Economic Concepts Flashcards
List the direct relationship factors to shift demand curve upwards other than price
- Price of substitute goods (Inc in P of hamburgers will inc demand for hot dogs)
- Expectations of price change (tax in the future, buy more now)
- Income for normal goods (as wealth inc, demand inc)
- Extent of the market (more babies=more baby food demand)
List the inverse relationship factors that shift demand curve downward
- Price of a complement good (Inc in P of chips will cause less demand for salsa)
- Income for inferior goods (when wealth inc, demand for used cars decreases)
- Consumer boycott
- Consumer tastes change
- Contraction (less spending decreases equilibrium GDP)
What do elasticities measure? Name the different types.
The sensitivity of something (QD) to changes in something else (P). Price elasticity of demand Price elasticity of supply Income elasticity of demand Cross elasticity of demand
If ED > 1
If ED < 1
If ED = 1
Elastic, as P inc total revenue dec
Inelastic, as P inc total revenue inc
Unitary elastic, as P inc no change to revenue
Elasticity of Demand =
ED= % ^ in QD / % ^ in P
What is the Arc method calculation for ED
ED= (^ in QD/Avg QD)/(^ in P/Avg P)
* All elasticities can use the arc method
Full unemployment implies..
Frictional and structural (no cyclical)
The Phillips Curve implies that…
In the short term policies that result in higher inflation may also reduce unemployment
Explain effects when supply shifts to the right
Sellers will now supply more quantity at the same or lower price (At $20, now supply 70 instead of 50 units; for a quantity of 50, now charge lower price of $10 instead of $20)
A state law increasing the minimum wages that employers must pay may cause…
The supply curve for unskilled workers to shift inward (price floor cause QS to exceed QD)
Stagflation
Combo of stagnation (high unemployment) and inflation
Opportunity Cost
The forgone value of the next best use of an asset (Developing land prevents from selling, resulting in forfeit of benefit of proceeds which would be the opportunity cost)
International Dumping
Selling below cost in an effort to reduce competition
Structural Unemployment
Lose job as a result of change in demand for goods/services
Frictional Unemployment
Results from new workers entering the work force, displacing existing workers and normal turnover
Different types of foreign exchange currency risk
- Translation - accounting risk
- Finance operations in the local currency
- Transaction risk - match as many revenues to costs as possible in each market.
- Hedging
What happens in a price ceiling set below equilibrium?
QD will exceed QS resulting in a shortage of goods
What happens in a price floor set above equilibrium?
QS will exceed QD resulting in unpurchased surpluses of goods
NAIRU unemployment
“Non-accelerating inflation rate of unemployment”
The sum of frictional and structural
Earned/spent 40,000 in 2002 when CPI was 180; same worker earned/spent 50,000 in 2012 when CPI was 230. How much did real income fall by?
Income in 2002 purchased equivalent of (40,000 x 230/180= 51,111) in 2012. Real income fell by 2.2% (51,111-50,000 / 50,000)
An item is inelastic if…
The increase in demand is proportionately lower than a decrease in price
High elasticity would be indicated by…
An increase in demand that is proportionately higher than a decrease in price
Income Elasticity of Demand
= % ^ in QD / % ^ in Income
* Positive = normal good
Negative= inferior good (change of 2.0 mercedes, change of .5 spam)
Cross Elasticity of Demand
= % ^ in QD for product X
/ % ^ in Price of product Y
* Measures change in QD of a good to a change in the price of another good, determines substitutes if +, complements if -.
Increase (Decrease) in demand, no change in supply..
Inc (Dec) in Price, Inc (Dec) in quantity purchased
No change in demand, Inc in supply
Dec in Price, Inc in quantity purchased
No change in demand, Dec in supply
Inc in Price, Dec in quantity purchased
Inc in demand, Inc in supply
Uncertain Price, Inc in quantity purchased
Dec in demand, Dec in supply
Uncertain Price, Dec in quantity purchased
Inc in demand, Dec in supply
Inc in Price, Uncertain quantity purchased
Dec in Demand, Inc in supply
Dec in Price, Uncertain quantity purchased
Positive shift in supply curve results from .. Opposite for negative shift
Dec in production cost, improvement in technology, dec in price of other goods, dec in expected future prices
If supply is elastic.. (opposite is true)
Supply will fluctuate as the price changes
Inflation effects
- Inversely to purchasing power
- Discourages saving behavior
- Interest rates increase
- Reduce demand for loans, houses, autos, etc
- Value of bonds/fixed income decreases
- Inferior goods demand increases
- Foreign goods more affordable than domestic
- Demand for domestic goods decreases
Positive shift in demand curve…
Inc of substitutes’ price, decrease in complement’s price, inc in consumer income (for normal goods), decrease in consumer income (for inferior goods), expected future price increases, inc in # of consumers
What happens in a price floor?
