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Economics Flashcards

1
Q

Factors of production

A

crude oil, labor. Firms are buyers in product markets

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2
Q

Services and finished goods

A

cars, clothing etc. Firms are sellers in product markets

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3
Q

Law of Demand

A

Quantity demanded typically increases at lower prices and decreases at higher prices

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4
Q

Law of Supply

A

Increase in price results in an increase in the quantity supplied

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5
Q

To find the market supply or demand you must ___

A

multiply the coefficients by the number of participating firms

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6
Q

Stable Equilibrium

A

When there are forces that move price and quantity back towards equilibrium values when they deviate from those values

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7
Q

Unstable Equilibrium

A

If the supply curve is less steeply sloped than the demand curve, prices above or below equilibrium will tend to get further from equilibrium

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8
Q

Common Value Auction

A

Value of item to be auctioned will be the same to any bidder, but the bidders do not know the value at the time of the auction (oil lease auctions). All bidders must determine what the value is. Winner’s curse is when the bidder overestimates

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9
Q

Private Value Auction

A

Auction of art or collectibles

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10
Q

English Auction or Ascending Price Auction

A

Bidders can bid an amount greater than the previous high bid ad the bidder that first offers the highest bid of the auction wins the item

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11
Q

Sealed Bid Auction

A

Each bidder provides one bid which is unknown to other bidders

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12
Q

Second Price Sealed Bid Auction

A

Bidder submitting highest bid wins but pays price of the second bidder

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13
Q

Reservation Price

A

The highest bid that a bidder is willing to pay

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14
Q

Descending Price Auction (Dutch Auction)

A

Begins with the price greater than what any bidder will pay, this price is reduced until a bidder agrees to pay it

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15
Q

Noncompetitive Bid

A

Indicates those bidders will accept the amount of Treasuries indicated at the price determined by the auction, rather than specifying a maximum price

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16
Q

Consumer Surplus

A

The difference between the total value to consumers of the units of a good that they buy and the total amount they must pay for those units

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17
Q

Producer Surplus

A

The excess of the market price above the opportunity cost of production or total revenue minus the total variable cost of producing those units

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18
Q

The efficient quantity of a good for a producer

A

is also the quantity of production that maximizes total consumer surplus and producer surplues

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19
Q

Allocation of Resources is efficient if…

A

it maximizes the sum of consumer and producer surplus. Any excess or shortage is known as deadweight loss

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20
Q

Price Controls

A

rent control and minimum wage

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21
Q

Taxes and Trade Restrictions

A

subsidies and quotas. Taxes increase the price that buyers pay and decrease the amount sellers receive. Subsidies effectively increase the amount sellers receive and decrease the price buyers pay, leading to production of more goods

Quotas are imposed production limits, resulting in production of less than the efficient quantity of the good

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22
Q

External Benefits

A

Result in demand curves that do not represent the societal benefit of the good or service, so the equilibrium quantity produced and consumed is less the efficient quantity

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23
Q

External Costs

A

Result in an over-allocation of resources to production by the polluting firms

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24
Q

Public Goods

A

Consumed by people regardless of whether or not you paid for them. I.e national defense

