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BEC Corporate Governance, Economics, and Financial Management > Microeconomics > Flashcards

Microeconomics Flashcards

1
Q

What are some characteristics of a free market economy?

A
  1. Economic decisions are made by individual decision makers
  2. What gets produced does depend on preferences of end-use consumers
  3. Interdependent relationship between individual consumers and business firms.
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2
Q

Describe the relationship between individual consumers and business firms?

A

Individual depend on businesses for income and goods/services. Businesses depend on individuals for economic resources (inputs) and as buyers of its goods and services (output).

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3
Q

What are examples of economic resources?

A

Labor (human work, etc.) capital (financial and man-made), and natural resources (land, minerals, etc.)

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4
Q

What are the four major flows of a free-market economy flow model?

A
  1. Individuals provide economic resources to business firms
  2. Firms provide payment to individuals for economic resources
  3. Firms provide goods and services to individuals
  4. Individuals provide payment to firms for goods and services
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5
Q

If financial institutions and businesses suddenly and severely restrict the availability of consumer credit, which one of the flows would be most likely to be the first to be impacted adversely?

A

IV. Individuals provide payment to firms for goods and services. The lack of credit likely would reduce consumer demand, which would then begin to impact other flows

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6
Q

Why is the demand curve negatively sloped?

A

The demand schedule of an individual or of the market shows that more units of a commodity are demanded as the price decreases. Therefore, the demand curve would be negatively sloped; the quantity demanded would be lower at higher prices and would increase as price decreases. Demand curve has a negative slope; quantity is inversely related to price.

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7
Q

For demand, which variable is independent and dependent?

A

Quantity (x) is dependent.

Price (y) is independent.

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8
Q

Explain why price (y) is an independent variable and why quantity (x) is a dependent variable?

A

“quantity” is a function of “price,” price is an independent variable and quantity is the dependent variable. The quantity demanded of a commodity depends upon (i.e., is dependent on) the price of acquiring the commodity.

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9
Q

What are some things that would cause an INCREASE in demand for a commodity? Shift demand curve right.

A
  1. Increase # of consumers
  2. Increase in consumer preferences
  3. Increase in price of substitute commodity or decrease in price of complementary commodity
  4. Expected price increase in near future (demand increases now before prices go up)
  5. Increase in income. This increases demand for normal goods, but decreases demand for inferior goods.
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10
Q

What are some things that would cause an DECREASE in demand for a commodity? Shift demand curve left.

A
  1. Decrease # of consumers
  2. Decrease in consumer preferences
  3. Decrease in price of substitute commodity or increase in price of complementary commodity
  4. Expected price decrease in near future (demand decrease now before prices go down)
  5. Decrease in income. This decreases demand for normal goods, but increases demand for inferior goods.
  6. Organized boycott
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11
Q

What will not cause an increase/decrease (shift) in demand, but instead will impact only change in quantity demanded?

A

Price change. A change in price causes movement along a specific demand curve. Example: reduction in price will cause increase in quantity demanded.

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12
Q

The demand curve for a product reflects which of the following?

A

The impact that price has on the amount of a product purchased.

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13
Q

What is derived demand?

A

Derived demand is the demand for a good or service that results because it is an input needed in order to provide another good or service for which there is demand. The demand for a good or service is derived from the demand for another good or service. The theory of derived demand explains why an increase in product A increases the demand for resources used to produce product A.

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14
Q

Concurrent with significant downturn in economy, what most likely cause a decline in demand for a product?

A

Income of market participants decreased. Decrease in income would lower demand for normal goods, but increase demand for inferior goods.

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15
Q

What does “invisible hand” mean?

A

Guidance and benefits that society accrues as a result of individuals acting in their own economic self-interest.

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16
Q

What is the difference between outward and inward shift mean with regards to demand and supply?

A 
Outward = positive 
Inward = negative
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17
Q

What are the non-price variables that would cause a change in supply?

A
  1. # of providers. If number of providers increase, then supply increases and vice versa.
  2. Cost of inputs. If these increase, supply will decrease (left) and vice versa.
  3. Technological advances and improvements. Increase supply (right).
  4. Price expectations. If producers expect higher future price, will increase supply (right) and vice versa
  5. Change in prices of other goods and services
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18
Q

Describe the supply schedule.

