final!!!!! Flashcards
if deflation is occuring, NGDP is
less than RGDP and the GDP deflator is less than 100
total expenditure by consumers does change with a change in price. but it is dependent on elasticity.
when there is a unit elastic good total expenditure….
when there is inelastic demand……
when there is elastic demand…….
1) no change in expenditure
2) total expenditure increases when the price increases
3) total expenditure decreases when the price increases
this is similar to the idea: raise prices if demand is inelastic. means it is worthwhile to raise price even if people buy less
when the fed raises interest rates
the dollar appreciates
more people want to put their money into US assets (banks) which strengthens our currency
while transfer payments themselves dont count in GDP, ……. does count in GDP
spending of a transfer payment
ex) spending of SNAP
when there is a downturn in the economy, the fed could …. the FFR to stimulate the economy
lower
when the fed issues treasury bills, this raises the interest rate. why?
this is like the fed selling a bond. they are getting paid for the bond, leading to a decrease in the circulating money supply.
FRED data graphs have shaded regions that represent
recessions
this corresponds to low output (RGDP) and high unemployment
market power
extent to which a seller can charge a higher price without losing sales
perfect competition
1) all firms sell identical good
2) there are many buyers and sellers, who are relatively small
monopoly
only seller in the market
oligopoly
market dominated by a handful of sellers
monopolistic competition
market w many small businesses competing, each selling differentiated products
fewer competitors means your product will be
more unique
most businesses are
imperfectly competitive
imperfect competition
few competitors, somewhat differentiated product
increase in competitors = …….. in market power
decrease
increase in market power = ……. in independent pricing strategy
increase
firm demand curve
shows how Qd changes in response to a firm changing its price
perfect comp = ……. demand curve
perfectly elastic
monopoly demand curve is
market demand curve
marginal revenue
addition to total revenue from selling one more unit
marginal revenue reflects the
output effect - discount effect
MR =
P- (change in P*Q)
p-(price cut*q that get the price cut)
MR characteristics
lies below demand curve
declines faster than demand curve
discount effect on a graph
difference between firm demand curve and MR
golden rule of profit maximization
produce until MR=MC
what does market power lead to
1) higher prices
2) smaller quantity (inefficient)
3) increased economic profit
4) business survival at inefficiently high costs
market power is bad because it causes
underproduction
competition leads to
decreased Price and increased Quantity
competition policy
ensures markets remain competitive
anti trust policy
anti collusion
limits agreements between rivals that state they will not compete against eachother
merger laws
prevents competing businesses from combining to consolidate market power
being a monopoly is legal……. is illegal
monopolizing a market
policy that minimizes harm from exercizing market power
price ceiling
accounting profit
total revenue-explicit financial cost
OC of running a business includes
forgone wages and interest
economic profit
total revenue-explicit and implicit costs
determines if you should open a business
average revenue
price
(TR/Q)
firm demand curve is also the
AR curve
MR=DARP
marginal revenue is equal to demand, average revenue, and price
average cost
costs per unit
total cost/quantity
increase in production
spreads fixed costs and raises variable costs
profit margin =
price-average cost
on a graph: profit margin lies between demand curve and AC curve
enter a market if
you expect positive economic profit
P>AC
new competitors make a market….. but then existing competitors exit which restores…….. for those who remain
less profitable
profitability
exit a market if
you expect negative economic profits
AC>P
positive economic profit leads to
1) rivals enter market
2) your market power decreases
3) P and Q decrease so that you can compete
4) economic profit decreases
negative economic profit leads to
1) rivals exit market
2) your market power increases
3) P and Q increase because theres less competition
4) economic profit increases
in the long run:
free entry pushes profits down to zero
free exit ensures market wont remain unprofitable
in the long run, price =
AC
as long as businesses are free to enter and exit
at LR equilibrium
ATC just touches the demand curve
ATC is below the demand curve when businesses enter and above it when they exit
AC matters because it determines
profitability and LR profitability determines barriers to entry
demand side barriers to entry (customer lock in)
1) switching costs
2) customer loyalty from goodwill
3) network effects
supply side barriers to entry (cost advantages)
1) learning by doing
2) mass production
3) R and D
4) relationships
5) limit access to key inputs
gov barriers to entry (gov policy)
1) patents
2) regulations
3) licence reqs
4) lobbying for regulation barriers
entry deterrence strategies (scare off rivals)
1) excess capacity
2) financial resources
3) brand proliferation can ensure there are no profitable niches to exploit
4) reputation for fighting
when MC=demand
market is perfectly competitive
increase in gov spending= …… in real interest rate
increase
higher demand for borrowing equals a higher price for borrowing
linear opportunity cost of one unit
OC (1 unit x) = change in good y/change in good x
unit elastic means that
the change in the p offsets the change in q
price elasticity = -1. percent change in qd= percent change in P in the opposite direction
total expenditure will not change
in competitive markets reducing trade barriers will never
reduce total surplus
firms will exit in the short run when
they cannot cover their variable costs
decreasing ATC doesnt necessisarily mean
decreasing MC
when the RER>1, the ……. good is more ……..
domestic, expensive
when the domestic good is more expensive
it means the currency is uncompetitive and that means that imports will increase and exports will decrease
lowering the FFR counters
an economic downturn
issuing gov bonds or bills
increases money supply which increases inflation
efficiency occurs when
MC=MB
deadweight loss is not counted in
consumer surplus
oligopolies are more concerned with
strategic choices of rivals
monopolies and perfectly competitive firms are less concerned with rivals
linear OC simplified
(OC good 1)= change in other good/change in good 1
