Economic Concepts & Strategy

Question 1

Demand Curve

Answer 1

A demand curve shows that the inverse relationship between price and the quantity of a product or service that a group of consumers are willing and able to buy at a particular time.

Question 2

Demand Curve Shifts

Answer 2

The DEMAND CURVE SHIFTS if there are changes in relevant factors other than a change in price. “ the demand curve shifted upward,” “the demand curve shifted outward,” “the demand curve shifted to the right” or “ demand increased”.

Changes in the demand curve where QUANTITY DEMANDED becomes SMALLER for each and every price are described as “the demand curve SHIFTS DOWNWARD,” “ the demand curve SHIFTS inward,” “ the demand curve shifted to the LEFT,” or “DEMAND DECREASES.”

Question 3

Reasons why demand curves may shift are?

Answer 3

1.) The price of a SUBSTITUTE.
Increases in the PRICE of product A, will make product B, MORE attractive
2.) EXPECTATIONS of price INCREASES
Consumers are more likely to buy now if they think that prices will increase in the future
3.) INCOME (for normal goods)
When income INCREASES (wealth increases), demand INCREASES.
4.) Extent of the MARKET
NEW CONSUMERS may increase demand, therefore increasing the SIZE of the market

Question 4

Demand Curve Shifts (download)

Answer 4

a. ) The price of a complement good– when products are normally used together an increase in the price of one of the goods decreases demand for the other.(chips and salsa)
b. ) Income (for inferior goods) – for some goods(e.g.,old cars) when income increases (wealth), demand decreases as consumers shift their spending to other goods (e.g. new cars)
c. ) Consumer boycotts - an organized boycott will, if effective, temporarily decrease in demand for a product.
* consumer tastes are indeterminate relationships.

Question 5

Okun’s Law

Answer 5

Okun’s Law
Provides a general rule of thumb linking changes in the ECONOMIC GROWTH and UNEMPLOYMENT. Okun’s Law does NOT have PRECISE predictive power NOR does it focus on INTEREST RATES or INFLATRION.

Question 6

Macroeconomics

Answer 6

Macroeconomics is the study of the economy as a whole (Big Mac). The key concerns of macroeconomics include UNEMPLOYMENT, INFLATION, and LONG -TERM ECONOMIC GROWTH. Macroeconomics studies to roles of HOUSEHOLDS (CONSUMERS), (NON-FINANCIAL) BUSINESSES, GOVERNMENTS, the FINANCIAL SECTOR, and FOREIGN ECONOMIES and causing and/or alleviating undesired FLUCTUATION in DOMESTIC economic conditions

Question 7

Gross Domestic Product (GDP)

Answer 7

Gross Domestic Product (GDP) also known as NOMINAL GDP. The total dollar value, at current (or nominal) market prices, of all the FINAL GOODS AND SERVICES produced WITHIN ONE countries BORDERS (regardless of the citizenship of the individual residents or the country of headquarters of the companies involved during a period of time typically a year.

Question 8

Quantitative Easing

Answer 8

Quantitative Easing involves the Fed BUYING SECURITIES to add LIQUIDITY at the time, when SHORT-TERM interest RATES are already close to zero. Quantitative easing does NOT involve LOWERING interest rates because they’re already close to zero. Running budget surpluses would NOT result in increased overall liquidity for the economy.

Question 9

Full Employment

Answer 9

Full employment consists of the TOTAL of FRICTIONAL unemployment and STRUCTURAL unemployment. CYCLICAL unemployment is assumed to be zero.

Question 10

Opportunity Cost

Answer 10

Opportunity Cost is defined as the best ALTERNATIVE USED for benefit FOREGONE as a result of a business decision.

Question 11

Percentage change for account Balances

Answer 11

When calculating PERCENTAGE CHANGE of account balances from one period to another, the prior. BASE QUANTITY is used to measure the change. The CHANGE in balances is DIVIDED by the BASE. To calculate percentage change: [(CURRENT BALANCE – PRIOR BALANCE)/PRIOR BALANCE] = PERCENTAGE CHANGE.

Question 12

To maintain a Fixed Exchange Rate

Answer 12

a country may have to increases interest rates if they have trade deficit with the country whose currency it targets, increase its interest rates if it has higher inflation rates in the country whose currency it targets, or change its interest rates to match changes in the country whose currency it targets..

Question 13

Elasticity

Answer 13

Elasticity measures the sensitivity of demand to change in a determinant. If elasticity is greater than 1, demand is considered elastic and total revenue will decline if the price is increased. If elasticity is less than 1, demand is considered inelastic and total revenue will increase in the price is increased. If elasticity is equal to 1, demand is said to be unitary, and is not sensitive to price changes. The point of inflection is = 1.0.

Question 14

Price Elasticity Of Demand

Answer 14

Price elasticity of demand = percentage change in quantity demanded / percentage change in price.

Question 15

Price Elasticity of Demand (ARC Method)

Answer 15

Change in quantity demanded / average quantity demanded divided by changing price /average price

Question 16

Income Elasticity of Demand

Answer 16

Income elasticity of demand = Percentage of change in quantity demanded / percentage change in income

Question 17

Cross Elasticity of Demand

Answer 17

Cross Elasticity of Demand = percentage change in quantity demanded for a product X / percentage change in the price of product Y

Question 18

Direct relationships with supply curves (increases in that factor cause supply curve to shift outward or supply to increase.

