Economic Concepts Demand & Supply Flashcards
What is price elasticity of demand? How to determine it?
Price elasticity of demand responsive to the quantity demanded to change in price.
If ED is greater than 1 then the demand is elastic, the change in quantity demanded
If ED s less than 1, then demand is inelastic, the change in quantity demanded is less
If ED is equal to 1, then the demand is elastic (Unitary), quantity demanded will not proportionally change.
When the increase in demand for product A increases and the demand for resources that are used to make Product A also increases what is that called?
The theory of derived demand is working
If a product increases and the product supply decreases then what will be the result of the market change?
Price would increase when the D curve shift to the (Right), while if the decrease in product supply this allows the supply curve to the (Left) meaning the quantity is (Uncertain)
What would economists identify “inferior” during a recent recession?
“Inferior” goods are based on the customer’s response to change in income.
When customers income drops and sales of production increases
Using the Just in Time inventory processes, and product elastic. How can MGMT use JIT to maximize profits?
Here you want to Pay attention to the
Price point Supply Demand
4 20 10
3 15 15
2 10 20
1 5 25
Here you want to pay attention where the supply and demand are equal so the price point $3 is the answer in this example
What are some ways to determine the price of a product?
- The quality of the product
- The life span of the product
- The customer preference for the quality compared to price
If product A has elasticity of 1.5 and Product B has an elasticity of 3.0. What effect will the price increase most likely have on the company?
Since the price of elastic is greater than 1 for product A & B then the revenue for both products decrease.
If price elastic is less than 1 then the revenue of both products will increase
The price of elasticity of demand for the two products A & B?
Formula:
Price elasticity of demand
Percentage change in quantity demanded / Percentage change in price
Product A Price increase 20% / Demand decrease 40%
40% / 20% = 2.00 Elastic since it’s greater than 1
Product B Price increase 30% / Demand decrease 20%
20% / 30% = 0.67 Inelastic since the rate is less than 1
If Product A has an elasticity of 1.5 and Product B has elasticity of 3.0, what effects would it have on the revenue of the company?
Both Product A & B have a elastic and total revenue is decrease if the price is going to increase
If Product A has an elasticity of 1.5 and Product B has elasticity of 3.0, what effects would it have on the revenue of the company?
Both Product A & B have a Inelastic, which cause the total revenue to decrease and price to increase
In the market whenever the demand increases and supply decreases, what is this a prediction of?
Price will be increased and the supply would be uncertain
What is Price discrimination? What are the characteristics?
Price discrimination is where firm or entity changes their prices to different customers groups for the same products or services.
Characteristics
different elasticities of demand
Firm set the price (Monopoly)
Separate market segments
Differentiated locations
What is the formula for inelastic demand? How to calc it?
Formula is
percent change in quantity demanded / percent change in price
3% decrease in the quantity demanded / 5 percent price increase results = 0.677 which is inelastic
What is Inflation distort reported income?
Inflation distorts reported income by expenses items based on historical cost. Wages and sales wouldn’t be considered to distort reported income because revenue and expenses are current market conditions vs historical costs. Depreciation would be considered because the cost would be purchased in prior years
What happens to revenue when the demand for a product is inelastic?
The revenue will fail because the product is inelastic so the ED is less than 1 which revenue is dropped
How to calc the nominal value of?
Percentage change in nominal value = New Value - Initial value / Initial value * 100
Percentage Change in real value = Percentage change in nominal value - inflation rate
Part 1
Percentage change in nominal value = New Value - Initial value / Initial value * 100
200 - 195 = 5
5 / 195 = 0.02564102564
0.02564102564 x 100 = 2.564102564
Part 2
Percentage Change in real value = Percentage change in nominal value - inflation rate
2.564102564 - 4.00% = -1.44
Part 3
Beginning Material 195 x -1.44 = 2.80 per ton decrease
What happens when technological advances in the production of a product to the supply curve?
It causes the supply curve to shift outwards which causes a decrease in prices and higher quantities of the produced product
How is GDP defined?
By the monetary value of all final goods and services produced within one year. It includes consumption by households, investments by business, government purchases, and net exports.
What are the stages of business cycle?
Expansion
Peak
Contraction
Trough
What happens during a Expansion stage of business?
The economy is in bull market
Inflation could be coming and it’s target rate because the growth can be overheating
Unemployment decreasing meaning people are able to find jobs
What happens during a Peak stage of business?
Peak is where the economy is highest limit and it’s needs to cool off
Price of Goods & Services has increased and there is growth in the economy
Unemployment is at natural rate
What happens during a Contraction stage of business?
During the contraction stage the economy is weak and the stock market is
How can the Federal reserve reduce the inflationary pressure?
By using the contractionary monetary policies this will
- sell the securities of treasury,
- raising the discount rate
- increase the reserve requirement
What is Contractionary fiscal policy?
- Increase Taxes
- Reduce spending on roads, bridges, and people who are unemployment
Goals for Contractionary fiscal policy is to prevent the economy from overheating and growing rapidly to keep a balance
What is Expansionary fiscal policy?
