Economics and Strategy Flashcards
What is change in quantity demanded
Movement along he demand curve from one price quantity combination to another
What happens in period of rising inflation
The purchasing power of the money declines as measured by the increase in price level (negative related)
Note that contracts that include the indexing of pmts will be impacted as the prices will increase.
Scanning, assessing, forecasting, monitoring
scanning - scan of all segments of the general environment, collecting data about all segments to understand the effects of economic changes on the firm’s industry
assessing - determining changes in the firm’s strategy that are necessary
forecasting - developing probable projections of what might happen and its timing
monitoring - study of environmental changes identified by scanning to spot trends
What does the consumer price index measure
The price change of a bundle of consumer goods - the rate of inflation
What is the most important means by which the money supply is controlled?
Open market operations through bond sales and purchases are flexible (govt securities can be purchased or sold in large or small amounts) cause prompt changes in bank reserves, and are more subtle than reserve ration changes.
Reserve ration changes are infrequent, offer less flexibility, and have less prompt effects than open market operations.
What does the govt do in a period of inflation/deflation
In a period of inflation, the govt could decrease the money supply, or increase interest rates.
In a period of deflation, the govt wants to encourage borrowing and investment to promote economic growth.
Note that in a period of deflation, interest rates are often near zero or even negative. Reducing rates is not as effective as increasing the money supply.
What does the central bank do
Most important function is to regulate the money supply in accordance with policies established to promote the nation’s economic well being. Monetary policy seeks to provide a supply of money, employment, and a relatively stable price level.
Note this is NOT managed by the national government.
Purely competitive market
Very large number of firms who produce a standardized product. Individual firms are price takers. Firms have no control over prices. No/low barriers to entry for new firms.
Firms sell homogeneous product, customers indifferent, level of a firms output is small compared to industry total, firm must sell at equilibrium price
Monopoly
Firm is the industry. There is one sole seller of a product or service. Has considerable control over price.
A natural monopoly exists when because of economic or technical conditions, only one firm can efficiently supply the product.
Monopolistically competitive market
Relatively large number of sellers produce differentiated products, and operating noncollusively.
Economies or diseconomies of scale, advertising, and heterogeneous products
Oligopolistic market
Small number of sellers who make interdependent pricing and output decisions. A few firms often work together to control prices.
Easier for firms to agree on price if they have similar cost structures, fewer firms, and products are standardized.
It will be harder to collude if economy is in a recession as there is a temptation to price cut and gain sales at the expense of rivals.
Has a kinked demand curve as competitors will often match price decreases but are hesitant to match price increases.
What would a city ordinance that freezes rent prices cause?
If prices are held artificially low, demand will exceed supply. The demand and supply curves are not affected by the rent freeze. The supply of rental space will decline due to the price freeze.
In the long run, why would a firm experience increasing returns
Due to economies of scale.
If both the supply and demand for a good increase, what happens to the market price
Depends on the amounts of the supply and demand increase.
What happens if the dollar price of the euro rises?
The dollar depreciates against the euro. Euro appreciates against the dollar.
The euro is likely to buy more US goods.
Note that how many European goods the euro will buy depends on INFLATION.
How do you calculate real value?
Real (after inflation) value = future dollars / (1+ inflation rate)
What happens with an increase in the market supply of beef
An increase in the supply of beef would result in a lower equilibrium price and therefore increase the demand for beef.
It will NOT increase the price of beef.
What are agreements that are unaffected by increase in inflation?
A borrower whose debt has a fixed interest rate - would pay debt with dollars of less purchasing power
A union worker whose contract includes a provision for regular cost of living adjustments - contract maintains purchasing power
A saver whose savings was placed in a variable rate savings account - adjusts savings rate for inflation
NOTE a retiree living on fixed income would be hurt as lower purchasing power
How do you calculate the marginal propensity to save?
It is the change in savings divide by the change in income
Note that the marginal propensity to consume is the inverse. (change in consumption / change in income)
What policy package would be most effective at dampening the economy and preventing inflation?
All have the effect of dampening the economy and preventing inflation: Reducing govt spending Increasing taxes Reducing money supply Increasing interest rates
What is the law of diminishing marginal utility
Marginal utility declines with each additional unit the consumer receives
Trough of a business cycle
There is unused capacity and an unwillingness to make investments
What are assumptions in a perfectly competitive financial market?
There are a large number of buyers and suppliers and no single participant or group of participants can influence market prices
Prices vary based on both supply and demand.
Differentiation
Can be real or perceived by the customer
Can be based on service or by market segment
It is not always related to the cost of producing the product.
Aggregate demand
It includes govt purchases, if govt purchases decreases, it will decrease aggregate demand
Transfer price for connected companies in different countries, producer has 40% tax rate and other has 50%
Objective is to have the transfer price maximized if the tax rate in the producing country A is lower. This lowers the overall tax burden.
This will maximize reported taxable income in the lower tax country and minimize reported taxable income in the higher tax country.
Consumer price index
Primary purpose is to compare relative prices of a basket of goods over time.
CPI is measured as the price that urban consumers paid for a fixed basket of goods and services in relation to the price of the same goods and services purchased in some base period. It is therefore in appropriate for measuring what companies buy. The producer price index is the measure used by companies.
Typically measured annually or more
CPI reflects what consumers paid, not what they are willing to pay.
