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BEC > Economics > Flashcards

Economics Flashcards

1
Q

How does price affect supply?

A

^ price ^supply

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2
Q

What causes a supply curve shift?

A

other than price change

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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
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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
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5
Q

How does price affect the demand for an item?

A

When the prices of an item increases- demand for it decreases.

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6
Q

Price elasticity changes to revenue

A

PRICE INCREASE

Elastic demand: total rev decrease

Inelastic: tot revenue increase

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7
Q

Cross-elasticity

A

change in demand for one good when the price of a related / competing good changes

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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

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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

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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

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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
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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

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13
Q

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

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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)

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15
Q

Under elastic demand- how does price affect revenues?

A

Prx increases - Rev decreases

Prx decreases- Rev increases

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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

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17
Q

How does revenue react to price under Inelastic Demand?

A

Prx increases- Rev increases

Prx decreases- Rev decreases

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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
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19
Q

What is Unitary Demand?

A

Total revenue will remain the same if price is increased

Coefficient of elasticity = 1

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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).

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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
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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

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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

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24
Q

Equilibrium Price?

A

Quantity Supplied = Quantity Demanded

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25
Q

Optimal Production?

A

Marginal Revenue = Marginal Cost

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26
Q

How is Income Elasticity of Demand calculated?

A

(% Change Qty D) / (% Change in Income)

Normal goods > 1 (demand increases more than inc)

Inferior goods < 1 (demand increases less than inc)

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27
Q

What is included under the income approach for calculating GDP?

A
  • 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)

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28
Q

What is GDP (Gross Domestic Product)?

A

The annual value of all goods and services produced domestically at current prices by consumers-biz-gvnt-foreign comp with domestic interests

Included: Foreign company has US Factory

Not included: US company has foreign factory

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29
Q

What is the result of a Price Floor?

A

Causes a surplus if above equilibrium price.

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30
Q

What is included under the Expenditure Approach for calculating GDP?

A
  • Personal Consumption
  • Gross Private Fixed Investment: biz/resid
  • Government Purchases
  • Net Exports
  • Inventory changes
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31
Q

What is Nominal GDP?

A

Measures goods/services in current prices.

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32
Q

Net Domestic Product

A

GDP - Depreciation

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33
Q

For what is a GDP Deflator used?

A

Used to convert GDP to Real GDP

Measures prices for net export, investment, government expenditures, consumer spending.

Most comprehensive measure of price level

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34
Q

What is Real GDP?

A

Nominal GDP / (GDP Deflator x 100)

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35
Q

Accelerator Theory

A

Economic Activity spurs Capital Investment which creates additional Demand and further Economic Activity

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36
Q

What is Gross National Product (GNP)?

A

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
Q

Most volatile portion of GDP

A

investment

38
Q

What is the Consumer Price Index (CPI)? How is it applied?

A

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
Q

Price Index Calculation

A

Market basket Curr Year & curr yr Price

Market basket Curr Year & prior yr Price

40
Q

How is disposable income calculated?

A

Personal Income - Personal Taxes

41
Q

How are Returns to Scale calculated?

A

(% Increase in output) / (% Increase in input)

Greater than 1 = Increasing returns to scale

Less than 1 = Decreasing returns to scale

42
Q

When is the economy in Recession?

A

When GDP growth is negative for two consecutive quarters.

43
Q

What is a Depression?

A

A prolonged- severe recession with high unemployment rates

No requisite period of time for the economy to officially be in a depression

44
Q

What are the stages of the Economic Cycle?

A
  • Peak (highest)
  • Recession (decreasing)
  • Trough (lowest)
  • Recover (increasing)
  • Expansion (higher again)
45
Q

Leading Indicators

A
  • 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
Q

Coincident Indicators

A
  • Non-Ag employees on payroll
  • Personal income less transfer pmts
  • Industrial production
  • Mft and trade sales
47
Q

Lagging Indicators

A
  • Average duration of unemployment
  • Inventory to sales ratio
  • Labor cost/unit
  • Average prime rate
  • Loans
  • Consumer debt/income
  • CPI for services
48
Q

Which people are included in the calculation of unemployment?

A

Only people looking for jobs

49
Q

Phillips Curve

A

Unemployment v Inflation

50
Q

What is Cyclical Unemployment?