To increase purchasing of securities this allows the banks to have more money to lend people
Lowering the discount rate, this will allow the increase in the money supply and more more credit available for businesses
Decrease the reserve requirements fed reduces the allows banks to have more funds available to lend consumers and businesses
During an unexpected economic recession, which policy is best to use and why?
The monetary policy because it acts more quicker than the fiscal policy. During the monetary policy the reducing the interest rates will come into effect immediately to stabilize things. Also, for fiscal policies to reduce taxes that would need to be approved first from congress and that can take some time to take into effect
What causes a federal deficit?
When the tax revenue is exceeded by government spending
EX - Biden sending Billions of dollars to to send to Ukraine and tax revenue is exceeds which in result will cause an increase in taxes
What strategy would the fed purse under the expansionary policy?
Purchase more securities, lowering the discount rate, and decrease reserve requirements for member banks that lend money to consumers and businesses
During periods of deflation what actions are made to handle deflation?
Increase in the money supply
Periods of deflation are where the money supply is because during deflation prices drop and consumers and businesses focus on the cheapest price they can get. So that’s when the money supply goes up the purchase of securities are up and the discount rate is down which allows banks to have access to more cash
When the gov is concerned about the economy boom or rise of inflation, what policy would be most apprirate?
When the gov is concerned about an economic boom or inflation they will go to the contractionary fiscal policy
policy the gov can increase taxes by getting it approved by the congress.
Also the gov and decrease gov spending.
How can the federal reserve fight inflation?
By using the Contractionary policy
- Sell short -term U.S Treasury
- increase the discount rate
- lowering reserve requirements
By implement the the money supply would decrease
How to calc the before tax cash inflow expressed in nominal dollars?
Real dollars 200,000 within 2 years
inflation rate 6% for the period
So you multiply 200,000 x 1.06 x 1.06 = 224,720
What’s the purpose of CPI?
To determine and compare the relative price changes over time
What does inflation do to the value of currency and assets?
The value of current decreases while the assets increase and dominate
Ex - 2023 the dollar is value is low and assets value are extremly high
What happens to revenue when ED is greater than 1?
Demand is elastic and total revenue decreases and prices increase
What are some of the business risks?
Interest risk - market rates exceeds fixed long term rates
Liquidity rate risk - funds won’t be able to cover shirt term obligations
Market risk - sales or asset value decline
Credit risk - customers or borrows fail to pay (Ex - line of credit we used for BP Gas)
What are the Currency or foreign exchange risk?
Transactions risk - when the buys products from a foreign company prices of products is denominated in selling company currency or has received in a foreign currency.
Translation risk - when a parent company faces loses by owning a foreign subsidiary and the financial statements are denominated in that country currency are translated into parent company’s currency. Economic Risk - when a company’s market value changes rapidily and the currency changes as well in a rapid matter
What is forward contract? And when should you use it?
Guarantees locks in and the exchange rate for the future date. It provides exporters with protection against a negative fluctuation in exchange rate
When a US parent company is reviewing their cash flow from it’s international subsidiaries. What would be the primary consideration in the company cash flow analysis?
Repatriation restriction would be reviewed because is what brings in the money into the US. US companies want to ensure their funds are in the US since they’re not there physically
Types of exchange rate system
Free fluctuation floating - exchange rates that move freely which is set by the supply and demand of the currency
Fixed - A country’s central banks buys and sells foreign currencies as they are needed to maintain it’s exchange rates “fixed”
Managed - mixture of floating and fixed exchange rate systems
What causes a currency of stable countries to appreciate?
What causes currency of stable countries to appreciate are the following:
- lower inflation
- higher real interest
- trade surplus
Which economic market structure is characterized by low barriers to entry and numerous competitors selling differentiated products?
Monopolistic competition because it has low barriers to entry and
What happens to foreign country currency when it depreciates against the US Dollar?
The foreign currency become less expensive for individuals and business who make purchase in the US dollar
When should a US based company hedge its transaction because its in the short position?
When a company is at a short position that means they need to purchase foreign currency in order to pay off a liability. And the company they purchase foreign currency has a received the currency has a long position
Short position remember that’s the party that doesn’t have it yet (they’re short at the moment)
What is globalization?
going on for many decades
Here are the aspects of
- reduced home bias
- people having more internationally diversified portfolios
- more firms are operating internally to funds on taxes and labor
Ex - Nike making shoes at China
How to calc the value change of a company investment in the U.S Dollar?
Percentage change in value = (Current value - Initial value) / initial value
1.00 / 2.57 FC = 0.38911 (Current value)
1.00 / 3.15 FC = 0.31746 (Initial value)
Current value 0.38911 - Initial value 0.31746 / Initial value 0.31746
-0.0716 / 0.31746 = -0.1840096631 decrease since a negative number
What happens to imports and exports when the US dollars
Imports will be increased because when US dollar goes down additional funds are needed to pay for imports.
Ex - Toyota would get more expensive than a Ford
Exports will be decreased as foreign purchasers would pay less for U.S exports because currency buys more U.S dollars exports prices fall
When the foreign currency becomes weak compared to the US dollar, what happens to prices of goods?
