- Microeconomics focuses on the behavior and purchasing decsions of individuals and firms.

- A demand curve shifts when demand variables other than price - For example if the price of substitute products for Product X increase in the demand curve would shift to the right, increasing quantity demanded but holding price flat.

- Measures the sensitivity of demand regardless if teh changes in price are positive or negative Formula: Elasticity of demand = _Change in Quantity Demanded_ Average Quantity divided by _Change in Price_ Average Price

- Occurs when variable other than price change - For example if the costs to produce the product increase, the supply curve would shift up and to the left. The price of the good would stay the same but the quantity supplied would decrease.

- Measures the percentage change in the quantity supplied of a product resulting from a change in price Formula: Elasticity of demand = _% Change in Quantity Supplied_ % Change in Price

- Macroeconomics looks at the economy as a whole - Focuses on measures of economic output, employment, inflation, and trade surpluses and deficits - Also examines the pending of three major segments of the economy, consumers, business, and government

GDP Gap = Potential GDP - Real GDP - A positive gap means there are unemplyed resources; may lead to unemployment - A negative gap means that the economy is running above normal capacity; may lead to rising prices

Module 42 Flashcards by Peter Benevides

MICROECONOMICS

Microeconomics focuses on the behavior and purchasing decsions of individuals and firms.

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DEMAND CURVE SHIFT

A demand curve shifts when demand variables other than price
For example if the price of substitute products for Product X increase in the demand curve would shift to the right, increasing quantity demanded but holding price flat.

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FACTORS AFFECTING DEMAND CURVE BESIDES PRICE

Direct Relationship:
- Price of substitute goods
- Expectations of price increases
- Consumer weath, except for inferior goods
- Size/popularity of the market
Inverse Relationship
- Price of compliment products
- group boycott
Indeterminable Relationship
- Consumer tastes

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PRICE ELASTICITY OF DEMAND

Measures the sensitivity of demand to a change in prices

Formula:

Elasticity of demand =

% Change in Quantity Demanded
% Change in Price

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ARC METHOD

Measures the sensitivity of demand regardless if teh changes in price are positive or negative

Formula:

Elasticity of demand =

Change in Quantity Demanded
Average Quantity

divided by

Change in Price
Average Price

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INTERPRETATION OF DEMAND ELASTICITY COEFFICIENT

If E > 1, Elastic
If E = 1, Unitary
If E < 1, Inelastic

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RELATIONSHIP BTWN ELASTICITY AND REVENUE

Price Increases on Revenue
- E > 1, Elastic - Decreases
- E = 1, Unitary - No Chnage
- E < 1, Inelastic - Increases
Price Decreases on Revenue
- E > 1, Elastic - Increases
- E = 1, Unitary - No Chnage
- E < 1, Inelastic - Decreases

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INCOME ELASTICITY OF DEMAND

Measures the sensitivity of demand to a change in income

Formula:

Elasticity of demand =

% Change in Quantity Demanded
% Change in Income

E>0 for normal goods

E<0 for inferior goods

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CROSS ELASTICITY OF DEMAND

Measures the change in demand for a good when price of related good changes

Formula:

Elasticity of demand =

% Change in Quantity Demanded X
% Change in Price of Y

E>0 for substitutes

E=0 for unrelated goods

E<0 for complements

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CONSUMPTION FUNCTION

This is the relationship between the changes in personal disposable income and consumption

Formula:

C = Co + C1*YD

C = consumption for the perios

Y = Disposable income for the period (Indep Var)

Co = the constant

C1 = The slope of consumption funct (MPC)

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RELATIONSHIP BTWN MPS AND MPC

MPS + MPC = 1

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SUPPLY SHIFT CURVE

Occurs when variable other than price change
For example if the costs to produce the product increase, the supply curve would shift up and to the left. The price of the good would stay the same but the quantity supplied would decrease.

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FACTORS AFFECTING SUPPLY CURVE BESIDES PRICE

Direct Relationship:
- Number of products
- Government subsidies
- Gov. price controls
- Price expecations
Inverse Relationship
- Change in prod costs, or technological advances
- Price of other goods

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ELASTICITY OF SUPPLY

Measures the percentage change in the quantity supplied of a product resulting from a change in price

Formula:

Elasticity of demand =

% Change in Quantity Supplied
% Change in Price

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INTERPRETATION OF SUPPLY ELASTICITY COEFFICIENT

If E > 1, Elastic
If E = 1, Unitary
If E < 1, Inelastic

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MACROECONOMICS

Macroeconomics looks at the economy as a whole
Focuses on measures of economic output, employment, inflation, and trade surpluses and deficits
Also examines the pending of three major segments of the economy, consumers, business, and government

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GDP GAP

GDP Gap = Potential GDP - Real GDP

A positive gap means there are unemplyed resources; may lead to unemployment
A negative gap means that the economy is running above normal capacity; may lead to rising prices

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INCOME APPROACH CALCULATION OF GDP