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25
Free Rider Problem
People benefit from public goods regardless of if they paid for it
26
Price Ceilings
If price ceiling is below equilibrium price, a shortage occurs where the quantity supplied is less tan the quanity demanded. Price above which producers cannot legally sell and is generally set below the market equilibrium
27
Price Ceilings Lead too
Long lines (opportunity cost of time), suppliers engage in discrimination, suppliers take bribes, suppliers reduce quality of goods Example is rent control
28
Price Floor
If price floor is above equilibrium price, excess supply occurs as producers produce more at a higher price than they should be producing
29
Price Floors lead too
unsold goods, lower demand. Minimum wage is an example of a price floor
30
Tax on a good will
increase its equilibrium price and decrease its equilibrium quantity
31
Tax Revenue is
the amount of the tax times the new equilibrium quantity
32
Statutory Incidence
Who is legally responsible for paying the tax
33
Actual tax incidence
Is independent of whether the government imposes the tax on consumers or suppliers
34
If demand is less elastic than supply, consumers will
bear a higher burden or pay a greater portion of the tax than suppliers
35
If Supply is less elastic than demand, producers will
bear a higher burden or pay a greater portion of the tax than consumers
36
Subsidy
Usually results in a shift downward of the supply curve, or more goods produced
37
Price Elasticity
Measure of the responsiveness of the quantity demanded to a change in price. Percentage change in quantity demanded over percentage change in price
38
Elasticity
Not dependent on units of measurement because it is based on percentage changes. IT IS NOT THE SLOPE FOR DEMAND CURVES
39
If price elasticity equals -1 then
total revenue (p x q) is maximized at that price
40
Price Elasticity - Portion of Income spent on a good
the large the proportion of income that is spent on a good, the more elastic an individuals demand for that good will be (i.e. car or house)
41
Time
Elasticity of demand tends to be greater the longer the time period since the price change
42
Income Elasticity
The sensitivity of quantity demanded to change in income
43
Cross Price Elasticity of Demand
Ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good
44
Substitutes
When the increase in price of a good leads to an increase in demand for another good
45
Complement
When an increase in price of a good leads to a decrease in demand for another good
46
Changes in demand and supply equate to ____
shifts in the demand / supply curve
47
Supply is increased by
advances in production technology and by decreases in input prices
48
Supply changes in response to a change in the cost of inputs
true
49
Utility Theory
Explains consumer behavior based on preferences for various alternative combinations of goods, in terms of the relative level of satisfaction they provide
50
Condition of Non-Satiation
Other things equal, more is always preferred to less
51
If Utility is 200 vs. another bundle utility of 100,
You can only say that you prefer bundle 1 to bundle 2
52
Indifference curves rules
1. For two goods, slope downward 2. Convex towards the origin 3. Cannot cross
53
Marginal Rate of Substitution
The rate at which the consumer will willingly exchange units of good x for good y
54
Equilibrium Bundle of Goods
The point where the highest attainable indifference curve is just tangent to the budget line
55
Key point about the substitution effect and income effect
Substitution effect always acts to increase the consumption of a good that has fallen in price, while the income effect can either increase or decrease consumption of a good that has fallen in price
56
Normal Good
One for which the income effect is positive
57
Inferior Good
Income effect is negative
58
Giffen Good
An inferior good for which the negative income effect outweighs the positive substitution effect when price falls. Giffen good would have an upward sloping demand curve
59
Veblen Good
Higher price makes the good more desireable (Gucci bag)
60
Accounting Profit
Equates to the bottom line. Total revenues less total explicit costs
61
Economic Profit
Accounting Profit less implicit costs (opportunity costs)
62
Economic Profit of zero is ______
what we expect in equilibrium - that's why they are called abnormal profits.
63
Economic Rent
The payment to a resource in excess of the minimum payment to retain resources in their current use. Supply is inelastic
64
Total revenue
price x quantity
65
Average Revenue
TR / Quantity
66
Marginal Revenue
The increase in total revenue from selling one more unit of a good or service
67
Factors of Production
land, labor, capital, materials
68
Production Function
Q = f(K,L)
69
Marginal Product
Output with only one worker`(slope)
70
Diminishing Marginal Productivity
When the quantity of labor for which the additional output for each additional worker begins to decline
71
In the short run, as long as items are being sold for more than their cost, the store should ____
stay open
72
In the long run, as long as items are sold for less than their average total cost, the store should ____
shut down
73
Firm under perfect competition
Price = MR = AR
74
Short-run shutdown point
If average revenue is less than average variable cost in the short run
75
Increasing Cost Industry
an industry in which per-unit costs and output prices are higher when industry output is increased in the long run. An example includes oil - as oil demand increases, costs of E&P increase more
76
Decreasing Cost Industry
an industry in which per-unit costs and output prices are lower when industry output is increased in the long run. Flat panel televisions are a good example of this
77
Constant Cost Industry
