Economics Flashcards

1
Q

BEC

How does a price increase affect supply?

A

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

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2
Q

BEC

What is a supply curve shift?

A

When supply changes due to something other than price.

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3
Q

BEC

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

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4
Q

BEC

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

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5
Q

BEC

How does price affect the demand for an item?

A

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

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6
Q

BEC

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

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7
Q

BEC

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

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8
Q

BEC

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

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9
Q

BEC

What is the Marginal Propensity to Consume?

A

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

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10
Q

BEC

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

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11
Q

BEC

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

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12
Q

BEC

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).

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13
Q

BEC

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

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14
Q

BEC

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

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15
Q

BEC

Under elastic demand- how does price affect revenues?

A

Price increases- Revenue decreases

Price decreases- Revenue increases

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16
Q

BEC

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

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17
Q

BEC

How does revenue react to price under Inelastic Demand?

A

Price increases- Revenue increases

Price decreases- Revenue decreases

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18
Q

BEC

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

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19
Q

BEC

What is Unitary Demand?

A

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

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20
Q

BEC

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)

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21
Q

BEC

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

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22
Q

BEC

What happens under Demand-Pull inflation?

A

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

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23
Q

BEC

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

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24
Q

BEC

What is the Equilibrium Price?

A

The price where Quantity Supplied : Quantity Demanded

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25
# BEC What is Optimal Production?
When Marginal Revenue : Marginal Cost
26
# BEC What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
27
# BEC 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
28
# BEC What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation
29
# BEC What is included under the Expenditure Approach for calculating GDP?
Individual Consumption Private Investment Government Purchases Net Exports
30
# BEC What is Nominal GDP?
Measures goods/services in current prices.
31
# BEC For what is a GDP Deflator used?
Used to convert GDP to Real GDP
32
# BEC What is Real GDP?
Nominal GDP / GDP Deflator x 100
33
# BEC What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
34
# BEC What is the Consumer Price Index (CPI)? How is it applied?
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
# BEC How is disposable income calculated?
Personal Income - Personal Taxes
36
# BEC How is Return to Scale calculated?
% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale
37
# BEC When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
38
# BEC What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
39
# BEC What are the stages of the Economic Cycle?
Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)
40
# BEC What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
41
# BEC What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
42
# BEC What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
43
# BEC Which people are included in the calculation of unemployment?
Only people looking for jobs
44
# BEC What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy
45
# BEC What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job
46
# BEC 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 they quit their job and get computer training
47
# BEC How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
48
# BEC What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
49
# BEC What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
50
# BEC What is the Real Interest Rate?
Inflation-adjusted interest rate
51
# BEC What is the Nominal Rate?
Rate that uses current prices
52
# BEC What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
53
# BEC What is included in the M1 money supply?
Currency- Coins- and Deposits
54
# BEC What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
55
# BEC What is Deficit Spending?
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
# BEC How can the Fed control the money supply?
By buying and selling the government's securities.
57
# BEC How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
58
# BEC What is a Tariff?
A tax on imported goods
59
# BEC What is a quota?
A limit on the number of goods that can be imported
60
# BEC How do international trade restrictions affect domestic producers?
They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices
61
# BEC How to international trade restrictions affect foreign producers?
They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices
62
# BEC How do international trade restrictions affect foreign consumers?
They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets
63
# BEC How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices
64
# BEC What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
65
# BEC What is Accounting Profit?
Revenue - Accounting Cost
66
# BEC What is Economic Cost?
Explicit + Implicit Cost
67
# BEC What is Economic Profit?
Revenue - Economic Cost