Economics 12-13 Flashcards
12-13 (96 cards)
1
Q
Short run
A
The time period over which some factors of production are fixed. Typically, we assume that capital is f ixed in the short run so that a f irm cannot change its scale of operations (plant and equipment) over the short run.
2
Q
Long Run
A
All factors of production (costs) are variable in the long run.
3
Q
Breakeven
A
Total Costs (Fixed & Variable) = Total Revenue
Average Total Costs = Average Revenue = Price
Economic Profit = 0
4
Q
Shut Down Points
A
If AR >= ATC - continue operation
If AR >= AVC but AR < ATC, continue in Short Run but shut down in Long Run
If AVC > AR, shut down in short term and exit in Long Term
5
Q
Short-run Shut Down Point
A
If average revenue is greater than average variable cost in the short run, the f irm should continue to operate, even if it has losses.
6
Q
long-run shutdown point.
A
In the long run, the firm should shut down if average revenue is less than average total cost.
7
Q
Price Taker
A
When market is in perfect competition, firm is price taker ie takes price set by market
Marginal Revenue = Price
8
Q
Price Searcher
A
- set their own prices
- demand curve is downward sloping
- marginal revenue =/= price
- Imperfect Competition
9
Q
Breakeven/Shutdown in Imperfect Competition
A
TR=TC: Breakeven
TC > TR > TVC: continue in SR, shut down in LR
TVC > TR: shut down in SR & LR
As Marginal Revenue =/= Price –> analysis based on totals is needed
Holds for both price taker and price searcher
10
Q
minimum efficient scale
A
The lowest point on the LRATC corresponds to the scale or plant size at which the average total cost of production is at a minimum.
Under perfect competition, firms must operate at minimum eff icient scale in long-run equilibrium, and LRATC will equal the market price. Recall that under perfect competition, firms earn zero economic pro it in long-run equilibrium. Firms that have chosen a different scale of operations with higher average total costs will have economic losses and must either leave the industry or change to the minimum eff icient scale.
11
Q
Economies of Scale
A
- The downward-sloping segment of the LRATC curve indicates that economies of scale (or increasing returns to scale) are present.
- Economies of scale result from factors such as labor specialization, mass production, and investment in more efficient equipment and technology.
- In addition, the firm may be able to negotiate lower input prices with suppliers as it increases in size and purchases more resources.
- A firm operating with economies of scale can increase its competitiveness by expanding production and reducing costs.
12
Q
Diseconomies of Scale
A
- The upward-sloping segment of the LRATC curve indicates that diseconomies of scale are present.
- Diseconomies of scale may result as the increasing bureaucracy of larger firms leads to ineff iciency, problems with motivating a larger workforce, and greater barriers to innovation and entrepreneurial activity.
- A f irm operating under diseconomies of scale will want to decrease output and move back toward the minimum eff icient scale.
13
Q
Constant returns to scale
A
There may be a relatively flat portion at the bottom of the LRATC curve that exhibits constant returns to scale, or relatively constant costs across a range of plant sizes.
14
Q
5 Factors that are examined when studying market structures
A
- Number + Size of Firms
- Differentiation of Products
- Bargaining Power of Firm wrt Price
- Barriers to Entry/Exit
- Competition on Factors other than price
15
Q
Perfect Competition
A
- Many small firms
- Identical Products
- Perfectly Elastic DC - no control of price
- Low Barriers to Entry
- No factor other than price considered
16
Q
Monopolistic Competition
A
- Large Number of Firms
- Good substitutes but differentiated
- Downward Sloping - relatively elastic
- Low Barriers
- Differentiated through Features, Marketing, Quality
17
Q
Oligopoly
A
- Few Large Firms
- Good Substitutes or differentiated
- Downward sloping DC - elasticity dependant on industry
- High Barriers typically due to Economies of Scale
- Differentiated through Branding, Marketing, Quality & Features
18
Q
Monopoly
A
- Single Large Size
- No substitute
- Downward sloping curve - relatively inelastic
- High Barrier
- Sources of monopoly: patent, copyright, control of natural resource, usually backed by specific laws & government regulations
19
Q
4 models of Oligopoly
A
- Kinked Demand Curve Model
- Cournot Duopoly Model
- Nash Equilibrium Model
- Stackelberg Dominant Firm Model
20
Q
Kinked Demand Curve Model
A
Assumes competitor is unlikely to match price increases done by a competitor but likely to match price decreases. Hence, the DC below the current price is less elastic and above the current price is more elastic. With a kink in the demand curve, we also get a gap in the associated MR curve, as shown in Figure 12.8. For any firm with a MC curve passing through this gap, the price where the kink is located is the firm’s prof it-maximizing price.