Answer 18

Direct Relationships:
– Number of Producers – will produces normally increase the quantity supplied of a product at a given price.
– Government Subsidies – additional funding permits producers to produce more inputs and thus increase quantity supplied at any given price.
– Price Expectations – if producers expect higher prices, producers will increase quantities.
– Reduction in costs of production and technological advances.
*Inverse relationship with supply curve:
Increasing production costs (e.g.,production taxes) if producers costs increase produces will decrease their quantity supplied at a given price.
Prices of other products – if producers may produce both product A and B, and producing A becomes more profitable, produces will decrease their quantity supplied of B at any given price.

Question 19

Price Elasticity of Supply

Answer 19

Price Elasticity of Supply (ES) = percentage change in quantity supplied / percentage change in price

Question 20

Economic Profit (loss)

Answer 20

Economic Profit (loss) – The excess (shortfall) of the profit or suppliers of a particular product over (under) the normal profit of the economy (and economic profit attracts new suppliers and an economic loss causes suppliers to exit production.

Question 21

Price Ceilings

Answer 21

Price Ceilings resulting SHORTAGES of goods.

Question 22

Price Floors

Answer 22

Price Floors result in unsold SURPLUSES of goods.

Question 23

Marginal Utility (satisfaction)

Answer 23

Marginal Utility – the SATISFACTION VALUE to the consumer of the next dollar they spend on a particular product.

Question 24

Marginal Propensity to Consume (MPC)

Answer 24

Marginal Propensity to Consume (MPC) – the percentage of the next dollar in personal disposable income that the consumer would be expected to spend (change in consumption(spending) / change in income).

Question 25

Marginal Propensity to Save (MPS)

Answer 25

Marginal Propensity to Save (MPS) – the percentage of the next, and personal DISPOSABLE INCOME that the consumer would be expected to save (MPC plus MPS must equal 100%, or 1. (Change in SAVINGS/ Change in INCOME)

Question 26

Marginal Costs (MC)

Answer 26

Marginal Costs (MC) – the INCREASING cost that will result from REDUCING one extra unit. Only VARIABLE costs are RELEVANT since fixed costs will increase in such circumstances.

Question 27

Marginal Revenue (MR)

Answer 27

Marginal Revenue (MR) – the change in total REVENUE ASSOCIATED with the sale of ONE MORE UNIT of OUTPUT. A good should be produced and sold as long as the marginal costs (MC) of producing the good is LESS THAN than or EQUAL TO the marginal revenue (MR) from the sale of that good.

Question 28

Marginal Revenue Product

Answer 28

Marginal Revenue Product – the INCREASE in total REVENUE RECEIVED by the addition of ONE WORKERr.

Question 29

Return to Scale

Answer 29

Return to Scale is the INCREASING units PRODUCED (OUTPUT) that results from an increase in production COSTS (INPUT)

= percentage INCREASE in INPUT/PERCENTAGE INCREASE in input.
*When GREATER THAN 1, INCREASING returns to scale. This would normally occur up to a certain level for all firms because of economies of scale. Return to scale is LESS THAN 1, DECREASING returns to SCALE. This will normally occur beyond a certain level of all firms because of diseconomies of scale.

Question 30

Pure (Perfect) Competition

Answer 30

Pure (Perfect) Competition – this a LARGE number of BUYER and SELLERS, EASY ENTRY and exit of SUPPLIERS (NO BARRIERS to entry/exit), a HOMOGENEOUS (STANDARD or IDENTICAL) product, and ABSENCE of NON-PRICE COMPETITION (advertising and perceived QUALITY DIFFERENCES)

Question 31

Sherman Act of 1890

Answer 31

Sherman Act – this 1890 law prohibits price-fixing, market division, and restricted resale agreements among suppliers

Question 32

Clayton Act of 1914

Answer 32

The Clayton Act of 1914 – this 1914 law prohibits stock mergers that reduce competition, price discrimination, and, and directorships among competing firms.

Question 33

Robinson – Patman Act Of 1936

Answer 33

Robinson - Patman Act of 1936 – this law prohibited DISCOUNTS to LARGE purchases ‘NOT based on COST DIFFERENTIALS.

Question 34

Celler–Kefauver Act of 1950

Answer 34

Celler–Kefauver Act of 1950 – this law PROHIBITS ACQUISITION of ASSETS of a competitor if it would REDUCE competition.

Question 35

Monopolistic Competition

Answer 35

Monopolistic Competition – there are MULTIPLE SUPPLIERS, but they are producing HETEROGENEOUS (differentiated) products, resulting in a great deal of NON-PRICE COMPETITION.
– CONSISTS of multiple suppliers
– HETEROGENEOUS products
– lots of NON-PRICE competition (advertising)
– EASY ENTRY and EXIT to market
– the firm’s demand curve is NEGATIVELY SLOPING

Question 36

Oligopoly

Answer 36

Oligopoly – there are only a FEW (generally LARGE) SUPPLIERS with significant BARRIERS to ensure. Products may be HOMOGENEOUS (such as the OIL industry) or HETEROGENEOUS (such as the AIRLINE manufacturing market). There is a LIMITED ABILITY to CONTROL PRICES through changing QUANTITY produced (although formal quantity agreements among competitors, known as CARTELS, are ILLEGAL in the US), and a tendency of the different companies to MATCH PRICE changes. Often leads to situations resembling a monopoly.
– a few large sellers
–  HETEROGENEOUS or HOMOGENEOUS products
– BARRIERS to ENTRY (COST OF PATENT)
– NON-PRICE COMPETITION exists
– RIVAL actions are OBSERVED
– the firm's DEMAND curve is KINKED