Economics Flashcards

1
Q

How does a price increase affect supply?

A

When the prices of an item increases supply increases- because more sellers are willing to sell.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is a supply curve shift?

A

When supply changes due to something other than price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What are the characteristics of a positive supply curve shift (shift right)?

A

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the characteristics of a negative supply curve shift (shift left)?

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

How does price affect the demand for an item?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What is a Positive Demand Curve Shift (Shift Right)?

A

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What is a Negative Demand Curve Shift (Shift Left)?

A

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What is the Marginal Propensity to Consume?

A

How much you spend when your income increases
Calculate: Change in Spending / Change in Income

Spending / (1-MPC) = change in GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is the Marginal Propensity to Save?

A

How much you save when income increases
Calculate: Change in Savings / Change in Income
Also equals 1 - Marginal Propensity to Consume

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
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).

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

How does spending change due to the multiplier effect?

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Under elastic demand- how does price affect revenues?

A

Price increases- Revenue decreases

Price decreases- Revenue increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What conditions would indicate Elastic Demand?

A

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 well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

How does revenue react to price under Inelastic Demand?

A

Price increases- Revenue increases

Price decreases- Revenue decreases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What conditions would indicate Inelastic Demand?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What is Unitary Demand?

A

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

How is Income Elasticity of Demand calculated?

A

% 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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What conditions occur under periods of inflation?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

What happens under Demand-Pull inflation?

A

Overall spending increases
Demand increases (shifts right)
Market equilibrium price increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

What is the Equilibrium Price?

A

The price where Quantity Supplied : Quantity Demanded

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

What is Optimal Production?

A

When Marginal Revenue : Marginal Cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What is the result of a Price Floor?

A

Causes a surplus if above equilibrium price.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

What is GDP (Gross Domestic Product)?

A

The annual value of all final goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interestsIncluded: Foreign company has US FactoryNot included: US company has foreign factory

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

What is included under the income approach for calculating GDP?

A
I PIRATED
Income of proprietors
Profits of corporations
Interest (net)
Rent income
Adjustments for net foreign income and misc items
Taxes (indirect business taxes)
Employee compensation (wages)
Depreciation (capital consumption allowance)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

What is included under the Expenditure Approach for calculating GDP?

A
GICE
Government Purchases of goods and services
Gross domestic Private Investment
Personal Consumption expenditures
Net Exports
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is Nominal GDP?

A

Measures goods/services in current prices.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

For what is a GDP Deflator used?

A

Used to convert GDP to Real GDP

32
Q

What is Real GDP?

A

Nominal GDP / GDP Deflator x 100

33
Q

What is Gross National Product (GNP)?

A

Like GDP; Swaps foreign production.
US Firms overseas are included
Foreign firms domestically are not included

34
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

35
Q

How is disposable income calculated?

A

Personal Income - Personal Taxes

36
Q

How is Return to Scale calculated?

A

% Increase in output / % Increase in input

Greater than 1 : Increasing returns to scale

Less than 1 : Decreasing returns to scale

37
Q

When is the economy in Recession?

A

When GDP growth is negative for two consecutive quarters.

38
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

39
Q

What are the stages of the Economic Cycle?

A

Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)

40
Q

What are leading indicators?

A

Conditions that occur before a recession or before a recoveryExample: Stock Market or New Housing Starts

41
Q

What are lagging indicators?

A

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

42
Q

What are coincident indicators?

A

Conditions that occur during a recession or during a recovery

Example: Manufacturing output

43
Q

Which people are included in the calculation of unemployment?

A

Only people looking for jobs

44
Q

What is Cyclical Unemployment?

A

GDP doesn’t grow fast enough to employ all people who are looking for work (not included in full employment), recession or contraction

45
Q

What is Frictional Unemployment?

A

People are changing jobs, temporarily laid off, or entering the work force.
Time needed to match qualified job seekers with available jobs
This is a normal aspect of full employment.
Example: A recent college graduate is looking for a job

46
Q

What is Structural Unemployment?

A

A worker’s job skills do not match those necessary to get a job so they need education or training
Also, workers may not live where job is available

47
Q

How does inflation relate to unemployment?

A

High Unemployment : Low Inflation (Vice Versa)

48
Q

What is the Discount Rate?

A

The rate a bank pays to borrow from the Fed.

49
Q

What is the Prime Rate?

A

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

50
Q

What is the Real Interest Rate?

A

Inflation-adjusted interest rate

51
Q

What is the Nominal Rate?

A

Rate that uses current prices

52
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.

53
Q

What is included in the M1 money supply?

A

money used to purchase goods and services

Currency- Coins- checkable Deposits, travelers checks

54
Q

What is included in the M2 money supply?

A

Highly liquid assets other than currency- coins or deposits

55
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

56
Q

How can the Fed control the money supply?

A

By buying and selling the government’s securities.

57
Q

How does the Fed control economy-wide interest rates?

A

By adjusting the discount rate charged to banks

58
Q

What is a Tariff?

A

A tax on imported goods

59
Q

What is a quota?

A

A limit on the number of goods that can be imported

60
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

61
Q

How to international trade restrictions affect foreign producers?

A

They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices

62
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

63
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

64
Q

What is Accounting Cost?

A

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs

65
Q

What is Accounting Profit?

A

Revenue - Accounting Cost

66
Q

What is Economic Cost?

A

Explicit + Implicit Cost

67
Q

What is Economic Profit?

A

Revenue - Economic Cost

68
Q

What are the factors that shift aggregate demand?

A

TWICE G(overnment)

Taxes
Wealth
Interest Rates
Consumer confidence
Exchange rates

Government spending

69
Q

What two things are involved in an expansionary fiscal policy?

A

Increased government spending

Decreased taxes

70
Q

What are nonmonetary assets? monetary?

A

fluctuate with inflation and deflation (building machinery)

fixed in dollar amounts (cash A/R)

71
Q

How does the Fed conrol the money supply?

A

Open market operations (purchase and sale of gov’t securities)

  • sale = decrease money supply
  • purchase = increase money supply

Change discount rate

  • increase = decreases money supply
  • decrease = increase money supply

Change required reserve ratio

  • inc = dec money supply
  • dec = inc money supply

Quantitative easing = fed buys financial assets from banks

72
Q

What is stagflation?

A

falling output
rising unemployment
rising price level

73
Q

What two trends cause inflation?

A

Increase in AD

Decrease is STAS

74
Q

What are the factors that shift demand curves?

A
WRITEN
Changes in:
Wealth
Price of Related goods
Consumer income
Consumer tastes
Consumer expectations
Number of buyers
75
Q

What are the factors that shift the supply curve?

A
E COST
Changes in:
Price Expectations
Production costs
Subsidies or taxes
Technology
76
Q

What are Porter’s 5 forces?

A
factors affecting the competitive environment of the firm
Barriers to entry
Market competitiveness
Existence of substitutes
Bargaining power of customers
Bargaining power of suppliers
77
Q

How do firms, whether perfectly or imperfectly competing, produce?

A

Where marginal cost = marginal revenue