Economics Flashcards
Supply
Supply for an item is defined as a schedule showing the amount of that item that sellers can and will supply at various price levels during a given period of time
Demand
Demand for an item is the schedule of the amount of that item that buyers can and will purchase at various price levels during given period of time.
The intersection of the supply and demand curves is…
the equilibrium or market-clearing price
Demand Elasticity
Ed = (%∆ in Qd/%∆ in P)
If Ed>1, demand is…
Elastic
If Ed<1, the demand is…
Inelastic
Ed = 1 is…
called unit elasticity
Demand for an item tends to be _______ at higer prices and _______ at lower prices
elastic; inelastic
If Ed > 1, a price decrease will ______ total revenue
increase
If Ed < 1, a price decrease will ______ total revenue
decrease
The main factor affecting supply elasticity is…
time
The % increase in sales needed to maintain the same revenue while decreaseing the price is…
Price Decrease %/(1-(Price Decrease %))
The % increase in sales required to increase revenue and decrease prices
[(1+Sales Increase) - (1-Price Decrease)]/[1-Price Decrease]
Normal Profit
The cost of obtaining and retaining entreprenurial ability
Economic Profit
Sales - Raw Materials - Operating Expenses - Normal Profit
Firms earning losses will __________________ in an attempt to earn economic profits where they are available
reallocate their resources
As the ______ system allocates resources toward _________ industries and away from __________ industries, the economy as a whole reaches general ___________.
price; expanding; declining; equillibrium
Short Run
Period over which fixed costs cannot be changed although they can be used in different ways. In the short run, resources that can be changed are called variable costs.
Law of Diminishing Returns
The more variable resources are combined with fixed resources, there will be a point beyond which the marginal output obtained by adding additional variable resources will decline.
Average Total Cost (ATC)
ATC = AFC + AVC
Average Fixed Class (AFC)
Total fixed costs / output
Marginal Cost (MC)
∆Cost / ∆Output
If MC < AVC, AVC will ______________ and once MC > AVC, _____________.
continue to fall; will begin to rise
The MC and AVC intersect at…
the minimum point of the AVC curve.
In the long run, all costs are ____________.
variable
After an intial decline in ATC due to ____________________, the curve reaches a minimum point and then begins to rise as _________________ begin to have an effect.
economies of scale; diseconomies of scale
The smallest level of output at which a firm can achieve minimum ATC is called _____________________.
Minimum Efficient Scale (MES)
When diseconomies of scale are encountered quickly, MES will occur ar _______ levels or output. When economies of scale are extensive, MES will occur at ________ levels of output.
lower; higher
Economies of Scope
Synergies created from vertical integration
GNP
Measures the total value of all goods and sercives produced by a national economy. Includes goods and services produces by domesically based firms opperating abroad.
GDP
The output of goods and services produced domestically without regard to the origin of the producer
__________ occures when the demand for goods and services in the marketplace increases at a faster rate than the supply of these items.
Inflation
Real Interest Rate
Interest Rate - Inflation Rate
Inflationary periods are typically characterized by _________ interest rates as investors demand _________ nominal rates to earn a desired real rate of return.
rising; higher
2 risks to bond-holders from changing inflation rates
1) market prices of holdings fall
2) purchasing power of interest payments decrease
Deflation
A persistent and appreciable decline in the general level of prices.
Disinflation
A reduction in the rate of inflation
Stagflation
A prolonged period of a high inflation and a high rate of unemployment
Business Cycle Phases
Expansion (Recovery), Peak, Contraction (Decline), Trough
Recession
When Real GDP declines for two successive quarters (six months).
Depreciation
When Real GDP declines for 2 years or more
3 Types of Busienss Cycle Indicators
Leading, Coincident, and Lagging
Examples of Leading Economic Indicators
Average workweek, Initial jobless claims, New orders, Vendor performance, Contracts and ordersfor plant and equipment, New building permits, S&P 500, M2, Change in business and consumer borrowing, Interest rate spreads, Index of consumer expectations
Examples of Coincident Indicators
Non-Ag Payrolls, Personal Income, Industrial Production, Manufacturing and Trade Sales
Lagging Economic Indicators
Avg. duration or unemployment; Relationship of inventory to sales, manufacturing, and trade; Labor cost per unit for manufacturing goods, Avg. prime rate charged by banks, Commercial and industrial loans outstanding, Consumer installement to personal income, CPI for services
Changes in the business cycle least affect ________ equities the least
deffensive
Examples of defensive industries
Utilities, nondurable household goods, tobacco, and food.
