I. Economics Flashcards
Ed (Price elasticity of demand)
% change in Qd /
% change in price
1.0= unitary
1.0 = elastic
Arc method of Ed (Price elasticity of demand)
Change in Qd / Avg Qd
/
Change in price / Avg Price
Income Elasticity of Demand
% change in Qd /
% change in income
(pos = normal good, neg = inferior)
Cross Elasticity of Demand
% change in Qd for prod X /
% change in price of prod Y
> 0: they are substitutes, direct relation
Elastic vs Inelastic
Elastic = P^ Rev \/, flexible (consumers will easily move to another good) Inelastic = P ^ Rev ^, NEED IT!
Supply vs Demand curves (directions)
Demand (D - down) inverse Qd and P
Supply (sUPply - up) direct Qs and P
Es (Price elasticity of supply)
% change in Qs /
% change in price
1.0= unitary
1.0 = elastic
Price Ceiling (higher lower?) (shortage surplus?)
Can’t go higher than the ceiling (its low on the graph!)
if below equilibrium it is a shortage
Price Floor (higher lower?) (shortage surplus?)
Must go above the floor (its high on the graph!)
if above equilibrium it is a surplus
D shift vs S shift (direct or inverse)
D shifts are direct (P and Qd move the same)
S shifts are indirect (P and Qs opposite)
Price and Quantity on X,Y?
Price is x - vert
Q is Y - horiz
A city freezes rent prices, this may cause:
- Demand to fall
- Supply to rise
- Demand to exceed supply
- Supply to exceed demand
Demand to exceed supply
Freeze price = ceiling (lower than equilib)
Creates shortage
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
-Impact of prices on the amount of product purchased
Demand curve shows relationship between P and Qd
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
-Item has many substitutes
Elastic = flexible consumers (can move to diff product)
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
-5% price increase, 3% decrease in Qd
(5) %change Qd /
(3) %change P
Over 1 = elastic, under 1 = inelastic
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
-P up, Q unknown
Shift right in D, shift left in S
Definite increase in price but can’t be sure of Q
If market demand increases:
- Price will fall
- Qd and P will increase
- Qd up, P down
- Qd complement goods will fall
-Qd and P will increase
Shift in demand (right) moves both up
Marginal Utility
Additional satisfaction from a single more unit
“Marginal” = additional
Marginal propensity to save/consume
1 - mps = mpc (and vice versa)
OR
[change in savings/spend] /
change in disposable income
Fixed vs Variable
Fixed - fixed in total, vary per unit
Variable - fixed per unit, vary in total
Marginal cost and Marginal Revenue?
MR = MC?
Marginal = additional
Cost - cost to produce 1 more unit
Revenue - profit from selling 1 more unit
MR=MC -> Max profits
Economies of scale
Determines optimum firm size (shows efficiency)
outputs / input = 1.0 [constant]
if less than 1: diseconomies/decreasing
over 1: economies of scale/increasing
Perfect competition
Large number of buyers, large number of sellers, no differentiation, flat demand curve, easy entry/exit
Pure monopoly
Only one seller, no substitutes/mkt entry, vertical demand curve
Monopolistic Competition
Between PComp/PMonop, normal demand curve, can be differentiated, have multiple suppliers, relatively easy entry/exit
Oligopoly
Few producers who may collude, barriers to entry, kinked demand curve
Strategic planning
SWOT analysis
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
-No single trader(s) can have significant impact on market prices
Large number of small producers
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
- Firms in these markets sell products that are close substitutes to one another, but that are not identical
ex) cereal, cell phones, etc
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
-Involves efforts by one or more companies to eliminate competitors by charging prices lower than their competition
Killing competition so they can overcharge later
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
-Create a mission statement
Always first!
Nominal GDP (two types)
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
Real GDP
GDP adjusted for inflation to get it to “constant” dollars
Gross National Products (GNP)
Produced by our residents (can be in or out of our country)
Multiplier Effect for GDP
1 / MPS x change in spending = GDP growth
3 Measures of Price inflation
CPI - measure of fixed basket of goods (Curr yr / base yr)
ProducerPI - fixed basket at wholesale cost
GDP Deflator - convert nominal into real GDP
Demand Pull inflation
Demand curve shifted upward (pull curve up)
People have more money, make the prices go up (more willing to pay more)
Phillips Curve
Short term trade off: lower wage inflation (int rates), higher unemployment
Cost Push Inflation
Supply curve shift inward (pushed back)
Prices up but lower quantity available, production costs up and costs are “pushed” onto consumers
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
-Unemployment, economic growth, inflation
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
100 in total Consumption by households: 40 Investment by businesses: 30 Government purchases of G/S: 20 Net exports: 10
You expect high inflation in the future, where should you invest?
- Precious metals
- T-bonds
- Stock
- Corporate bonds
Precious metals
Good in inflation, stock is good for LT, bonds are fixed (inflation then value would “drop”)
Leading, coincident, lagging indicators
- Leading: show before exp/recess happens. ex) stock prices
- Coincident: follow exp/recess ex) production
- Lagging: move after economic changes ex) unemployment rate
Types of unemployment (3)
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
Nominal, real, risk-free interest rate
Nominal - quoted by bank
Real- adjusted for inflation
Risk free- rate assuming no risk
Fed funds, prime rate
Fed funds rate- fed loans $ banks
Prime rate- banks lend to best credit worthy consumer
Fiscal vs Monetary Policy
Fiscal - gov actions: taxes, subsidies, spending
ex) lower tax, stimulate econ, starts deficit (fiscal expansion)
Monetary - fed changes
Monetary Policy, 3 tools
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)
Classic Economic Theory
No Fiscal policy use, economy regulates itself
Keynesian Theory
Fiscal policy should stimulate economy (taxes, gov spending, subsidies)
Monetarist Theory
Focuses on monetary policy (reserve ratio, open mkt ops, discount rate)
Supply side Theory
Reducing taxes, leads to spending, jobs, more growth (multiplier effect) [uses Laffer curve to find best ratio of taxes vs income/motivation]
New Keynesian Theory
Combo of Keynesian and monetarist theory, so use both fiscal and monetary policy
Austrian Theory
Boom, bust cycles causing economic problems
Which economic term describes a decline in prices and in the interest rate level?
- Inflation
- Deflation
- Expansion
- Recession
Deflation
DOWN prices
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
-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
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
Reduce gov spending, increase taxes, reduce $ supply, increase int rates
All helps contractionary policy
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
-Purchase securities and lower the discount rate
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)
-Reduce taxes, increase gov spending (run a deficit)
Deficit always helps unemployment, puts money out there
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
20 billion
1 / .2 [1-mpc=mps] = 5
5 x F = 100
F=20
Which type of unemployment is caused by technological advances?
- Cyclical
- Frictional
- Structural
- Short-term
-Structural
Change in the economic “structure”
Absolute vs Comparative advantage in International trade
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)
Tariffs, who they affect?
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
Foreign currencies: inflation vs interest rates (choose which)
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
Hedging options: call vs put
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)
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
Its exports are less expensive for the US
Their currency devalued, therefore US can buy more at a cheaper price
Which Fed policy would increase money supply?
- Change the multiplier effect
- Increase reserve reqs
- Reduce the discount rate
- Sell more Treasury bonds
Reduce the discount rate
Will help the economy/increase $ supply
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
Shows reduction in very high tax rates may result in higher revenue (100% tax example)
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
Many corps are moving lower-value-added tasks to countries with lower wages
(think call centers)
