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0-SFCPA-BEC > Economics (17-27%) > Flashcards

Economics (17-27%) Flashcards

1
Q

What are the 4 stages of an Economic/Business Cycle?

A

1 - expansion
2 - peak
3 - contraction
4 - trough

series of fluctuations in economic activity relative to long-term growth trend

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2
Q

What would be happening during 1st stage of Economic/Business Cycle - Expansion?

A
  • GDP will be rising

- unemployment will be decreasing

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3
Q

What would be happening during 2nd stage of Economic/Business Cycle - Peak?

A
  • inflation will be increasing
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4
Q

What would be happening during 3rd stage of Economic/Business Cycle - Contraction?

A
  • economy as a whole in decline (GDP falling, unemployment rising, etc.)
  • contraction until bottoms out
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5
Q

What would be happening during 4th stage of Economic/Business Cycle - Trough?

A
  • bottomed out point - clear recession is underway, negative GDP - after bottoms out, economy starts to grow again - known as recovery phase
  • Inflation will be decreasing (deflation)
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6
Q

What is a recession?

A

two consecutive quarters of negative economic growth

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7
Q

What is a depression?

A

severe recession - long period of negative economic growth

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8
Q

What is a Leading Indicator in relation to the Economic Cycle? and what are some examples?

A

leading indicators considered predictive - can SIGNAL either economic growth or economic decline

  • money supply
  • S&P500 index
  • change in prices of raw materials
  • number of unemployment claims
  • number of building permits
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9
Q

What is a Lagging Indicator in relation to the Economic Cycle? and what are some examples?

A

lagging indicators FOLLOW economic activity (growth or decline)

  • prime interest rates
  • labor costs of manufacturing
  • average duration of unemployment
  • overall dollar volume of outstanding commercial and industrial loans
  • ratio of manufacturing and trade inventories to sales
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10
Q

What are the 4 most common market structures?

A 
PMO-MCPC
1 - perfect monopoly (PM)
2 - oligopoly (O)
3 - monopolistic competition (MC)
4 - perfect competition (PC)
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11
Q

What is a Perfect Competition market structure (PC)?

A

4

  • LARGE number of BUYERS AND SELLERS,
  • NO SINGLE trader could have significant impact on market prices
  • Market entry is VERY EASY
  • Demand curve would be perfectly HORIZONTAL

(NONEXISTENT-NONE)

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12
Q

What is a Perfect Monopoly market structure (PM)?

A

1

  • SINGLE SELLER
  • NO CLOSE SUBSTITUTE for the good(s) they sell (UNIQUE)
  • MAKES UP ENTIRE MARKET (Market entry = DIFFICULT)

2 main reasons would exist:
1 - single company is able to produce at a lower cost than multiple producers - ECONOMIES OF SCALE
2 - company has legal control or authority of resources required to produce the products

(UTILITIES)

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13
Q

What is a Monopolistic Competition market structure (MC)?

A

3

  • MANY SELLERS
  • DIFFERENTIATED products
  • CLOSE SUBSTITUTES for the products
  • Market entry = FAIRLY EASILY
  • long-term profits not possible because if a firm is making PROFITS IN SHORT TERM, more firms will enter market until all firms BREAKING EVEN

(RESTAURANTS, CLOTHING, COSMETICS)

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14
Q

What is a Oligopoly market structure (O)?

A

2

  • SMALLER number of SELLERS
  • sell either SIMILAR or DIFFERENTIATED products
  • Market entry = DIFFICULT (RESTRICTED)
  • each seller is LARGE ENOUGH to INFLUENCE market PRICES

(AIRLINES, OIL, CELL PROVIDERS)

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15
Q

What is Inflation?

A

general increase in prices and interest rates (deflation is opposite)

federal government uses CPI (consumer price index) to measure inflation

inflation distorts reported income because depreciation is not reflective of current fixed asset replacement costs

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16
Q

What is Fiscal Policy? What is Monetary Policy?

A

FISCAL policy is established by Congress - deals with spending and taxes

MONETARY policy is established by Federal Reserve - deals with achieving national objectives through control of the money supply

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17
Q

What are the effects of trade policies? and what are some examples of controls over trade?

A

controls over trade can benefit or harm certain countries, sectors, or industries that are not restricted from the controls

  • tariffs (taxes on imported products)
  • embargos (prohibit trade with certain counties)
  • aggregate supply and demand
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18
Q

In macroeconomics, what is investing considered?

A
  • construction (residential or non-residential)
  • business durable equipment
  • business inventory

*putting money into stock market is NOT investing, that is ‘saving’ in the context of macroeconomics

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19
Q

What is Average Propensity to Consume (APC)?

