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Flashcards in Economics Deck (67)
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How does a price increase affect supply?

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


What is a supply curve shift?

When supply changes due to something other than price.


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


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


How does price affect the demand for an item?

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


What is a Demand Curve Shift?

When demand changes due to something other than price.


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


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


What is the Marginal Propensity to Consume?

How much you spend when your income increases

Calculate: Change in Spending / Change in Income


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


How is the multiplier effect calculated?

(1 / 1-MPC) x Change in Spending


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).


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


How is Price Elasticity of Demand calculated?

% Change in Quantity Demand / % Change in Price


Under elastic demand- how does price affect revenues?

Price increases- Revenue decreases

Price decreases- Revenue increases


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


How does revenue react to price under Inelastic Demand?

Price increases- Revenue increases

Price decreases- Revenue decreases


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


What is Unitary Demand?

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1


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)


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


What happens under Demand-Pull inflation?

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases


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


What is the Equilibrium Price?

The price where Quantity Supplied : Quantity Demanded


What is Optimal Production?

When Marginal Revenue : Marginal Cost


What is the result of a Price Floor?

Causes a surplus if above equilibrium price.


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


What is included under the income approach for calculating GDP?

Sole Proprietor and Corp Income
Passive Income
Employee Salaries
Foreign Income Adjustments


What is included under the Expenditure Approach for calculating GDP?

Individual Consumption

Private Investment

Government Purchases

Net Exports


What is Nominal GDP?

Measures goods/services in current prices.


For what is a GDP Deflator used?

Used to convert GDP to Real GDP


What is Real GDP?

Nominal GDP / GDP Deflator x 100


What is Gross National Product (GNP)?

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included


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


How is disposable income calculated?

Personal Income - Personal Taxes


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


When is the economy in Recession?

When GDP growth is negative for two consecutive quarters.


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


What are the stages of the Economic Cycle?

Peak (highest)
Recession (decreasing)
Trough (lowest)
Recover (increasing)
Expansion (higher again)


What are leading indicators?

Conditions that occur before a recession or before a recovery

Example: Stock Market or New Housing Starts


What are lagging indicators?

Conditions that occur after a recession or after a recovery

Examples: Prime Interest Rates- Unemployment


What are coincident indicators?

Conditions that occur during a recession or during a recovery

Example: Manufacturing output


Which people are included in the calculation of unemployment?

Only people looking for jobs


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


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


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


How does inflation relate to unemployment?

High Unemployment : Low Inflation (Vice Versa)


What is the Discount Rate?

The rate a bank pays to borrow from the Fed.


What is the Prime Rate?

The rate a bank charges their best customers on short-term borrowings.


What is the Real Interest Rate?

Inflation-adjusted interest rate


What is the Nominal Rate?

Rate that uses current prices


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.


What is included in the M1 money supply?

Currency- Coins- and Deposits


What is included in the M2 money supply?

Highly liquid assets other than currency- coins or deposits


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


How can the Fed control the money supply?

By buying and selling the government's securities.


How does the Fed control economy-wide interest rates?

By adjusting the discount rate charged to banks


What is a Tariff?

A tax on imported goods


What is a quota?

A limit on the number of goods that can be imported


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


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


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


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


What is Accounting Cost?

Explicit (Actual) cost of operating a business

Implicit costs are opportunity costs


What is Accounting Profit?

Revenue - Accounting Cost


What is Economic Cost?

Explicit + Implicit Cost


What is Economic Profit?

Revenue - Economic Cost