Economics Flashcards
1
Q
How does price affect supply?
A
^ price ^supply
2
Q
What causes a supply curve shift?
A
other than price change
3
Q
Positive supply curve shift (right) causes
A
- Supply increases at each price point
- Higher Equilibrium GDP
- Number of sellers increases
- Examples: Government subsidies or technology improvements that decrease costs for suppliers
4
Q
Cause of a negative supply curve shift (shift left)?
A
- Supply decreases at each price point
- Lower Equilibrium GDP
- Alternative product price increase
- Cost of producing item increases
5
Q
How does price affect the demand for an item?
A
When the prices of an item increases- demand for it decreases.
6
Q
Price elasticity changes to revenue
A
PRICE INCREASE
Elastic demand: total rev decrease
Inelastic: tot revenue increase
7
Q
Cross-elasticity
A
change in demand for one good when the price of a related / competing good changes
8
Q
What is a Positive Demand Curve Shift (Shift Right)?
A
- When demand increases at each price point
- Price of substitutes go up
- Future price increase is expected
- Market expands
Expansion - more spending increases equilibrium GDP
9
Q
What is a Negative Demand Curve Shift (Shift Left)
A
- Demand Decreases at each price point
- Price of complement goes up
- Boycott
- Consumer income changes
- Consumer tastes change
Contraction - less spending decreases equilibrium GDP
10
Q
What is the Marginal Propensity to Consume?
A
How much you spend when your personal income increases
=Change in Spending / Change in Income
11
Q
Non-income factors affecting consumption
A
- Expectations about future prices
- Quantity of liquid assets
- Amount of consumer debt
- Stock of consumer durable goods
- Attitudes about savings
- Interest rates
12
Q
What is the Marginal Propensity to Save?
A
How much you save when personal income increases
=Change in Savings / Change in Income MPC + MPS = 1
13
Q
What is a Demand Curve Shift?
A
When demand changes due to something other than price.
14
Q
How is Price Elasticity of Demand calculated?
A
(% Chng in Qty Demand) / (% Chng in Price)
ARC METHOD:
(Chng demand/avg quantity) x (Chng price/avg price)
15
Q
Under elastic demand- how does price affect revenues?
A
Prx increases - Rev decreases
Prx decreases- Rev increases
16
Q
What conditions would indicate Elastic Demand?
A
Many substitutes (luxury items)
10% drop in demand / 8% increase in price = 1.25 (Elastic)
Prx increases - Rev decreases
Prx decreases- Rev increases
17
Q
How does revenue react to price under Inelastic Demand?
A
Prx increases- Rev increases
Prx decreases- Rev decreases
18
Q
What conditions would indicate Inelastic Demand?
A
- Few substitutes
- 5% drop in demand / 10% increase in price = .5 (inelastic)
- Prx increases- Rev increases
- Prx decreases- Rev decreases
19
Q
What is Unitary Demand?
A
Total revenue will remain the same if price is increased
Coefficient of elasticity = 1
20
Q
How does increased spending by consumers and the government affect the demand curve?
A
As spending by consumers or the government increases- the demand curve increases (shifts right).
21
Q
What conditions occur under periods of inflation?
A
- Interest rates increase
- Reduced demand for loans
- Reduced demand for durable goods
- Value of bonds and fix inc securities decrease
- Inferior good demand to increase
- Foreign goods more affordable
- Demand for domestic goods decrease
22
Q
What happens under Demand-Pull inflation?
A
- Overall spending increases
- Demand increases (shifts right)
- Market equilibrium price increases
Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
23
Q
What happens under Cost-Push inflation?
A
- Overall production costs increase
- Supply decreases (shifts left)
- Market equilibrium price increases
Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase
24
Q
Equilibrium Price?
A
Quantity Supplied = Quantity Demanded
25
Optimal Production?
Marginal Revenue = Marginal Cost
26
How is Income Elasticity of Demand calculated?
(% Change Qty D) / (% Change in Income)
Normal goods \> 1 (demand increases more than inc)
Inferior goods \< 1 (demand increases less than inc)
27
What is included under the income approach for calculating GDP?
* Compensation
* Proprietor Income
* Company Profits
* Net Interest
* Rental Income of Persons
= NATIONAL INCOME (NI)
* Indirect Taxes
* Other, statutory discrepency
= NET NATIONAL PRODUCT
* consumption of fixed capital
= GROSS NATIONAL PRODUCT (GNP)
* +/-Foreign Income Adjustments
= GROSS DOMESTIC PRODUCT (GDP)
28
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers-biz-gvnt-foreign comp with domestic interests
## Footnote
Included: Foreign company has US Factory
Not included: US company has foreign factory
29
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
30
What is included under the Expenditure Approach for calculating GDP?
* Personal Consumption
* Gross Private Fixed Investment: biz/resid
* Government Purchases
* ***Net** Exports*
* Inventory changes
31
What is Nominal GDP?
Measures goods/services in current prices.
32
***Net*** Domestic Product
GDP - Depreciation
33
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
Measures prices for net export, investment, government expenditures, consumer spending.
Most comprehensive measure of price level
34
What is Real GDP?
Nominal GDP / (GDP Deflator x 100)
35
Accelerator Theory
_Economic Activity_ spurs _Capital Investment_ which creates additional _Demand_ and further _Economic Activity_
36
What is Gross National Product (GNP)?
The price of all goods and services produced by labor and property supplied by nation's residents
US Firms overseas are included- Foreign firms domestically are not included
37
Most volatile portion of GDP
investment
38
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark.