What is Average Propensity to Save (APS)?

A

APC - percent of disposable income spent on consumption goods

APS - percent of disposable income saved

APC + APS = individuals disposal income

1,000 income - 600 goods = 400 saved
600/1,000 = 60% (APC)
400/1,000 = 40% (APS)
60% + 40% = 100%

20
Q

What is macroeconomics?

A

the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity (and includes the government)

21
Q

What is microeconomics?

A

the part of economics concerned with single factors and the effects of individual decisions

22
Q

What are 3 types of economic resources?

What are the 4 main interrelated flows of flow of resources?

A

3 types of economic resources - scarce-limited amount of each:

  • labor
  • capital
  • natural resources

4 main interrelated flows of flow of resources:

  • individuals providing resources to business (people go to work)
  • businesses pay these individuals for these resources (paycheck)
  • businesses provide goods and services to consumers (consume goods)
  • individuals provide payment to businesses for these goods and services (payments)

in free market economy, government regulation should be the least important factor in determining resource allocation

23
Q

What is demand? How does demand work?

A

SUBSTITUTE COMMODITY is one which meets basic need/want as another, when price of one increases, demand will decrease and shift to other substitute commodities

COMPLEMENTARY COMMODITY is one which is used together with another, when price decreases for one, demand increases for it and commodity for which it is complementary

24
Q

What is a demand curve? What does a demand curve represent?

A

negatively sloped, with quantity on X axis (horizontal) and price on Y axis (vertical) - as demand goes up, quantity becomes less and less, and the price increases
Y L\
X

represents impact that its price has on the amount of the product that will be purchased

demand going up - going up (left) the curve
demand going down - going down (right) the curve

25
Q

What is the difference between a demand and a quantity demand?

A

change in price changes the quantity demanded and causes a MOVEMENT ALONG A DEMAND CURVE

change in demand SHIFTS ENTIRE CURVE either inward (less demand) or outward (more demand)
*shift inward (more total demand) if increase in income of market participants

26
Q

What is the difference between supply and supply demanded?

A

change in quantity supplied is movement along given supply curve as result in change in price

change in supply SHIFTS ENTIRE CURVE either inward or outward

*normal supply curve has a positive slope
Y L /
X

supply going up - going up (right) the curve
supply going down - going down (left) the curve

27
Q

What is market equilibrium?

A

the point at which demand curve meets a supply curve

if price for a good is fixed below market equilibrium, will create excess demand because there is a price ceiling

example: if government imposed price ceiling on rent - quantity demanded would exceed quantity supplied

a price ceiling causes a quantity shortage
a price floor causes a quantity surplus

28
Q

What is elasticity?

A

measures change in market factor as a result of change in another market factor - typically referring to how much demand for a product changes based on change in price

29
Q

What are the 4 measures of elasticity?

A

1 - ELASTICITY OF DEMAND:
% change in quantity demanded as result of % change in price
2 - ELASTICITY of SUPPLY:
degree to which quantity supplied changes as result of % change in price
3 - INCOME ELASTICITY of DEMAND:
measures change in quantity demanded of a good compared to change in income of consumers of that good
4 - CROSS ELASTICITY of DEMAND:
measures change in quantity demanded compared to change in price of another good

30
Q

When is elasticity of demand considered elastic? when considered inelastic?

A

if 3% price decrease results in 5% increase in quantity demanded, then demand is ELASTIC (said price decrease results in even higher increase in quantity demanded)

if 3% price decrease results in 2% increase in quantity demanded, then demand is INELASTIC (said price decrease results in even lower increase in quantity demanded)

31
Q

What are the 4 main determinants of a products elasticity?

A

1 - availability of close substitutes
2 - if good is a necessity or a luxury
3 - proportion of income spent on good
4 - time elapsed since change in price

INELASTIC - critical prescription drug that patient absolutely needs with no substitute, would have perfectly inelastic demand (INSULIN)

ELASTIC - on other hand - demand for luxury automobiles is highly elastic (EGGPLANT)

32
Q

What is a utility?

A

satisfaction derived from acquisition or use of a commodity

UTIL- hypothetical unit of measure to quantify satisfaction derived from a commodity

MARGINAL UTILITY - satisfaction derived from each additional unit of commodity

33
Q

What is the law of diminishing marginal utility?

A

with each additional unit of a commodity acquired, utility (satisfaction) goes down

after 4 slices of pizza, slice 5 is not as good, and slice 6 even less good, and so on

*as individual acquires more and more units of a commodity, utility increases, but marginal utility decreases

34
Q

What is Porters 5 Forces?

