Introduction to Economics and Business Ethics Flashcards
Definition of Economics?
The Science which studies human behavior as a relationship between ends and scarce means which have alternative uses.
What is “Scarcity”? and “Resources”?
Scarcity: The available resources are insufficient to satisfy all desires
Resources: Time and talent of people, buildings and equipment (capital), natural resources, knowledge
What is Economics about?
Understanding how individuals make decisions.
The interaction between individuals (collective Behavior)
Difference between micro- and macro- economics?
micro: How do agents make their decisions and how do agents interact. Specific markets, individual behavior.
macro: Relation between GDP, inflation, unemployment. Money supply and demand. Exchange rates.
Difference between Positive and Normative economics?
Positive: purely descriptive. True or False and can be tested
Normative: Includes recommendations. Is based on value judgements, cannot be classified into true or false and cannot be tested.
What is Consumption?
The use of goods or services to satisfy needs. The end to which economic activity is directed.
What is Production?
The use of inputs (labor, resources, capital services) LRK, to produce outputs (Goods & services, or Investment) Y = Consumption + investments
What is Capital Stock? (investment) and How is it calculated?
Capital at time t is equal to the capital at a previous time plus the investments that take effect at time t, minus the depreciation.
Kt = Kt-1 + It - Dt
What are the different types of relations between economy and the environment?
- Natural Resource Extraction
- Waste Insertion
- Amenity Services (sunbathing, swimming, hiking)
- Basic Life Support Services (Ecosystem services such as energy production)
How do Supply and Demand act in a Price vs. Quantity graph?
Supply quantity increases as Price Increases.
Demand Quantity decreases as Price increases.
What is Willingness to Pay (WTP) used for?
It can be used to derive the demand curve in a Price vs. Quantity graph (Individuals demand curve)
What is the Law of Diminishing Marginal Utility?
It states that as a consumer consumes more of a good or service, the additional utility gained from each additional unit consumed will eventually decline.
What is the assumption of “Non-satiation”?
Also known as “More is Better”.
It is the assumption that consumers always want more of at least one good, and they are willing to give up some of another good to get it.
What are indifference curves?
Curves in a Good1 vs Good2 which represent how much of a Good1 the consumer is willing to give up to gain an amount of the Good2.
It is a line which, for a specific consumer, represents a combination of 2 goods that gives the consumer the same level of satisfaction.
Assumed to be negative sloped and convex towards the origin of the graph.
What is Marginal Rate of Substitution?
The slope of an indifference curve. (MRS). Rate at which a consumer is willing to trade off one good for the other while remaining indifferent.
What is the assumption of Completeness in indifference curves?
The assumption that a consumer can rank every possible consumption bundle (is preferred to, is not preferred to, is indifferent between)
What is the assumption of Transitivity in indefference curves?
If bundle A is preferred to B, and B is preferred to C, then A is preferred to C.
What is the formula for the Budget Line for a Quantity 1 in a Quantity of Product 1 vs. Quantity of Product 2 graph?
Q1 = Y / P1 - (P2 / P1) * Q2
Where Y is the budget constraint, P are the Product Unit Prices, and Q the quantities of each product
What consumption bundle offers more utility?
The indifference curve farthest away from the origin. So when choosing between option A and B, the one that is in an indifference curve further away from the origin should be the one chosen. (The budget line is tangent to this indifference curve)
How does a change in budget affect the Budget Line in an indifference graph?
It produces a parallel line to the previous budget line. (Same slope)
What is an Opportunity Cost?
The benefit of the best forgone alternative
What is Marginal Analysis?
An analysis that helps us identify “Efficient” consumption levels in the light of opportunity costs. It asks the question “What is the benefit of an additional unit?”
In a graph where Marginal Benefit and Marginal Opportunity Costs are plotted, where is the most efficient distribution of the good?
The point at which the Marginal Benefit and Marginal Cost intersect. The marginal Cost line being the Marginal benefit of a secondary use of the good
What is Aggregated Demand?
The sum of all individual demand curves. (Horizontal sum of curves).
What is Price Elasticity of Demand? How is it calculated?
