Economics and Business Cycles, Measures, and Indicators_M1

Question 1

What are the Business Cycles?

5 Business Cycles

“Every peak contracts through recovery”

Answer 1

1. Expansion
2. Peak
3. Contractionairy Phase
4. Trough
5. Recovery Phase
   * Business cycles represent the rise and fall of economic activity relative to long-term growth trends.
   * As economic activity is frequently measured using a country’s gross domestic product (GDP), business cycles show GDP rising and falling over time.

Variations are based on duration and intensity

Question 2

What are the characteristics of expansion phase?

1 of 5 Business Cycles

Answer 2

• GDP is rising and unemployment is falling.
• Firm profits will generally be increasing, because the demand for goods and services is increasing.
• Inflation.

Question 3

What are the characteristics of peak phase?

2 of 5 Business Cycles

Answer 3

• The highest point of economic activity.
• It is the point where GDP is at its highest level in the cycle.
• Unemployment is at its lowest level in the cycle. (labor shortages, which will put upward pressure on the overall price level). Excess demand for labor not an excess supply of labor.
• A firm may face higher costs due to the capacity constraints and input shortages they may face. Business inventories are likely to be low.
• The overall price level is likely to be rising not falling.

Question 4

What are the characteristics of contractionary phase?

3 of 5 Business Cycles

Answer 4

• Activity where GDP starts to decline.
• Inflation moderates.
• Unemployment increases
• Decrease in economic activity.
• Profits are decreasing.

Question 5

What are the characteristics of trouph phase?

4 of 5 Business Cycles

Answer 5

• The lowest level of economic activity.
• GDP is at its lowest level in the cycle.
• Unemployment is at its highest level in the cycle.
• Firm profits are likely to be at their lowest level.
• Firms often try to reduce the size of their workforce and reduce other costs.

Question 6

What are the characteristics of the recovery phase?

5 of 5 Business Cycles

Answer 6

• Follows a Trouph.
• Economic activity begins to increase.
• Profits begin to stabilize.
• demand for goods and services begins to rise.

Question 7

What are the terms that describes business cycles?

Answer 7

Recession

• #1 Potential output will exceed actual output. (not producing at full potential).
• GDP is falling for at least two consecutive quarters.
• A decline in consumer purchases (likely due to slow wage growth).
• Increased unemployment.
• Falling stock prices and Profits.
• Reduction of wealth.
• Rising inventories.
• Decreases in business investment.
• Rising unemployment
• The Federal Reserves can lower the discount rate to stimulate the economy

Depression: a more severe recession.
Stagflation: results from declining output and rising prices.

Inflation:

• Full employment and price stability, a major tax reduction.
• Inflation is defined as a sustained increase in the general prices of goods and services.
• It occurs when prices on average are increasing over time.

Deflation:

• Deflation is defined as a sustained decrease in the general prices of goods and services.
• It occurs when prices on average are falling over time.
• Most economists believe deflation is a much bigger economic problem than inflation.

Question 8

How are business cycles measured?

Answer 8

Business Cycle Measurements

• It’s the rise and fall of economic activity relative to long-term growth trends.
• Economic activity is measured using a country’s gross domestic product (GDP).
• Business cycles show GDP rising and falling over time.

Economies of scale

• Occurs when companies experience cost advantages resulting from gains in production efficiencies.
• The more produced, the faster and more efficient the production process becomes, resulting in cost savings.

Diminishing Returns

• Outputs would grow at a lesser rate than inputs.

Diseconomies of scale

• Costs increase due to production inefficiencies.

Comparative Advantage

• A company or country specializes in the production of a specific good or goods.
• Which allows maximizing production relative to cost and relative to what trading partners are able to produce.

Question 9

What are the 4 policies the Govt. uses to stimulate economic activity (growth or decline)?

Answer 9

1. Fiscal Policy
2. Monetary Policy
3. Regulations
4. Trade Controls

Question 10

What is Fiscal Policy?

implemented by Government. Control GDP activitity

1 of 4 Govt. Policies used to control economic activity

Answer 10

EXPANSIONARY POLICIES/Recession
* GDP Output increase.
* Shift the aggregate demand curve to the right.

• INCREASED GOVT. SPENDING (Subsidies, public works projects, welfare programs, and salaries paid to govt. employees).
• An increase in government spending causes GDP to rise and unemployment to fall.
• LOWERING TAXES (Keeps more money in the hands of consumers and helps to increase economic growth).

