Lehigh Finance and Economics Memorization

Question 1

Microeconomics

Answer 1

Microeconomics is the branch of economics that deals with the behavior of individual economic units, including:

Consumers Workers Investors Firms

Question 2

Macroeconomics

Answer 2

Macroeconomics deals with the behavior of an entire economy rather than the individual economic units in the economy. There are three key focus areas in macroeconomics:

Inflation Unemployment Economic Growth

Question 3

Normative + Positive Analysis

Answer 3

Normative analysis attempts to describe the way the world should be, and it often involves value judgments.

Question 4

Real vs. Nominal

Answer 4

Real accounts for inflation, nominal does not

Question 5

reservation price

Answer 5

the minimum amount they are willing to accept.

Question 6

opportunity cost

Answer 6

the value of the items “given up”

Question 7

explicit costs (accounting costs)

Answer 7

These costs are sometimes referred to as “bookkeeping” costs.

Question 8

implicit cost

Answer 8

the cost of resources already owned by the firm that could have been put to some other use.

Question 9

accounting profits

Answer 9

revenues less explicit costs

Question 10

economic profits

Answer 10

revenues less explicit and implicit costs

Question 11

law of demand

Answer 11

As the price of a typical good or service increases, the quantity demanded decreases.

Question 12

law of supply

Answer 12

As the price of a typical good or service increases, the quantity supplied also increases.

Question 13

demand schedule

Answer 13

a table showing quantity demanded at different prices.

Question 14

demand curve

Answer 14

graphically shows the relationship between quantity demanded and price.

Question 15

income effect

Answer 15

When prices rise, the amount of goods or services that a consumer can afford to purchase will decrease.

Question 16

substitution effect

Answer 16

As the price of good rises, consumers will tend to substitute some of their purchases into other goods, because they are now relatively less expensive.

Question 17

supply schedule

Answer 17

table showing quantity supplied at different prices.

Question 18

invisible hand

Answer 18

individuals acting freely in a competitive marketplace, in the pursuit of their own self-interest, will generate an efficient market equilibrium.

Question 19

price floor

Answer 19

the market price is not allowed to fall below the designated level. Common examples of price floors are agricultural subsidies.

Question 20

price ceiling

Answer 20

the market price is not allowed to rise above the designated level. Common examples of price ceilings are rent controls.

Question 21

Factors affecting elasticity

Answer 21

There are several factors that affect the level of price elasticity in a market:

1) Basic necessities will have a lower elasticity than luxury items.
2) Goods with few substitutes will have a lower elasticity than goods with many substitutes.
3) Goods will tend to have lower elasticity in the short-run than in the long-run.

Question 22

elasticity

Answer 22

measures the responsiveness of demand to a change in price.

Question 23

fixed costs

Answer 23

costs that do not change with the level of production.

Question 24

variable costs

Answer 24

change with the level of production. An example is the cost of raw materials.

Question 25

law of diminishing returns

Answer 25

As an input increases (holding other inputs constant), the incremental output will eventually decline.

Question 26

increasing returns to scale

Answer 26

output increases proportionately more than inputs increase, then production is said to exhibit

Question 27

returns to scale

Answer 27

Refers to how output increases if all inputs are increased.

Question 28

constant returns to scale

Answer 28

output increases proportionately to inputs

Question 29

decreasing returns to scale

Answer 29

output increases proportionately less than inputs increase

Question 30

marginal analysis

Answer 30

The idea behind marginal analysis is that the most relevant factors in a decision are marginal changes; that is, the incremental changes that will occur as a result of the decision.

Question 31

consumer surplus

Answer 31

Consumer surplus equals the difference between the buyers' reservation prices and the actual amount paid.

Question 32

producer surplus

Answer 32

Producer surplus equals the difference between the sellers' reservation prices and the market price.

Question 33

arbitrage profit

Answer 33

profit extracted from the simultaneous purchase and sale of an asset or commodity. 1) Simultaneous: the transactions must occur at the same time. If there is a time delay, it is not true arbitrage. 2) Identical: Commodities must be the same—wheat for wheat, gold for gold. Assets must have matching cash flows—bonds, stocks, other securities. 3) Price Differential: prices for the asset must be different on different exchanges, but must be occurring simultaneously.

Question 34

Market Efficiency

Answer 34

The Law of One Price proposes that in an efficient market, trade of any item will have the same price on any exchange at a particular point in time. The Law of One Price must hold and is facilitated by the process of arbitrage.

Question 35

Liquidity

Answer 35

Is the ease by which an investment can be sold for cash.

Question 36

Bond

Answer 36

Is a debt instrument sold by a bond issuer to raise capital for use in their institution.

Question 37

How company raises capital

Answer 37

Debt financing (loans or bond issues) or through equity financing. The second method is accomplished when the company sells stock or shares of their equity.

Question 38

Market Capitalization

Answer 38

Is the market value of the shares (# shares x share price).

Question 39

Dividend yield

Answer 39

Company's future profits, paid to the investor in the form of dividends.

Question 40

Capital gains yield

Answer 40

price appreciation (capital appreciation) that is realized by selling the shares to another investor at a higher price than what was originally paid. The yield is negative if the shares are sold for less than the purchase price.

Question 41

Diversifiable Risk

Answer 41

Diversifiable risk is unique to each company's stock, due to the specific circumstances of that company. This risk can be reduced by adding stocks from other companies to the investment pool.

Question 42

mutual funds

Answer 42

are a means of diversifying a stock portfolio and reducing the diversifiable risk. They are a basket of stocks that can represent the full market or just a portion. For example: