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Flashcards in Economics Deck (67)
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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.