CONTRACTIONARY Policies/Inflation (opposit from expansionary policies)

• GDP Output decreases.
• Shift the aggregate demand curve to the left.
• Decrease Govt. spending.
• Increase in taxation: ( Causes GDP to fall and unemployment to rise).

Question 11

What is Monetary Policy?

Implemented by the “Federal Reserve”

2 of 4 Govt. Policies used to control economic activity

Answer 11

Increasing or decreasing the discount rate (the interest rate charged by the Federal Reserve to its member banks for short-term loans) is one of the main mechanisms by which the Federal Reserve controls the money supply.

Expansionary Monetary Policy/Recession

• Causes the money supply to increase.
• Lowering the reserve requirements.
• Increases money supply.
• Decrease interest/discount rates to reduce the cost of borrowing for economic growth.
• GDP to increase which causes a decrease in unemployment.
• Increase aggregate demand.

Contractionary Monetary Policy/Inflation

• GDP to decrease and unemployment to increase. (Consumer spending will likely decline) (will negatively impact corporate profits)
• Increasing the reserve requirement.
• Selling Govt. Securities, lower aggregate demand.
• Increasing the discount rate leads to a reduction in borrowing from member banks and, therefore, a reduction in the money supply. Declines in the money supply lead to an increase in
  interest rates.

Question 12

How does the Federal Reserves control the money supply?

Answer 12

The Treasury prints money not the Feds.

The Federal Reserve must increase the money supply through:
1. Federal open market committee (FOMC) purchasing or selling government securities,
2. Raising or lowering the discount rate, or
3. Changing the reserve ratio.

Question 13

What are Regulations?

3 of 4 Govt. Policies used to control economic activity

Answer 13

• Rules established by the Govt. to guide the industry and its entities on how to operate.
• Main purpose is to protect individuals and employees to hold entities accountable for it’s actions and to safeguard the environment.

Examples:

• Taxes
• Antitrust Laws
• Employment and Labor Laws
• Truth-in-Advertisement Laws
• Privacy Laws
• Environmental Regulations
• E-mail Marketing Laws
• Insurance Requirements
• Licensing and Permits
• Compensation Disclosure

Question 14

What are trade controls?

4 of 4 Govt. Policies used to control economic activity

Answer 14

• A Tariff is a tax assessed on imported goods. Tariffs generate revenue for domestic governments and they help protect domestic producers by making imported goods more expensive and less attractive.
• Embargoes are put in place to prohibit importing goods from a specific country.
• Quotas are set as maximum limits on the number of goods imported.

NOTE: Export controls prohibit the unlicensed export of specific information to foreign countries.

Also used by the government to protect the U.S. economy?

Question 15

What are the Leading Indicators of economic status?

Used to predict economic activity.

Answer 15

Leading indicators tend to occur before the fact or predict
economic activity.

• Price changes of materials because they tend to change prior to the economic activity that incorporates the materials, and can be used to predict changes in overall economic activity.
• Orders for goods because the corresponding activity that they generate (e.g., hiring of contractors, additional purchases of materials, home sales, etc.) affects the overall economy and occurs subsequent to the orders being initiated.

EXAMPLES of slow economic growth:

• Average new unemployment claims A decrease in unemployment claims, tells businesses that the economy is strong.
• Decreases in Building Permits implies that there will be fewer buildings in the future, corresponding activity such as purchases of materials, hiring of contractors, home sales, etc. are negatively affected by this.
• Decreases in commercial loans.

OTHER LEADING INDICATORS
include: the average length of the workweek, Money Supply, prices of selected stocks, and index of consumer expectations.

Used to predict the length of business cycles.

Question 16

Lagging Economic Indicators?

Answer 16

• Tend to follow economic activity, or occur as a result of economic activity, gives signals after the fact.
• The average duration of unemployment.
• The prime rate charged by banks and bank loans outstanding.

Question 17

What are coincident indicators?

Answer 17

Occur contemporaneously with economic activity.

• Manufacturing and trade sales because the increases or decreases tend to occur at the same time as the increases or decreases in overall economic activity.
• Industrial Production

Question 18

What is the common strategy for all the business structures?

Answer 18

• All firms should operate where marginal revenues = marginal cost.

Question 19

What are the different business structures?

4 Business Structures

Answer 19

Regardless of the market structure in which a firm operates, the most profitable strategy is to operate where marginal revenue equals marginal cost.

