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ECON I > Final Exam > Flashcards

Final Exam Flashcards

1
Q

Imperfect Competition (7)

Monopolistic competition

A

Market structure where many firms sell products that are similar but not identical, leading to competition among them. Each firm has a monopoly over its own product, but they compete with other firms that offer similar products or substitutes.

Example: clothing store, restaurants

In these markets, firms don’t have to worry that small price hike will make them lose all customers

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2
Q

Imperfect Competition (7)

Oligopolies

A

A market with only a handful of large sellers.
Limited competition

Examples: pharmaceutical drugs

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3
Q

Imperfect competition (7)

Firm demand

A

Demand face by the firm, summarizing the quantity that buyers demand from an individual firm as it changes its price.

The more market power a firm has, the more its demand is close to the market demand

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4
Q

Imperfect competition (7)

Marginal revenue

A

The revenue generated from selling one additional unit

**Firms will be happy to produce until marginal revenue equals marginal cost - at which point increasing production further does not increase their profits
**

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5
Q

Imperfect competition (7)

Equilibrium

A

Under imperfect competition, firms tend to maximize their profit

Marginal costs = marginal revenue

Marginal revenue is always decreasing under a downward sloping demand curve since extra unit produced means the total quantity is increasing and the unit price is decreasing. Hence one extra unit will bring less (but positive!) revenue compared to the last unit produced.

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6
Q

Imperfecto competition (7)

Bertrand (price) competition

A

Firms set price, and the one with the lowest price wins the whole market

Game theoretical approach: suppose that both firms set the equal price that is larger than MC and split the market in half, one firm can get the whole market by slightly lowering price.

They keep undercutting each other until they reach P = MC -> Nash Equilibrium

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7
Q

Imperfect competition( 7)

Cournot (quantity)competition

A

Firms set quantity, and the price is determined by the total quantity in the market.

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8
Q

Imperfect competition( 7)

Bertrand paradox

A

Just two sellers can produce an outcome same as perfect competition

The only equilibrium is where both firms charge marginal costs - just as in a perfectly competitive market!

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9
Q

Imperfect competition( 7)

Killer acquisitions

A

Where incumbent firms may acquire innovating startups to terminate their potentially competing innovations

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10
Q

Imperfect competition (7)

Monopsony power

A

A business using its market power as a major buyer of labor to pay lower prices, including lower wages

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11
Q

Labour markets (8)

Utility

A

A measure of the amount of satisfaction a person derives from something that allows individuals to compare choices.

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12
Q

Labour markets (8)

Indifference curve

A

A curve of the points which indicate the combinations of goods and services that provide same level of utility to the individual

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13
Q

Labour markets (8)

Budget constraint

A

It defines the most expensive combinations of goods
that a person can afford

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14
Q

Labour markets (8)

Nominal Wages

A

Wages measured in money (W )

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15
Q

Labour markets (8)

** Real wages**

A

Adjusted for inflation, by scaling W by a price index p (w = W /p)

This is what interests workers!

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16
Q

Labour markets (8)

Income effect

With essential goods becoming increasingly cheap relative to leisure time, we observe two effects that govern whether people should want to work more or less

A

The effect that the additional income would have if there were no change in the prices (in this case, wages)

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17
Q

Labour markets (8)

Substitution effect

With essential goods becoming increasingly cheap relative to leisure time, we observe two effects that govern whether people should want to work more or less

A

The effect that is only due to changes in the prices,
holding utility level constant

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18
Q

Labour markets (8)

Labour force participation

A

The share of population that is interested in working

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19
Q

Labour markets (8)

**
1. Employed:
2. Unemployed
3. Working-age population**

A
  1. Working-age people who are working
  2. working-age people without jobs who are actively searching for work and available to work if they find one
  3. People aged 15-64 who are not in the military or institutionalized
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20
Q

Labour markets (8)

Frictional unemployment

A

Occurs due to the time it takes for employers to search for workers and for workers to search for jobs

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21
Q

Labour markets (8)

Sources of frictional unemployment

A

1.* Job searching*: time it takes for workers and employers to find positions that match their skills, preferences, and salary expectations
2. Skills mismatch: workers’ skills do not align well with available job openings
3. Unemplyoment insurance: incentivize workers to take longer in their job search

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22
Q

Labour markets (8)

Structural unemployment

A

Wages don’t fall to bring labor demand and supply into equilibrium

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23
Q

Labour markets (8)

Sources of structural unemployment

A

1. Efficiency wages: Employers might pay wages higher than the equilibrium level to boost worker productivity, morale, or loyalty
2. Wage stickeness: often, wages do not adjust downwards to changes in labor market conditions (e.g. decrease in demand for firm’s products). This can be due to long-term employment contracts or employee resistance to wage cuts.
3. Unions: They bargain for higher wages.

