Economics, Strategy, Globalization Flashcards
Focuses on the behavior and purchasing decisions of individuals and firms
microeconomics
the quantity of a good or service that consumers are willing and able to purchase at a range of prices at a particular time
demand
occurs when demand variables, other than price, change
Demand curve shift
Goods (i.e. bread, potatoes) whose demand gos up as consumer income (wealth) goes down
Inferior goods
Ed=% Change in quantity demanded/% Change in price=(Q2-Q1)/Q1/(P2-P1)/P1
Price Elasticity of demand
Demand is elastic–sensitive ot price changes
When Price Elasicity of Demand is >1
Demand is unitary–not sensitive or insenstitive ot price changes
When Price Elasticity of Demand is =1
Demand is inelastic–not sensitive to price changes
When Price Elasticity of Demand
=(Percentage change in quantity demanded)/(Percentage cahnge in income) Positive for normal goods, negative for inferior goods)
Income Elasticity of Demand
=(Percentage change in the quanitty demanded of Product X)/(Percentage change in the price of Product Y) –If positive, goods are substitutes –If negative, goods are complements –if 0, goods are unrelated
Cross Elasticity of Demand
As the price of a good falls, con sumers will use it to replace similar goods
Substitution effect
As the price of a good falls, consumers can purchase more with a given level of income
Income effect
as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
Law of Diminishing Marginal Utility
A curve used in economics which shows how consumers would react to different combinations of products –used to evaluate marginal utility
Indiferrence curves
represents the combinations of goods and services that a consumer can purchase given current prices with his or her income
Budget Constraint
The amount of income that individuals receive and have available to purchase goods and services (after receiving transfer payments from the government andpaying taxes)
Personal Disposable income
Depicts the relationship between changes in personal disposable income and consumption C=C0+(C1*YD)
Consumption function
An economic term for the amount that consumption changes in response to an incremental change in disposable income
Marginal Propensity to Consume (MPC)
The percentage of additional income that is saved
Marginal Propensity to Save (MPS)
The percentage change in the quantity supplied of a product resulting from a change in the product price =(% change in quanitty supplied)/(% change in price)
Elasticity of Supply
The price at which all the goods offered for sale will be sold (quantity demanded=quanitty supplied)
Equilibrium Price
A specified maximum price that may be charged for a good, usually established by a government–if set below equilibrium, will cause shortages because suppliers will spend time producing other goods
Price ceiling
A specified minimum price that may be charged for a good, usually establsihed by a government–if set above equilibrium, will cause surplus
Price floor
Used to describe damange to common areas that is caused by the production of certain goods (ex. pollution)
Externalities
Fixed cost per unit of production –decreases as more units are produced
Average fixed cost (AFC)
Total variable costs/ # units produced -Initially stays constant until the inefficiencies of pdoucing in a fixed-size facility cause variable costs to begin to rise
Average variable cost (AVC)
The cost of producing one extra unity -initially decreases then beginsto increase due to ineffiencies
Marginal Cost (MC)
Total costs/# units produced –behavior depends on the makeup of fixed and variable costs
Average Total Cost (ATC)
In LR, output increases in same proportion as increases in production
Constant returns to scale
in LR, output increases by a greater proportion as increases in production
Increasing returns to scale
In LR, output increases by a smaller proportion than increases in production factors
Decreasing returns to scale
The amount of profit necessary to compensate the owners for their capital and/or managerial skills–just enough to keep a firm in business in the LR
Normal profit
the amount of profit in excess of normal profit–does not exist in a perfectly competitive market in the LR
Economic Profit
the additional revenue received from the sale of one additional unit of product
Marginal revenue
the additional cost incurredfrom the production of one additional unit of product
Marginal cost
the additional output obtained from employing one additional unit of a resource (ex. one more worker)
Marginal product
the change in total revenue from emplopying one additional unit of a resource
Marginal revenue product
=Marginal Revenue Product/ Marginal Product
Marginal revenue per-unit
The price of all goods and services produced bya domestic economy for a year at current market prices
Nominal Gross Domestic Product (GDP)
The price of ALL goods and services produced by the economy at a price level adjusted (constant) prices (i.e. with effects of inflation eliminated)
Real GDP
the maximum amont of production that could take place in an economy without putting pressure on the general level of prices
Potential GDP
difference between potential GDP and real GDP –if positive, means there are unemployed resources –if negative, means that the economy is running above normal capacity
GDP gap
GDP minus depreciation
Net Domestic Product (NDP)
The price of all goods andservices produced by labor and property suplied by the nation’s residents
Gross National Product (GNP)
Curve depicting the demand of consumers, businesses, and government as well as foregin purchasers for the goods and services of hte economy at different price levels
Aggregate demand curve
As price levels increase, nominal interest rates increase causing a decrease in interest sensitive spending (i.e. homes, automobiles, appliances)
Interest Rate Effect