Examples of cylical industries
Manufacturing, homebuilders, auto manufacturers, and transportation companies.
Popular theories to contorl econmic cyclicality
Keynesian, Supply-Side, and Monetary
Keynesian Economic Theory
States that government intervention in the economy is neccessary for sustained economic growth and stability. Govt. should use fiscal policy to combat the effecs of inflation and deflation, as well as influence economic activity
Fiscal Policy
Government’s use of taxation and expenditure programs to maintain a stable, growing economy. Its main focus is on economic growth and high employment.
Becasue fiscal policy is established by _________, decisions in some cases may be based on __________ rather than __________ motives.
congress; political; economic
Supply-Side Economics
Places emphasis on reducing taxes and the size of government to give individuals and corporations more money to invest and thus, stimulating economic activity.
Monetary Poilicy
Attempts to control the supply of money and credit in the economy inorder to affect interest rates and thus cause an increase or decrease in economic activity.
The ________________ attempts to control the ___________ and _______ to maintain a stable growing economy with the aim of combating __________.
Federal Reserve Board; money supply; credit; inflation
M!
Currency + Demand Depositits+ Other Checkable Deposits
M2
M1 + Money Market Deposit Accounts + Savings and Small Time Deposits + Balences of Money Funds + Overnight Repurchase Agreements at Banks
M3
M2 + Large Time Deposits + Term Repurchase Agreements at Banksn and Savings and Loans + Eurodollars
Tools of the Fed
Reserve Requirements, Discount Rate, Open Market Operations, Margin Requirements, Moral Suasion
Reserve Requirments
The portion of deposits that member banks are required to keep with the FRB. Changes can be drastic making RR the least used tools in monetary policy
Multiplier Effect
The rate at which banks can create new money by relending deposits and in turn creating new deposits
Velocity of Money
Measures the number of times a dollar is spent over a given period.
Discount Rate
The rate the Fed charges member banks in the case of emergency. Although it is the basis of other key interest rates, the discount rate is the only rate directly controlled by the Fed.
Federal Funds Rate
The interest charged for overnight loans between banks. Considered the most volitale interest rates.
Open Market Operation
involves the purchase of US TBills through primary government dealers, banks and brokers appointed by the Fed. The most effective, flexible, reversable and frequently used tool of the Fed. Designed to keep the Ferdeal Funds Rate within its target range.
Repurchase Agreement
Contract between the Fed and and primary dealer to purchase US TBills from the dealer at a fixed price with a provision to resale back to the dealer at a negotiated rate
Matched Sale
Reverse Repurchase Agreement
Margin Requirements
The Fed can determine the amount of credit that brokerages and banks can extend to purchase securities. It is the least effetive tool as it only affects securities market transactions
Intermediation
The ability of financial intermediaries (such as banks) to attract deposits and, in turn, extend credit
Disintermediation
The process by which investors withdraw funds from banks and seek higher-yielding investments elsewhere
If interest rates in the US are _________ than rates overseas, foreign investors will look to invest more in the US
higher
_________ US interest rates compared to foreign yields may lead to a stronger dollar
higher
If the US dollar strengthens, exports from the US will ________, leading to a trade _______.
decrease; deficit
When American goods are sold abroad, US banks that facilitate the exchange must ________ foreign currency creating a(n) ________ in the US money supply.
deposit; increase
Current Account
Shows the results for trade transactions completed in the current year
Capital Account
Deals with long-term trade transactions, usually involving property or financial assets.
A current account deficit would have to be _______ with a ________ account ________. The net of the two accounts must be ______.
balanced; capital; surplus; zero
Interbank System
Open market trading system consisting of the world’s major commercial and central banks trading that sets currency conversion rates by trading with each other through currency brokers.