21
Q
Cournot Model
A
- In Cournot’s duopoly model, two f irms with identical MC curves each choose their preferred selling price based on the price the other firm chose in the previous period.
- Firms assume that the competitor’s price will not change.
- The long-run equilibrium for an oligopoly with two f irms (duopoly), in the Cournot model, is for both firms to sell the same quantity, dividing the market equally at the equilibrium price.
- The equilibrium price is less than the price that a single monopolist would charge, but greater than the equilibrium price that would result under perfect competition.
- With a greater number of producers, the long-run market equilibrium price moves toward the competitive price.
22
Q
Stackelberg Model
A
- While the Cournot model assumes the competitors choose price simultaneously each period, the Stackelberg model assumes pricing decisions are made sequentially. One firm, the “leader,” chooses its price first, and the other firm chooses a price based on the leader’s price.
- In long-run equilibrium, under these rules, the leader charges a higher price and receives a greater proportion of the f irms’ total prof its.
23
Q
Nash Equilibrium
A
- A Nash equilibrium is reached when the choices of all firms are such that there is no other choice that makes any firm better off (increases prof its or decreases losses).
- The Cournot model results in a Nash equilibrium. In equilibrium, neither competitor can increase pro its by changing the price they charge.
24
Q
Rules Based Models
A
- These models are early versions of rules-based models, which fall under the heading of what are now generally termed strategic games.
- Strategic games comprise decision models in which the best choice for a firm depends on the expected actions (reactions) of other firms.
25
Collusion
competitors making a joint agreement to charge a given price—or, alternatively, to agree to speci fic levels of output.
Eg: OPEC Cartel
- Cartel-member countries agree to restrict their oil production to increase the world price of oil.
- Members sometimes choose to “cheat” on the cartel agreement by producing more than the amount of oil they have agreed to produce.
- If members of a cartel do not adhere to the agreement (taking advantage of the higher market price but failing to restrict output to the agreed-upon amount), the agreement can quickly break down.
26
Conditions of collusive agreements
- There are fewer firms.
- Products are more similar (less differentiated).
- Cost structures are more similar.
- Purchases are relatively small and frequent.
- Retaliation by other firms for cheating is more certain and more severe.
- There is less actual or potential competition from firms outside the cartel.
27
Dominant Firm Model
In this model, a single firm has a signi ficantly large market share because of its greater scale and lower cost structure—the dominant f irm (DF). In such a model, the market price is essentially determined by the DF, and the other competitive firms (CFs) take this market price as given.
A price decrease by one of the CFs, which increases QCF in the short run, will lead to a decrease in price by the DF, and CFs will decrease output or exit the industry in the
long run. The long-run result of such a price decrease by competitors below P* would then be to decrease the overall market share of competitor firms and increase the market share of the DF.
28
What do regulators use to measure degree of monopoly or market power of firms in an industry?
Regulators often use market shares (percentages of market sales) to measure the degree of monopoly or market power of f irms in an industry. Often, mergers or acquisitions of companies in the same industry or market are not permitted by government authorities when they determine that the market share of the combined firms will be too high and, therefore, detrimental to the economy.
29
Concentration Measures
Market or industry concentration measures are often used as an indicator of market power.
- N-firm concentration ratio
- Herfindahl-Hirschman Index (HHI)
30
N-Firm Concentration Ratio
- sum of the percentage market shares of the largest N firms in a market.
- While this measure is simple to calculate and understand, it does not directly measure market power or elasticity of demand.
- limitation: it may be relatively insensitive to mergers of firms within an industry.
31
Her indahl-Hirschman Index (HHI).
