Economics SS3 Flashcards
Quantity of demand is a function of …:
Price of good Px
Individuals’ incomes I
Price of relatated products (Py)
Many other factors may be added
What is the Law of Demand?
Increase in quantity as Decrease in Price
Quantity supplied is a function of …:
Price of good Px
Cost of Production Cx
- Labor Cost
- Material Cost
- Production overheads
- Technology
- Many other factors may be added
Formula of Elasticity of Demand
% Variation Q / % Variation Px
Definition of Elastic Demand
% Increase in price leads to a larger % decrease in quantity demanded
PED in absolute terms is greater than one (i.e. PED |1.0|)
Definition of Inelastic demand
% increase in price leads to a smaller percentage decrease in quantity demanded.
PED in absolute term is less than one (PED < |1.0|)
Influence of :
- Availability and closeness of substitues
- Proportion of income spent on item
- Time elapsed since previous price change
- Increase substitues –> Increase in Elasticity
- Increase in proportion of income –> Increase in Elasticity
- Increase in Time –> Increase Elasticity
Price Elasticity of Demand and Total Revenue : Impact of inelastic/elastic range on revenue when price increase
Inelastic range : Increase total revenue
Elastic Range : Decrease total revenue
Formula of Income elasticity
% Change in quantity demanded / % change in income
Impact of income elasticity on
a. normal good
b. inferior good
a. Normal Income : Increase in income; Increase in demand (i.e. Elasticity > 0)
b. Inferior good : Increase in income; Decrease in Demand (i.e Elasticity < 0)
Cross Price Elasticity of demand on
a. Substitutes
b. Complements
a. Elasticity > 0
b. Elasticity < 0
Cross Price Elasticity of demand on
a. Substitutes
b. Complements
a. Elasticity > 0
b. Elasticity < 0
Substitution effect when the price of a good decreases
Always increases consumption of the good which the price has fallen.
Income effet when the price of a good decreases
Normal good : Positive effect
Inferior good : Negative effect
Substitutions and Income Effect on :
a. Normal goods
b. Inferior goods
c. Giffen goods
d. Veblen good
a. Quantity increase due to both substitution and income effect
b. The quantity purchased increases as the substitution effect outweighs the income effets.
c. The quantity decrease (Income effects have outweigh the substitution effect)
d. Decrease in quantity purchases (people put less value on the good when its price is lower)
Definition of diminishing marginal returns
- Additional unit will begin to decrease at some amount of the input
- The marginal product may become negative at some quantity of the input.
What is the situation when a company is at :
a. Breakeven
b. Shotdown in LR
c. Shotdown in SR and LR
a. MC = ATC
b. MC = AVC
c. MC < AVC
What are the characteristics of Perfect Competition?
a. How many firms?
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price Power
a. Many firms
b. Very low Barriers to entry
c. Very good substitutes
d. Nature of competition : Price only
e. Price power : none
What are the characteristics of Monopolistic Competition?
a. Number of sellers
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price power
a. Many firms
b. Barriers to entry : Low
c. Good substitutes but differentiated
d. Nature of competition : Price, Marketing, features
e. Price power : Some
What are the characteristics of oligopoly?
a. Number of sellers
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price power
a. Few firms
b. Barriers to entry : High
c. Very good substitutes or differentiated
d. Nature of competition : Price, marketing, features
e. Price power : Some to significant
What are the characteristics of Monopoly?
a. Number of sellers
b. Barriers to entry
c. Nature of substitute products
d. Nature of competition
e. Price power
a. Single firm
b. Barriers to entry : Very High
c. No good substitutes
d. Nature of competition : Advertising
e. Price power : Significant
In the Short-Run situation under Perfect Competition, when a firm :
a. Maximize profit
b. Zero profit
c. Loses
a. MC = MR = Price
b. ATC = Price
c. ATC > Price
What is the Perfect Competition - Equilibrium in long term?
MR = AR = D
Study Graph
Assumptions on Cournot Model (Duopoly model)
- Homogeneous Product
- Firms have market power (quantity will affect price)
- Firm choose quantities simultaneously
- Both firms have identical and constant marginal costs of production
What is game theory?