A

model to evaluate competitive conditions of a market

1 - BARGAINING POWER OF CUSTOMERS:
how many customers? how many competitors/substitute products do they have to choose from? cost of switching to another product?
2 - BARGAINING POWER OF SUPPLIERS:
how many suppliers compared to number of firms? cost of switching to another supplier?
3 - THREAT OF NEW ENTRANTS:
how much capital required to enter market? difficult based on regulation? patents? barriers to entry?
4 - THREAT OF SUBSTITUTE PRODUCTS:
amount of product differentiation? cost of switching products? price of substitute products?
5 - INTENSITY OF COMPETITION:
growth of market? barriers to exit? number of competitors?

35
Q

What is SWOT Analysis?

A

SWOT:

  • Strengths
  • Weaknesses
  • Opportunities
  • Threats

process of evaluating internal and external factors that will affects ability to reach objectives

36
Q

What are the 3 types of competitive strategies?

A

CDF
1 - COST LEADERSHIP (to broad or narrow market)
2 - DIFFERENTIATD PRODUCTS (to broad or narrow market)
3 - FOCUS STRATEGY

37
Q

What is the cost leadership type of competitive strategy? (C in CDF)

A
  • trying to compete purely on price in production of common products
  • competitive advantage is gained by performing internal value chain activities efficiently - allows business to match prices of competitors or develop cost structure lower than competitors
  • fails when buyers become less price sensitive and develop brand loyalty or if company misses out on technological advantages by trying to cut too many costs and is surpassed by competitor who innovated
38
Q

What is the differentiated products type of competitive strategy? (D in CDF)

A
  • relies on offering premium products/features that customers are willing to pay more for
  • works when different people see value in differentiated products for different reasons, and when different players in market choose different features to emphasize
  • weakness is overestimating appeal of differentiated product/feature, and investing resources to bring products to market that consumers do not buy, or costs of producing desired features is too high and business is not sustainable
39
Q

What is the focus strategy type of competitive strategy? (F in CDF)

A
  • based on serving niche market and establishing either cost leadership or differentiated position in the niche
  • works when niche has size and demand to sustain business
  • fails when either demand of niche does not sustain business, or when competitors keep entering niche until it’s saturated and too hard to product profit
40
Q

What is Market Risk? What is Business-Specific Risk?

A

market risk - SYSTEMATIC RISK - large-scale risk of markets and natural disasters - cannot be mitigated by diversification, but can be mitigated to a small degree by some types of insurance

business-specific risk - UNSYSTEMATIC RISK - collection of specific risks based on sector, regulations, cost structure, nature of products, etc. - can be mitigated through diversification

41
Q

What is Interest Rate Risk?

A

risk that changing interest rates will have on investments and long-term debts/bonds

investment in long-term bonds made at certain interest rate - investor bears risk that market interest rates will go up, which lowers value of investment in debt at a set interest rate

interest rate risk can be offset with forward/futures contracts, interest rate swaps or an option contract

42
Q

What is Currency Exchange Risks?

A

risk of changes in value of different currencies of a transaction or in which operates in

currency risks can be hedged against through derivatives such as forward/futures contracts, swaps, or an option contract

43
Q

What is Liquidity Risks and Ratios?

A
  • risk that an asset cannot be sold (liquidated) for cash equal to its fair value - can be mitigated to some degree through diversification
  • risk associated with running business with low liquidity - having low working capital, current ratio, or quick ratio
44
Q

What is Credit Risk?

A

risk of default on debt from borrower failing to make payments - creditor risks repayment of principal and interest, but also faces extra costs of cash flow disruption and costs of trying to collect

can be mitigated:

  • charging higher interest rates to higher-risk borrowers
  • placing stipulations on loans that borrowers need to meet (debt covenants)
  • credit insurance
  • derivatives to hedge against high risk borrowers
  • diversification (lending to many borrowers)
45
Q

What is Inflation Risk?

A

risk that inflation decreases purchasing power of a fixed amount - same $100 can buy less and less as inflation increases - results in need for business to adjust cash flow planning and increase required rate of return on potential projects to compensate for

46
Q

What are some other types of risk in business?

A
  • STRATEGIC RISK:
    long-term risk by having competition - best controlled by strategic planning and optimizing operations
  • OPERATIONAL RISK:
    short-term risk of running a business day-to-day - best controlled by focusing on execution of company’s strategic plan
  • CONTINGENCY PLANNING:
    method of dealing with risk with things like disaster recovery planning
  • COST AVOIDANCE:
    avoiding costs, faster way of increasing profits than increasing revenue, because increasing revenue usually involves increasing costs as well as marketing, adding features, etc.

0-SFCPA-BEC (5 decks)

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