Economics Flashcards
How does a price increases affect supply?
When the prices of an item increases, supply increases because more sellers are willing to sell.
What is supply curve shift?
A supply curve shift happens when supply changes due to something other than price.
What are the characteristics of a positive supply curve shift (shift right)?
- Supply increases at each price point.
- Higher Equilibrium GDP
- Number of sellers increase: market can get flooded.
Examples: Government subsidies or technology improvements that decrease costs for suppliers
What are the characteristics of a negative supply curve shift (shift left)?
- Supply decreases at each price point.
- Lower Equilibrium GDP
- Cost of producing item increases
Examples:
- Shortage of gold - so less gold watches are made;
- Wars or crises in rice-producing countries means there is less rice on the market.
How does price affect the demand for an item?
When the price of an item increases, demand for it decreases (inverse relationship)
What is a Demand Curve Shift?
A demand curve shift happens when demand changes due to something other than price.
What is a Positive Demand Curve Shift (Shift Right )?
- When demand increases at each price point
- Price of substitutes go up - e.g. price of beef rises, so people buy more chicken
- Future price increase is expected - e.g. War in Middle East: long lines at gas pumps
- Market expands - e.g. people get new free health care plan- demand at clinic rises
- Expansion - more spending increases equilibrium GDP
What is a Negative Demand Curve Shift (Shift Left)?
- Demand decreases at each price point.
- Price of complement goes up - e.g. price of beef goes up - less demand for ketchup
- Boycott - e.g. Company commits social blunder - consumers boycott
- Consumer income rises - e.g. Demand for inferior goods drops as people have more money to spend
- Consumer tastes change
- Contraction - less spending decreases equilibrium GDP
What is the Marginal Propensity to Consume?
MPC is how much you spend when your income increases.
Calculate: Change in Spending / Change in Income
What is the Marginal Propensity to Save?
Marginal Propensity to Save is how much you save when income increases.
- Calculate: Change in Savings / Change in Income
- Also equals 1 - Marginal Propensity to Consume
How is the multiplier effect calculated?
(1 / 1-MPC) x Change in Spending
How does increased spending by consumers and the government affect the demand curve?
As spending by consumers or the government increases, the demand curve increases (shifts right).
How does spending change due to the multiplier effect?
The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.
One consumer spends money, which:
- Increases the income of a business - Increases the income of a vendor - Increases income of employees - Increases tax revenue
How is Price Elasticity of Demand calculated?
% Change in Quantity Demand / % Change in Price
Under elastic demand, how does price affect revenues?
Under elastic demand, when:
- Price increases, Revenue decreases - Price decreases, Revenue increases
What conditions would indicate Elastic Demand?
-Many substitutes (luxury items)
-Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)
- Price increases - Revenue decreases
- Price decreases - Revenue increases
How does revenue react to price under Inelastic Demand?
Under Inelastic Demand, when:
- Price increases, Revenue increases.
- Price decreases, Revenue decreases.
What conditions would indicate Inelastic Demand?
-Few substitutes (groceries - gasoline)
-Considered inelastic if coefficient of elasticity is less
than 1
5% drop in demand / 10% increase in price = .5 (inelastic)
- Price increases - Revenue increases - Price decreases - Revenue decreases
What is Unitary Demand?
Unitary demand means:
-Total revenue will remain the same if price is increased. -Considered unitary if the coefficient of elasticity = 1
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income
-Normal goods > 1 (demand increases more than
income)
-Inferior goods < 1 (demand increases less than
income)
What conditions occur under periods of inflation?
- Interest rates begin to increase
* Reduced demand for loans
* Reduced demand for houses, autos, etc. - Value of bonds and fixed income securities decrease
- Inferior good demand to increase
- Foreign goods more affordable than domestic
- Demand for domestic goods decrease
What happens under Demand-Pull inflation?
- Overall spending increases
- Demand increases (shifts right)
- Market equilibrium price increases
What happens under Cost-Push inflation?
-Overall production costs increase
-Supply decreases (shift left)
-Market equilibrium price increases
Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase.
What is the Equilibrium Price?
The price where Quantity Supplied = Quantity Demanded
What is Optimal Production?
