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Final review Flashcards

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1
Q

Assumptions behind law of demand

A

The income effect & The substitution effect & The law of diminishing marginal utility

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2
Q

Non-price determinants of demand

A
  1. Income
  2. Tastes and preferences
  3. Future price expectations
  4. Price of substitutes/complementary goods
  5. Number of consumers (population/demographic change)
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3
Q

Assumption behind law of supply

A

Law of diminishing marginal returns & Increasing marginal costs

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4
Q

Non-price determinants of supply

A
  1. Change in cost of FOP
  2. Price of related goods (in cases of joint/competitive supply)
  3. Indirect taxes and subsidies
  4. Future price expectations
  5. Change in technology
  6. Number of firms
  7. Supply shocks
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5
Q

Consumer and producer surplus on graph

A

Consumer surplus: below D, above P
Producer surplus: above S, below P

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6
Q

Allocative efficiency is when

A

MB=MC

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7
Q

Assumptions behind rational consumer choice

A
  1. Consumer rationality
  2. Utility maximization
  3. Perfect information
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8
Q

Limitations of rational consumer choice

A
  1. Biases: rule of thumb, anchoring, framing, availability
  2. Bounded rationality
  3. Bounded self-control
  4. Bounded selfishness
  5. Imperfect information
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9
Q

Choice architecture (decisions can be directed/manipulated to some degree)

A
  1. Default choice
  2. Restricted choice
  3. Mandated choice
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10
Q

Business objectives

A
  1. Profit maximization
  2. Alternative business objects
    a. Corporate social responsibility
    b. Market share
    c. Satisficing
    d. Growth
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11
Q

Profit maximization occurs where

A

MC=MR

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12
Q

Determinants of PED

A
  1. Number and closeness of substitutes
  2. Degree of necessity
  3. Proportioin of income spent
  4. Time
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13
Q

Determinants of PES

A
  1. Time
  2. Mobility of FOP
  3. Unused capacity
  4. Ability to store
  5. Rate at which costs increase
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14
Q

Reasons for government intervention

A
  1. Earn govt revenue
  2. Support firms
  3. Support households on low incomes
  4. Influence level of production
  5. Influence level of consumption
  6. Correct market failure
  7. Promote equity
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15
Q

Forms of government intervention

A
  1. Price controls (price ceilings & floors)
  2. Indrect taxes and subsidies
  3. Direct provision of services
  4. Command and control regulation and legislation
  5. Consumer nudges
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16
Q

Socially optimum equilbirum is where

A

MSB=MSC

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17
Q

Govt responses to negative externalities of production

A
  1. Legislation and regulation
  2. Indirect production tax
  3. Carbon tax
  4. Tradable permits
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18
Q

Govt responses to negative externalities of consumption

A
  1. Legislation, regulation, and advertisement
  2. Tax
  3. Subsidies to “helathier” substitute
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19
Q

Govt responses to positive externalities of production

A
  1. Subsidy
  2. Direct provision
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20
Q

Govt responses to positive externalities of consumption

A
  1. Subsidies
  2. Direct provision
  3. Advertising
  4. Legislation and regulation
  5. Nudges
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21
Q

Characteristics of common pool resources

A
  1. Tragedy of the commons
  2. Rivalrous but non-excludable
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22
Q

Govt responses to common pool resources

A
  1. Tradable permits
  2. Legislation (e.g. carbon tax)
  3. Education (awareness creation)
  4. International agreements
  5. Collective self-governance
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23
Q

Characteristics of public goods

A
  1. Free rider problem
  2. Non-rivalrous and non-excludable
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24
Q