Prices of goods become cheaper for foreign in the US and increase in exports
What ED is greater than 1 and it’s elastic what happens to revenue?
Revenue will Decreases while prices will increase
What are the characteristics of monopolistic competition?
- Low barrier to entry easy to enter and exit the market
Which return cause price of products to be high
- Differentiated products
Ex - Would be iPhone & Starbucks
cause that’s the only products they sell and they’re looking to sell to those shoppers
What are the effects on housing sector and trade deficit?
Housing sector would increase because houses are more affortable relatively low prices and rising incomes
Trade deficit would decrease
What is keynesians view economic systems?
the cause of business cycle fluctuations are from inadequate demand
What is stagflation like?
- High inflation
- High rising prices of goods
- High unemployment
this causes an increase in production in labor and energy
Solutions to this is to focus on supply side of polices
An example of perfectly competitive financial market?
Is when no single trader can have an impact on the market price
What are ways the federal reserve increase the money supply?
Remember when the the federal reserve wants to get out of a recession or the economy is slow and high unemployment the federal reserve wants to increase the “Money Supply” and use the “Expansionary policies”
- The fed will do the following things
- purchase more securities
- decrease reserve requirement
- reduce the discount rate
What actions would the fed take to take on Inflation?
- Sell more treasury
- Increase the discount rate
What are the characteristics of predatory pricing?
- eliminate competition
- both intent and damage must be proving in court of law (However, it’s difficult to prove because it can be disguised as intense market compeition which is legal
-
During the peak stages of business cycle there are concerns of the economy overheating and inflation, how can the fed prevent inflation from occuring?
the fed will take on the following actions
- reduce gov spending reduce the demand of good and services paid by the gov
- increase taxes reduce the disposable income available to the taxpayers
- increase discount rate which cause an increase of interest for debitors which slows the economy down
- reduce the money supply because you want to get rid of the amount of money availble to spend which down the econ
In order to address inflation, what can the fed do to address it?
The main objective is to increase the money supply “Expansionary”
- Reduce the discount rate which will get more people and businesses to loan which will help the economy
When there is a increased unemployment, decreased business investment, rising inventory levels, lower interest rates and stock prices, what is this an example of?
Recession
Kinked demand curve is associated with which type of market structure?
Oligopoly
What is the primary cause of fluctions in a business activity resulting in alternative rise and fall of the economic growth?
level of total spending on economic levels
How can a country be able to impose countervailing duties legally under WTO rules?
the only way other country needs to disobey WTO panel that told to correct a problem
What are Monopolistic Competition characteristics?
Low barriers to entry
What’s the difference between US Treasury rates and corporate bond rates?
Default risk premium
What happens when federal deficit increases?
There is a decrease in tax revenue and increased entitlement payments
the only reason there would be an increase in federal deficit because feral deficit spending exceeds tax revenues
During expanision phase what would happen to the house sector and trade defict?
The housing sector would increase because because houses would be cheaper and lower interest rates to borrow money
Trade sector would also increase because of the increase in domestic income increase imports
Which school of economic believes that the cause of business cycle fluctuations is inadequate demand?
Keynesian
What business cycle typically characterized by decelerating GDP growth and accelerating inflation?
Late expansion
Where GDP is slowing down and accelerating inflation is slowing down as well
Historically the duration of most expansions and recessions?
several years and several months
What is the primary purpose of monitoring internal controls to verify internal control systems?
Risks
Quantitative help the fed with?
the fed buys various securities and increases the montary base (add liquity to the econ)
in order to address unemployment what does congree need to do?
reduce taxes, increase gov spending and run deficits
When do supplier are able to influence or control buyers?
when supplier don’t face threat of substitute products
How to calc before the tax cash inflows expressed in nominal dollars?
Real after tax cash is 200,000 x inflation predicted is 6% = 1.06 x 1.06 because the real dollar is expected to be that for 2 years.
So this is how we would calc the before the tax cash flows expressed for 2 years
200,000 x 1.06 x 1.06 = 224,720
What is the primary purpose of the consumer price index (CPI) ?
Compare relative price changes over time
What doesn’t happens during market equilibrium?
Effective price ceiling have lowered prices to protect the interests of consumers
there could be price controls if there was a disequilibrium so can only happen legally enforced or binding
What type of risk is most useful when risk is being prioritized?
expected value
What are the Primary concerns of macroeconomics?
unemployment, economic growth, and gov budget deficits
What would cause a primary consideration in the company cash flow analysis?
that would be the respatriation restrictions
Calc the change in investment in the US Dollar?
percentage change in value
= after the investment exchange rate exchange rate at the time of investment
(0.3174603175 0.3891050584)
-0.07164474091/ 0.3891050584
-0.1841269841
What affect would the demand curve or supply curve have when tech advances in production of a product have?
only the supply curve is applied for the tech advances in the production of a product
True regarding international trade and investment?
added lower value trade and dropping lower wages
Most useful when risk is being prioritized?
Expected value highlights possible risks and likelihood and amount of risks into a single value