A

A supply schedule (or supply curve) shows the quantity of a commodity that will be supplied (provided) at different selling prices during a period of time. The supply curve normally is positively sloped; the quantity supplied increase along a given supply curve as the price increases.

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19
Q

What would not cause an increase or decrease in supply curve?

A

A change in price. This will increase or decrease quantity supplied but not move the supply curve.

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20
Q

What is the independent and dependent variable in supply curve?

A 
Independent = price (y)
Dependent = quantity (x)
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21
Q

What two things would affect the cost of inputs? Relates to supply curve.

A
  1. Change in prices of related commodities

2. Government taxes or subsidies

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22
Q

If supply curve shifts inward, why would price increase in order for the same quantity to be provided?

A

Best way to solve this. Draw out supply curve w/ P1 and Q1. Move supply curve left. You will see that price will increase if you want to keep same quantity.

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23
Q

What is the best way to solve problems related to quantity and price for demand and supply?

A

Drawing out demand or supply curve with P1 and Q1. Moving these curves on graph and calculating P2 and Q2. You can visualize increases/decreases in price and quantity.

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24
Q

Straight-line curves are not interdependent. Why is that?

A

“Not interdependent” means that the value of one variable does not depend on the value of another variable. The value of one variable does not change with a change in the value of the other variable.

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25
Q

Graphs are a means of depicting the relationship between two variables. These variables are usually identified as?

A

Dependent (x) and independent (y)

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26
Q

What is the basic equation for straight-line plot on graph?

A

U=y+q(x)
U - Unknown value of variable y being determine
y - y-intercept or where x=0
q - value by which the value of y changes for each unit
x - # of units

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27
Q

In this equation D=b+m(a), what would constitute a positive, negative, or neutral slope curve?

A
  1. Positive slope curve if m is > 0
  2. Negative slope curve if m is < 0
  3. Neutral is slop curve is zero
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28
Q

How would an independent and dependent variable constitute a positive slop?

A

When the dependent variable moves in the same manner or direction as the independent variable, then the relationship between the variables is positive.

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29
Q

In a competitive market for labor in which demand is stable, if workers try to increase their wage, then what will be the result?

A

Employment must fall. If wages rise in a stable market, demand for labor will decline and employment will fall.

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30
Q

What is the effect of price and quantity during an increase and decrease in demand?

A

Increase demand: Shifts curve to the right. Price increases as well as quantity
Decrease demand: Shifts curve to left. Price decreases and quantity decreases.
Draw out demand curve!

31
Q

What is the effect on price and quantity during an increase and decrease in supply?

A

Increase supply: Shifts curve to the right. Quantity increases as price decreases.
Decrease supply: Shifts curve to the left. Quantity decreases as price increases.
Draw out supply curve!

32
Q

What is the difference between price ceiling and price floor (price fiat)?

A

Price ceiling: Price less than equilibrium price. Shortage. Quantity demanded > Quantity Supplied. Excess demand.
Price floor: Price greater than equilibrium price. Surplus. Quantity supplied > quantity demanded. Excess supply.

33
Q

When an actual price or price ceiling is below equilibrium price, will there be excess demand or supply?

A

Supply = Shortage
Demand = Excess
Vice versa

34
Q

What is the best way to solve problems related to price ceilings, price floors, shortages, and surpluses.

A

Draw out demand and supply curve w/ price and quantity equilibrium. Then draw out line for actual price. See how this effects demand and supply curves (shortage or surplus).

35
Q

If demand for product is elastic, how would price changes impact total revenue (increase or decrease in price)?

A

Price increase - TR decrease
Price decrease - TR increase
Since %CQ>%CP (elastic), increase in price would result in greater than proportionate decrease in quantity.

36
Q

If demand for product is inelastic, how would price changes impact total revenue (increase or decrease in price)?

A

Price increase - TR increase
Price decrease - TR decrease
Quantity % change is less than % change in price.

37
Q

What are the coefficients for elastic, unitary, and inelastic?

A

Elastic > 1
Unitary = 1
Inelastic < 1

38
Q

What is the elasticity of demand formula?