When firms in the industry experience no change in resources costs and output prices over the long run
78
Relationships among the marginal and average cost curves
AFC slopes downward The vertical distance between the ATC and the AVC curves is equal to AFC MC declines initially, then increases ATC and AVC are U shaped The MC curve above AVC is the firm's short run supply curve in a perfectly competitive market
79
Minimum efficient scale
Under perfect competition, firms must operate at minimum efficient scale in long-run equilibrium
80
Under perfect competition firms earn ________
zero economic profit
81
Profit Maximization Formula
MR = MC or TR-TC max
82
Marginal Revenue Product
The amount of additional revenue received from employing an additional unit of an input
83
At the optimal combination of labor and capital, the ratio of each input's marginal revenue product to its cost per unit is equal to one
TRUE
84
Perfect Competition
Many firms produce identical products
85
Monopoly
Producers are not identical
86
Oligopoly
only a few firms are competing.
87
Natural Monopoly
Refers to a situation where the average cost of production is falling over the relevant range of consumer demand (pubic utilities)
88
The long-run equilibrium output level for a perfectly competitive firm is .....
where MR=MC=ATC
89
Nash Equilibrium
When two or more participants in a non-cooperative game have no incentive to deviate from their respective equilibrium strategies given their opponents strategies
90
Exchange Rate
Simply the price or cost of units of one currency in terms of another $1.416USD/EUR means a EUR cost $1.416USD, or $1.416 USD per EUR
91
Real exchange rate
Tells us the dollar cost of purchasing that same unit of goods and services based on the new (current) dollar/euro exchange rate
92
When is the real rate of exchange equal to the nominal rate of exchange?
When the CPI of both currencies is equal
93
Spot Exchange Rate
Exchange rate for immediate delivery, which for most currencies means the exchange of currencies takes place two days after the trade
94
Forward Exchange Rate
Currency exchange for an exchange to be done in the future. Forward rates are quoted for various future dates. It is an agreement to exchange a specific amount of one currency for a specific amount of another on a future date specified in the agreement
95
Forward Contract
An agreement between two parties in which one party, the buyer, agrees to buy from the other party, the seller, an underlying asset at a later date for a price established at the start of the contract
96
Real Money Accounts
mutual funds, pension funds, insurance companies, and other institutional accounts that do not use derivatives
97
Primary dealers in currencies and originators of forward foreign exchange contracts are large ____________
large multinational banks
98
Direct Quote
The value of one unit of a foreign currency in units of the home currency. $0.60USD/AUD is the direct quote of australian dollar to a US investor
99
Indirect Quote
The amount of a foreign currency for one unit of the home currency
100
Converting Indirect / Direct Quotes
$1.16USD/EUR direct quote in EUR is 1/1.16 or 0.862EUR/USD
101
Base Currency
The currency in which the quote represents one unit, or the foreign currency for a direct quote
102
Price Currency
The currency for which the quote represents a number of units. The home currency is the base currency for an indirect quote
103
Cross Rate
The exchange rate between two currencies implied by their exchange rates with a common third currency
104
Forward Rate Quotations are expressed ___
as the unit of points is the last decimal place
105
When currencies are freely traded and forward currency contracts exist, the forward premium or discount is approximately equal to the difference between the two countries interest rates
This is because there is an arbitrage trade with riskless profit to be made when this relation does not hold
106
Exchange Rate Regimes
Two for countries that do not issue their own currencies. Seven for countries that issue their own currencies Two are formal dollarization and a monetary union
107
Currency Board Arrangement
An explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate (Hong Kong and USD). Essentially imports the inflation rate of the outside currency
108
Conventional Fixed Peg Arrangement
Country pegs its currency within margins of +/- 1 percent versus another currency or a basket that includes the currencies of its major trading / financial partners
109
Target Zone
Permitted fluctuations in currency value relative to another currency or basket are wider. More policy discretion because the bands are wider
110
Crawling Peg
Exchange rate adjusted periodically, typically to adjust for higher inflation vs. the currency used in the peg
111
Elasticities Approach
Approach to understanding the impact of exchange rate changes on the balance of trade focuses on how exchange rates affect total expenditures on imports and exports. The total expenditures, not the quantity, is what matters
112
Marshall Lerner Condition
Conditions under which a depreciation of the domestic currency will decrease a trade deficit
113
Why are import and export quantities relatively insensitive to currency depreciation in the short run?
Because import and export contracts for the delivery of goods most often requires delivery and payment in the future
114
J-curve Effect
The short-term increase in the deficit followed by a decrease when the Marshall-Lerner condition is met
115
Absorption Approach
Shortcoming of elasticities approach is that it only considers trade flows and ignores capital flows
116
Autarky
Does not trade with other countries
117
Trade Protection
A government places restrictions, limits, or charges on exports or imports

CFA Material (6 decks)

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