Economics Flashcards
Factors for Positive Demand Curve Shift
Price of substitute goods
Expectations of price increases
Consumer income and wealth
Size of the market
Factors for Negative Demand Curve Shift
The price of complementary goods
Consumer income and wealth
Group boycott
Price Elasticity
Percentage change in quantity demanded/ percentage change in price
> 1 = elastic
<1 = inelastic
=1 =unitary
Elastic
Total revenue will decline if the price is increased
Unitary
total revenue will remain the same if the price is increased
Inelastic
Total revenue will increase if the price is increased, since the percentage increase in price exceeds the decrease in demand
Income elasticity
Percentage change in quantity demanded/ percentage change in income
\+ = normal good - = inferior
Cross elasticity
Percentage change in demand for product x / percentage change in price of product y
\+= substitute -= complements
Marginal Propensity ot consume (MPC)
The percentage of the next dollar in personal disposable income that the consumer would be expected to spend
Marginal Propensity to save (MPS)
The percentage of the next dollar in personal disposable income that the computer would be expected to save
Factors Causing A Direct Relationship on the supply curve
number of producers
government subsidies
price expectations
Factors with an inverse relationship on the supply curve
Changes in production costs
Prices of other goods
Marginal cost
The increase in cost that will result from an increase in one unit of production. Only variable costs are relevant, since fixed costs won’t increase such circumstances
In the long run, all costs are…..
variable, since increasing production beyond certain levels will require increasing in capacity, caused even “fixed “ costs to rise
Return to scale
the increase in units produced (output) that results from an increase in production costs (input)
Return to scale formula
percentage increase in output/ percentage increase in input
>1 = economies of scale <1 = diseconomies of scale
Economies of scale
increased efficiency that results from producing more units of a product
Diseconomies of scale
increased inefficiencies that result from expanding production
Gross Domestic Product (GDP)
the price of all goods and services produced by a domestic economy for a year at current market prices
Real GDP
adjusted to remove the effect of price inflation in the goods and services
Gross national product (GNP)
price of all goods and services produced by labor and property supplied by the nations residents.
Difference between GDP and GNP
GNP includes income received by the nations resident from other countries for products that are a part of foreign economies
GNP excludes payments made to the residents of other countries for products that are a part of the domestic economy
Effects of Price Inflation on Interest rates
Price inflation causes an increase in interest rates and decreases the willingness of consumers to borrow, causing a negative shift in the demand curve for items whose purchase is typically financed, such as houses and automobiles
Effects of Price inflation on wealth
Price inflation causes the value of fixed income investments (such as bonds) to decrease, causing individuals to have less wealth and reducing their consumption of normal goods. (The consumption of inferior goods will increase, but these are typically a small part of the overall economy.)
Effects of Price inflation on international purchasing
Domestic price inflation makes domestic goods and services more expensive relative to foreign goods and services, causing an increased demand for foreign products and a native shift in the demand curve for domestic goods and services
The three common measures of price inflation are
Consumer price income (CPI)
Producer price index (PPI)
GDP deflator
Consumer price index
This measure the price of a fixed basket of goods and services that a typical urban consumer might purchase in relation to the price of the same goods and services in a earlier base period.
Producer price index
The measures a fixed basket of good at the wholesale costs to dealers (such as retail stores) rather than the price to consumers.
GDP deflator
This utilizes the total production of the economy as measured by GDP and is used to convert GDP to real GDP.
Demand Pull Inflation
When appreciate spending increases, the demand curve moves to the right, causing the market equilibrium to occur t a higher price levels and quantity
Cost push inflation
When production costs increase, the supply curve moves to the left, causing the market equilibrium to occur at higher price levels but a lower quantity.
Multiplier Effect
There will be a positive shift in the demand curve when there is an increase in spending by consumers, businesses, or governments. The size of the shift will be significantly larger than the amount spent, due to the multiplier effect of increased spending increasing the income of suppliers, who in turn will spend more, increasing the income of other suppliers and so on
Multiplier Effect Formula
Change in spending/ Marginal propensity to save
Panic
a severe contraction of GDP occurring within a very short time frame (generally lasting less than a year)
Recovery
The term used to refer to the period of expansion that follows the end of a contraction
Frictional Unemployment
time period during which people are unemployed as a result of changing jobs or newly entering the workforce.
Structural unemployment
potential workers whose job skills do not match the needs of the workforce asa result of changing demand for goods and services of technological advances that reduce or eliminate the need for the skills they possess
Cyclical work
represents the unemployment caused by variations in the business cycle, when real gap fails to grow at the pace necessary to employ all willing workers
Nominal interest rate
rate measured in terms of nations currency
Real interest rate
rate adjusted for inflation
Risk free rate
rate that would be charged to a borrower if the lender had an absolute certainty of being repaid
Discount rate
rate set by the Federal Reserve at which a bank can borrow from a Federal Reserve bank
Prime rate
The rate that bank charge their most creditworthy customers on short term loans from banks
Fiscal policy
collects taxes and spends, the government may try to aid certain industries or the economy as a whole
Fiscal expansion or deficit spending
involves raising spending levels without an equivalent increase taxes or lowering taxes without an equivalent decrease in spending
Monetary policy
The Federal Reserve System is charged with control over the money supply. By taking actions that increase or decrease the total amount of money in circulation, the Fed has a major impact on total spending.
Absolute advantage
this exists when the country can produce the goods at a lower cost than the other country
Comparative advantage
this exists when the cost of producing those goods relative to the cost of producing other goods is lower in that country than in the other country
Tariff
tax on imported goods
World Trade Organization (WTO)
formed to encourage all countries to maintain free trade policies and to prevent trade wars.
North American Free Trade Agreement (NAFTA)
signed by the US, Mexico and Canada in order to remove trade restrictions existing between those countries
Balance of Payments
accounts summary of the transactions of a nation with others
Spot rate
exchange rate for currencies that will be immediately delivered
Forward rate
rate at which two parties agree they will exchange the currencies at a specific future fdate
Factors affecting foreign exchange rates
Inflation-the currency with higher inflation will fall in value relative to the other
Interest rates-the currency in the nation with higher interest rates will rise in value
Balance of payments- currency of the country that is a net exporter will rise in value
Government intervention-currency will rise if official reserves are used to buy it
Political and economic stability-the currency will fall when there are threats to stability
Strategic planning
identifying an organizations long term goals and determining the best approaches to achieving these goals