Game theory suggests that if competitors cannot detect cheating, they will choose to violate collusion agreement and increase output.
What is strategic games?
Strategic games models the best choice for a firm depending on the actions and reactions of competitors.
What are the characteristics of a dominant firm oligopoly?
- One dominant firm is the low cost producer
- Dominant firm produce most of the output
- Dominant firm essentially sets the market price P*
What are the characteristics of Monopoly?
Barries to entry :
- Economies of scale (natural monopoly)
- Government licensing and legal barriers
- Resource control
Price setting strategies :
- Single-price, price discrimination
Perfect price discrimination is efficient when…
- Charge each consumer the maximum the consumer is willing to pay for each unit
- No deadweight loss
- Produce same quantity as perfect competition
- No consumer surplus; entire surplus goes to producer
What are the elements that are included in the GDP?
Makes value of all final goods and services produced in a country/economy
- Produced during the period
- Only goods and services only
- Final goods and services only (not intermediate)
- Rental value for owner-occupied housing (estimated)
- Government services (at cost) - not transferts
Describe the methods for calculating GDP
- Income approach = Earnings of all households + businesses + government
- Expenditures approach = Sum market values of all final goods and services, or sum all the increases in value at each stage of the production process
GDP formula
GDP = C + I + G + (X-M)
Difference between nominal and real GDP
Nominal GDP : Sum of all current-year goods and services at current-year prices
Real GDP : Sum of all current year goods and services at base-year prices.
GDP Delator formula
GDP Deflator = (Nominal GDP / Real GDP) x 100
What is the composition of national income?
Employees’ wages and benefits
+ Corporate and government profits pre-tax
+ Interest income
+ Unincorporated business owners’ income
+ Rent
+ Indirect Business taxes - subsidies (taxes and subsidies that are included in final prices)
What is the composition of personal income?
national income \+ transfer payments to households - Indirect business taxes - corporate income taxes - undistributed corporate profits
What is the formula of personal disposable income?
= Personal income - personal taxes
Voir graph aggregate supply and demand + explanation
Whare are the factors that increase SRAS?
- Decreases in input prices
- Improved expectations about future
- Decreases in business taxes
- Increases in business subsidies
- Currency appreciation that reduces the cost of imported inputs
Whare are the factors that increase LRAS?
- Increase in labor supply
- Increased availability of natural resources
- Increased stock of physical capital
- Increased human capital (labor quality)
- Advances in technology / labor productivity
What are the factors that increase Economic growth?
- Increase in labor supply
- Increased availability of natural resources
- Increased stock of physical capital
- Increased human capital (labor quality)
- Advances in technology / labor productivity
What is the formula of growth in potential GDP?
Growth in labor force + Growth in labor productivity
What is the production function approach?
Y = A x f(L,K) Y = Aggregate economic output L = Size of labor force K = Amount of capital available A = Total factor productivity
What is the formula of per capita growth?
Growth in per-capita potential GDP = Growth in technology + Wc (growth in the capital-to-labor ratio)
The inventory/sales ratios _____ during an expansion/contraction
Contraction : Increase
Expansion : Decrease
What is the utilization of labor and capital during
a. Contraction
b Expansion
Contraction : Labor and capital are used less intensively
Expansion : Labor and capital are used more intensively
Impact on imports and exports when domestic currency :
a. Appreciates
b. Depreciates
a. Increase in imports, decrease in exports
b. Decrease in imports, increase in exports
Describe the Neoclassical school of though.
Cause of Business cycles : Technology changes
Recommended policy : Allow wages, prices to adjust
Describe the Keynesian and New Keynesian school of though.
Keynesian :
- Cause of business cycles : AD shifts with changes in business expectations; contractions persist due tu downward sticky wages
- Recommended policy : Use fiscal and/or monetary policy to restore full employment
New Keynesian :
- Cause of business cycles : Same as Keynesian; but other input prices also downward sticky
- Recommended Policy : Same as Keynesian
Describe the Monetarist school of though.
Cause of Business Cycles : Inappropriate changes in money supply growth rate
Recommended Policy : Steady, predictable growth rate of money supply
Describe the Austrian school of though.