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24
Q

the Malthusian view

A

Although technological innovation temporarily improves living standards, the resulting population increase would bring down wages to basic subsistence levels in the long run

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25
Q

Production function

A

Describes the relationship between inputs X and outputs Y:
Y =f(X) FIY- X is a vector that includes capital, K, and labor, L.

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26
Q

Marginal Product of Labor

A

The additional output produced with one extra unit of labor (holding other units constant)

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27
Q

Average Product of Labor

A

Total output divided by the labor input

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28
Q

Unified growth theory

A

Economic model of growth that outlines how a steady economic growth rate results when three economic forces come into play: labor, capital, and technology.

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29
Q

Smoothing

A

Economic agents tend to prefer to smooth out consumption in- stead of consuming everything later and nothing now

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30
Q

The principal-agent relationship

A

The principal-agent relationship is an arrangement in which one entity legally appoints another to act on its behalf

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31
Q

Principal–agent relationship

(Negative relationship)

A

(Example- Lending) - The lender (the principal) would like to ensure that the borrower (the agent) repays a loan, but cannot enforce this directly through a contract (AKA- Moral Hazard)

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32
Q

Principal–agent relationship

Addressing the Issue of Moral Hazard and Risks

A

Higher interest rates from riskier borrowers, while
keeping interest rates sufficiently low to not make default more attractive than paying back- Also require borrowers to put some of their own wealth at stake (in the form of
collateral or equity)

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33
Q

Credit rationing

A

Borrowers with less wealth face unfavorable lending terms or are denied loans, as they cannot provide enough collateral or equity

34
Q

Financial literacy

A

Capacity to process economic information and make informed financial decisions

35
Q

Regulatory environment for investors

A

a stable, transparent, and predictable regulatory framework, combined with rule of law, enhances investment oppor- tunities (

36
Q

Political stability

A

Political unrest or uncertainty leads to less secure property rights, reducing investment opportunities

37
Q

Modigliani’s Life Cycle Hypothesis

A

People seek to maintain roughly the same level of consumption throughout their lifetimes by taking on debt or liquidating assets early and late in life (when their income is low) and saving during their prime earning years when their income is high.

38
Q

Commercial banks

A

Firms that make profits through its lending and borrowing activities- They use deposits of their customers to make loans or investments

39
Q

Base money (AKA legal tender)

A
  1. Cash held by households, firms, and banks
  2. Balances held by commercial banks at the central bank
40
Q

Bank money

A

When commercial banks create money through making loans- Example: when a person borrows $100 from a bank, the bank doesn’t use existing base money to make this loan; instead, it generates a new deposit in the borrower’s account for $100. This is new bank money

41
Q

Broad money

A

Includes both bank money and base money, representing the total money supply circulating in the economy

42
Q

Policy (interest) rate

A

Central bank sets this rate depending on the amount of base money that is flowing

43
Q

Bank lending rate

A

The average interest rate charged by commercial banks to firms and households

44
Q

Maturity transformation

A

A service to the economy from banks involving- Accepting deposits which can be withdrawn on demand (short-term)
Making loans which have a fixed repayment date, often in the long-term - (It bridges the gap between short-term savers and long- term borrowers, facilitating long-term investments and planning in the economy)

45
Q

Risks from Maturity Transformation

A
  1. Liquidity risk: the risk that an asset cannot be exchanged for cash rapidly
    enough to prevent a financial loss
  2. Default risk: the risk that loans will not be repaid
46
Q

Present Value (PV)- in lending

A

Assets are determined by the risk-adjustment predictions for future incomes of the borrowers

47
Q

Bond

A

Financial instrument- A bond is a loan that the bond purchaser, or bondholder, makes to the bond issuer. Governments, corporations and municipalities issue bonds when they need capital. An investor who buys a government bond is lending the government money. If an investor buys a corporate bond, the investor is lending the corporation money

48
Q

Bank Run

A

Customers of a bank or other financial institution withdraw their deposits at the same time over fears about the bank’s solvency

49
Q

Prevention of Bank Runs

A

1.Deposit Insurance
2.Central Bank as a lender of last resort for solvency
3. Bank Capital requirements (set by the central bank to ensure that banks do not run out of money or create fear due to possible insolvency)

50
Q

Malthusian hypothesis

A

While the growth of the food supply or other resources is linear, which eventually reduces living standards to the point of triggering a population decline

51
Q

Inflation

A

A generalized rise in the overall level of prices (cost of living)
Also can be seen as a decline in the purchasing power of money

52
Q

Inflation rate

A

The annual percentage increase in the average price level

53
Q

Consumer price index (CPI)

A

index that tracks the average price con- sumers pay over time for a representative “basket” of goods and services- CPI is an inflation measure that is most commonly discussed in the news and most relevant to ordinary consumers

54
Q

CPI

How do gov agencies follow steps to construct the CPI?

