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BEC for OCT > I. Economics > Flashcards

I. Economics Flashcards

1
Q

Ed (Price elasticity of demand)

A

% change in Qd /
% change in price
1.0= unitary
1.0 = elastic

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2
Q

Arc method of Ed (Price elasticity of demand)

A

Change in Qd / Avg Qd
/
Change in price / Avg Price

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3
Q

Income Elasticity of Demand

A

% change in Qd /
% change in income
(pos = normal good, neg = inferior)

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4
Q

Cross Elasticity of Demand

A

% change in Qd for prod X /
% change in price of prod Y
> 0: they are substitutes, direct relation

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5
Q

Elastic vs Inelastic

A 
Elastic = P^ Rev \/, flexible (consumers will easily move to another good)
Inelastic = P ^ Rev ^, NEED IT!
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6
Q

Supply vs Demand curves (directions)

A

Demand (D - down) inverse Qd and P

Supply (sUPply - up) direct Qs and P

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7
Q

Es (Price elasticity of supply)

A

% change in Qs /
% change in price
1.0= unitary
1.0 = elastic

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8
Q 
Price Ceiling (higher lower?)
(shortage surplus?)
A

Can’t go higher than the ceiling (its low on the graph!)

if below equilibrium it is a shortage

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9
Q 
Price Floor (higher lower?)
(shortage surplus?)
A

Must go above the floor (its high on the graph!)

if above equilibrium it is a surplus

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10
Q

D shift vs S shift (direct or inverse)

A

D shifts are direct (P and Qd move the same)

S shifts are indirect (P and Qs opposite)

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11
Q

Price and Quantity on X,Y?

A

Price is x - vert

Q is Y - horiz

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12
Q

A city freezes rent prices, this may cause:

  • Demand to fall
  • Supply to rise
  • Demand to exceed supply
  • Supply to exceed demand
A

Demand to exceed supply
Freeze price = ceiling (lower than equilib)
Creates shortage

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13
Q

Demand curve for a product reflects:

  • Impact of prices on the amount of products offered
  • Willingness of producers to offer a product at a different price
  • Impact of prices on the amount of product purchased
  • Impact of prices on the purchase amount of related products
A

-Impact of prices on the amount of product purchased

Demand curve shows relationship between P and Qd

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14
Q

What indicates that an item would have a high elasticity of demand?

  • Item has many substitutes
  • Cost of the item is low compared to consumer budgets
  • Item is a necessity
  • Price changes are government regulated
A

-Item has many substitutes

Elastic = flexible consumers (can move to diff product)

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15
Q

Which would be inelastic demand?

  • 5% price increase, 3% decrease in Qd
  • 4% price increase, 6% decrease in Qd
  • 4% price increase, 4% decrease in Qd
  • 3% price decrease, 5% increase in Qd
A

-5% price increase, 3% decrease in Qd
(5) %change Qd /
(3) %change P
Over 1 = elastic, under 1 = inelastic

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16
Q

Demand increase and supply decreases for a product, what would economic theory predict?

  • Price up, Q down
  • P up, Q unknown
  • P unknown, Q increase
  • P unknown, Q decrease
A

-P up, Q unknown
Shift right in D, shift left in S
Definite increase in price but can’t be sure of Q

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17
Q

If market demand increases:

  • Price will fall
  • Qd and P will increase
  • Qd up, P down
  • Qd complement goods will fall
A

-Qd and P will increase

Shift in demand (right) moves both up

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18
Q

Marginal Utility

A

Additional satisfaction from a single more unit

“Marginal” = additional

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19
Q

Marginal propensity to save/consume

A

1 - mps = mpc (and vice versa)
OR
[change in savings/spend] /
change in disposable income

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20
Q

Fixed vs Variable

A

Fixed - fixed in total, vary per unit

Variable - fixed per unit, vary in total

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21
Q

Marginal cost and Marginal Revenue?

MR = MC?

A

Marginal = additional
Cost - cost to produce 1 more unit
Revenue - profit from selling 1 more unit
MR=MC -> Max profits

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22
Q

Economies of scale

A

Determines optimum firm size (shows efficiency)
outputs / input = 1.0 [constant]
if less than 1: diseconomies/decreasing
over 1: economies of scale/increasing

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23
Q

Perfect competition

A

Large number of buyers, large number of sellers, no differentiation, flat demand curve, easy entry/exit

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24
Q

Pure monopoly

A

Only one seller, no substitutes/mkt entry, vertical demand curve

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25
Q

Monopolistic Competition

A

Between PComp/PMonop, normal demand curve, can be differentiated, have multiple suppliers, relatively easy entry/exit

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26
Q

Oligopoly

A

Few producers who may collude, barriers to entry, kinked demand curve

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27
Q

Strategic planning

A

SWOT analysis

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28
Q

What is an assumption in a perfectly competitive market?