When Marginal Revenue = Marginal Cost
What is the result of a Price Floor?
Price Floor causes a surplus if above equilibrium price.
What is the Consumer Price Index (CPI)? How is it applied?
CPI is the 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
How is disposable income calculated?
Personal Income - Personal Taxes
How is Return to Scale calculated?
% Increase in output / % Increase in input
* > 1 =: Increasing returns to scale * < 1 : Decreasing returns to scale
When is the economy in recession?
The economy is in recession when GDP growth is negative for two consecutive quarters.
What is a depression?
A depression is a prolonged, severe recession with high unemployment rates.
No requisite period of time for the economy to officially be in a depression.
What are the stages of the Economic Cycle?
The stages of the economic cycle are:
- Peak (highest)
- Recession (decreasing)
- Trough (lowest)
- Recover (increasing)
- Expansion (higher again)
What are leading indicators?
Leading indicators are conditions that occur before a recession or before a recovery.
Example:
- Stock Market
- New Housing Starts
What are lagging indicators?
Lagging indicators are conditions that occur after a recession or after recovery.
Examples:
- Prime Interest Rates - Unemployment
What are coincident indicators?
Coincident indicators are conditions that occur during a recession or during a recovery.
Example: Manufacturing output
What groups of people are included in the unemployment calculation?
Only people looking for jobs.
What is Cyclical Unemployment?
GDP doesn’t grow fast enough to employ all people who are looking for work.
Example: People are unemployed because there aren’t enough jobs available due to the economy.
What is Frictional Unemployment?
People are changing jobs or entering the workforce. This is a normal aspect of full employment.
Example: A recent college graduate is looking for a job
What is Structural Unemployment?
A worker’s job skills do not match those necessary to get a job so they need education or training.
Example: A construction worker wants to work in an office, so he quit his job and get computer training.
How does inflation relate to unemployment?
High Unemployment = Low Inflation (Vice Versa)
What is the Discount Rate?
Discount Rate is the rate a bank pays to borrow from the Fed.
What is the Prime Rate?
Prime Rate is the rate a bank charges their best customers on short-term borrowings.
What is the Real Interest Rate?
Inflation-adjusted interest rate
What is the Nominal Rate?
The Nominal Rate is the interest rate that uses current prices.
What is the Risk-Free Rate?
Risk-Free Rate is the interest rate for a loan with 100% certainty of payback. It usually results in a lower rate.
Example: US Treasuries
What is included in the M1 money supply?
The M1 money supply includes:
- Currency
- Coins
- Deposits
What is included in the M2 money supply?
The M2 money supply includes highly liquid assets other than currency, coins or deposits.
What is Deficit Spending?
Deficit spending is characterized by:
-Increased spending levels without increased tax revenue. -Lower taxes without decrease in spending -Gamble that the multiplier effect will take over and boost economy
How can the Fed control the money supply?
The Fed can control the money supply by buying and selling the government’s securities.
How does the Fed control economy-wide interest rates?
The Fed controls economy-wide interest rates by adjusting the discount rate charged to banks.
What is a Tariff?
A tariff is a tax on imported goods.
What is a quota?
A quota is a limit on the number of goods that can be imported.
How do international trade restrictions affect domestic producers?
International trade restrictions are good for domestic producers.
- Demand curve shifts right. - Fewer substitutes. - They can charge higher prices
How to international trade restrictions affect foreign producers?
International trade restrictions are bad for foreign producers.
- Demand curve shifts left. - Fewer buyers. - They must charge lower prices
How do international trade restrictions affect foreign consumers?
International trade restrictions are good for foreign consumers.
-Supply curve shifts right. -Goods purchased at lower prices in the foreign markets.
How do international trade restrictions affect domestic consumers?
International trade restrictions are bad for domestic consumers.
- Supply curve shifts left. - Fewer goods bought due to higher prices.
What are Accounting Costs?
- Explicit (Actual) cost of operating a business
2. Implicit costs are opportunity costs
What is Accounting Profit?
Revenue - Accounting Cost
What is Economic Cost?
Explicit + Implicit Cost
What is Economic Profit?
Revenue - Economic Cost
