Section 2 Economics Flashcards
Marginal Propensity to Consumer vs Marginal Propensity to Save
MPC - How much you spend when income increases.
MPS - How much you save when income increases.
MP(C or S) = Change in (Spending or Savings) / Change in income
MPC + MPS = 100%
Elasticity
Elasticity - Elasticity measures the change in a market factor as a result of a change in another
market factor. Typically this is referring to how much the DEMAND for a product changes based on the change in price.
The 4 main determinants of a product’s elasticity are:
- The availability of close substitutes
- If the good is a necessity or a luxury
- The proportion of income spent on a good
- Time elapsed since a change in price
Price Elasticity of Demand
Price Elasticity of Demand
= % Change in Demand / % Change in Price
Elastic = Greater than 1 - Demand changed Significantly
Inelastic = Less than 1 - Demand changed Insignificantly
Unitary Demand = Change is equal to 1
Elastic Demand - Demand changes greater than 1. Product is not necessary so demand changes drastically compared to Inelastic Products
Inelastic Demand = Demand changes are less than 1. The product is a necessity so individuals are already buying at the amount required for them to live. Therefore, Changes in demand is low.
Consumer Price Index
Percent Change in consumer price index is calculated as the following.
((CPI Current - CPI Last) / CPI Last) * 100
Change in CPI * 100 = % Change in CPI
Cyclical Unemployment vs Frictional Unemployment
Cyclical - Outside of control - GDP doesn’t grow fast enough to employ all people. There aren’t enough jobs for everyone.
Frictional - Person is choosing to be unemployed - People are changing jobs. Graduating High School or College.
Structural Unemployment - Individual Quitting Job to acquire new skills. Construction worker quitting to be a computer scientist.
High Unemployment = Low Inflation (Vice Versa)
Discount Rate
Rate the FED is charging banks to borrow money. The FED can manipulate this for adjustments to inflation.
High Interest Rate = Slow borrowing power which reduces inflation.
Low Interest Rate = Increase borrowing power which increases inflation.
Increase Money Supply = Increased Inflation
Accounting and Economic Costs
Accounting Cost
- Explicit = Cost of Operating a Business
- Implicit = Oppourtunity Costs
Economic Cost = Explicit + Implicit Cost
Economic Revenue = Revenue - Economic Cost
Market Structures
Perfect Competition - there is a large number of
buyers and sellers, and so no single trader could have a significant impact on
market prices.
Perfect Monopoly - there is no close substitute
for the good(s) they sell. In other words, this one single firm makes up the entire market.
Monopolistic competition - A market with many sellers where the sellers sell differentiated products, and there are close substitutes for the products. Firms can
enter and exit the market easily.
Oligopoly - there are a small number of sellers, and these firms sell either similar or differentiated products. Entry to the market is restricted.
Systematic Risk VS Unsystematic Risk
Systematic Risk - Risks that impact the entire market and can’t be avoided.
Unsystematic Risk - Relates to a particular industry or company. Risk may or may not affect the company.
- Beta - the measurement of how volatile the investment is relative to the rest of the market.
Derivatives
Used to hedge against certain risks.
Options - Gives the buyer to option to buy or sell at a certain price.
Future - Forward Contract with a future value.
Interest Rate Swap - Forward Contract to Swap Payment Agreements. I.E. I pay you a fixed amount now and you pay me back the variable amount later based upon the market.
Fair Value Hedged - Hedge that protects against changes in fair value of an asset or liability.
Cash Flow Hedge - Hedge that protects against a change in future cash flows.
Foreign Currency Hedge - Protects the change in value of a foreign currency.
Comparative Advantage vs Absolute Advantage
Comparative Advantage - Whichever country has the least opportunity cost to produce a good.
Absolute Advantage - Produces more of both Products
A Country that has an absolute advantage cannot have the comparative advantage due to the opportunity cost of giving up something it produces more of.
The Smaller country has the comparative advantage because its opportunity cost is less.
Perfectly Inelastic and Elastic Lines on a Graph
Perfectly Inelastic line on a graph is vertical
Perfectly Elastic line on a graph is horizontal.