Price is set above market, surplus develops and QS is greater than QD
Quantity Demand is related___ to price..
Quantity Supply is related ____ to price..
Inversely
Directly
Economic Rent
Input is paid or purchased for a higher amount than the next highest bidder-consumer of that input would pay (Perfectly inelastic, like land, all the price is deemed economic rent. Higher price will not increase the supply
The most elasticity on a graph is the line with ___ slop
Mildest slop. Has the most change in QD for the same change in P
A price ceiling is set ___ market, and causes a ___
below the market
shortage
Expenditure Approach measuring GDP
GDP= Consumption + investment + gov expenditures + (Exports-Imports)
Measure change in account balance
(Current - old)/ Old
Marginal Propensity to Consume
MPC= ^ in spending / ^ in disposable income
How much you spend when income changes
Marginal Propensity to Save
MPS= ^ in savings / ^ in disposable income
** Savings = Income less Consumption
What factor would cause currency to appreciate in foreign market?
High domestic real interest rates make investment attractive, fueling demand for its currency
Size of discount/premium in annual terms
Forward rate-spot rate/spot
x months in year/months in forward period
Cost Push Theory
Inflation is caused when inc product costs are passed to consumers (think unions), supply decreases, equilibrium price increases
Demand Pull Theory
Inflation is caused by excess aggregate demand for goods (expansionary policy), GDP rises, unemployment falls, equilibrium price increase
When demand for a product is significantly elastic and prices are cut…
the increase in quantity demanded is proportionally more than the decrease in price.
A decline in dollar exchange rate will benefit..
Benefit US exporters (foreign markets have more buying power)
What is the effect when a foreign competitor’s currency becomes weaker compared to the U.S. dollar?
Foreign company will have an advantage in U.S. market bc dollar is stronger and will buy more foreign currency, which is good for foreign company
E sells to W. E is booming imports high. W is in recession. How will E react with respect to W currency?
E will decline with respect to W. Inc demand for W goods inc demand for W currency and thus price of W.
Increasing returns to scale
Economies of scale, when inputs triple but outputs more than triple
Monopolistic Competition
Large number of sellers
Differentiated products
Easy entry
Nonprice competition (advertising, branding, etc)
Factors that increase demand elasticity
Classify as luxury rather than necessity
Greater number of substitutes and % income spent on good
Price elasticity of supply
% ^ in QS
/ % ^ in Price
(Measures responsiveness of supply to change in price; high cost and low feasibility of storage decreases supply elasticity)
Utility maximization formula
Marginal utility of A / Price of A
= Marginal utility of B / Price of B
What is normal profit?
The cost of resources from an economic perspective (return on investment)
Multiplier effect
1 /MPS x change in spending= the change in national income due to change in spending
Return to Scale
% inc in output
/ % inc in input
(>1 inc returns to scale, <1 dec returns to scale)
Multiplier Coefficient
= 1/MPS
Any increase in autonomous investment, consumption, gov’t spending results in multiplied increase in national income
What item would increase a surplus in the Canadian balance of payment accounts?
Loans to Canadians by foreigners (An increase in a balance of payments surplus or deficit reduction occurs when more money enters a nation than leaves it)
The GDP needs to increase by x amount. How to figure out the gov’t expenditures needed?
Inc in gov expenditures= Inc in GDP x MPS
Optimal Production
Marginal revenue = Marginal cost
Economies of scale when..
Avg costs > Marginal costs
Leading indicators
Avg hours worked manufacturing, initial unemployment claims, stock prices, RM price changes, housing permits, money supply changes
Avg propensity to consume (APC)
Consumption / Income
Avg propensity to save (APS)
Savings / Income
Reducing the rate of monetary growth…
makes less money available, increasing interest rates as people compete for loans.
government borrowing to finance large deficits has which of the following effects?
exert upward pressure on interest rates. With more demand and a supply that stays static or increases less than the increase in demand, the price increases
To maintain a fixed exchange rate, a country may have to do all of the following
- Change its interest rates to match changes in the country whose currency it targets.
