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Flashcards in Economics Deck (67):
1

How does a price increase affect supply?

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

2

What is a supply curve shift?

When supply changes due to something other than price.

3

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

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

4

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

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

5

How does price affect the demand for an item?

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

6

What is a Demand Curve Shift?

When demand changes due to something other than price.

7

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

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

8

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

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

9

What is the Marginal Propensity to Consume?

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

10

What is the Marginal Propensity to Save?

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

11

How is the multiplier effect calculated?

(1 / 1-MPC) x Change in Spending

12

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

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

13

How does spending change due to the multiplier effect?

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

14

How is Price Elasticity of Demand calculated?

% Change in Quantity Demand / % Change in Price

15

Under elastic demand- how does price affect revenues?

Price increases- Revenue decreases

Price decreases- Revenue increases

16

What conditions would indicate Elastic Demand?

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

17

How does revenue react to price under Inelastic Demand?

Price increases- Revenue increases

Price decreases- Revenue decreases

18

What conditions would indicate Inelastic Demand?

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

19

What is Unitary Demand?

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

20

How is Income Elasticity of Demand calculated?

% 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)

21

What conditions occur under periods of inflation?

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

22

What happens under Demand-Pull inflation?

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

23

What happens under Cost-Push inflation?

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

24

What is the Equilibrium Price?

The price where Quantity Supplied : Quantity Demanded

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