Economic Concepts Flashcards
Demand Curve
As price increases demand decrease
DC - Positive Shift
An increase in demand at each price point (moves right)
DC - Negative Shift
A decrease in demand at each price point (moves left)
Direct Positive Demand Curve Shift Factors
1) Price of substitute goods
2) Expectations of price increase
3) Consumer income and wealth
4) Size of Market
Negative Demand Curve Shift Factors
1) Price of complimentary goods
2) Consumer income and wealth
3) Group Boycott
Price Elasticity
% change in QTY Demanded/% change in price
If elasticity > 1
Demand is consider elastic, total revenue will decline if the price is increased
If elasticity = 1
Demand is considered unitary, and total revenue will remain the same if price is increase
If elasticity < 1
Demand is consider inelastic, total revenue will increase if the price is increased
Income elasticity
% change in QTY demanded/% change in income
positive for normal goods and negative for inferior goods
Cross Elasticity
% change in demand for product X/% change in demand for product Y
This will be a positive number for substitute goods and a negative number for compliments
Marginal Utility
The satisfaction value to consumers of the next dollar they spend on a particular product
Law of diminishing marginal utility
The more a consumer has of a particular product, the less valuable the next unit of the product.
Personal disposable income
The available income of a consumer after subtracting payment of taxes or adding receipt of government benefits. Consumer will either spend or save.
Marginal propensity to consume MPC
The percentage of the next dollar in personal disposable income that the consumer would be expected to spend
Marginal propensity to save MPS
The percentage of the next dollar of disposable income that the consumer is expected to save (MPC plus MPS must equal 1)
Supply Curve
As the price of a product increases, the quantity offered by sellers increases
SC - Positive shift
An increase in supply at each price (the line moves to the right)
SC - Negative shift
A decrease in supply at each price (the line moves to the left)
Supply Curve Shift Direct
- Number of producers
- Government subsidies
- Price expectations
Supply Curve Shift Inverse
- Changes in production costs
* Prices of other goods
Market Equilibrium
The price at which the quantity demanded and quantity offered intersect is the equilibrium price
ME - Government Intervention
When the government intervenes to impose price ceilings, setting the price below equilibrium, the
quantity demanded will exceed quantity offered, resulting in shortages of goods. When the government
intervenes to impose price floors, setting price above equilibrium, the quantity offered will
exceed quantity demanded, resulting in unsold surpluses of goods.
Short Run Costs of Production
Over short periods of time and limited ranges of production, costs include fixed and variable
components:
SR - Fixed Costs
Costs that won’t change even when there is a change in production. Average fixed
costs are total fixed costs divided by units produced. An example is rent paid on the production
facility.
SR - Variable Costs
Costs that will rise as production rises. Average variable costs are total variable
costs divided by units produced. An example is materials used in the manufacture of the product.
SR - Total Costs
The sum of fixed and variable costs. Average total costs are total costs divided by
units produced.
SR - Marginal Costs
The increase in cost that will result from an increase in one unit in production.
Only variable costs are relevant, since fixed costs won’t increase in such circumstances.
Long-Run Costs of Production
In the long run, all costs are variable, since increasing production beyond certain levels will require
increases in capacity, causing even “fixed” costs to rise.
Return to scale Definition
is the increase in units produced (output) that results from an increase in production
costs (input).
Return to scale Formula
Return to scale = Percentage increase in output / Percentage increase in input
RTS Results > 1
we have increasing returns to scale. This will normally
occur up to a certain level for all firms because of economies of scale, or the increased efficiency
that results from producing more units of a product (such as the ability to have employees specialize
in different tasks and improve their abilities).
RTS Results < 1
we have decreasing returns to scale. This will normally
occur beyond a certain level for all firms because of diseconomies of scale, or the increased
inefficiencies that result from expanding production (such as the greater difficulty management
has in controlling the activities of larger numbers of employees and facilities).
Unemployment - Frictional
This represents the time period during which people are unemployed as a
result of changing jobs or newly entering the workforce. Because of the mobility of society,
there is always some level of this type of unemployment, even in a society that effectively
has “full” employment.
Unemployment - Structural
This represents potential workers whose job skills do not match the needs
of the workforce as a result of changing demand for goods and services of technological
advances that reduce or eliminate the need for the skills they possess. Such unemployment
normally requires retraining in order for these individuals to be employable again.
Unemployment - Cyclical
This represents the unemployment caused by variations in the business cycle,
when real GDP fails to grow at the pace necessary to employ all willing workers.
Nominal interest rate
The rate as measured in terms of the nation’s currency
Real interest rate
The rate adjusted for inflation
Risk-free interest rate
The rate that would be charged to a borrower if the lender had
an absolute certainty of being repaid (The rate paid on United States Treasury securities is
often considered to be a useful measure of the risk-free interest rate.)
Discount rate
The rate set by the Federal Reserve System at which a bank can borrow
from a Federal Reserve bank
Prime rate
The rate that banks charge their most creditworthy customers on short-term
loans from the bank