- Increase its interest rates if it has a higher inflation rate than the country whose currency it targets
- Increase its interest rates if it has a trade deficit with the country whose currency it targets
Exchange rate influences
One currency will depreciate relative to another at a rate equivalent to the difference in their inflation rates
Explain cyclical vs counter-cyclical businesses
Businesses or industries that perform much better than average during expansions and much worse than average during recessions are called cyclical; businesses or industry that that perform better during recessionary phases and worse during expansionary phases are called counter-cyclical or defensive (Replacement auto part industry = counter-cyclical)
The labor market for masons is competitive and stable. What is the likely short-term result of an attempt to increase masons’ wages?
Decreased employment levels
Comparative Advantage
Exists when the OC of producing that good is less than the cost of producing other goods in the same country, compared to another country.
- Whoever has lower OC should produce (when trying to find OC it goes on the bottom of the fraction)
What is the primary reason for nations to devalue their currencies?
Improve the balance of trade- currency devaluation:
- Makes exports cheaper in foreign markets, increasing exports.
- Increase domestic inflation (money is worth less than it was before devaluation)
- Reduce foreign investment, as prices for foreign goods and investments become higher priced (in terms of local currency).
Assumptions of Classical Economic Theory
- Full employment is an attribute of equilibrium
- Flexible wages allow self-correction of shortages and surpluses in labor markets
- Increase in money leads to an increase in aggregate demand
What group would an import tariff on cars benefit most?
Import tariffs result in higher costs for the consumer of the imported product and, hence, lower quantity demanded
What is the effect on prices of U.S. imports and exports when the dollar depreciates?
Import prices will increase and export prices will decrease (imports increase bc foreign sellers want more of the devalued currency; exports decrease bc nation’s goods are cheaper to foreign purchasers)
Diminishing Returns
There is a point at which equal additional units of input add less to the output than previous units of input (decreasing efficiency)
Lower inflation leads currencies to
Appreciate
Increases in interest rates cause…
a country’s currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates
If country A increases tariffs on agricultural products from country B
Prices of agricultural products in country B will rise
A company that maintains a variety of lines of credit from different providers reduces its
Liquidity risk (Reduce the chances of having to sell illiquid long term assets to generate cash in the short term)
How can a company manage the risk of raising interest rates in the future
- Replace LT bonds with ST bonds like high yields or floating rate bonds
- Sell LT bonds, promote LT CD’s
- Derivative swaps (interest rate futures, but fees will increase with rates)
- Reduce mismatch between average maturities of its A and L (bc of mismatch interest exp will increase faster than interest income)
When economy-wide interest rates climb substantially…
- In the short term, banks with many variable-rate loans perform better than banks with many fixed-rate loans
- Long-term loans will reprice to higher interest rates more slowly than short-term loans
National income is:
Net domestic product plus (+) a country’s net income earned abroad less (-) indirect business taxes
(GDP - depreciation + wages, interest, rent, profits, NI earned abroad - indirect business taxes)
Mitigate currency risk
- Finance operations with loans obtained in the local currency
- Match local revenues with local costs
- Derivatives
Balance of payments - current and capital accounts
Current= goods and services (exports+, imports -), unilateral transfers, interest and dividends (from investment outside the country) Capital= domestic investments by foreigners and foreign investments by residents
Pure Competition Market Structure
Large number sellers/buyers acting independently
Homogeneous/standardized products
Free entry/exit
Perfect information (no single trader can impact market)
No nonprice competition
Net Domestic Product
GDP - depreciation
When currency appreciates…
It can buy more units of another currency (and demand for currency goes up)
Income Approach measuring GDP
GDP= Sum of wages, interest, rent, profits, depreciation, indirect business taxes, and net factor income (the sum of all income earned by households and firms in one year)
Real GDP calculation
Nominal GDP / GDP deflator
x 100
To maintain a fixed exchange rate, a country may have to do all of the following…
- Change its interest rates to match changes in the target country
- Increase interest rates if it has a higher inflation than currency it targets
- Increase interest rates if it has a trade deficit with the country whose currency it targets
Calculate marginal revenue per unit
change in total selling price
/ change in quantity of units produced
* The change in revenue per unit when an add’t unit of input is added
