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CPA > CPA BEC Flashcards > -Economics > Flashcards

-Economics Flashcards

1
Q

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

What is a supply curve shift?

A

A supply curve shift happens when supply changes 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
  • Supply increases at each price point.
  • Higher Equilibrium GDP
  • Number of sellers increase: market can get flooded.

Examples: Government subsidies or technology improvements that decrease costs for suppliers

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4
Q

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

How does price affect the demand for an item?

A

When the price of an item increases, demand for it decreases.

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6
Q

What is a Demand Curve Shift?

A

A demand curve shift happens when demand changes due to something other than price.

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7
Q

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

A
  • When demand increases at each price point
  • Price of substitutes go up - e.g. price of beef rises, so people buy more chicken
  • Future price increase is expected - e.g. War in Middle East: long lines at gas pumps
  • Market expands - e.g. people get new free health care plan- demand at clinic rises
  • Expansion - more spending increases equilibrium GDP
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8
Q

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

A
  • Demand decreases at each price point.
  • Price of complement goes up - e.g. price of beef goes up - less demand for ketchup
  • Boycott - e.g. Company commits social blunder - consumers boycott
  • Consumer income rises - e.g. 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

What is the Marginal Propensity to Consume?

A

MPC is how much you spend when your income increases.

Calculate: Change in Spending / Change in Income

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10
Q

What is the Marginal Propensity to Save?

A

Marginal Propensity to Save is 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

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

Under elastic demand, when:

  • Price increases, Revenue decreases
  • Price decreases, Revenue increases
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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

Under Inelastic Demand, when:

  • Price increases, Revenue increases.
  • Price decreases, Revenue decreases.
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18
Q

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

What is Unitary Demand?

A

Unitary demand means:

  • Total revenue will remain the same if price is increased.
  • Considered unitary if the coefficient of elasticity = 1
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20
Q

How is Income Elasticity of Demand calculated?

A

% Change Quantity Demanded / % Change in Income

  • Normal goods > 1 (demand increases more than income)
  • Inferior goods < 1 (demand increases less than income)
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21
Q

What conditions occur under periods of inflation?

A
  • Interest rates begin to 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

What happens under Demand-Pull inflation?

A
  • Overall spending increases
  • Demand increases (shifts right)
  • Market equilibrium price increases
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23
Q

What happens under Cost-Push inflation?

A
  • Overall production costs increase
  • Supply decreases (shift 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

What is the Equilibrium Price?

A

The price where Quantity Supplied = Quantity Demanded

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25
Q

What is Optimal Production?

A

When Marginal Revenue = Marginal Cost

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26
Q

What is the result of a Price Floor?

A

Price Floor causes a surplus if above equilibrium price.

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27
Q

What is Gross Domestic Product (GDP)?

A

GDP is 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
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
29
Q

What is included under the Expenditure Approach for calculating GDP?

A
  • Individual Consumption
  • Private Investment
  • Government Purchases
  • Net Exports
30
Q

What is Nominal GDP?

A

Nominal GDP measures goods/services in current prices.

31
Q

What is a GDP Deflator?

A

GDP Deflator is 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

GNP is Like GDP. It swaps foreign production.

  • US Firms overseas are included.
  • Foreign firms domestically are not included.
34
Q

What is the Consumer Price Index (CPI)? How is it applied?

A

CPI is the 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
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

  • > 1 =: Increasing returns to scale
  • < 1 : Decreasing returns to scale
37
Q

When is the economy in recession?

A

The economy is in recession when GDP growth is negative for two consecutive quarters.

38
Q

What is a depression?

A

A depression is a prolonged, severe recession with high unemployment rates.

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

The stages of the economic cycle are:

  • Peak (highest)
  • Recession (decreasing)
  • Trough (lowest)
  • Recover (increasing)
  • Expansion (higher again)
40
Q

What are leading indicators?

A

Leading indicators are conditions that occur before a recession or before a recovery.

Example:
Stock Market
New Housing Starts

41
Q

What are lagging indicators?

A

Lagging indicators are conditions that occur after a recession or after recovery.

Examples:
Prime Interest Rates
Unemployment

42
Q

What are coincident indicators?

A

Coincident indicators are conditions that occur during a recession or during a recovery.

Example: Manufacturing output

43
Q

What groups of people are included in the unemployment calculation?

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 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 workforce. 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 he quit his job and get computer training.

47
Q

How does inflation relate to unemployment?

A

High Unemployment = Low Inflation (Vice Versa)

48
Q

What is the Discount Rate?

A

Discount Rate is the rate a bank pays to borrow from the Fed.

49
Q

What is the Prime Rate?

A

Prime Rate is 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

The Nominal Rate is the interest rate that uses current prices.

52
Q

What is the Risk-Free Rate?

A

Risk-Free Rate is the interest rate for a loan with 100% certainty of payback. It usually results in a lower rate.

Example: US Treasuries

53
Q

What is included in the M1 money supply?

A

The M1 money supply includes:

  • Currency
  • Coins
  • Deposits
54
Q

What is included in the M2 money supply?

A

The M2 money supply includes highly liquid assets other than currency, coins or deposits.

55
Q

What is Deficit Spending?

A

Deficit spending is characterized by:

  • 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
Q

How can the Fed control the money supply?

A

The Fed can control the money supply by buying and selling the government’s securities.

57
Q

How does the Fed control economy-wide interest rates?

A

The Fed controls economy-wide interest rates by adjusting the discount rate charged to banks.

58
Q

What is a Tariff?

A

A tariff is a tax on imported goods.

59
Q

What is a quota?

A

A quota is a limit on the number of goods that can be imported.

60
Q

How do international trade restrictions affect domestic producers?

A

International trade restrictions are good for domestic producers.

  • Demand curve shifts right.
  • Fewer substitutes.
  • They can charge higher prices
61
Q

How do international trade restrictions affect foreign producers?

A

International trade restrictions are bad for foreign producers.

  • Demand curve shifts left.
  • Fewer buyers.
  • They must charge lower prices
62
Q

How do international trade restrictions affect foreign consumers?

A

International trade restrictions are good for foreign consumers.

  • Supply curve shifts right.
  • Goods purchased at lower prices in the foreign markets.
63
Q

How do international trade restrictions affect domestic consumers?

A

International trade restrictions are bad for domestic consumers.

  • Supply curve shifts left.
  • Fewer goods bought due to higher prices.
64
Q

What are Accounting Costs?

A
  1. Explicit (Actual) cost of operating a business
  2. 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

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