  • No single trader(s) can have significant impact on market prices
  • Some traders can impact market prices more than others
  • Trading prices vary based on supply only
  • Information about borrowing/lending is only available to those willing to pay market prices
A

-No single trader(s) can have significant impact on market prices
Large number of small producers

29
Q

Which of the following are true about monopolistic competition?

  • Prices are lower and quantities are higher than perfect competition
  • There are few producers and large barriers to entry
  • Firms in these markets sell products that are close substitutes to one another, but that are not identical
  • Prices are higher and quantities are lower than under pure monopoly
A
  • Firms in these markets sell products that are close substitutes to one another, but that are not identical
    ex) cereal, cell phones, etc
30
Q

Predatory pricing:

  • Involves efforts by one or more companies to eliminate competitors by charging prices lower than their competition
  • Hurts consumers short term
  • Benefits consumers long term
  • Is practiced in monopolistically competitive markets
A

-Involves efforts by one or more companies to eliminate competitors by charging prices lower than their competition
Killing competition so they can overcharge later

31
Q

Which step should be completed first in strategic planning?

  • Translate objectives into goals
  • Determine actions to achieve goals
  • Develop performance measures
  • Create a mission statement
A

-Create a mission statement

Always first!

32
Q

Nominal GDP (two types)

A

Nominal GDP - final goods and services within country boarders
Income approach- sums all income from sale of final goods/services
Expenditure approach- sums all expenditures to purchase final goods/services

33
Q

Real GDP

A

GDP adjusted for inflation to get it to “constant” dollars

34
Q

Gross National Products (GNP)

A

Produced by our residents (can be in or out of our country)

35
Q

Multiplier Effect for GDP

A

1 / MPS x change in spending = GDP growth

36
Q

3 Measures of Price inflation

A

CPI - measure of fixed basket of goods (Curr yr / base yr)
ProducerPI - fixed basket at wholesale cost
GDP Deflator - convert nominal into real GDP

37
Q

Demand Pull inflation

A

Demand curve shifted upward (pull curve up)

People have more money, make the prices go up (more willing to pay more)

38
Q

Phillips Curve

A

Short term trade off: lower wage inflation (int rates), higher unemployment

39
Q

Cost Push Inflation

A

Supply curve shift inward (pushed back)

Prices up but lower quantity available, production costs up and costs are “pushed” onto consumers

40
Q

Macroeconomics is concerned with:

  • Unemployment, economic growth, inflation
  • Trade balance, foreign investment, interest rates
  • National debt and budget balance
  • Lending growth, interest rates, large asset prices
A

-Unemployment, economic growth, inflation

41
Q 
What is the GDP?
Financial transactions: 60
Second hand sales: 50
Consumption by households: 40
Investment by businesses: 30
Government purchases of G/S: 20
Net exports: 10
A 
100 in total
Consumption by households: 40
Investment by businesses: 30
Government purchases of G/S: 20
Net exports: 10
42
Q

You expect high inflation in the future, where should you invest?

  • Precious metals
  • T-bonds
  • Stock
  • Corporate bonds
A

Precious metals

Good in inflation, stock is good for LT, bonds are fixed (inflation then value would “drop”)

43
Q

Leading, coincident, lagging indicators

A
  • Leading: show before exp/recess happens. ex) stock prices
  • Coincident: follow exp/recess ex) production
  • Lagging: move after economic changes ex) unemployment rate
44
Q

Types of unemployment (3)

A

Frictional- normal turnover (always there)
Structural- job skills lagging with demand (computers changing workplace “structure”)
Cyclical- jobs changing based on busin cycle
FULL EMPLOY: Frictional + structural

45
Q

Nominal, real, risk-free interest rate

A

Nominal - quoted by bank
Real- adjusted for inflation
Risk free- rate assuming no risk

46
Q

Fed funds, prime rate

A

Fed funds rate- fed loans $ banks

Prime rate- banks lend to best credit worthy consumer

47
Q

Fiscal vs Monetary Policy

A

Fiscal - gov actions: taxes, subsidies, spending
ex) lower tax, stimulate econ, starts deficit (fiscal expansion)
Monetary - fed changes

48
Q

Monetary Policy, 3 tools

A

Fed controls money in circulation with:
Reserve ratio: what banks can hold vs loan out (low RR, help econ)
Discount rate: bank borrowing from Fed (low rate, help econ) (keeps int rates low)
Open mkt operations: biggest, buy/sell securities (buy back = help economy = increase $ supply)

49
Q

Classic Economic Theory

A

No Fiscal policy use, economy regulates itself

50
Q

Keynesian Theory

A

Fiscal policy should stimulate economy (taxes, gov spending, subsidies)

51
Q

Monetarist Theory

A

Focuses on monetary policy (reserve ratio, open mkt ops, discount rate)

52
Q

Supply side Theory

A

Reducing taxes, leads to spending, jobs, more growth (multiplier effect) [uses Laffer curve to find best ratio of taxes vs income/motivation]

53
Q

New Keynesian Theory

A

Combo of Keynesian and monetarist theory, so use both fiscal and monetary policy

54
Q

Austrian Theory

A

Boom, bust cycles causing economic problems

55
Q

Which economic term describes a decline in prices and in the interest rate level?