A

% change in quantity/% change in Price

39
Q

In the elasticity formula, you can use three different denominators to calculate % change in price of quantity. The numerator is the change in price or quantity. What are the three denominators you can use?

A
  1. Original quantity. Change in quantity/Original Quantity
  2. Average quantity. Change in quantity/Average (x+y/2)
  3. New quantity. Change in quantity/new quantity
40
Q

Why would a product w/ high price elasticity of demand be considered an item w/ similar substitutes?

A

A good that’s elastic has higher %CQ than %CP. Therefore, when a good has many substitutes, a small change in price will result in a greater change in quantity demanded as consumers switch to the substitutes. So, for example, if the price of an item with many substitutes increases, consumers will switch to lower-cost substitutes, reflecting a high price elasticity of demand.

41
Q

Tower Inc. sells a product that is a close substitute for a product offered by Westco. Historically, management of Tower has observed a coefficient of cross-elasticity of 1.5 between the two products. If management of Tower anticipates a 5% increase in price by Westco, how would this action by Westco’s management be expected to affect the demand for Tower’s product? Explain best way to solve this.

A

Formula for elasticity is coefficient of elasticity = %CQ/%CP. You are given two variables which are coefficient and %CP. You can solve for %CQ by cross multiplying. This gives you 0.75 (.05 x 1.5). To determine impact of demand for Tower’s product, it is stated the products are close substitutes meaning high elasticity (Positive: greater than 0). When the price of one substitute product increases, than the demand for the other product (Tower) will increase. If the coefficient was negative (complementary) than demand would decrease.

42
Q

As an individual acquires (or consumes) more units of a commodity over a given time period, what is the effect on the individual’s total utility and marginal utility?

A

Total utility increases (Upward sloping curve)
Marginal utility decreases (Downward sloping curve)
“Law of diminishing marginal utility”

43
Q

What is utility?

A

Utility is a measure of satisfaction in economics.

44
Q

What is the formula for total utility satisfaction?

A

TUS=Marginal utility A/A price = Marginal utility B/B price

45
Q

How do you determine the ratio of the price of one product to the price of another product?

A

MU of product A/MU of product B

46
Q

What is the best approach to solving marginal utility questions?

A
  1. Write out formula of MU of A/Price of A = MU of B/Price of B.
  2. Determine the variables given and the particular variable you need to solve for.
    For example, if you are given MU of A, Price of A, Price of B. Then you need to solve for Price of B.
  3. Write out formula and with variables given then cross multiply to solve for missing variable.
47
Q

All cost curves have a “U-shape” except?

A

Average fixed cost (AFC) curve. Fixed costs do not change with changes in output over the relevant range of production, the more units produced, the lower the average fixed cost. Therefore, the average fixed cost decreases continuously over the relevant range of production. It is not “U-shaped.”

48
Q

When dealing with long-run cost analysis, what would characterize increasing returns to scale, constant returns to scale, and decreasing returns to scale with regards to outputs and inputs?

A

Increasing returns to scale = Outputs > inputs in long run. LAC curve is decreasing.
Constant returns to scale = Outputs = inputs in long run. LAC is at bottom part.
Decreasing returns to scale = Outputs < inputs in long run. LAC curve increasing.

49
Q

What is the law of diminishing returns and does this apply to long run or short run?

A

Short run.

The marginal product (output) falls as more units of a variable input are added to fixed inputs.

50
Q

Regarding periods of analysis, what are some characteristics pertaining to long-run analysis and short-run analysis?

A

Short-run analysis - At least one factor is assumed to be fixed, many inputs can be varied
Long-run analysis - Assumed all inputs to the production process can be varied; no inputs are fixed

51
Q

How do you calculate AFC, AVC, and ATC?

A 
AFC = FC/# of units
AVC = VC/# of units
ATC = AFC + AVC
52
Q

In microeconomics, the distinguishing characteristic of the LONG RUN on the supply side is that?

A

All inputs (costs) are variable.

53
Q

How do you calculate marginal physical product? Example question, one worker is being added.

A

Marginal physical product is the additional output obtained by adding one additional worker (or unit). Subtract total product units from each other to determine marginal product.

54
Q

Regarding economies of scale, increasing size of the factory will result in what?