Govt responses to public goods

A
  1. Direct provision
  2. Contracting out to the private sector
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25
Types of asymmetric information
1. Adverse selection (one agent has more info than the other) 2. Moral hazard
26
Govt responses to asymmetric information
1. Legislation and regulation 2. Provision of information
27
Private responses to asymmetric information
1. Signalling 2. Screening
28
Assumptions behind perfect competition
1. Many firms 2. Free entry 3. Homogeneous products
29
Assumptions behind monopoly
1. Single/dominant firm 2. High barriers to entry 3. No close substitutes
30
Assumptions behind oligopoly
1. Few large firms 2. High barriers to entry 3. Interdependence
31
Assumptions behind monopolistic competition
1. Many firms 2. Free entry 3. Product differentiation
32
Rational producer behavior
Profit maximization a. Profit=Total revenue-Total cost b. Profit max at MC=MR c. Abnormal profit when AR>AC d. Normal profit when AR=AC e. Losses when AR
33
Advantages of large firms having significant market power
1. EOS (e.g. natural monopolies) 2. Investments in R&D, leading to innovation
34
Risks in markets dominated by one/few firms
1. Output 2. Price 3. Consumer choice
35
Govt responses to significant market power abuse
1. Legislation and regulation 2. Government ownership 3. Fines
36
Approaches to national income accounting
Income, output, expenditure approaches
37
Alternative measures of well-being
1. OECD Better Life Index 2. Happiness Index 3. Happy Planet Index
38
Determinants of consumption (C)
1. Consumer confidence 2. Interest rates 3. Wealth 4. Income taxes 5. Level of household indebtedness 6. Expectations of future price level
39
Determinants of investment (I)
1. Interest rates 2. Business confidence 3. Technology 4. Business taxes 5. Level of corporate indebtedness
40
Determinants of government spending (G)
1. Political and economic priorities
41
Determinants of net exports (X-M)
1. Income of trading partners 2. Exchange rates 3. Trade policies
42
Determinants of SRAS
1. Costs of FOP 2. Indirect taxes
43
Inflationary and deflationary gaps if
Inflationary: Ye > Yp Deflationary: Ye < Yp
44
Monetarist vs Keynesian
-Monetarist: based on price mechanism and free market that tends towards "full employment" -Keynesian: wages are downward sticky (hence PL is downward sticky)
45
Factors that change LRAS/Keynesian AS
1. Changes in quantity/quality of FOP 2. Improvements in technology 3. Increases in efficiency 4. Changes in institutions
46
Implications of the monetarist model
1. Inflationary/deflationary gaps disappear and economy tends back towards full employment 2. No govt intervention 3. In LR, changes in AD has no impact on Y but only lead to inflation/deflation 4. Favor supply-side policies
46
47
Implications of the Keynesian model
1. Recessionary/deflationary gaps can persist -> govt intervention 2. Increase in AD may or may not affect PL 3. Favor demand-side policies
48
Macro objectives
1. Economic growth 2. Low unemployment 3. Low and stable rate of inflation
49
Short-term/actual growth
Increase in actual output (Y) due to AD increase Movement outwards inside PPC
50
Long-term/potential growth
Increase in potential productive capacity due to increased quality/quantity of FOP Shift of PPC outwards
51
Positive consequences of economic growth
1. More jobs, higher income 2. Income distribution (depends) 3. Deflation (improved tech -> lower cost of prod -> lower P)
52
Negative consequences of economic growth
1. Sustainability (depletion of resources) 2. Income distribution (depends) 3. Inflation (more income -> higher D -> higher P) 4. Unemployment (improved tech)
53
Difficulties measuring unemployment
1. Hidden unemployment 2. Under-employment 3. Unemployment rate is an average
54
Causes of unemployment
1. Cyclical (demand-deficient) 2. Structural 3. Seasonal 4. Frictional
55
Natural rate of unemployment includes
1. Structural 2. Seasonal 3. Frictional
56
Consequences of unemployment
1. Income loss 2. Self-esteem 3. Stress/depression/poor health 4. Loss of skill/motivation 5. Family issues 6. Homelessness 7. Increase in crime, drug use, violence 8. Loss of output, real GDP 9. Operating inside national PPC 10. Tax revenue loss 11. Welfare benefits from govt budget 12. Disparity in income, inequality
57
Limitations of CPI in measuring inflation
1. Different rates of inflation for different income earners (buy different goods) 2. Different rates of inflation depending on regional/cultural factors 3. Changes in consumption pattern due to substitution effect when price changes 4. Changes in consumption patterns due to increasing use of discount stores/sales 5. Comparability over time 6. Changes in product quality
58
Causes of inflation
1. Demand-pull inflation: increase in AD 2. Cost-push inflation: higher cost of production -> decrease in AS, can lead to stagflation (inflation+decrease in economic activity)
59
Consequences of high inflation rate
1. Uncertainty 2. Redistributive effect (saver, lender, fixed-income, cash holders are worse off, borrowers are better off) 3. Effects on saving (loss for savers) 4. Damage to export competitiveness 5. Economic growth 6. Inefficient resource allocation (inaccurate signals and incentives)