When price levels increase, the market value of certain financial assets decreases cauusing individuals to have less wealth and therefore they reduce their consumption
Wealth effect
When domestic price levels increase relative to foreign currencies,foreign products become less expensive causing an increase in imported goods and a decrease in exported goods, decreasing the aggregate demand for domestic products
International purchasing power effect
Occurs when the output level of the economy creates just enough spending to purchase the entire output
Equilibrium GDP
Refers to the fact that an increase in spending by consumers, businesses, or hte government has a multiplied effect on equilibrium GDP
The multiplier
a fluctuation in aggregate economic output that lasts for several years
business cycle
businesses that perform better in periods of expansion and worse in periods of recession
cyclical businesses
businesses that are affected little by business cycles using economic indicators
defensive businesses
nominal rate - inflation premium
Real interest rate
expenditures made by businesses based on expected profitability htat are independent of the level of national income (i.e. constant regardless of if economy is expanding/contracting)
Autonomous investment
incremental spending based on an increased level of economic activity
Induced investment
States that as economic activity increases, capital investment must e made to meet the level of increased demand, which in turn creates additional economicc demand which further feeds the economic expansion
Accelerator theory
unemployment that occurs because individuals are forced or voluntarily change jobs (new entrants fall into this category)
Frictional unemployment
Unemployment that occurs due to changes in demand for products or services, or technological advances that cause not as amny individuals witha particular skill to be needed
Structural unemployment
unemployment caused by the condition in which real GDP is less than potential GDP
Cyclical unemployment
the rate of increase in the price level of goods and services,usually measured on an annual basis
Inflation
the ter used to descrive a decrasein the price levels of goods and services–very damaging
Deflation
measures the price that urban consumers paid for a fixed basket of goods and services in relation to hte price of hte same goods and services purchased in some base period
Consumer price index (CPI)
measures the prices of finished goods and materials at htewholesale level
The producer price index (PPI)
MEASURES THE PRICES FOR NET EXPORTS, INVESTMENT, OGVERMENT EXPENDITURES, AND CONSUMER SPENDING –THE MOST COMPRENSIVE MEASURE OF PRICE LEVEL
the GDP deflator
inflation caused by aggregate spending exceeding the economy’s normal full-employment output capacity (real GDP>potential GDP)
Demand-pull inflation
inflation caused by increasing hte cost of producting goods and services
Cost-push inflation
the price paid for the use of money
Interest rates
interest rate in terms of goods that are adjusted for inflation
Real interest rate
Interest rate in terms of the nation’s currency
Nominal interest rate
the risk that the firm will not pay the interest or princiapl of the loan
Credit risk
An increase in deficit, either ddue to an increase in government spending or to a decrease in taxes
Fiscal expansion
A decrease in deficit due to increase in taxes
Fiscal contraction
A committee in the Federal Reserve responsible for buying/selling U.S. securities
Federal Open-Market Committee (FOMC)
If the central bank is purchasing overnment secruties and expanding hte money supply
Expansionary open-market operation
Occurs wehn a central bank is selling government securities (and therefore decreasing hte money supply)
Contractionary open-market operations
Theory that holds that market eqilibrium will eventually resultin full employment over htelong run wihtout government intervention
Classic economic theory
theory that holds that the economy does not necessarily move towards full employment on its own and focuses on the use of fiscal policy (taxes) to stimulate hte economy
Keynesian theory
theory that holds that fiscal policy is too crude a tool for control of hte economy, and focuses on the use of monetary policy to control economic growth
Monetarist theory
theory that holds that bolstering an ecnomoy’s ability to suppply mopre goods is the most effect way to stimulate growth–can be done through reduction in taxes
Supply-side theory
theory that combines Keynesian and monetarist htoeries and focuses on using a combination of fiscal and monetary poicy to stimulate hte economy and contorl for inflation
Neo-Keynesian theory
a tax on an imported product
import tariff
a striction on the amount of a good that may be imported during a period
import quota
a total ban on the importation of specific goods
embargo
elected by an exporting country to limit the quality of goods that can be exported to appease importing countries and keep them from imposing stiffer import restrictions
voluntary export restraint
a control imposed bya governmenton the purchase or sale of foreign currencies by residents, or on the purchase or sale of local currency by nonresidents
foreign-exchange control
A form of predatory pricing in which a manufacturer in one country exports a product at a price that is lower than the price charged in its home country–prohibited by WTO
dumping
payments made by a government to encourage the production and export of specific products (ex. special tax benefits)
export subsidies
duties imposed by an importing country to neutralize the negative effects of export subsidies
countervailing duties
organization of countries designed to supervise and liberalize trade among participating countries
World Trade Organization
free trade agreement between Canada, Mexico, and U.S.
