Economic Concepts Flashcards
Law of Demand
- higher prices reduce the demand for an item and lower prices increases the demand for an item.
- there is an inverse relationship between the price consumers are willing to pay for an item and the amount they are willing to purchase.
- The demand curve slopes down and to the right, indicating that as a price drops, the quantity demanded will increase.
Elastic
- a small price change causes a rather large change in the amount purchased.
- common with goods that have many substitutes.
- Perfect elasticity results in a horizontal demand curve.
Inelastic
- a large price change may not cause much of a change in the quantity demanded.
- there are not many substitutes.
- Perfect in-elasticity is represented by a demand curve the is vertical.
Second law of demand
- time has the greatest effect of elasticity.
- when the price of a product increases, consumers will reduce their consumption more in the long run than in the short run.
- the demand for goods is more elastic in the long run than in the short run.
Factors causing a shift in the demand curve
- changes in consumer income (consumers will buy more if they have more money)
- Changes in the price of related goods. The price of substitute goods influences demand. If the price of one good rises, the demand for the other good will rise.
- Changes in consumer expectations. If the price is expected to rise in the future, the consumer will buy more now.
- Changes in the number of consumers in the market. When cities increase, there are more people affecting demand.
- Demographic changes.
- changes in consumer tastes and preferences.
Law of Supply
- a higher price will increase the supply of a good.
- there is a direct relationship between the price of a good and the amount of the good supplied in the market place.
- the supply curve slopes up and to the right
Change in quantity supplied
- represented as a movement along the supply curve.
- it is the willingness of producers to offer a good at different prices.
Factors resulting in a shift of the supply curve
- factors that increase the opportunity cost of producing a good will discourage production and shift the supply curve inward and to the left.
- Changes in resource prices
- changes in technology
- Natural disasters and political disruptions
Income elasticity
- the sensitivity of demand to change in consumer income.
- a inferior good has negative income elasticity which means when income increases, the quantity demanded decreases. When income decreases, the quantity demanded increases.
- a normal good has positive income elasticity.
Expansionary Fiscal Policy
- reducing taxes
- increasing government spending
-results in higher GDP and higher price levels
Restrictive Fiscal Policy
- decreasing spending
- increasing taxes
-will slow the economy down
3 ways the Federal Reserve uses monetary policy to influence the money supply
1) increasing or decreasing the reserve requirements
2) increasing or decreasing the discount rate
3) Open market operations
Leading Economic Indicators
- Housing starts
- orders for durable goods
- changes in consumer sentiment
Coincident Economic Indicators
- unemployment rate
- level of industrial production
- corporate profits
Lagging economic indicators
- prime rate
- changes in CPI
- Average duration of unemployment
GDP
GDP = C + G + I + NX
C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures and NX is the nation’s total net exports, calculated as total exports minus total imports (NX = Exports - Imports).
Mid-contraction to trough
- interest rates are down
- inflation is down
- value of stocks and bonds increase
- value of real estate and gold decrease
Trough to mid-expansion
- interest rates are down
- inflation is down
- unemployment decreases
- capacity utilization increases
- capital spending increases
- corporate earnings increase
- stocks and bonds increase
- real estate and gold decrease
Mid-Expansion to Peak
- Interest rates increase
- inflation increase
- labor productivity decrease
- capacity utilization increase
- stocks and bonds decrease
- real estate and gold increase
Peak to mid-contraction
- interest rates increase
- inflation increase
- corporate profits decrease
- capital spending decrease
- unemployment increase
- stocks and bonds decrease
- real estate and gold increase