A

Lower AVERAGE costs. With growth comes specialization of labor and related production efficiencies related to the law of diminishing returns.

55
Q

What is marginal revenue?

A

The change in total revenue associated with producing and selling one more unit.

56
Q

How do you calculate marginal revenue formula wise?

A

of units x selling price of a unit minus (-) # of units x selling price of the prior unit.

57
Q

What is the formula to calculate marginal revenue PER UNIT?

A

Dividing formula.
Numerator: Difference between total revenue. (SP x # of units)-(SP x # of units)
Denominator: Marginal product; difference in number of unit.

58
Q

What is the formula to calculate marginal cost?

A

of units x ATC for one unit - # of units x ATC for the other (next) unit

59
Q

Leading indicators are measures of economic activity that occur before changes in business cycle. What are the eight leading indicators?

A
  1. Consumer expectations
  2. Initial claims for unemployment
  3. Weekly manufacturing hours
  4. Stock prices
  5. Building permits
  6. New orders for consumer goods
  7. New order for manufactured capital goods
  8. Real money supply
60
Q

Variations between business cycles are most likely attributable to which of the following factors?

A

Duration (length) and intensity (magnitude)

61
Q

Lagging (trailing) indicators occur after changes in business cycle. What are seven lagging indicators?

A
  1. Average duration of unemployment (chronic unemployment)
  2. Change in index of labor cost per unit of output
  3. Average prime rate charged by banks
  4. Ratio of manufacturing and trade inventories to sales
  5. Commercial and industrial loans outstanding
  6. Ratio of consumer installment credit
  7. Change in CPI for services
62
Q

List the four phases of the business cycle in order of occurrence (1 is first, 4th is last).

A
  1. Peak
  2. Recession
  3. Trough
  4. Recovery
63
Q

Provide a brief description for peak, recession, trough, and recovery.

A

Peak - point in the economic cycle that marks the end of rising aggregate output and the beginning of a decline in output.
Recession - a period during which aggregate output is decreasing.
Trough - point in the economic cycle that marks the end of a decline in aggregate output and the beginning of an increase in output.
Recovery - period during which aggregate output is increasing.

64
Q

What are two characteristics of a recessionary phase of a business cycle?

A
  1. Potential national income will exceed actual national income
  2. High cyclical unemployment (not natural rate)
65
Q

What is economic stagflation?

A

Economy is stagnant but inflation occurs (rising prices). Prices need to be rising. Decreasing interest rates and lower stock prices mean prices are going down.

66
Q

What is an inflationary period?

A

inflationary period exists when the general level of prices is increasing. Caused by excess demand or higher cost of inputs driving up prices.

67
Q

What is a depression period?

A

Economic downturn that is severe and long term. Negative GDP occurs.

68
Q

What characterizes an economic recession?

A
  1. Drop in consumer purchases
  2. Investments fall
  3. Interest rates and stock prices fall
  4. Real income falls
  5. Unemployment increases
    Significant decline in an economy lasting several months
69
Q

What are two key characteristics of a trough?

A
  1. Unused productive capacity

2. Unwillingness to risk new investments

70
Q

Where do peaks and troughs occur in the business cycle?

A

Peak - Occurs at end of expansionary period

Trough - Occurs at end of recession

71
Q

Why are industries such as commercial construction, machinery/equipment, and residential construction impacted by business cycles?

A

These industries are all impacted by changes in business cycle such as: decrease/increase in business investment, increase/decrease purchase of homes, consumer spending, interest rates, employment, and unemployment.

72
Q

In a multiplier effect question, how do you solve for MPC? When you are given ME and ICS (Change Spending).

A

First, write ME formula and plug in variables ME and ICS
Second, solve for ME amount by multiplying ICS by (1/1-MPC). Determine the number equal to (1/1-MPC).
Third, once you’ve determined that number, solve for MPS by cross multiplying formula. 1/MPS(1-MPC) x number calculated
Fourth, once you’ve solved for MPS after cross multiplying than you can easily calculate MPC by 1-MPS.

73
Q

What is formula for multiplier effect (ME)?

A

ME = Initial change in spending x (1/1-MPC)

BEC Corporate Governance, Economics, and Financial Management (19 decks)

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