Cause of Business Cycles : Government intervention in economy
Recommended Policy : Don’t force interest rates to artificially low levels
Describe the New Classical (Real Business Cycle theory) school of though.
Cause of Business Cycles : Rational responses to external shocks, technology changes
Recommended Policy : Don’t intervene to counteract business cycles
What are the types of Unemployment and describe them?
- Frictional : Unemployment results from the time it takes employers and employees to find each other.
- Structural : Unemployment results from long-term changes in the economy that require workers to gain new skills to fill new jobs
- Cyclical : Unemployment results from changes in economic growth; equals zero at full employment
What is the formula of Unemployment Rate?
Number of unemployed / Labor force
- Labor force = unemployed + employed
What is the formula of the participation ratio?
Labor force / Working-age population (>16)
Describe discouraged workers
Discouraged workers are those who are available for work but not employed or seeking employment; considered not in labor force and not counted as unemployed.
Describe :
a. Inflation
b. Inflation rate
c. Disinflation
d. Deflation
e. Hyperinflation
a. Persistent increase in price lever over time
b. Percent increase in price level over a period (usually one year)
c. Decrease in positive inflation rate over time
d. Persistent decrease in price level over time; negative inflation rate
e. Out-of-control high inflation
Describe a price index
A price index is a weighted average of goods and services prices compared to a base period used as a proxy for the overall or average price level.
Describe the consumer price index (CPI)
It measures the cost of a fixed “basket” of goods and services compared to their cost in a base period.
What is the formula of the consumer price index (CPI)?
CPI = (Cost of basket at current prices / Cost of basket at base year prices) x 100
What are the other inflation indexes?
- Price index for personal consumption expenditures : Weight based on surveys of business instead of surveys of consumers.
- GDP deflator
- Producer price index : Crude materials, intermediate goods, finished goods prices.
Compare headline inflation and core inflation.
- Headline inflation : Price indexes that include all goods and services
- Core inflation : It refers to prices of all goods excluding food and energy.
What are the limitations of inflation measures?
The CPI is widely believed to overstate the true rate of inflation.
The most significant biases in the CPI data include :
- Consumer substitution of lower-priced products for higher priced products
- New goods replace older, lower-priced products
- Price increases dut to quality improvements
What are the adjustments for CPI Bias?
- Laspeyres index : CPI is calculated using basket weights from base period.
- Paasche index : It uses basket weights from current period and compare cost to base period
- Chained price index : It reduces bias from substitution.
Fisher Index : Geometric mean of Laspeyres and Paasche Indexes
Describe cost-push (or wage-push) inflation
Increases in wages or other producer input prices decrease short-run aggregate supply, increase price level.
Describe-pull inflation
Increase in aggregate demand above full employment increases price level
What are the characteristics of credit risk?
- Credit cycles tend to be longer, deeper, and sharper than business cycle
- When the economy is strong or improving, the willingness of lender to extend credit, and on favorable term is high.
Describe this economic indicator : Lending economic indicators
Turning points that usually proceed those of the overall economy; they are believed to have value for predicting the economy’s future state, usually near-term.
Describe this economic indicator : Coincident economic indicator
Turning point that are usually close to those of the overall economy, they are believed to have value for identifying the economy’s present state.
Describe this economic indicator : Legging economic indicators
Turning points that take place later than those of the overall economy, they are believed to have value in identifying the economy’s past condition.
Explain the N-Firm Concentration Ratio
Sum of the percentage market shares of the N largest firms in an industry.
Low ratios indicate competitive market
Higher ratios indicate oligopoly
What are the disadvantages of the N-Firm Concentration Ratio?
- Ignores barriers to entry
- Largely unaffected by mergers
Explain the Herfindahl-Hirschman Index (HHI)
Sum of squared market shares of N largest firms in a market.
What are the advantages and disadvantages of the Herfindahl-Hirschman Index (HHI)?
Advantages :
- More sensitive to mergers than N-Firm ratio
- Widely used by regulators
Disadvatanges :
- Ignores barriers to entry
- Ignores demand elasticity
Definition of capital consumption allowance
The output that goes to replace capital stock wearing out, depreciation.