Compensation to Employees
+ Corporate Profits
+ Net Interest
+ Proprietors Income
+ Net Rental Income of Persons
= National Income
+ Indirect Taxes
-Other, Including Statutory Income
= Net National Product
+ Consumption of Fixed Capital
= Gross National Product
+Payments of Factor Income to Other Countries
-Receipts of Labor Income from Other Countries
= Gross Domestic Product

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NET DOMESTIC PRODUCT CALCULATION

Gross Domestic Product
- Depreciation (also called Capital Cost Allow)
= Net Domestic Product

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EXPENDITURE APPROACH CALCULATION OF GDP

Personal Consumption Expenses
+ Gross Private Domestic Fixed Investment (biz/res)
+ Gross Purchases (fed,state,local)
+ Net Exports (can plus or minus)
+ Change in Biz Inventories (may be plus or minus)
= Gross Domestic Product

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THE MULTIPLIER, THE CHANGE IN EQULIB GDP

Where:

MPS + MPS = 1

Change in GDP Equilib =

(1 / MPS) * change in spending

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DISPOSABLE INCOME

Formula:

Personal Income - Persoanl Taxes =

Disposable Income

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MONEY MEASURES

M1, M2, M3

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Currency
+ Demand Deposits
= M1
+ Savings Accounts
+ Small Time Deposits (<$100k)
= M2
+ Large Time Deposits (>=$100k)
=M3

FORWARD PREMIUM OR DISCOUNT IN FX

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Formula:

Forward Premium or Discount =

Forward Rate – Spot Rate
Spot Rate

*
Moths or Days in Year
Months or Days in Forward Period

**ABSOLUTE ADVANTAGE**

- An advantage a country has over countries in the production of a good or service

**BUSINESS CYCLES**

- A fluctuation in aggregrate economic output the lasts for several years

**COMPARATIVE ADVANTAGE**

- An advantage a country has in producing a good or service because it has no alternative users of its resources that would involve a higher return

**COST LEADERSHIP**

- A strategy that involves focusing on reducing the costs and time to produce, sell, and distribute a product or service

**DEMAND**

- The quantity a good or service that a consumer is willing and able to purchase at a given price

**DEFLATION**

- The rate of decline in the price level of goods and services

**DEPRESSION**

- A deep and long lasting recession

**DUMPING**

- A form of predatory pricing in which a manufacturer in one country exports a product at a price that is lower than the priced charged in its home country

**ECONOMIC PROFIT**

- The amount of profit in excess of normal profit

**EXPORT SUBSIDIES**

- Payments made by a government to encourage the production and export of specific products

**GOVERNMENT BUDGET SURPLUS(DEFICITS)**

- the excess (deficit) of government taxes in relation to government transfer payments and purchases

**MARGINAL PRODUCT**

- The additional output obtained from employing one additional unit of resource (e.g one additional worker)

**MARGINAL PRODUCT**

- The additional output obtained from employing one additional unit of resource (e.g one additional worker)

**MARGINAL REVENUE**

- The additional revenue received from the sale of one additional unit of product

**MARGINAL REVENUE PRODUCT**

- The change in total revenue from employing one additional unit of product

**MARKET EQUILIBRIUM**

- The price at which all the goods offered for sale will be sold

**MONOPOLISTIC** **COMPETITION**

- TA market characterized by many firms selling a differentiated product or service

**NOMINAL GDP**

- The price of all goods and services produced by a domestice economy for a year at current market prices

**NOMINAL INTEREST RATE**

- The interest rate in terms if the nations currency

**NORMAL PROFIT**

- The amount of profit necessary to compensate the owners for their capital and/or managerial skill

**OLIGOPOLY**

- A market characterized by significant barriers to entry. As a result there are few sellers of the product

**POTENTIAL GDP**

- The maximum amount of production that could take place in an economy without putting pressure on the general level of prices

**PRICE CEILING**

- A specified maximum price that may be charged for a good, usually established by a government. A price ceiling will cause good shortages.

**PRICE FLOOR**

- A specified minimum price that may be charged for a good, usually established by the government. A price floor will cause over production of the good.

**PRODUCT DIFFERENTIATION**

- A strategy that involves modification of a product to make it more attractive to the target market or to differentiate it from competitors products.

**PURE COMPETITION**

- An industry in which there are a large number of sellers of virtually identical products or services. No individual seller is able to affect the market price.

**PURE MONOPOLY**

- A market in which there is a single sellerof a product or service for which there are no close substitutes

**REAL GDP**

- The price of all goods and services produced by a domestic economy at price level adjusted (constant) prices.

**REAL INTEREST RATE**

- The interest rate adjusted for inflation

**SUBSTITUTION EFFECT**

- The fact that as the price of good or service falls, consumers will use it to replace similar goods or services

**SUPPLY**

- The quantity of a good or service that will be supplied by producers at a given price

**UNEMPLOYMENT RATE**

- The percentage of the total work force that is unempliyed at a given time

Module 42 Flashcards

(56 cards)