Principles Of Economics Flashcards
Endogenous variables
Explained in the model
Exogenous variables
Logically given, are not in the model
Positive question
How are things?
Normative question
How things should be?
Opportunity cost
Cost of the upcoming best alternative
Comparative statics
How will change of some exogenous variable affect the model?
Marginal analysis
How will a marginal change of some variable affect the cost?
Ommited variables bias
One should not consider a correlation to be a causality when not taking into account all relevant variables
Reverse concellity bias
When not clear, one can’t be sure about the direction of the causality (it can be the other way)
Demand curve
Represents the relation between demand and price
Normal good
Product, which demand grows with the income of the buyer (e.g. chocolate:-)
Inferior good
Product, which demand falls with the income of the buyer (e.g. public transport)
Complements
Products, which demands move the same way; one depends on another
Accounting costs
The money needed to run the business
Opportunity costs
What’s the best alternative use of resources
Causality
Influence of one event/process/state/object is responsible for an ocurrence of another one
Casual effects
Change of an exogenous variable affects only one endogenous variable (and the other ones remain as before)
Correlation
Relationship between variables (doesn’t mean causality)
Equation
How can the buyer spend his money?
m = v_q + P × q
Excess supply
When the price is higher than WTP
Excess demand
When the demand is higher than the WTA
Surge pricing
Flexible adjusting of the price accordingly to the demand
Individual customer surplus
The difference between willing-to-pay and the amount the customer actually pays for the good
Individual producer surplus
The difference between willing-to-accept and the amount the supplier actually receives for the good
Price Ceiling
Highest possible price that can be paid for a good
Gains from trade (no equation)
Difference between the WTP and WTA for each Q_i
Marginal damage
Additional cost which is not included in the price of the good
Excess burden
Trades that will be normally traded but are not because of a tax
Price discrimination
Charging a different price to different customers
Non credible threat
A decision that the next player is threatening with, and which will be bad for the first to decide, but will be at the same time bad for the one threatening as well so he won’t really choose it → it can be ignored
Entry deterrence
Discouraging potential competitors from entering a market
Unravelling market
WTP is low → the offered quality gets lower → WTP gets lower → the offered quality gets lower → …
Annuity
“prepaid” insurance product
Adverse selection
One player has some info about the product that the other one doesn’t have
Hidden action
One player does something (relevant to the game), and the other one doesn’t know it
Labour income
The money the company has to pay to its employees
Capital income
The money the company has to pay to its owners (stakeholders, shareholders…)
Production approach to GDP
GDP =
GDP is the value of the company’s market production
= P × Q
Expenditure approach to GDP
GDP =
GDP is the company’s expenditures, while the unsold products of the firm are added to those expenditures
= ∑ expenditures
Income approach to GDP
GDP =
GDP is the revenue of the firm
= consumption + investment + expenditure + (export - import)
Definition of GDP
Another definition of GDP
The market value of all final goods and services that are produced in an economy each year
The market value of the difference between revenue and intermediate loose of each company.
Nominal GDP
impact of production change to nominal GDP =
Calculation by products a and b:
GDP0 (GDP in one year) =
GDP1 (GDP in some other year) =
compares one year’s productions by the same year’s prices
= real GDP
= Qa0 × Pa0 + Qb0 × Pb0
= Qa1 × Pa1 + Qb1 × Pb1
This is the one in the news:
Real GDP
real GDP growth =
Calculation by products a and b:
GDP0 (GDP in one year) =
GDP1 (GDP in some other year) =
compares one year’s productions with some other year’s prices
= (real GDP_x - real GDP(x-n)) / (real GDP(x-n)
= Qa0 × Pa0 + Qb0 × Pb0
= Qa1 × Pa0 + Qb1 × Pb0
GDP deflator =
what is it good for?
Consumer price index (CPI) =
Inflation rate (IR) =
= (nominal GDP) / (real GDP) ×100
Measures the impact of inflation to the GDP
= cost of sth_x / cost of sth_(x-n)
= (price index_x - price index_(x-n)) / price index_(x-n)
Labour demand
the optimal number of workers hired by the company
Marginal product of labour
how valuable is for the firm to hire one more worker (WTP for labour force)
Frictional unemployment
when the employee exits the company, he is for some time unemployed anyway
Multiplier effect
something (multiplier) amplifies the impact of a shock (= “vicious circle”)
Government demand
the government can spend money to support the firms
Automatic components
reactions of the government to the recession that happen automatically (e.g. taxes depending on the income get lower)
Crowding-out effects
- Both firms and state offer bonds
- Firms may go bankrupt, states usually don’t – people prefer government bonds
- Then the firms have less money to finance themselves
- Less affects the firms that don’t rely on external funds
Money market
a market, where the banks can borrow the money from another bank to disburse their customers
Open market
a market between private banks and the central bank, where the banks can buy money they need in exchange for their stocks
Refinancing rate
How is it used for the monetary policy?
the tax the bank has to pay for asking the central bank for money
- By lower rate the central bank enforces the economic activity
- By higher rate the central bank brakes the economic activity
Expansionary policy
why is it used?
higher government expenditures
fiscal policy to support economics during recession
Contractionary policy
why is it used?
lower government expenditures
fiscal policy to bake economics during boom
Production change contribution to the change in GDP (formula)
ΔGDP × Δproduction / original production
Price change contribution to the change in GDP (formula)
ΔGDP × Δprice / original price