It expresses how demand is affected by change of a variable while all others remain constant. (How demand changes relative to price changes)
ηii = (dQi/Qi) / (dPi/Pi)
What do different values of elasticity mean?
< |-1| : Inelastic
= |-1|: unit elasticity
> |-1| : Elastic
If a product is easy to substitute elasticity is more negative.
What are the Consumer Theory Assumptions?
- Each individual has own preferences
- Individual receives satisfaction (utility) by consuming a good
- Each individual tries to maximize utility
- Non-Satiation
- Completeness
- Transitivity
- Law of diminishing Marginal Utility
How does an indifference curve for perfect substitute goods look? what about complimentary goods?
Substitutes: Straight Line with negative slope
Compliments: “L” shape.
What is Cross Price elasticity? How is it calculated?
It describes how the quantity of demand of a good A will change if the price of a good B changes.
It is calculated using the Price Elasticity Formula:
ni,j = [dQi/Qi]/[dPj/Pj]
What are the steps for a supply function analysis?
1.- Production Function
2.- Cost Functions: VC & TC
3.- Average and marginal cost functions: ATC, AVC & MC
4.- Supply Function
What are costs associated to?
Production Factors = inputs.
- Labour
- Capital
- Land & other resources like energy/water
- Other factors (Information, social networks)
What are the different costs during production?
- Fixed Cost (FC) : Independent from production quantity
- Variable Cost (VC): Vary with production quantity
- Total Cost (TC): TC = FC + VC
- Average Fixed Costs (AFC): AFC = FC/Q
- Average Variable Costs (AVC) : AVC = VC/Q
- Average Costs (AC): AC = TC/Q = AFC + AVX
- Marginal Cost (MC) : MC = ∂TC / ∂Q, Cost of an additional production unit
What are some graphical characteristics of AC, AFC, AVC, and MC?
AFC: decreases with quantity
AVC: May decrease first, but increases after some quantity
AC: sum of AFC + AVC -> U-Shaped
MC: crosses AC and AVC curves at their minimum
What is the optimal quantity to produce in short term? what about Long Term?
In general the quantity must be where the Market Price is equal to the Marginal Costs (MC).
Short Term: if the price is lower than the AVC then nothing should be produced.
Long Term: if the price is lower than the AC then nothing should be produced.
What is a Pareto Improvement?
When A can be improved without making B worse or vice-versa.
What is the Utility Possibility Frontier?
A line that indicates the maximum frontier for which all possible utility combinations are achievable. (All Combinations below this line are attainable). Also called Pareto Frontier.
What is the Pareto Principle?
Anything that isn’t a Pareto Improvement but also isn’t a Pareto “Deterioration”, cannot be defined as better or worse, or are Pareto “Incomparable”. What is North-East of the combination is a Pareto improvement. What is South-West is a Pareto Deterioration. What is North-West or South-East in Pareto Incomparable.
What is Welfare Economics based on?
Also called Normative Economics
- Welfarism (How good is it for people?)
- Pareto Principle
- Income Distribution or Equity (What is Fair? Rawl’s, Utilitarian, Bernoulli-Nash, Weighted)
What is the Utilitarian approach?
The utility of the different individuals counts the same. Social Welfare Function (SWF): W = UA + UB
What are Social Indifference Curves?
SIC: Set of welfare allocations for which society is indifferent. Same level of Social Welfare. Normally linear with a slope of -1.
In a Utilitarian Approach, where is the optimal combination?
Where the Social Indifference Curve is the farthest from the origin.
What is Rawl’s Theory of Justice?
Social and economics inequalities are to be arranged so that they are to be of greatest benefit to the least-advantaged members of society.
The level of social welfare depends on the utility of the “poorest” person.
W = min (Ua, Ub)
What shape do Social Indifference Curves have in Rawl’s Approach?
L- shape
What is the Bernoulli-Nash SWF?
W = UA*UB
It is a compromise between the Utilitarian and Rawl’s Approach.
What is the Weighted Social Welfare Function?
W = wAUA + wBUB
where wA ≠ wB
What are the Kaldor-Hicks efficiency criterion?
A way to determine societys welfare.