  • Inflation
  • Deflation
  • Expansion
  • Recession
A

Deflation

DOWN prices

56
Q

Which action is a preventative measure for a period of deflation?

  • Increase interest rates
  • Increase the money supply
  • Decrease interest rates
  • Decrease the money supply
A

-Increase the money supply
(not lower interest cuz there is no money to borrow [you’re still at the same money supply, supply first then int])
More $, spend money, prices go up, inflation

57
Q

An economy is at a peak. Which would dampen the economy and prevent inflation?

  • Increase gov spending, reduce taxes, increase $ supply, reduce int rates
  • Reduce gov spending, increase taxes, increase $ supply, increase int rates
  • Reduce gov spending, increase taxes, reduce $ supply, increase int rates
  • Reduce gov spending, reduce taxes, reduce $ supply, reduce int rates
A

Reduce gov spending, increase taxes, reduce $ supply, increase int rates
All helps contractionary policy

58
Q

What does the Fed use in expansionary policy?

  • Purchase securities and lower the discount rate
  • Reduce the reserve req and raise the discount rate
  • Raise the reserve req and lower the discount rate
  • Raise the reserve req and raise the discount rate
A

-Purchase securities and lower the discount rate

59
Q

In standard microecon theory to address unemployment:

  • Reduce taxes, increase gov spending (run a deficit)
  • Reduce taxes, reduce gov expenditures (run balanced budget)
  • Increase taxes, increase gov spending (run balanced budget)
  • Reduce taxes, maintain gov spending (run surplus)
A

-Reduce taxes, increase gov spending (run a deficit)

Deficit always helps unemployment, puts money out there

60
Q

Full employment GDP: 1.3 Trillion, Actual GDP: 1.2 Trillion, MPC is .8, Ignoring inflation what gov spending amount will reach full employment?

  • 100 billion
  • 80 billion
  • 20 billion
  • 10 billion
A

20 billion
1 / .2 [1-mpc=mps] = 5
5 x F = 100
F=20

61
Q

Which type of unemployment is caused by technological advances?

  • Cyclical
  • Frictional
  • Structural
  • Short-term
A

-Structural

Change in the economic “structure”

62
Q

Absolute vs Comparative advantage in International trade

A

absolute - do everything better and at lower (opportunity) cost
comparative - country is able to produce a good at a lower relative cost than another country (do what you’re specialized in and just trade for what you need)

63
Q

Tariffs, who they affect?

A

Tariffs going up on imports:
Domestic producers -helps, demand goes up
Domestic users- hurts, both domestic (less than foreign) and foreign good prices will likely go up
Domestic producer of exported good - negative
Foreign producers - negative, must pay tariff
Foreign users - good, their local producer will try to sell more in the local market, likely at a lower price

64
Q

Foreign currencies: inflation vs interest rates (choose which)

A

You don’t want to buy currencies with high/increasing inflation rates cuz they will buy less in the future ($1 now might be worth .75 in the future)
You do invest in countries with high interest rates: can get a higher rate of return

65
Q

Hedging options: call vs put

A

Option: not required to buy/sell commodity
Call: buy it in the future, think price will go up
Put: sell it in the future, set price today (think my currency will drop)

66
Q

A countries exchange rate with US changed from 1.5 to the dollar, to 1.7 to the dollar. Which is correct?

  • Its exports are less expensive for the US
  • Its currency appreciated
  • Its imports of US goods are more affordable
  • Its purchase of the US $ will cost less
A

Its exports are less expensive for the US

Their currency devalued, therefore US can buy more at a cheaper price

67
Q

Which Fed policy would increase money supply?

  • Change the multiplier effect
  • Increase reserve reqs
  • Reduce the discount rate
  • Sell more Treasury bonds
A

Reduce the discount rate

Will help the economy/increase $ supply

68
Q

The Laffer curve:

  • Shows all reductions in taxes result in higher tax revenues
  • Shows reduction in very high tax rates may result in higher revenue
  • Shows that increases in tax rates don’t affect tax revenues
A

Shows reduction in very high tax rates may result in higher revenue (100% tax example)

69
Q

Which is true about international trade and investment?

  • Companies always benefit from moving factories to countries with the lowest wages
  • Many corps are moving lower-value-added tasks to countries with lower wages
  • Companies operating across countries match their assets and liabilities across countries and currencies
  • Companies operating across countries match their revenues and costs across countries and currencies
A

Many corps are moving lower-value-added tasks to countries with lower wages
(think call centers)

BEC for OCT (7 decks)

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