Economics Flashcards Preview

Agency Law > Economics > Flashcards

Flashcards in Economics Deck (67)
Loading flashcards...
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.
2
Q
What is a supply curve shift?
A
When supply changes due to something other than price.
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
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

5
Q
How does price affect the demand for an item?
A
When the prices of an item increases- demand for it decreases.

6
Q
What is a Demand Curve Shift?
A
When demand changes due to something other than price.
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
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
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
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
11
Q
How is the multiplier effect calculated?
A
(1 / 1-MPC) x Change in Spending
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).
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
14
Q
How is Price Elasticity of Demand calculated?
A
% Change in Quantity Demand / % Change in Price
15
Q
Under elastic demand- how does price affect revenues?
A
Price increases- Revenue decreases

Price decreases- Revenue increases

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
17
Q
How does revenue react to price under Inelastic Demand?
A
Price increases- Revenue increases

Price decreases- Revenue decreases
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
19
Q
What is Unitary Demand?
A
Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1
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)
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
22
Q
What happens under Demand-Pull inflation?
A
Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases
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
24
Q
What is the Equilibrium Price?
A
The price where Quantity Supplied : Quantity Demanded
25
Q
What is Optimal Production?
A
When Marginal Revenue : Marginal Cost
26
Q
What is the result of a Price Floor?
A
Causes a surplus if above equilibrium price.
27
Q
What is GDP (Gross Domestic Product)?
A
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
Q
What is included under the income approach for calculating GDP?
A
Sole Proprietor and Corp Income
Passive Income
Taxes
Employee Salaries
Foreign Income Adjustments
Depreciation
29
Q
What is included under the Expenditure Approach for calculating GDP?
A
Individual Consumption

Private Investment

Government Purchases

Net Exports
30
Q
What is Nominal GDP?
A
Measures goods/services in current prices.
31
Q
For what is a GDP Deflator used?
A
Used to convert GDP to Real GDP
32
Q
What is Real GDP?
A
Nominal GDP / GDP Deflator x 100
33
Q
What is Gross National Product (GNP)?
A
Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included
34
Q
What is the Consumer Price Index (CPI)? How is it applied?
A
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
Q
How is disposable income calculated?
A
Personal Income - Personal Taxes
36
Q
How is Return to Scale calculated?
A
% Increase in output / % Increase in input

Greater than 1 : Increasing returns to scale

Less than 1 : Decreasing returns to scale
37
Q
When is the economy in Recession?
A
When GDP growth is negative for two consecutive quarters.
38
Q
What is a Depression?
A
A prolonged- severe recession with high unemployment rates

No requisite period of time for the economy to officially be in a depression
39
Q
What are the stages of the Economic Cycle?
A
Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)
40
Q
What are leading indicators?
A
Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts
41
Q
What are lagging indicators?
A
Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment

42
Q
What are coincident indicators?
A
Conditions that occur during a recession or during a recovery

Example: Manufacturing output
43
Q
Which people are included in the calculation of unemployment?
A
Only people looking for jobs
44
Q
What is Cyclical Unemployment?
A
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
Q
What is Frictional Unemployment?
A
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
Q
What is Structural Unemployment?
A
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
Q
How does inflation relate to unemployment?
A
High Unemployment : Low Inflation (Vice Versa)
48
Q
What is the Discount Rate?
A
The rate a bank pays to borrow from the Fed.
49
Q
What is the Prime Rate?
A
The rate a bank charges their best customers on short-term borrowings.
50
Q
What is the Real Interest Rate?
A
Inflation-adjusted interest rate
51
Q
What is the Nominal Rate?
A
Rate that uses current prices
52
Q
What is the Risk-Free Rate?
A
Rate for a loan with 100% certainty of payback.

Usually results in a lower rate.

US Treasuries are an example.
53
Q
What is included in the M1 money supply?
A
Currency- Coins- and Deposits
54
Q
What is included in the M2 money supply?
A
Highly liquid assets other than currency- coins or deposits
55
Q
What is Deficit Spending?
A
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
Q
How can the Fed control the money supply?
A
By buying and selling the government's securities.
57
Q
How does the Fed control economy-wide interest rates?
A
By adjusting the discount rate charged to banks
58
Q
What is a Tariff?
A
A tax on imported goods
59
Q
What is a quota?
A
A limit on the number of goods that can be imported
60
Q
How do international trade restrictions affect domestic producers?
A
They are good for domestic producers.

Demand curve shifts right

Fewer substitutes

They can charge higher prices
61
Q
How to international trade restrictions affect foreign producers?
A
They are bad for foreign producers

Demand curve shifts left

Fewer buyers

They must charge lower prices
62
Q
How do international trade restrictions affect foreign consumers?
A
They are good for foreign consumers

Supply curve shifts right

Goods purchased at lower prices in the foreign markets
63
Q
How do international trade restrictions affect domestic consumers?
A
They are bad for domestic consumers

Supply curve shifts left

Fewer goods bought due to higher prices
64
Q
What is Accounting Cost?
A
Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs
65
Q
What is Accounting Profit?
A
Revenue - Accounting Cost
66
Q
What is Economic Cost?
A
Explicit + Implicit Cost
67
Q
What is Economic Profit?
A
Revenue - Economic Cost