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BEC > Economics > Flashcards

Economics Flashcards

1
Q

How does a price increase affect supply?

A

o When the price of an item increases, supply increases

o More sellers are willing to sell

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2
Q

When does a Supply Curve Shift and Demand Curve Shift Occur?

A

A change due to something other than price

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3
Q

What are the characteristics of a Positive Supply Curve Shift (Shift Right)?

A

o Supply increases at each price point
o Higher Equilibrium GDP
o Number of sellers increase (More companies selling, Market is flooded)
o Government market interference via subsidy (Grants or tax credits for wind farms)
o Technology Improvements (Fast internet makes e-commerce efficient)

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4
Q

What are the characteristics of a Negative Supply Curve Shift (Shift Left)?

A

o Supply decreases at each price point
o Lower Equilibrium GDP
o Cost of producing item increases (Price increases, Less products are made)
o Wars or Crisis (A country that makes rice gets attacked, Less rice on the market)

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5
Q

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

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

A

Demand increases at each price point

  • Price of Substitute increases
  • Future Price Increase is expected
  • Market Expands
  • Expansion
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7
Q

What happens to Supply/Demand if a Future price increase is expected?

A

Lower Supply, high demand.

Example:
War in Middle East breaks out; therefore, People line up at gas stations

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8
Q

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

A

o Demand decreases at each price point
o Price of compliment goes up (Price of ketchup rises, Less demand for beef)
o Boycott
o Consumer income rises (Demand for inferior goods drops as people have more money to spend)
o Consumer tastes change (A hot diet fad gets replaced by another)
o Contraction (Less spending decreases equilibrium GDP)

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9
Q

Marginal Propensity to Consume (MPC)

A

o How much you Spend when income increases
o Change in Spending / Change in Income

MPC + MPS = 100%

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10
Q

Marginal Propensity to Save (MPS)

A

o How much you Save when income increases
o Change in Savings / Change in Income

MPC + MPS = 100%

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11
Q

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

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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).

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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
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14
Q

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

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15
Q

Under elastic demand, how does price affect revenues?

A

Price increases, Revenue decreases
Price decreases, Revenue increases

Price and Revenue have an inverse relationship

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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

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17
Q

How does revenue react to price under Inelastic Demand?

A

Price increases, Revenue increases
Price decreases, Revenue decreases

Price and Revenue have an direct relationship

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18
Q

What conditions would indicate Inelastic Demand?

A

“Income = Inelastic ”
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

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

How is Income Elasticity of Demand calculated?

A

% Change Quanitity 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

What conditions occur under periods of inflation?

A

o Interest rates increase
o Reduces demand for loans
o Reduces demand for houses, autos, etc.
o Value of bonds and fixed income securities decrease
o Inferior good demand to increase
o Foreign goods more affordable than domestic
o Demand for domestic goods decrease

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22
Q

What happens under Demand-Pull inflation?

A

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

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23
Q

What happens under Cost-Push inflation?

A

o Overall production costs increase
o Supply decreases (shifts left)
o Market equilibrium price increases
o Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

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24
Q

What is the Equilibrium Price?

A

The price where Quanitity Supplied = Quantity Demanded

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25
Q

What is Optimal Production?

A

Marginal Revenue = Marginal Cost

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26
Q

What is the result of a Price Floor?

A

Causes a surplus if above equilibrium price.

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27
Q

What is GDP (Gross Domestic Product)?

A

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

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28
Q

What is included under the income approach for calculating GDP?

A 
Sole Proprietor and Corp Income   
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments   
Depreciation
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29
Q

What is included under the Expenditure Approach for calculating GDP?

A 
Individual Consumption (c)   
Private Investment (lg)
Government Purchases (G)   
Net Exports (Xn)  = exports minus imports

GDP = C + lg + G + Xn

30
Q

What is Nominal GDP?

A

Measures goods/services in current prices.

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, 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] x 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

GDP growth negative 2 consecutive quarters

38
Q

What is a Depression?

A

o A prolonged, severe recession with high unemployment rates

o 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

Occur before a recession or before a recovery

Example: Stock Market or New Housing

41
Q

What are lagging indicators?

A

Occur after a recession or after a recovery

Example: Prime Interest Rates, Unemployment

42
Q

What are coincident indicators?

A

Occur during a recession or during a recovery

Example: Manufacturing

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

Example: People are unemployed in 2010 because there aren’t enough jobs available due to the economy

45
Q

What is Frictional Unemployment?

A

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
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

Example: A construction worker wants to work in an office, so they quit their job and get computer training

47
Q

How does inflation relate to unemployment?

A

High Unemployment = Low Inflation (Visa 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

Example: US Treasuries

53
Q

What is included in the M1 money supply?

A

Currency, Coins, and Deposits

54
Q

What is included in the M2 money supply?

A

Highly liquid assets

55
Q

What is Deficit Spending?

A

o Increased spending levels without increased tax revenue
o Lower taxes without decrease in spending
o Gamble that the multiplier effect will takeover and boost economy

56
Q

How can the Fed control the money supply?

A

Money supply can be controlled by the Fed’s

buying and selling of government 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

Tax on imported goods

59
Q

What is a quota?

A

Limit on number of imported good

60
Q

How do international trade restrictions affect domestic producers?

A

They are good for domestic producers.

o Demand curve shifts right
o Fewer substitutes
o Charge higher prices

61
Q

How to international trade restrictions affect foreign producers?

A

Bad for foreign producers

o Demand curve shifts left
o Fewer buyers
o Charge lower prices

62
Q

How do international trade restrictions affect foreign consumers?

A

Good for foreign consumers

o Supply curve shifts right
o Goods purchased at lower prices

63
Q

How do international trade restrictions affect domestic consumers?

A

Bad for domestic consumers

o Supply curve shifts left
o Fewer goods bought due to higher prices

64
Q

What is Accounting Cost?

A 
o Explicit (Actual) cost of operating a business 
o 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 some characteristic of an emerging market?

A 
Low debt-to-GDP ratios 
low-cost labor, 
high savings rates, 
large currency reserves, and 
high investment in infrastructure.
rapid growth in the number of middle-class consumers 
Improving supply-chain linkages
69
Q

How do you calculate Net GDP?

A

GDP - Total Capital Depreciation

70
Q

What is a Monopoly?

A

Only one seller.
In a market with no substitutes.
Chooses price maximize profits.
Entry into market is high (can be economic, social or political.)

71
Q

What is an oligopoly?

A

Few sellers.
Select group control over prices
Entry into market high barriers
Products produced are similar

BEC (9 decks)

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