1. Monopoly
2. Oligopoly
3. Monopolistic Competition
4. Perfect Competition

Question 20

What is a natural monopoly?

Answer 20

A natural monopoly exists when economic and technical
conditions permit only one efficient supplier.

Question 21

How to describe participant behavior of a Monopoly?

1 of 4 Business Structures

Answer 21

• One company would be a monopoly.
• Will not focus on market share but focus on profitability from production levels that will maximize profits.
• Demand is inelastic.
• One firm selling a product with no close substitutes.

Question 22

How to describe participant behavior of a Oligoploly?

2 of 4 Business Structures

Answer 22

Oligopoly Behavior

Few firms in the market
Significant barriers to entry
Differentiated products
Fixed (or semi fixed) prices
Kinked demand curves
The “kink” is at the prevailing price.
Best real world examples of oligopoly are the airline and auto industries.
An oligopolist’s demand curve is linear but “kinked.” Above the
“kink,” demand is highly elastic. Below, very inelastic

rival firms will follow suit if prices decrease; but if one firm increases its price, rival firms will not match it (The Game Theory). Coordinating production volume and price changes along with product differentiation.
* Under oligopoly, strategic plans focus on maintaining market share and call for the proper amount of advertising (to ensure product differentiation) and ways to properly adapt to price changes or required changes in production volume

• Game theory is a study of mathematical models of conflict and cooperation between rational decision makers. There are several versions of game theory models that are used to evaluate participant behavior under oligopolies.

Oligopoly Indicators/Characteristics

• A concentration ratio is a quantitative indicator of industry concentration that measures the market share of the leading firms in an industry relative to all firms in the industry.
• The Herfindahl index is a measure of the size of firms relative to the industry that gives more weight to larger firms. It may be used as an indicator of an oligopoly; it may be used to understand oligopoly behavior.
• Relatively few sellers with differentiated products would indicate an oligopoly.
• Know as having the kinked demand curve sharply downward. This occurs because, in oligopoly market conditions, the other firms in the market will match any price reduction so they do not lose market share but will not match any price increase of an individual firm. Therefore, for the individual firm
  attempting to raise its prices beyond equilibrium, consumers will quickly buy from other firms in the market and demand will drop off sharply creating a kinked demand curve.

Question 23

What are the characteristics of monopolistic competition?

3 of 4 Business Structures

Answer 23

• Other companies produce similar products.
• The firm is able to influence prices.
• The firm faces few barriers to entry.
• The firm has a downward sloping, fairly elastic demand curve.
• The goods are NOT identical or perfect substitutes. The definition of being able to “influence prices” is that the firm has a downward sloping demand curve.
• A firm has little market control It cannot influence them as much as a pure monopoly can, but the influence is still there.
• The firm is still not a price-taker; it is a price-maker.
• Monopolistic competition is characterized by a relatively large number of sellers who produce differentiated products. There are few barriers to entry and firms exert some influence over the price and the market. Best examples are brand name consumer products.
• , strategic plans include maintaining the market share (as with pure/perfect competition), enhanced product differentiation, and allocation of resources to advertising, product research, etc.

EX. Best examples are brand name consumer products.

Question 24

What are the characteristics of Perfect Competition?

4 of 4 Business Structures

Answer 24

• The absence of significant economies of scale.
• Horizontal or flat demand curves for the output of individual firms.

Choice “A” is incorrect. Horizontal demand curves represent demand that is perfectly
price elastic (buyers will only pay one price for any quantity of a product). This occurs
in perfectly competitive markets.

• The consumer obtains the product at a low price as economically feasible.
• Every firm is forced to produce at the most efficient output rate.
• Individual consumers are also price takers at the market equilibrium price.
• A relatively large number of sellers and a standardized product indicates perfect competition.
• There is very little product differentiation
• Prices are set by the market.
• Costs have to be kept low in order for a company to survive.
• Maintaining the market share and being responsive to market conditions related
  to sales price.

EX. Market conditions characterizing pure competition include
homogeneous, not differentiated, products

Question 25

Perfect competition environment vs. imperfect competition for monopolist compared to production and price?

Answer 25

Compared to firms in a perfectly competitive market, a
monopolist tends to produce substantially less but charge a higher price

Question 26

What is dumping?

Answer 26

Dumping occurs when the price charged to foreign customers on exported goods is less than either the price charged in the domestic market or less than the production cost.

Tarrif’s and Quatos prevents Dumping