“A change is efficient if those who gain can compensate the losers and still remain better-off”
Also called Potential Pareto Criterion
It compares the total benefits to the total losses, similar to the utilitarian approach
What is Economic Rent for Consumers?
The difference between Willingnes to Pay and Price being paid. Also called Consumer Welfare or Consumer Surplus. The area between the Demand Line and the Expenditure Area.
What is Economic Rent for Producers?
The difference between the Price and the Variable Costs. Also called Producer Surplus. The Revenue area minus the Variable Costs area.
How is Variable Costs represented graphically? (3 different methods)
1st way: Area bellow the MC curve
2nd way: VC = AVC * Q, Rectangle below AVC where Q is the quantity at which MC crosses the Price.
3rd way: Rectangle with vertex at where MC crosses AVC + the area bellow MC at the Quantity.
How is total Welfare calculated?
Producer Surplus + Consumer Surplus.
Also the Area between Demand and Supply curves
What is Dead Weight Loss?
The area between the Produced Quantity and the Optimal Quantity and between the Supply and Demand Curves. Indicates the difference between possible benefits and actual benefits
What does a consumer tax do to the Supply Demand graph and the Consumer and Producer Surplus? What about a producer Tax?
- For a constant tax per unit, the Demand curve shifts down but parallel to the Original by the Tax Price. Consumer surplus is given by area between New equilibrium price + tax , the original equilibrium price and the demand curve. Producer surplus the area between the new equilibrium price, the original equilibrium price and the supply curve.
- Same effect but shifting the supply curve up parallel to the original.
Consumer surplus is given by area between New equilibrium price, the original equilibrium price and the demand curve. Producer surplus the area between the new equilibrium price - tax, the original equilibrium price and the supply curve.
What does a Producer Subsidy do to the Demand and supply graph?
Producer Subsidy, shifts Supply curve Down Parallel to the original. Producer surplus is given by the area between the New Equilibrium Price + surplus, the original equilibrium price and the Supply curve. Consumer Surplus is given by new equilibrium price, original equilibrium price, and the demand curve.
What is an Externality?
Positive or negative effect that production has on the environment.
What is a Marginal Social Cost?
The cost or supply that should be produced taking into account societal factors, such as taking care of the environment, etc.
What are public goods?
Goods that are available to anyone, and its consumption is not influenced by the consumption by another.
What are the 4 different types of Goods?
Private Good: Exclusion + rivalry
Common Good: non-exclusion + rivalry
Club Good: Exclusion + non-rivalry
Public Good: non-Exclusion + non-rivalry
How is Marginal Social Benefit of a public good calculated graphically? What about a Private good?
Public: The vertical addition of the marginal benefit curves.
Private: Horizontal addition of marginal benefit curves.
What is Market Failure?
Demand Curve and Supply Curve do not intersect at all.
What is the Prisoners Dilemma?
It describes how an individual’s success in making a choice depends on the choices of others.
What is the Nash-Equilibrium?
It represents a stable outcome where no participant can improve its payoff by changing its strategy while the other keeps theirs.
How can the future value of a present investment cost be calculated?
V = (1 + i)t P
where: t = number of years
i = discount rate or inflation rate
P = Present Value
How can the present value of future benefits be calculated?
P = V (1 + i) -t
What are some of the most important dates in the 20th Century regarding world economics?
1914-1918: World War I
1917: Russian Revolution
1929-1939: Great Depression
1938-1945: World War II
1945-1991: Cold War
1949: Chinese communist Revolution.
1950-1970: The Golden Age of economic growth for Europe and the US
1973-1979: Oil crisis and economic stagnation
1980s: Tatcher and Reagan, deregulation of business and globalisation
1991: Fall of the Soviet Union
1995: World Trade Organization (Trips Agreement)
2001: China member of WTO
2008-2009: Financial Crisis = 12 years of 0 interest rates
What is “Good Will”?
The intention of doing a good duty without taking into account the benefits to yourself or to others
What is Utilitarianism? (Ethics)
“Consequentialism”, A good action = the action that maximizes utility (Happiness).
The consequences make the action good or bad.
What is Deontology?
“Duty Ethics”. Good Will + Categorical Imperative
What is CSR? what are the two CSRs?
