Economics (Ninja notes) Flashcards
Supply: when the price of an item increases, what happens to the supply?
Supply increases, there is a Direct relationship between supply and price
Supply: what happens if a Supply chain changes because of something other than price?
The whole supply curve shifts
We at happens when the Supply curve shifts right?
Positive Shift
• Supply increases at Each price point
• Higher Equilibrium GDP
• Number of Sellers increase
- Ex: more companies selling “Smartphones
- market becomes flooded
• Government market interference via subsidy
- Grants or tax credits for ‘“wind” farms
• Technology Improvements
- Fast internet makes ecommerce efficient
We at happens when the Supply curve shifts Left ?
Negative Supply Curve Shift • Supply decreases at each price point • Lower Equilibrium GDP • Cost of producing item increases - Ex: price of gold increases - less sold watches are made • Wars or Crisis - country that makes rice gets attacked - less rice on the market
Demand: we at happens when the price of an item Increases?
Demand for it decreases ( Inverse relationship between Price/Demand
Demand changes due to something other than price ?
Positive Demand Curve shift
• Demand increases at each price point
What are some examples of what would cause a POSITIVE shift?
• Price of Substitute goes up
- Price of Beef goes up then MORE demand for chicken
• Future price expected to increase
- War in MiddleEast Breaks out, people start lining up at Gas Stations
• Market Expands
- people set new free health care plans, Demand at clinics go up
• Expansion - more spending increases Equilibrium GDP
What happens when there is a Negative Demand curve Shift?
• Demand decreases at Each price point
• Price of Compliment goods go up
- Ex: ketchup goes up so less beef is purchased
• Boycott
- Company commits a social blunder
- Consumers boycott
• Consumer income rises
- Demand for inferior goods drops as people have more money to spend
- once people get better jobs they start Eating out at nicer places
• Consumer tastes change
- Fat, Sick, Nearly dead documentary comes out and people start shopping at Whole Foods
• Contraction - less spending decreases equilibrium GDP
Define & Formula: Marginal Propensity to Consume
• How much you Spend when income increases
% Change in Spending / % Change in income
Define & Formula: Marginal Propensity to Save
• How much you Save when income increases
% Change in Savings / Change in Income
MPC + MPS = 100%
How do you calculate “Multiplier Effect?”
[1 / (1 - MPC)] x Change in Spending
What would cause Demand Curve increases? (Shifts Right) as
- Spending by Consumers increases
* Spending by Government increases
Statement: increase in DEMAND ends a up being Larger than the amount of income Spent in the Economy due to the Multiplier effect.
One Consumer Spends money
1st step increases income of the business
then biz spends money w/ supplier So their income increases
then the vendor’s Employees’ income increases
Increases in Tax Revenue for Gov.
Formula: Price Elasticity of Demand
% Change Quantity Demanded / % Change Price
ELASTIC DEMAND: what happens with each?
- price and revenue
- substitutes
- considered elastic?
- Ex: Solve: if Demand drops 10% and Price goes up 8%
- Price Up then Revenue Down
- Price Down then Revenue Up
- MANY substitutes (luxury items)
- considered elastic if > 1
10% / 8% = 1.25 then it’s Elastic
INELASTIC DEMAND: what happens with each?
- price and revenue
- remember?
- substitutes
- considered inelastic?
- Ex:Solve: Demand drops 5% and Price goes up 10%
- Price Up then Revenue Up
- Price Down then Revenue Down
- Remember that “Income = Inelastic”
- FEW substitutes (gasoline)
- Considered Inelastic if < 1
5% / 10% = .5 Inelastic
Unitary Demand (explain)
Total REVENUE will remain the SAME if the price is INCREASED
Considered Unitary if = 1
Income Elasticity of Demand
% of Change Qty. Demand / % of Change Income
- Normal Goods > 1 (demand increases more than income)
- Inferior Goods < 1 (demand increases less than income)
Inflation (what is the result of?)
- interest rates increase
- Reduces the demand for loans
- Reduces the demand for houses, autos, Etc.
- Value of bonds and fixed income securities decrease
- Inferior goods demand increases
- Foreign goods are more affordable than domestic
- Demand for domestic goods decrease
Demand - Pull Inflation ?
• Overall spending increase
- Demand increases (shifts right)
- Market equilibrium price increases
Cost - Push Inflation
- Overall production costs increase
- Supply decreases (shift left)
- Market equilibrium price increases
- Demand - Pull and Cost - Push Inflation BOTH result in market equilibrium price to increase
Formula: Equilibrium Price
Qty. Supplied = Qty. Demanded
Formula: Optimal Production
Marginal Revenue = Marginal Cost
Price Floor (what does it cause?)