- sum of the squares of the market shares of the largest f irms in the market.
- reduces limitation of M&A impact found in the N-firm concentration ratio
32
Business Cycle
The business cycle is characterized by fluctuations in economic activity. The business cycle has four phases: expansion (real GDP is increasing), peak (real GDP stops increasing and begins decreasing), contraction or recession (real GDP is decreasing), and trough (real GDP stops decreasing and begins increasing).
33
Ways to show Business Cycles
Classical Cycle: Based on Real GDP relative to a beginning value
Growth cycle: refers to changes in % difference between real GDP and its longer-term trend or potential value (average line)
Growth rate cycle: refers to changes in the annualized percentage growth rate from one period to the next and tends to show both peaks and troughs earlier than the other two measures and thus is the preferred measure.
34
Expansion
An expansion features growth in most sectors of the economy, with increasing employment, consumer spending, and business investment. As an expansion approaches its peak, the rates of increase in spending, investment, and employment slow but remain positive, while in flation accelerates.
35
Contraction
A contraction or recession is associated with declines in most sectors, with inf lation typically decreasing.
36
Recovery
When a contraction reaches a trough and the economy begins a new expansion or recovery, economic growth becomes positive again and in flation is typically moderate, but employment growth might not start to increase until the expansion has taken hold convincingly.
37
Measure of Expansion & Contraction
Economists commonly consider two consecutive quarters of growth in real GDP to be the beginning of an expansion, and two consecutive quarters of declining real GDP to be the beginning of a contraction.
38
Credit Cycles
- refer to cyclical f luctuations in interest rates and the availability of loans (credit).
- Typically, lenders are more willing to lend, and tend to offer lower interest rates, during economic expansions.
- Conversely, they are less willing to lend, and require higher interest rates, when the economy is slowing (contracting).
- Credit cycles may amplify business cycles. Widely available or “loose” credit conditions during expansions can lead to “bubbles” .
- expansions tend to be stronger, and contractions deeper and longer lasting, when they coincide with credit cycles.
- They do not always coincide, however, as historical data suggest credit cycles have been longer in duration than business cycles on average.
39
Why is the inventory-sales ratio an important business cycle indicator?
The inventory-sales ratio indicates whether firms have too much or too little inventory on hand, which can signal the approach of economic peaks or troughs.
40
What happens to the inventory-sales ratio when an economic expansion is nearing its peak?
Sales growth slows, unsold inventories accumulate, and the inventory-sales ratio increases above its normal level, signaling potential economic contraction
41
How do firms typically respond to an unplanned increase in inventory?
Firms reduce production to adjust for the unplanned increase in inventory, which can contribute to an economic contraction.
41
How is an increase in inventories reflected in GDP statistics?
An increase in inventories is counted as economic output in GDP, whether the increase is planned or unplanned.
42
What might an analyst miss by only looking at GDP growth without considering the inventory-sales ratio?
The analyst might see economic strength rather than the beginning of weakness if they overlook changes in the inventory-sales ratio.
43
What occurs to the inventory-sales ratio when an economic contraction reaches its trough?
As sales growth begins to accelerate, inventories are depleted more quickly, causing the inventory-sales ratio to decrease below its normal level.
44
How do firms react when sales growth accelerates after a trough?
Firms increase output to meet rising demand, which brings the inventory-sales ratio back toward normal levels.
45
How do firms typically adjust to fluctuations in business activity with their labor force?
Firms adjust by changing output per hour, altering work hours, or adding/removing overtime, rather than immediately hiring or laying off workers.
46
How do firms manage their physical capacity during contractions?
Instead of selling plant and equipment, firms may reduce physical capacity by spending less on maintenance or delaying equipment replacement.
47
What is a firm's approach to adjusting production levels with physical capital during economic fluctuations?
Firms first use existing physical capital more or less intensively. They only increase production capacity by investing in new plant and equipment if an expansion persists
48
Consumer Spending
It is the largest component of gross domestic product, depends on the level of consumers’ current incomes and their expectations about their future incomes.
As a result, consumer spending increases during expansions and decreases during contractions.
49
How is consumer spending on durable goods affected by the business cycle?