60
Causes of deflation
1. Decrease in AD 2. Increase in SRAS
61
Disinflation vs deflation
-Disinflation: inflation at a decreasing rate -Deflation: negative inflation rate
62
Consequences of deflation
1. Uncertainty 2. Redistributive effects (borrowers are worse off, savers are better off) 3. Deferred consumption 4. Association with high levels of cyclical unemployment and bankruptcies 5. Increase in real value of debt 6. Inefficient resource allocation (inaccurate signals and incentives) 7. Policy ineffectiveness (monetary policy)
63
Phillips curve shows
Relationship between unemployment rate and inflation (inverse relationship) -> conflict between macro objectives
64
SR and LR Phillips curve
Inverse relationship between inflation and unemployment is only temporary
65
Consequences of high govt debt
1. Debt servicing costs 2. Credit ratings 3. Impacts on future taxation 4. Impacts on future govt spending
66
Economic inequality
1. Unequal distribution of income 2. Unequal distribution of wealth
67
Measuring economic inequality
Lorenz curve and Gini coefficienct
68
Single indicators of poverty
1. Poverty line 2. Minimum income standards
69
Composite indicators of poverty
Multidimensional poverty index (health, education, living standards)
70
Difficulties measuring poverty
1. National poverty is an average 2. Does not consider wealth and savings 3. Often based on surveys (subjective) 4. Usually higher cost of living in urban areas compared to rural areas 5. % people below poverty line does not show how far/close to poverty line they fall below 6. Govt's intentional over/underestimation
71
Causes of economic inequality and poverty
1. Inequality of opportunity 2. Different levels of resource ownership 3. Different levels of human capital 4. Discrimination (gender, race, etc.) 5. Unequal status and power 6. Govt tax and benefits policies 7. Globalization and technological change 8. Market-based supply side policies
72
Impact of income and wealth inequality
1. Economic growth: rich's wealth trickles down (growth) vs poverty cycle (no growth) 2. Standard of living 3. Social instability: polarization
73
Types of taxes
1. Progressive: increase as income increase 2. Regressive: decrease as income increase 3. Proportional: constant tax rate
74
Types of direct taxes
1. Personal income 2. Corporate income 3. Wealth
75
Policies (other than taxation) to reduce poverty, income, and wealth inequality
1. Policies to reduce inequalities of opportunities/investment in human capital 2. Transfer payments 3. Targeted spending on goods and services (e.g. education, healthcare, water) 4. Universal basic income 5. Policies to reduce discrimination 6. Minimum wages
76
Demand and supply side policies
1. Demand: monetary and fiscal 2. Supply: market-based and interventionist
77
Monetary policy
Control of money supply and interest rates by the CB
78
Goals of monetary policy
1. Low and stable rate of inflation (inflation targeting) 2. Low unemployment 3. Reduce business cycle fluctuations 4. Promote a stable economic environment for long-term growth 5. External balance
79
Tools of monetary policy
1. Open market operations 2. Minimum reserve requirements 3. Changes in the CB minimum lending rate (base rate/discount rate/refinancing rate changes) 4. Quantitative easing
80
Constraints on monetary policy
1. Limited scope of reducing interest rates, when close to zero 2. Low consumer and business confidence 3. Inability to deal with stagflation (supply-side causes)
81
Strengths of monetary policy
1. Incremental, flexible, and easily reversible 2. Short time lags
82
Sources of govt revenue for fiscal policy
1. Direct and indirect taxation 2. Sales of G+S from state-owned enterprises 3. Sales of govt assets
83
Types of govt expenditures
1. Current expenditure (day-to-day cost) 2. Capital expenditure (infrastructure) 3. Transfer payments
84
Goals of fiscal policy
1. Low and stable inflation 2. Low unemployment 3. Promote a stable economic environment for long-term growth 4. Reduce business cycle fluctuations 5. Equitable distribution of income 6. External balance
85
Constraints on fiscal policy
1. Political pressure 2. Time lags 3. Sustainable debt 4. Crowding out 5. Inability to deal with supply-side causes 6. Unsustainable debt
86
Strengths of fiscal policy
1. Targeting of specific economic sectors 2. Govt spending effective in deep recession 3. Stable economy 4. Infrastructure, R&D, education spending -> potential LR economic growth
87
Supply-side effects of fiscal policies
1. Govt spending on capital goods and R&D 2. Govt spending on human capital 3. Incentives through lower business tax -> new capital formation and R&D
88
Automatic stabilizers
1. Progressive taxes 2. Unemployment benefits
89
Goals of supply-side policies
1. Long-term growth by increasing economy's productive capacity 2. Improving competition and efficiency 3. Reducing labor costs and unemployment through labor market flexibility 4. Reducing inflation to improve international competitiveness 5. Increasing firms' incentives to invest in innovation by reducing costs
90
Market-based policies
1. Encourage competition: deregulation, privatization, trade liberalization, anti-monopoly regulation 2. Labor market: reduce power of labor unions, reduce unemployment benefits, abolish min wages 3. Incentive-related: personal income tax cuts, business and capital gains tax cuts