Year 1 = 1.0 ((CPI Current - CPI Last) ÷ CPI Last) \* 100
39
Price Index Calculation
_Market basket Curr Year & curr yr Price_
Market basket Curr Year & prior yr Price
40
How is disposable income calculated?
Personal Income - Personal Taxes
41
How are Returns to Scale calculated?
(% Increase in output) / (% Increase in input)
Greater than 1 = Increasing returns to scale
Less than 1 = Decreasing returns to scale
42
When is the economy in Recession?
When ***GDP*** growth is negative for two consecutive quarters.
43
What is a Depression?
A prolonged- severe recession with high unemployment rates
No requisite period of time for the economy to officially be in a depression
44
What are the stages of the Economic Cycle?
* Peak (highest)
* Recession (decreasing)
* Trough (lowest)
* Recover (increasing)
* Expansion (higher again)
45
Leading Indicators
* Average Weekly hours
* Avg Weekly intitial claims for unemployment
* Mft new orders, consumer goods/materials
* Vendor perfomance (deliveries)
* Building permits
* Stock prices
* M2
* Interest rate spread, 10y Treasury - fed funds
* Index of consumer expectations
46
Coincident Indicators
* Non-Ag employees on payroll
* Personal income less transfer pmts
* Industrial production
* Mft and trade sales
47
Lagging Indicators
* Average duration of unemployment
* Inventory to sales ratio
* Labor cost/unit
* Average prime rate
* Loans
* Consumer debt/income
* CPI for services
48
Which people are included in the calculation of unemployment?
Only people looking for jobs
49
Phillips Curve
Unemployment v Inflation
50
What is Cyclical Unemployment?
GDP doesn’t grow fast enough to employ all people who are looking for work
51
What is Frictional Unemployment?
People are changing jobs or entering the work force.
This is a normal aspect of full employment.
52
What is Structural Unemployment?
job skills do not match job so they need education or training
53
How does inflation relate to unemployment?
High Unemployment = Low Inflation (Vice Versa)
* CPI fixed basket of urban consumer
* PPI prx at wholesale finished goods/materials
* GDP deflator, most comprehensive. Includes net exports, investment, govnt exp, consumer spend
54
What is the Discount Rate?
The rate a member bank pays to borrow from the Fed.
55
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
56
What is the Real Interest Rate?
Inflation-adjusted interest rate
Inflation Premium
57
What is the Nominal Rate?
Rate that uses current prices
58
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback.
Usually results in a lower rate. US Treasuries are an example.
59
How can the Fed control the money supply?
By buying and selling the government's securities.
60
What is included in the M1 money supply?
1. Currency
2. Coins
3. Demand Deposits
61
What is included in the M2 money supply?
* M1 (Currency, coin, deposits)
* Savings accounts
* Small-time deposits (\< $100,000)
* Highly liquid assets
Fed Focus
62
What is Deficit Spending?
* Increased spending levels without increased tax revenue.
* Lower taxes without decrease in spending
* Gamble that the multiplier effect will take over and boost economy
63
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
64
What is a Tariff?
A tax on imported goods
65
What is an import quota?
A limit on the number of goods that can be imported
66
How do international trade restrictions affect _domestic producers_?
* They are good for domestic producers.
* Demand curve shifts right
* Fewer substitutes
* They can charge higher prices
67
How do international trade restrictions affect _foreign producers_?
* They are bad for foreign producers
* Demand curve shifts left
* Fewer buyers
* They must charge lower prices
68
How do international trade restrictions affect _foreign consumers_?
* They are good for foreign consumers
* Supply curve shifts right
* Goods purchased at lower prices in the foreign markets
69
How do international trade restrictions affect _domestic consumers_?
* They are bad for domestic consumers
* Supply curve shifts left
* Fewer goods bought due to higher prices
70
What is Accounting Cost?
Explicit (Actual) cost of operating a business
* Implicit costs are opportunity costs
71
What is Accounting Profit?
Revenue - Accounting Cost
72
What is Economic Cost?
Explicit (Actual)
+ Implicit (Opportunity) Cost
73
What is Economic Profit?
Revenue - Economic Cost
74
Marginal Revenue
additional revenue from one additional unit
75
Marginal Product
Additional output obtained with one additional unit of resource
76
Marginal Revenue Product
Change in total revenue from one additional unit of resource
77
Marginal Revenue per-unit
(Marginal Rev Product) / (Marginal Product)
78
Substitution Effect
as price falls, consumers use product to replace others
79
Income effect
As price of product falls, users can purchase more of it
80
Law of Diminishing Marginal Utility
Additional utility of consuming each additional unit decreases
81
Inefficiences
Government intervention
Externalities (polution)
82
Two kinds of Investment
1. Autonomous: expected profitability, independent of national income
2. Induced: incremental due to increased demand
83
Classical Economic Theory
No Gov
No fiscal policy
Market Equilibrium = Full employment
84
Keynesian Theory
Fiscal policy stimulates
Reduce taxes, Use Govt spending
85
Supply-side Theory
Decrease taxes to stimulate
Only works if taxes are too high
Laffer curve demonstrates consumer reactions
86
Neo-Keynesian
Keynsesian + Monetarist
Use fiscal and monetary
Balance stimulation w/ inflation
87
Monetarist
Fiscal too crude
Use monetary policy
88
Export Subsidies
Counterveiling Duties
Encourage Export
Discourage import of subsidized products
89
Balance of Payments:
Current Account
Capital Account
Reserve Account
Summary Flow of Nation's Trx with other Nations
Current: flow of goods and services
Capital: flow of investments
Reserve: changes in nation's reserves