Consumer spending on durable goods is highly cyclical, with higher purchases during expansions when incomes rise and economic confidence is high. During contractions, consumers often postpone these purchases.
50
Why do consumers delay purchasing durable goods during economic contractions?
Consumers delay purchasing durable goods during contractions due to uncertainty about their employment status and prospects for income growth.
51
How does consumer spending on services relate to the business cycle compared to durable goods?
Consumer spending on services is positively correlated with business cycle phases but is less sensitive than spending on durable goods.
52
What types of spending on services are considered discretionary?
Discretionary spending on services includes travel, lodging, and restaurant meals.
53
What types of spending on services are considered less discretionary?
Less discretionary spending on services includes telecommunications, health care, and insurance.
54
How does consumer spending on nondurable goods behave over the business cycle?
Spending on nondurable goods, such as food at home and household products, remains relatively stable over the business cycle.
55
Important determinants of the level of economic activity
1. Mortgage Rates
2. Housing Costs Relative to Income
3. Speculative activity
4. Demographic factors
56
How do mortgage rates influence the housing sector?
Low mortgage rates tend to increase home buying and construction, while high mortgage rates tend to reduce them.
57
What is the effect of housing costs relative to income on the housing market?
When incomes are high relative to housing costs, home buying and construction increase. Conversely, if housing costs rise faster than incomes, housing activity can decrease, even if incomes are rising, as often occurs late in expansions.
58
How does speculative activity impact the housing market?
Rising home prices can lead to speculative buying based on expected future gains.
This can drive more construction, but eventually, excess building and falling prices can decrease speculative demand, leading to a dramatic decline in housing activity.
59
What role do demographic factors play in the housing sector?
The proportion of the population aged 25 to 40, a key group for household formation, positively influences housing activity. Additionally, strong population shifts from rural to urban areas can significantly increase the demand for new housing.
60
What are the most important factors determining a country's import and export levels?
The most important factors are domestic GDP growth, GDP growth of trading partners, and currency exchange rates.
61
How does increasing domestic GDP growth affect imports?
Increasing domestic GDP growth leads to higher purchases of foreign goods, thereby increasing imports.
62
How does decreasing domestic GDP growth impact imports?
Decreasing domestic GDP growth reduces imports as domestic demand for foreign goods declines.
63
How does an increase in foreign GDP growth affect a country's exports?
An increase in foreign GDP growth boosts foreign incomes, leading to increased sales of domestic goods to foreigners (exports).
64
What is the impact of an increase in the value of a country’s currency on imports and exports?
An increase in currency value makes domestic goods more expensive for foreign buyers (reducing exports) and foreign goods cheaper for domestic buyers (increasing imports).
65
How does a decrease in the value of a country's currency affect imports and exports?
A decrease in currency value makes domestic goods cheaper for foreign buyers (increasing exports) and foreign goods more expensive for domestic buyers (decreasing imports).
66
Do currency exchange rates affect import and export volumes immediately?
Currency effects on imports and exports respond to persistent trends in foreign exchange rates over time, rather than to short-term changes.
67
How do currency effects on imports and exports compare to GDP growth effects?
Currency effects can differ in direction from GDP growth effects and are more complex, while changes in GDP levels and growth rates have more direct and immediate effects.
68
Summarize typical characteristics of a Trough
– The GDP growth rate changes from negative to positive.
– There is a high unemployment rate, and an increasing use of overtime and temporary workers.
– Spending on consumer durable goods and housing may increase.
– There is a moderate or decreasing inf lation rate.
69
Summarize typical characteristics of a Expansion
– The GDP growth rate increases.
– The unemployment rate decreases as hiring accelerates.
– There are investment increases in producers’ equipment and home construction.
– The inf lation rate may increase.
– Imports increase as domestic income growth accelerates.
70
Summarize typical characteristics of a Peak
– The GDP growth rate decreases.
– The unemployment rate decreases, but hiring slows.
– Consumer spending and business investments grow at slower rates.
– The in flation rate increases.
71
Summarize typical characteristics of a Contraction
– The GDP growth rate is negative.
– Hours worked decrease; unemployment rate increases.
– Consumer spending, home construction, and business investments decrease.