91
Interventionist policies
1. Education, training 2. Improving quantity, quality, and access to health care 3. R&D 4. Provision of infrastructure 5. Industrial policies
92
Demand-side effects of supply-side policies
1. Interventionist: increased govt spending -> increased AD 2. Market based: increased investment spending, disposable income -> increased AD
93
Constraints on supply-side policies
1. Market-based: equity, time lags, vested interests, environmental impact, potential unemployment in SR 2. Interventionist: costs, time lags
94
Strengths of supply-side policies
1. Market-based: improved resource allocation, no burden on govt budget, economic growth, potential employment in LR 2. Interventionist: direct support of sectors important for growth, economic growth
95
Benefits of international trade
1. Increased competition 2. Lower prices 3. Greater choice 4. Acquisition of resources 5. More foreign exchange earnings 6. Access to larger markets 7. Economies of scale 8. More efficient resource allocation 9. More efficient production
96
Absolute advantage
Ability to produce a good using fewer resources
97
Comparative advantage
Ability to produce a good with less opportunity cost
98
Sources of comparative advantage
Factor endowments (differences in quality and quantity of FOP) -Educated labor -Climate -Technologies -Natural resources
99
Limitations of the theory of comparative advantage
1. Fixed FOP 2. Perfect competition (identical goods) 3. Full employment of all resources 4. Free trade 5. No transportation cost 6. Specialization according to comp advantage may not allow necessary structural changes to occur 7. Trade on the basis of comparative advantage may lead to excessive specialization
100
Tariff definition
Tax charged on imported goods
101
Quota definition
Legal limit on the quantity of goods that can be imported into a country
102
Subsidy/export subsidy definition
Amount of money paid by the govt to a firm, per unit of output, lowering the production cost
103
Administrative barriers definition
Bureaucratic procedures a trading firm has to get through when shipping a product abroad
104
Types of administrative barriers
1. Red tape 2. Health, safety, and environmental standards 3. Embargoes (extreme quota)
105
Arguments for trade protection
1. Protection of infant (sunrise) industries 2. National security 3. Health and safety 4. Environmental standards 5. Anti-dumping 6. Unfair competition 7. BOP correction 8. Govt revenue 9. Job protection 10. Economically least developed country (ELDC) diversification
106
Arguments against trade protection
1. Misallocation of resources 2. Retaliation 3. Increased costs 4. Higher prices 5. Less choice 6. Domestic firms lack incentive to become more efficient 7. Reduced export competitiveness
107
Types of preferential trade agreements
1. Bilateral 2. Regional 3. Multilateral (World Trade Organization)
108
109
Advantages of trading blocs
1. Trade creation 2. Greater access to markets offer potential EOS 3. With freedom of labor, there are greater employment opportunities 4. Membership in a trading bloc may allow for stronger bargaining power in multilateral negotiations 5. Greater political stability and cooperation
110
Disadvantages of trading blocs
1. Trade diversion 2. Loss of sovereignty 3. Challenge to multilateral trading negotiations
111
Advantages of monetary union
1. Single currency eliminates exchange rate risks and uncertainty 2. Single currency eliminates transaction costs 3. Single currency encourages price transparency 4. Single currency promotes a higher level of inward investment 5. Low rates of inflation give rise to low interest rates, more investment, and increased output
112
Disadvantages of monetary union
1. Monetary policy pursued by the single CB impacts differently on each. member country, depending on its particular circumstances 2. Individual countries are no longer free to set their own interest rates and monetary policy 3. Single currency involves loss of exchange rates as a mechanism for adjustment 4. Fiscal policy is constrained by the convergence requirements
113
World Trade Organization (WTO) functions and objectives
1. Administer WTO trade agreements 2. Be a forum for trade negotiations 3. Handle trade disputes among member countries 4. Monitor national trade policies 5. Provide technical assistance and training for developing countries on trading issues 6. Cooperate with other international organizations
114
Factors affecting influence of WTO
1. Unequal bargaining power of members 2. Difficulties of reaching agreement on services/primary products
115
Factors that change D+S for a currency
1. Foreign demand for exports 2. Domestic demand for imports 3. Inward/outward FDI 4. Inward/outward portfolio investment 5. Remittances 6. Speculation 7. Relative inflation rates 8. Relative interest rates 9. Relative growth rates 10. CB intervention
116
Consequences of changes in exchange rate on economic indicators
1. Inflation rate 2. Economic growth 3. Unemployment 4. Current account balance 5. Living standards
117

IBH Economics (5 decks)

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