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Economics Flashcards

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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
Q

Free Rider Problem

A

People benefit from public goods regardless of if they paid for it

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26
Q

Price Ceilings

A

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

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27
Q

Price Ceilings Lead too

A

Long lines (opportunity cost of time), suppliers engage in discrimination, suppliers take bribes, suppliers reduce quality of goods

Example is rent control

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28
Q

Price Floor

A

If price floor is above equilibrium price, excess supply occurs as producers produce more at a higher price than they should be producing

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29
Q

Price Floors lead too

A

unsold goods, lower demand. Minimum wage is an example of a price floor

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30
Q

Tax on a good will

A

increase its equilibrium price and decrease its equilibrium quantity

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31
Q

Tax Revenue is

A

the amount of the tax times the new equilibrium quantity

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32
Q

Statutory Incidence

A

Who is legally responsible for paying the tax

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33
Q

Actual tax incidence

A

Is independent of whether the government imposes the tax on consumers or suppliers

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34
Q

If demand is less elastic than supply, consumers will

A

bear a higher burden or pay a greater portion of the tax than suppliers

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35
Q

If Supply is less elastic than demand, producers will

A

bear a higher burden or pay a greater portion of the tax than consumers

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36
Q

Subsidy

A

Usually results in a shift downward of the supply curve, or more goods produced

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37
Q

Price Elasticity

A

Measure of the responsiveness of the quantity demanded to a change in price. Percentage change in quantity demanded over percentage change in price

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38
Q

Elasticity

A

Not dependent on units of measurement because it is based on percentage changes. IT IS NOT THE SLOPE FOR DEMAND CURVES

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39
Q

If price elasticity equals -1 then

A

total revenue (p x q) is maximized at that price

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40
Q

Price Elasticity - Portion of Income spent on a good

A

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)

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41
Q

Time

A

Elasticity of demand tends to be greater the longer the time period since the price change

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42
Q

Income Elasticity

A

The sensitivity of quantity demanded to change in income

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43
Q

Cross Price Elasticity of Demand

A

Ratio of the percentage change in the quantity demanded of a good to the percentage change in the price of a related good

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44
Q

Substitutes

A

When the increase in price of a good leads to an increase in demand for another good

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45
Q

Complement

A

When an increase in price of a good leads to a decrease in demand for another good

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46
Q

Changes in demand and supply equate to ____

A

shifts in the demand / supply curve

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47
Q

Supply is increased by

A

advances in production technology and by decreases in input prices

48
Q

Supply changes in response to a change in the cost of inputs

A

true

49
Q

Utility Theory

A

Explains consumer behavior based on preferences for various alternative combinations of goods, in terms of the relative level of satisfaction they provide

50
Q

Condition of Non-Satiation

A

Other things equal, more is always preferred to less

51
Q

If Utility is 200 vs. another bundle utility of 100,

A

You can only say that you prefer bundle 1 to bundle 2

52
Q

Indifference curves rules

A
  1. For two goods, slope downward
  2. Convex towards the origin
  3. Cannot cross
53
Q

Marginal Rate of Substitution

A

The rate at which the consumer will willingly exchange units of good x for good y

54
Q

Equilibrium Bundle of Goods

A

The point where the highest attainable indifference curve is just tangent to the budget line

55
Q

Key point about the substitution effect and income effect

A

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
Q

Normal Good

A

One for which the income effect is positive

57
Q

Inferior Good

A

Income effect is negative

58
Q

Giffen Good

A

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
Q

Veblen Good

A

Higher price makes the good more desireable (Gucci bag)

60
Q

Accounting Profit

A

Equates to the bottom line. Total revenues less total explicit costs

61
Q

Economic Profit

A

Accounting Profit less implicit costs (opportunity costs)

62
Q

Economic Profit of zero is ______

A

what we expect in equilibrium - that’s why they are called abnormal profits.