A

GDP doesn’t grow fast enough to employ all people who are looking for work

51
Q

What is Frictional Unemployment?

A

People are changing jobs or entering the work force.

This is a normal aspect of full employment.

52
Q

What is Structural Unemployment?

A

job skills do not match job so they need education or training

53
Q

How does inflation relate to unemployment?

A

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
Q

What is the Discount Rate?

A

The rate a member bank pays to borrow from the Fed.

55
Q

What is the Prime Rate?

A

The rate a bank charges their best customers on short-term borrowings.

56
Q

What is the Real Interest Rate?

A

Inflation-adjusted interest rate

Inflation Premium

57
Q

What is the Nominal Rate?

A

Rate that uses current prices

58
Q

What is the Risk-Free Rate?

A

Rate for a loan with 100% certainty of payback.

Usually results in a lower rate. US Treasuries are an example.

59
Q

How can the Fed control the money supply?

A

By buying and selling the government’s securities.

60
Q

What is included in the M1 money supply?

A
  1. Currency
  2. Coins
  3. Demand Deposits
61
Q

What is included in the M2 money supply?

A
  • M1 (Currency, coin, deposits)
  • Savings accounts
  • Small-time deposits (< $100,000)
  • Highly liquid assets

Fed Focus

62
Q

What is Deficit Spending?

A
  • 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
Q

How does the Fed control economy-wide interest rates?

A

By adjusting the discount rate charged to banks

64
Q

What is a Tariff?

A

A tax on imported goods

65
Q

What is an import quota?

A

A limit on the number of goods that can be imported

66
Q

How do international trade restrictions affect domestic producers?

A
  • They are good for domestic producers.
  • Demand curve shifts right
  • Fewer substitutes
  • They can charge higher prices
67
Q

How do international trade restrictions affect foreign producers?

A
  • They are bad for foreign producers
  • Demand curve shifts left
  • Fewer buyers
  • They must charge lower prices
68
Q

How do international trade restrictions affect foreign consumers?

A
  • They are good for foreign consumers
  • Supply curve shifts right
  • Goods purchased at lower prices in the foreign markets
69
Q

How do international trade restrictions affect domestic consumers?

A
  • They are bad for domestic consumers
  • Supply curve shifts left
  • Fewer goods bought due to higher prices
70
Q

What is Accounting Cost?

A

Explicit (Actual) cost of operating a business

  • Implicit costs are opportunity costs
71
Q

What is Accounting Profit?

A

Revenue - Accounting Cost

72
Q

What is Economic Cost?

A

Explicit (Actual)

+ Implicit (Opportunity) Cost

73
Q

What is Economic Profit?

A

Revenue - Economic Cost

74
Q

Marginal Revenue

A

additional revenue from one additional unit

75
Q

Marginal Product

A

Additional output obtained with one additional unit of resource

76
Q

Marginal Revenue Product

A

Change in total revenue from one additional unit of resource

77
Q

Marginal Revenue per-unit

A

(Marginal Rev Product) / (Marginal Product)

78
Q

Substitution Effect

A

as price falls, consumers use product to replace others

79
Q

Income effect

A

As price of product falls, users can purchase more of it

80
Q

Law of Diminishing Marginal Utility

A

Additional utility of consuming each additional unit decreases

81
Q

Inefficiences

A

Government intervention

Externalities (polution)

82
Q

Two kinds of Investment

A
  1. Autonomous: expected profitability, independent of national income
  2. Induced: incremental due to increased demand
83
Q

Classical Economic Theory

A

No Gov

No fiscal policy

Market Equilibrium = Full employment

84
Q

Keynesian Theory

A

Fiscal policy stimulates

Reduce taxes, Use Govt spending

85
Q

Supply-side Theory

A

Decrease taxes to stimulate

Only works if taxes are too high

Laffer curve demonstrates consumer reactions

86
Q

Neo-Keynesian

A

Keynsesian + Monetarist

Use fiscal and monetary

Balance stimulation w/ inflation

87
Q

Monetarist

A

Fiscal too crude

Use monetary policy

88
Q

Export Subsidies

Counterveiling Duties

A

Encourage Export

Discourage import of subsidized products

89
Q

Balance of Payments:

Current Account

Capital Account

Reserve Account

A

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

BEC (9 decks)

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