Corporate Social Responsability
-Friedman: Maximizing Profit while respecting the law, social responsibility is the job of politicians, not business. 1970
-Freeman: Stakeholder Management. The interests of all stakeholders (Not just the shareholders) must be balanced.1984
Who was John Maynard Keynes?
Economist. Famous for his ideas regarding the government’s intervention in the economy in order to promote employment and economic stability.
Who was George W Bush? What did he do?
President of the U.S. Lowered interest rates, imposed the “american dream”. Anyone could take a mortgage to buy a house in 2003
What are the 4 different responsibilities an organization has according to Archie B. Carroll?
Philanthropic (desired by society)
Ethical (Expected by society)
Legal (Required by society)
Economic (Required by Society)
What did Kofi Annan do?
Initiate the United Nations Global Compact.
What are the 10 basic principles of the UN Global Compact?
1: Businesses should support and respect the protection of human rights
2: Businesses should make sure that they are not complicit in human rights abuses.
3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining;
4: The elimination of all forms of forced and compulsory labor;
5: The effective abolition of child labor;
6: The elimination of discrimination in respect of employment and occupation
7: Businesses should should support precautionary approach to environmental challenges;
8: Undertake initiatives to promote greater environmental responsibility;
9: Encourage the development and diffusion of environmentally friendly technologies
10: Businesses should work against corruption in all its forms, including extortion and bribery.
What companies must comply with non-financial reporting rules in the EU?
Large public-interest companies with more than 500 employees.
What is the CSRD?
Corporate Sustainable Reporting Directive. Introduces detailed reporting requirements on companies impact on the environment, human rights, and social standards, in line with the EU climate goals.
What is GRI?
Global Reporting Initiative. International organization that provides a framework for sustainability reporting (governance, ethics, human rights, labor practices, environment, community). Companies rate their own sustainability performance.
What is ESG Rating?
Environmental, Social, Governance Rating. A third party rates the organizations sustainability performance. Some of these third party companies are: Morgan Stanley Capital International (MSCI), Institutional Shareholder Services (ISS), Standard and Poor (S&P)
What was the ENRON scandal?
A financial scandal involving the American energy company Enron Corporation. It involved a range of fraudulent practices, including accounting fraud, insider trading, and bribery. Man of the executives were later convicted of these frauds. 2001
What is the Siemens Scandal?
The German engineering company Siemens AG, was involved in a range of corrupt practices, including bribery, money laundering, and embezzlement, leading legal action, resulting in fines and penalties totaling more than 2 billion Euros. 2006
What is Corporate Governance?
The system by which companies are directed and controlled. Provides structure through which the objectives of the company are set, and the means of attaining the objectives and monitoring performance.
What is the Code of corporate governance?
Recommendations on how to govern a corporation in accordance with general standards.
What is Compliance?
Acting in coherence with legislacion
What is corporate integrity?
Shared corporate values as foundation for strong compliance culture
What is Integrity/Compliance management?
Practical challenges of ensuring law abiding culture in corporations.
What are the risks of bad Corporate Governance?
- Reduced Profitability
- Reputational Risks
- Heavy fines and imprisonment
- Loss of Public Contracts
What is a One tier governance system?
The board of directors of a company has both executive and non-executive functions. Meaning that they oversee both day-to-day operations as well as the strategic direction of the company. More efficient decision making but lack of checks and balances and increased risk of conflicts of interest.
What is a two tier governance system?
The board of directors is divided into two, the boards for executive functions and the board for non-executive functions. Reduces conflicts of interest and improves accountability, but decision making is slower.
What is power in relation to ethics?
Anti-utilitarian, anti-ethical, anti egalitarian. It accentuates the difference between people.
What are the 4 principal statements that Machiavelli said?
- Crush your enemies
- Better to be feared than loved
- Be feared but not hated
- Be strong as a lion and cunning as a fox
What claim is Nietzche known for?
“Even the appeal to objectivity is an expression of subjective will”. Other claims, “God is dead”, “Super is the meaning of earth”.
What are 5 of Flyvbjerg s Propositions about power?
1.- Power Defines Reality
2.- Rationality in Context - Dependent