North American Free Trade Agreement (NAFTA)
an account summary of a nation’s trnasactions with other nations (3 sections: current acount, capital account, official reserve account)
Balance of Payments
Part of the balance of payments that shows the flow of goods andservices and government grants for aperiod of time
Current account
the difference between teh total goods exported and total goods imported
balance of trade
the difference between the total VALUE of goods and services esported and the total VALUE of goods and services imported
balance on goods and services
when a nation exports more than it imports
trade surplus
when a nation imports more than it exports
trade deficit
part of the balance of payments that shows the flow of investments in fixed and financial assets for a period of time
capital account
part of balance of payments that shows the changes in the nation’s rserves (gold and ofreign currency)
official reserve account
a pool of currencies from which member countreis can borrow to meet short-term deficits in balance of payments
International Monetary Fund (IMF)
a group of finanice ministers and central bank governers from 20 economies that seek to address issues affecting global financial stability
G-20
establishes monetary policy for members in the eurozone
European Union (EU)
the way a country manages its currency in respect to currencies of other countries
exchange rate regime
exchange rate is dictated by market factros
Floating exchange rate
a country’s central bank keeps the exchange rate from ddeviating too far from a target band or value
pegged exchange rate
an exchange rate is teid to the value of another currency
fixed exchange rate
an exchange rate where the country’s central bank attempts to control the movement in currency value
managed exchanged rate
the exchange rate of the currency for immediate delibery
spot rate
the exchange rate for a currency for future delivery
forward rate
a contract to take delibery of a specifiedfinancial instrument at a specified future date at the then-market price
future contract
forward-based contracts in which two parties agree to exchange an obligation to pay cash flows in one currency for an obligation to pay in anohter currency
currency swaps
borrowing and lending in multiple currencies
money market hedge
the exposure that a multinational company has because its financial statements must be converted to tis funcitonal currency
translation risk
the possibility of gians/losses resulting from income transactiosn occurring during a year when foreign exchanges occur
transaction risk
risks that threaten management’s ability to execute strategies and achieve the firm’s objectives
Business risks
A study of all segments in the general environment to predict he effects of hte general environment on the firm’s industry
Scanning
A study of environmenmental changes identified by scanning to spot important trends
Monitoring
Developing probably projections of what might happen and its timing
Forecasting
Determining changes in the firm’s strategy that are necessary as a result of hte information obtained from scanning, monitoring, and ofrecasting
Assessing
An industry composed of a large number of sellers that sell a virtually identical product with no barriers to entry
Perfect (Pure) competition
A market in which there is a single seller of a product or service for which there are no close substitutes
Pure monopoly
Monopolies that exist when economic or technical conditions permit only one efficient supplier
Natural monopoly
an industry characterized by many firms selling a differentiated product or service with product or service innovation
Monopolistic competition
A form of market characterized by few large sellers with significant barriers to entry and nonprice competition
Oligopoly
A market where only one buyer exists for all sellers
Monopsony
Industry analysis that involves gathering info about competitor’s capabilities, objectives, strategies, and assumptions and using that inofmrmation to understand the competitor’s behaviors
Competitor analysis
A list of possible actions that a competitor may take under varying circumstances, compiled after competitive analysis is conducted
Response profile
A cost reduction technique that involves a critical evaluation and major reddesign of existing processes to achieve breakthrough improvements in performace
Process reengineering
A cost reductionm technique that involves the identification and elimination of all types of waste in the production function
Lean manufacturing
A cost reduction strategy that involves the sharing of key ifnromation from the point of sale to the final consumer back to the manufacturer and suppliers
Supply Chain Management
collaborative agreements between two or more firms
Strategic alliances