63
Q

Economic Rent

A

The payment to a resource in excess of the minimum payment to retain resources in their current use. Supply is inelastic

64
Q

Total revenue

A

price x quantity

65
Q

Average Revenue

A

TR / Quantity

66
Q

Marginal Revenue

A

The increase in total revenue from selling one more unit of a good or service

67
Q

Factors of Production

A

land, labor, capital, materials

68
Q

Production Function

A

Q = f(K,L)

69
Q

Marginal Product

A

Output with only one worker`(slope)

70
Q

Diminishing Marginal Productivity

A

When the quantity of labor for which the additional output for each additional worker begins to decline

71
Q

In the short run, as long as items are being sold for more than their cost, the store should ____

A

stay open

72
Q

In the long run, as long as items are sold for less than their average total cost, the store should ____

A

shut down

73
Q

Firm under perfect competition

A

Price = MR = AR

74
Q

Short-run shutdown point

A

If average revenue is less than average variable cost in the short run

75
Q

Increasing Cost Industry

A

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
Q

Decreasing Cost Industry

A

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
Q

Constant Cost Industry

A

When firms in the industry experience no change in resources costs and output prices over the long run

78
Q

Relationships among the marginal and average cost curves

A

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
Q

Minimum efficient scale

A

Under perfect competition, firms must operate at minimum efficient scale in long-run equilibrium

80
Q

Under perfect competition firms earn ________

A

zero economic profit

81
Q

Profit Maximization Formula

A

MR = MC or TR-TC max

82
Q

Marginal Revenue Product

A

The amount of additional revenue received from employing an additional unit of an input

83
Q

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

A

TRUE

84
Q

Perfect Competition

A

Many firms produce identical products

85
Q

Monopoly

A

Producers are not identical

86
Q

Oligopoly

A

only a few firms are competing.

87
Q

Natural Monopoly

A

Refers to a situation where the average cost of production is falling over the relevant range of consumer demand (pubic utilities)

88
Q

The long-run equilibrium output level for a perfectly competitive firm is …..

A

where MR=MC=ATC

89
Q

Nash Equilibrium

A

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
Q

Exchange Rate

A

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
Q

Real exchange rate

A

Tells us the dollar cost of purchasing that same unit of goods and services based on the new (current) dollar/euro exchange rate

92
Q

When is the real rate of exchange equal to the nominal rate of exchange?

A

When the CPI of both currencies is equal

93
Q

Spot Exchange Rate

A

Exchange rate for immediate delivery, which for most currencies means the exchange of currencies takes place two days after the trade

94
Q

Forward Exchange Rate

A

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
Q

Forward Contract

A

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
Q

Real Money Accounts

A

mutual funds, pension funds, insurance companies, and other institutional accounts that do not use derivatives

97
Q

Primary dealers in currencies and originators of forward foreign exchange contracts are large ____________

A

large multinational banks

98
Q

Direct Quote

A

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
Q

Indirect Quote

A

The amount of a foreign currency for one unit of the home currency

100
Q

Converting Indirect / Direct Quotes

A

$1.16USD/EUR direct quote in EUR is 1/1.16 or 0.862EUR/USD

101
Q

Base Currency

A

The currency in which the quote represents one unit, or the foreign currency for a direct quote

102
Q

Price Currency

A

The currency for which the quote represents a number of units. The home currency is the base currency for an indirect quote

103
Q

Cross Rate

A

The exchange rate between two currencies implied by their exchange rates with a common third currency

104
Q

Forward Rate Quotations are expressed ___

A

as the unit of points is the last decimal place

105
Q

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

A

This is because there is an arbitrage trade with riskless profit to be made when this relation does not hold

106
Q

Exchange Rate Regimes

A

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
Q

Currency Board Arrangement

A

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
Q

Conventional Fixed Peg Arrangement

A

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
Q

Target Zone

A

Permitted fluctuations in currency value relative to another currency or basket are wider. More policy discretion because the bands are wider

110
Q

Crawling Peg

A

Exchange rate adjusted periodically, typically to adjust for higher inflation vs. the currency used in the peg

111
Q

Elasticities Approach

A

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
Q

Marshall Lerner Condition

A

Conditions under which a depreciation of the domestic currency will decrease a trade deficit

113
Q

Why are import and export quantities relatively insensitive to currency depreciation in the short run?

A

Because import and export contracts for the delivery of goods most often requires delivery and payment in the future

114
Q

J-curve Effect

A

The short-term increase in the deficit followed by a decrease when the Marshall-Lerner condition is met

115
Q

Absorption Approach

A

Shortcoming of elasticities approach is that it only considers trade flows and ignores capital flows

116
Q

Autarky

A

Does not trade with other countries

117
Q

Trade Protection

A

A government places restrictions, limits, or charges on exports or imports

CFA Material (6 decks)

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