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1
Q

How does a price increase affect supply?

A

When the prices of an item increases supply increases- because more sellers are willing to sell.

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2
Q

What is a supply curve shift?

A

When supply changes due to something other than price.

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3
Q

What are the characteristics of a positive supply curve shift (shift right)?

A

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

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4
Q

What are the characteristics of a negative supply curve shift (shift left)?

A

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

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5
Q

How does price affect the demand for an item?

A

When the prices of an item increases- demand for it decreases.

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6
Q

What is a Demand Curve Shift?

A

When demand changes due to something other than price.

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7
Q

What is a Positive Demand Curve Shift (Shift Right)?

A

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

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8
Q

What is a Negative Demand Curve Shift (Shift Left)?

A

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

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9
Q

What is the Marginal Propensity to Consume?

A

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

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10
Q

What is the Marginal Propensity to Save?

A

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

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11
Q

How is the multiplier effect calculated?

A

(1 / 1-MPC) x Change in Spending

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12
Q

How does increased spending by consumers and the government affect the demand curve?

A

As spending by consumers or the government increases- the demand curve increases (shifts right).

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13
Q

How does spending change due to the multiplier effect?

A

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.

One consumer spends money- which:
*Increases the income of a business
*Increases the income of a vendor
*Increases income of employees
*Increases tax revenue

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14
Q

How is Price Elasticity of Demand calculated?

A

% Change in Quantity Demand / % Change in Price

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15
Q

Under elastic demand- how does price affect revenues?

A

Price increases- Revenue decreases

Price decreases- Revenue increases

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16
Q

What conditions would indicate Elastic Demand?

A

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

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17
Q

How does revenue react to price under Inelastic Demand?

A

Price increases- Revenue increases

Price decreases- Revenue decreases

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18
Q

What conditions would indicate Inelastic Demand?

A

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

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19
Q

What is Unitary Demand?

A

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

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20
Q

How is Income Elasticity of Demand calculated?

A

% Change Quantity Demanded / % Change in Income

Normal goods greater than 1 (demand increases more than income)

Inferior goods less than 1 (demand increases less than income)

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21
Q

What conditions occur under periods of inflation?

A

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

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22
Q

What happens under Demand-Pull inflation?

A

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

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23
Q

What happens under Cost-Push inflation?

A

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

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24
Q

What is the Equilibrium Price?

