perfectly elastic
a slight change in price will cause demand to go to 0