A
  1. Survey consumers to determine spending basket
  2. Gather price information for each item in that expending basket
  3. Tally all the costs togehter
  4. Calculate inflation to determine the percentage change in the cost of the overall basket over time
55
Q

CPI

What are the challenges in measuring CPI?

A
  1. Quality imporvement can hide price decrease- example: phones imporve over time and price increased to reflect this (AKA not a result of inflation)
  2. New products can reduce the cost of living
  3. People adapt consumption decision- when price increases people change their consumption basket
56
Q

Personal Consumption Expenditure (PCE)

A

Used for monetary policy, like the Federal Reserve’s target inflation rate of 2%
PCE includes a wider range of goods and services compared to the CPI, accounting for indirect consumption like medical care paid by employers or the government

PCE basket may not align closely with consumers’ actual consumer spendin

57
Q

Producer Price Index (PPI)

A

Measures the price of inputs into the production process - it measures the inflation experienced by the businesses
Because goods in the PPI basket are inputs to the production of final consumer goods, one might think that changes in the PPI could forecast future changes in the CPI

58
Q

GDP Deflator

A

A measure of inflation based on the basket of all goods and services produced domestically-it includes capital goods but excludes imported goods

59
Q

Nominal variable

A

Variable measured in currency units

60
Q

Real variable

A

Variable adjusted for inflation

61
Q

Nominal Interest Rate

A

the stated interest rate without a correction for the effects of inflation

62
Q

Real interest rate

A

interest rate in terms of changes in your purchasing power, ≈ Nominal interest rate − Inflation rate

63
Q

Money Illusion

A

refers to the (mistaken) tendency to focus on nominal dollar amounts instead of real amounts

64
Q

Money- Three functions

A

1 Medium of exchange: used to buy goods
2 Unit of account: terms in which prices are quoted
3 Store of value: a way to transfer purchasing power to the future

65
Q

Hyperinflation

A

Extremely high rates of inflation- prices at least doubling every few months

66
Q

Hyperinflation effects on all three functions of money

A

1 Medium of exchange: people often resort to barter, using cigarettes and other commodities instead of money
2 Unit of account: as the value of money becomes very volatile, money ceases being a reliable measure of value
3 Store of value: under hyperinflation, people race to spend their cash before it becomes worthless

67
Q

Causes of Hyperinflation

A

Governments can generate revenue by printing money at virtually zero cost, using it to purchase goods
The ease of printing money tempts governments to do so in the face of serious fiscal problems like wars, reparations, and external debts

68
Q

Deflation

A

Is a generalized decrease in the overall price level (negative inflation)

69
Q

Central Bank

A

Financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations.

70
Q

Price stability

A

When inflation remains low, stable and predictable

71
Q

Quantitative Easing

A

Monetary policy that aims to increase aggregate demand by buying assets, even when the policy interest rate is zero- example - The central bank buys bonds and other financial assets
-Focuses on purchasing the long-term government bonds to target longer-term
interest rates
-These purchases raise asset prices and increase money supply, boosting spending
and borrowing

72
Q

Three instruments of monetray policy

A

1 Interest rate controls
2 Credit ceilings
3 Direct lending policy-(Requires banks to allocate credit to specific sectors, such as agriculture)

73
Q

World Market

A

World supply: the total quantity of a product produced by all manufacturers
in the world at each price
World demand: the total quantity of a product demanded across all buyers
in every country at each price
World price: the price that a product sells for in the global market

74
Q

Effects of imports on trade

On Domestic demand curve and supply curve

A

When imports become available (and the world price is less than domestic equilibrium price), the price falls to world price
Domestic supply will decline and demand will increase, and imports will fill the gap

Important to do exercises- LAB

75
Q

Tarrif

A

a tax imposed on imported products

76
Q

Trade red tape

A

excessive bureaucracy and formalities that inhibit trade

77
Q

Import Quote

A

a limit on the quantity of a good that can be imported

78
Q

Trade agreements

A

international agreements that often constrain protective measures that can be taken by countries and facilitate international trade

79
Q

Nominal Exchange rate

A

the price of a country’s currency in terms of another country’s currency

80
Q

Determinants of currency demand

A

Financial inflows: demand for domestic currency will increase if financial inflows rise
Financial outflows: supply of domestic currency will increase if financial out- flows rise
Exports: demand for domestic currency will increase if exports rise
Imports: supply of domestic currency will increase if imports rise

ECON I (2 decks)

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