A

The price where Quantity Supplied : Quantity Demanded

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25
What is Optimal Production?
When Marginal Revenue : Marginal Cost
26
What is the result of a Price Floor?
Causes a surplus if above equilibrium price.
27
What is GDP (Gross Domestic Product)?
The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory
28
What is included under the income approach for calculating GDP?
Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation
29
What is included under the Expenditure Approach for calculating GDP?
Individual Consumption Private Investment Government Purchases Net Exports
30
What is Nominal GDP?
Measures goods/services in current prices.
31
For what is a GDP Deflator used?
Used to convert GDP to Real GDP
32
What is Real GDP?
Nominal GDP / GDP Deflator x 100
33
What is Gross National Product (GNP)?
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
34
What is the Consumer Price Index (CPI)? How is it applied?
Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0 ((CPI Current - CPI Last) / CPI Last) * 100
35
How is disposable income calculated?
Personal Income - Personal Taxes
36
How is Return to Scale calculated?
% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale
37
When is the economy in Recession?
When GDP growth is negative for two consecutive quarters.
38
What is a Depression?
A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression
39
What are the stages of the Economic Cycle?
Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)
40
What are leading indicators?
Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts
41
What are lagging indicators?
Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment
42
What are coincident indicators?
Conditions that occur during a recession or during a recovery Example: Manufacturing output
43
Which people are included in the calculation of unemployment?
Only people looking for jobs
44
What is Cyclical Unemployment?
GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy
45
What is Frictional Unemployment?
People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job
46
What is Structural Unemployment?
A worker's job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training
47
How does inflation relate to unemployment?
High Unemployment : Low Inflation (Vice Versa)
48
What is the Discount Rate?
The rate a bank pays to borrow from the Fed.
49
What is the Prime Rate?
The rate a bank charges their best customers on short-term borrowings.
50
What is the Real Interest Rate?
Inflation-adjusted interest rate
51
What is the Nominal Rate?
Rate that uses current prices
52
What is the Risk-Free Rate?
Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.
53
What is included in the M1 money supply?
Currency- Coins- and Deposits
54
What is included in the M2 money supply?
Highly liquid assets other than currency- coins or deposits
55
What is Deficit Spending?
Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy
56
How can the Fed control the money supply?
By buying and selling the government's securities.
57
How does the Fed control economy-wide interest rates?
By adjusting the discount rate charged to banks
58
What is a Tariff?
A tax on imported goods
59
What is a quota?
A limit on the number of goods that can be imported
60
How do international trade restrictions affect domestic producers?
They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices
61
How to international trade restrictions affect foreign producers?
They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices
62
How do international trade restrictions affect foreign consumers?
They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets
63
How do international trade restrictions affect domestic consumers?
They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices
64
What is Accounting Cost?
Explicit (Actual) cost of operating a business Implicit costs are opportunity costs
65
What is Accounting Profit?
Revenue - Accounting Cost
66
What is Economic Cost?
Explicit + Implicit Cost
67
What is Economic Profit?
Revenue - Economic Cost
68
What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
69
How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
70
What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle Don't negatively impact operations
71
What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell them Average Inventory : (BI + E) / 2 Inventory Conversion Period : Average Inventory / Sales Per Day
72
What is the Receivables Collection Period?
Average time needed to collect A/R RCP : Average Receivables / Credit Sales Per Day
73
What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P payment Average Payables : (BP + EP) / 2 Payables Deferral Period : Average Payables / (COGS/365)
74
What is the Cash Conversion Cycle?
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors) Inventory Conversion Period + Receivables Collection Period - Payables Deferral Period : Cash Conversion Cycle (Inventory Really (-Pays) Cash)
75
What traits should Cash and Short-Term Investments have?
Liquid Safe
76
For what are Letters of Credit used?
Used for importing goods. Issued by importer's bank.
77
What is the advantage of using Trade Credit?
No interest cost if paid timely.
78
What is a Lockbox System? What are the advantages?
Customer Payments are sent to a bank-managed PO box. Employees don't have access to cash. Deposits are more timely. Interest income from deposits should pay for the Lockbox fees (if they don't- lockbox is not beneficial)
79
What is float?
Time it takes to mail a payment and have it clear your bank account Maximize float on cash payments Minimize float on cash receipts
80
What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checks Advantages: Checks take longer to clear -more float Low amounts of cash tied up for compensating (minimum) balances
81
What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 Bill Treasury Notes: Medium term (less than 10 years- more than 1) Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
82
What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government Greater than 9 Months Maturity Unsecured Issued by large firms
83
What are the advantages and disadvantages of Commercial Paper?
Advantages: Financing at less than Prime. No compensating balances required. Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren't lending.
84
What is Economic Order Quantity?
The order quantity that minimizes inventory costs. EOQ : Square Root of (2DO/C) D : Unit Demand (Annual) O : Order Cost C : Cost of Inventory
85
What is Carrying Cost?
The cost of keeping inventory.
86
What is Order Cost?
Cost of executing an order and starting product production.
87
What is inventory reorder point?
How low inventory should get before it should be re-ordered. IOP : Average Daily Demand x Average Lead Time
88
What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it's needed JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
89
What is Factoring of receivables?
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
90
What is a Trade Discount?
Buyer saves if paid early Example: 1/10 Net 30 1% Discount if paid within 10 days If not- bill is still due in 30 days
91
What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
92
What is the Prime Rate?
A benchmark used for lending only to the best customers Most customers will be charged Prime + 3%- for example If the lending institution and the customer are not in the same country- the LIBOR rate is often used
93
What is the Nominal (Face- Coupon- Stated) Rate?
Interest rate stated on the face of a bond.
94
How is Current Yield calculated?
CY : Interest Payment / Bond Price
95
What is the Effective (YTM- Market) Rate?
PV of Principle + Interest : Bond Price
96
What is a Zero Coupon Bond?
No interest payments made Bond sold at a discount Interest reflected when Bond matures
97
What are the characteristics of a Junk Bond?
High interest rate High default risk
98
What are debenture bonds?
Bonds unsecured by collateral
99
What are subordinated debentures?
Debenture Bonds that will be repaid if any assets are left after liquidation of a company
100
What are Redeemable Bonds?
Provision in Bond contract allows demand of Bond payment under certain circumstances
101
What is a Callable Bond?
Borrower can pay off debt early
102
What is a Convertible Bond?
Lender can demand payment via company stock instead of money
103
What is a Sinking Fund?
Borrower deposits regular sums into an account that will eventually pay off the debt
104
What is the disadvantage of Common Stock in comparison to bonds?
Common Stock is more expensive to issue than debt. Why? Investors demand a greater ROI than debtors (bondholders)
105
What is the advantage of Preferred Stock?
Hold dividend priority over common stock
106
What is Weighted Average Cost of Capital?
A company uses this to determine the true cost of their capital ``` Example: Debt costs 5%; 40% of Cap. Equity costs 12%; 60% of Cap. (5% x 40%) + (12% x 60%) WACC : 9.2% ```
107
What is CAPM?
A stock's expected performance is based on its beta (risk) compared to that of the stock market. More risk : more expected return.
108
How is Cost of Debt calculated?
(Interest Expense - Tax Benefit) / Carrying Value of Debt

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