Economics 2 Flashcards
How does revenue react to price under Inelastic Demand?
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?
Total revenue will remain the same if price is increased
Considered unitary if coefficient of elasticity : 1
How is Income Elasticity of Demand calculated?
% Change Quantity Demanded / % Change in Income
Normal goods greater than 1 (demand increases more than income)
Inferior goods less than 1 (demand increases less than income)
What conditions occur under periods of inflation?
Interest rates 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 (shifts 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?
Causes a surplus if above equilibrium price.
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests
Included: Foreign company has US Factory
Not included: US company has foreign factory
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption
Private Investment
Government Purchases
Net Exports
What is Nominal GDP?
Measures goods/services in current prices.
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