– The in lation rate decreases with a lag.
– Imports decrease as domestic income growth slows.
72
Economic Indicators
- Leading indicators that have been known to change direction before peaks or troughs in the business cycle,
- Coincident indicators that change direction at roughly the same time as peaks or troughs,
- Lagging indicators that tend not to change direction until after expansions or contractions are already underway.
73
The law of diminishing returns states that for a given production process, as more and more
of a resource (such as labor) are added, holding the quantities of other resources fixed, output....
increases at a decreasing rate
74
A firm that is experiencing diseconomies of scale should:
reduce plant size to efficient scale
75
Based on the concept of diminishing returns, as the quantity of output increases, the short-run marginal costs of production eventually:
rise at an increasing rate.
The law of diminishing returns states that as more variable resources are a production
process combined with a fixed input, output will eventually increase at a decreasing rate.
In the short run, as the quantity produced rises, costs rise at an increasing rate.
76
Manufacturing and trade sales are best described as a ____ indicator
co-incident
77
Firms' initial responses to an emerging economic contraction are most likely to be:
reducing overtime hours
78
The inventory-to-sales ratio for manufacturing and trade is classified as a ____ indicator
lagging
79
Which economic indicator is classified as a leading indicator for the United States economy?
Index of consumer expectations
80
Average weekly initial claims for unemployment insurance are classified as a _____ indicator
leading
81
Improvements in quantitative methods have made the occurrence of recessions
or expansions quite predictable. (True/False)
False
82
Policy errors are inevitable due to unpredictable events. (True/False)
True
83
Unemployment compensation is an example of (automatic/discretionary) fiscal stabiliser
automatic
84
Promoting economic growth and price stability are the goals of (fiscal policy/monetary policy)
Both
85
Neutral Interest Rate
The neutral interest rate is the sum of the trend rate of real economic growth and the target inflation rate. Monetary policy is expansionary if the policy rate is less than the
neutral interest rate and contractionary if the policy rate is greater than the neutral
interest rate.
86
To determine whether monetary policy is expansionary or contractionary, an analyst should
compare the central bank's policy rate to the:
Neutral Interest Rate
87
The velocity of transactions in an economy has been increasing rapidly for the past seven
years. Over the same time period, the economy has experienced minimal growth in real
output. According to the equation of exchange, inflation over the last seven years has:
increased more than growth in money supply.
The equation of exchange is MV = PY. If velocity (V) is increasing faster than real output (Y),
inflation (P) would have to be increasing faster than the money supply (M) to keep the
equation in balance.
88
Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control. (T/F)
True
89
Which is currently the most-used target for central banks?
inflation targeting
90
If a bank needs to borrow funds from the Federal Reserve to fund a temporary shortage in
reserves, it would borrow funds at the: (Fed rates/Discount Rate)
Discount Rate
91
The least likely result of import quotas and voluntary export restraints is:
increase in revenue for gov
92
Which approach to analysis of trade deficits indicates that in the absence of excess capacity
in the economy, currency devaluation provides only a temporary improvement in a country's trade deficit, and that long-term improvement requires either a smaller fiscal deficit or a
larger excess of domestic savings over domestic investment?
Absorption Approach
The absorption approach to analyzing how to improve a trade deficit suggests that in the
absence of excess capacity in the economy, currency devaluation provides only a temporary improvement in a country's trade deficit that will reverse after the decrease in real domestic wealth from the currency depreciation is restored. It also concludes that a
long-term improvement in the trade deficit requires either an improvement in the fiscal
deficit or an increase in the excess of domestic savings over domestic investment.
93
The Marshall-Lerner condition suggests that a country's ability to narrow a trade deficit by
devaluing its currency depends on:
The Marshall-Lerner condition is an outcome of the elasticities approach to analyzing the
balance of trade. It suggests that depreciation or devaluation of a currency is more likely
to narrow a country's trade deficit if domestic demand for imports and foreign demand for
the country's exports are more elastic.
94
Akor is a country that has chosen to use a conventional fixed peg arrangement as the
country's exchange rate regime. Under this arrangement, Akor's exchange rate against the
currency to which it pegs:
may fluctuate around its peg rate
95