Causes a Surplus if above equilibrium price
what is GDP ?
annual value of all goods and services produced DOMESTICALLY at current prices by:
- consumers
- businesses
- the Government
- foreign companies w/ domestic interests
What’s Included / Not Included in GDP?
Included - for is company has a U.S. factory
Not Included - US Company has a foreign factory
GDP: Income Approach Includes?
- sole proprietor & Corp. income
- passive income
- taxes
- employee salaries
- foreign income adjustments
- depreciation
GDP: Expenditure Approach Includes?
- Individual Consumption
- Private Investment
- Government Purchases
- Net Exports
Nominal GDP?
measures goods / services in current prices
GDP Deflator?
used to convert GDP to Real GDP
Real GDP ?
nominal GDP / GDP Deflator x 100
Gross National Product?
Like GDP, Swaps foreign production
• U.S. Firms overseas are included
• Foreign firms domestically Not included
Consumer Price Index
Formula and Explanation
[(CPI Current - CPI Last) / CPI Last] x 100
Price of goods relative to an Earlier period of time, which is the Benchmark Year 1=1.0
Formula: Disposable Income
Personal Income - Personal Taxes
Formula: Return to Scale
% Increase in Output / % Increase in Input
• > 1 Increasing returns to Scale
• < 1 Decreasing returns to scale
Recession
GDP Growth negative 2 consecutive quarters
Depression
- prolonged severe Recession w/ high unemployment rates
* No requisite period of time for the economy to officially be in a depression (no defined time)
What are the Steps in the ECONOMIC Cycle?
- Peak
- Recession
- Trough (bottom of U)
- Recovery
- Expansion
Leading Indicators (Economic Cycle)
Occur BEFORE a recession or recovery
Ex: Stock market or new housing
Lessing Indicators (Economic Cycle)
Occur AFTER a recession or recovery
Ex: Prime Interest Rates, Unemployment
Coincident Indicators (Economic Cycle)
Occur DURING a recession or recovery
Ex: Manufacturing
Unemployment (what’s included in Calculation ?)
Only people looking for Jobs
Cyclical Unemployment
- GDP doesn’t grow last enough to Employ all people who are looking for work
- People were unemployed in 2010 because there aren’t enough jobs available due to the economy
Frictional Unemployment
- People are changing jobs or entering the workforce (NORMAL aspect of Full Employment)
- Ex: Recent College Graduate is looking for a Job
Structural Unemployment
- A worker’s job skills Do NOT match those necessary to get a job (they need Education/ Training)
- A construction worker wants to work in a office, so they quit their job and get Computer Training
What is Unemployment’s relationship to Inflation ?
High Unemployment = Low Inflation (vice verse)
What is the “Discount Rate?”
Rato bank pays to borrow from the Fed
What is the “Prime Rate?”
Rate Bank charges their Best Customers On Short-Term borrowings
What is the “Real Interest Rate?”
Inflation-adjusted interest rate
What is the “Nominal Rate?”
Rate that uses current prices
What is the “Risk-free Rate?”
- Rate for a loan w/ 100% certainty of payback (usually results in a low or rate)
- Ex: U.S. Treasuries
Money Supply - M1
Currency, Coins, and Deposits
Money Supply - M2
Highly liquid assets
Gov. and Economy - Deficit Spending
- Increased spending levels w/o increased tat revenue
- Lower taxes w/o decrease in Spending
- Gable that the Multiplier Effect will takeover and boost economy
Gov. and Economy - Government Securities
Money Supply can be controlled by the Fed’s buying I selling of government securities
Ex: Gov. BUYS securities, want to Grow economy, this ADDs money (gives banks more to loan = consumers more to spend)
Gov. SELLs securities, takes money out of the economy (slows down inflation)
Gov. and Economy - Discount Rate
Fed controls “Economy-wide” interest rates by adjusting the discount rate charged to banks
International Trade:
Tax on imported goods
International Trade: Quota
Limit on number of imported goods
International Trade: Good for Domestic Producers
- Demand Curve shifts RIGHT
- Fewer substitutes
- Charge higher prices
International Trade: Bad for Foreign Producers
- Demand curve Shifts LEFT
- Fewer buyers
- Charge lower prices
International Trade: Good for Foreign Consumers
- Supply curve shifts RIGHT
* Goods purchased at Lower prices
International Trade: Bad for Domestic Consumers
- Supply curve Shifts LEFT
* Fewer goods bought due to higher prices
What are the two types of Accounting Costs?
- Explicit (actual) cost of operating a business
- Implicit costs are opportunity costs
What is the formula for Accounting Profit ?
Revenue - Accounting Cost
What is the formula for Economic Cost ?
Explicit + Implicit Costs
what is Economic Profit ?
Revenue - Economic Cost
