Fundamentals & Insurance: Economics and Consumer Protection Flashcards
“Loosening” policy
directly leads to an economic expansion
“Tightening” Policy
directly leads to an economic slowdown
Demand
reflects the Q of a good or service that consumers are willing to buy. Heavily dependent on P. as P increases, consumers demand less. As P decreases, consumers demand more.
Quantity Demanded
how much consumers are willing to demand at certain P levels. Any time there is a change in P, it’s a movement along the D curve = change in Q demanded.
Shift in Demand Curve
creates a change in D due to an increase/decrease in:
- income
- taxes
- savings rate
- disposable income
Anything that causes discretionary income to increase will shift the demand curve up and to the right.
Anything that causes discretionary income to decrease will shift the demand curve down and to the left.
SIT Down = Shift in Demand
Supply
reflects to Q of a good or service that businesses are willing to supply at a given P. The higher the P, the more suppliers are willing to supply. The lower the P, the less suppliers are willing to supply.
Change in Quantity Supplied
anytime there is a change in P, there is a movement along the S curve due to a P change, which is called a change in Q Supplied. as P decreases, firms are inclined to supply less. As P increases, firms are inclined to supply more.
Shifts in the Supply Curve
The supply curve will shift to the left/right because of a change in:
- technology
- competition
- anything other than P
Anything that causes production to improve will shift the supply curve down and to the right
Anything that causes an increase in production costs or supply to decrease, the supply curve will shift up and to the left.
Substitutes
“similar” purpose. As P change in one product changes the Q demanded for another product. P and D move together.
Complements
Products that are consumed jointly. A P change in one product changes the Q demanded for another product. Peanut butter and jelly.
As P increases, D decreases and vice versa
Elastic Demand
Demand curve is almost horizontal. Examples include airline tix, alcohol, luxury goods. Q Demanded responds significantly to changes in P.
Inelastic Demand
Q Demanded changes very little to changes in P. Cigs, gasoline, insulin. An inelastic demand curve is almost vertical “I”.
Business Lifecycle
Expansion, peak, recession/contraction, trough
Components within a Business cycle
see picture
Expansion
characterized by increasing GDP, inflation and interest rates. Unemployment is decreasing. Investments should be in ST bonds and equities
Peak
characterized by GDP being at its highest. Inflation and interest rates are peaking, and unemployment is at its lowest level. Since interest rates are increasing to cut off inflation, bonds, preferred stock, and other high-duration or fixed income assets should be sold. Equities and hard assets, such as gold and real estate tend to perform well in this environment.
Contraction/Recession
characterized by GDP slowing, inflation and interest rates are also beginning to decline, the unemployment rate begins to increase during the contraction phase. Equities and hard assets should be sold and reinvested into ST cash and bonds until the market settles out.
Trough
characterized by GDP, inflation, and interest rates being at their lowest levels, unemployment is at its highest, high-duration bonds will tend to perform well as bond yields drop and interest rates continue to fall. Stock purchases late in the cycle should be considered if valuations seem appropriate
GDP
measures the amount of goods and services produced in the US, regardless of ownership
GNP
measures the amount of goods and services produced by a country’s citizens, regardless of where the goods and services are produced
Recession
consists of 6 consecutive months (2 quarters) of declining GDP
Depression
Recession becomes a depression if the recession lasts 18 months (6 consecutive quarters)
moderate inflation
1-2%/year
Galloping Inflation
when money loses value very quickly
