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BEC 42

Economics, Strategy, Globalization

Demand curve inverse relationship between quantity (Q) demanded and price (P) and - downward sloping
Demand curve shift shifts when variable other than price change
Price elasticity of demand measures the sensitivity of demand to a change in price; > 1: elastic ( sensitive to price Δ); =1: unitary ( not sensitive to price Δ); < 1: inelastic E of demand= percentage Δ in Q demanded/ percentage Δ in P
Income elasticity of demand measures sensitivity of demand due to a change in income: IE of demand = percentage Δ in Q demanded/ percentage Δ in price
Normal goods demand increase as consumer income increase; IE of demand is positive
Inferior goods demand increases as consumer income decreases: IE of demand is negative
Cross elasticity of demand measures the change in demand for a good when the price of a related or competing good is changed.
Cross E of demand percentage change in Q demanded of product X/ percentage change in P of product Y
Substitute goods Cross E of Demand for two products is positive
Complement goods Cross E of demand is negative
Substitution effect as the price of a good falls, consumers will replace it with similar goods
Income effect as the price of a good falls, consumers can purchase more with a given level of income
Law of diminishing marginal utility the more goods an individual consume, the more total utility the individual receives HOWEVER the additional utility from consuming each additional unit decreases
Utility maximization a consumer maximizes utility from spending when marginal utility of the last dollar spent on each good is the same. Marginal utility of A/ price of A = marginal utility of B/price of B
Personal disposable income amount of income consumers have left to spend after transfer payments from government and paying taxes
Consumption function a Y = mx + b equation Y = Consumption, m =slope is the Marginal Propensity to Consume, x= disposable income for the period
Marginal propensity to consume/save ( MPC/MPS) describes how much of each additional dollar of disposable income a consumer will spend/save. MPC+ MPS = 1
Supply curve relationship between $ price and quantity supplied ; is an upward sloping curve
Supply curve shift occurs when variable other than price change
Elasticity of supply measures change in Q supplied from a change in P
Market equilibrium price at which Q demanded = Q supplied; where demand and supply curves intersect
Price ceiling a specified maximum price that can be charged for a good. If price ceiling is below equilibrium ===> shortages( suppliers will produce other goods)
Price floor a minimum specified price that may be charged for a good. If price floor is above equilibrium ===> surpluses ( suppliers will overproduce)
Externalities damage to common areas that is caused by production of certain goods. Supply is higher and the price is lower than appropriate ( i.e. pollution)
Fixed costs do not changes at different levels of production
Variable costs directly related to the level of production for the period
Average fixed cost ( AFC) FC per unit of production
Average variable cost ( AVC) VC per unit of production; stays constant until inefficiencies arise due to producing in a fixed size facility
Marginal cost ( MC) the added cost of producing on extra unit; initially decreases but begins to increase due to inefficiencies
Average total cost ( AVC) total costs divided by number of units produced
Law of diminishing returns as we try to produce more output with fixed productive capacity, marginal productivity will decline
Long run total costs all inputs are variable b/c additional plant capacity can be added. Returns to scale: Constant-output increases in the same proportion; increasing-output increases by a greater proportion; diminishing-output increases by a smaller proportion
Normal profits amount of profit necessary to compensate owners for their capital and/or managerial skills. Just enough profit to keep in business in the long run
Economic profit amount of profit in excess of the normal profit
Nominal Gross Domestic Product ( GDP) the price of all goods and services produced in a year at current market prices
Real GDP the price of all goods and services produced at price level adjusted ( constant and eliminates the effect of inflation) prices.
Potential GDP maximum amount of production that could take place without pressuring the general level of prices. Potential GDP minus Real GDP = GDP gap. >0 ==> unemployed resources in the economy <0 ==> economy is running above normal capacity and prices will rise
Net Domestic Product ( NDP) GDP minus depreciation
Gross National Product ( GNP) price of all goods and service produced by labor and property supplied by the nation's residents
Income approach to calculating GDP adds up all the incomes earned in the production of final goods and services
Expenditure( input) approach to calculating GDP adds up all expenditures to purchase final goods and services by households , businesses, and governments.
Interest rate effect as inflation increases, normal interest rates increase causing a decrease in interest sensitive spending
Wealth effect as inflation increases, the market value of certain financial assets decreases causing individuals to have less wealth and to decrease their consumption
International purchasing power effect as inflation increases relative to foreign currencies, foreign products become less expensive causing and increasing in ported goods and decrease in exported goods. -==> decrease in aggregate demand
GDP multiplier effect increase in spending by consumers, businesses, and/or the government has a multiplied effect on equilibrium GDP. 1/MPS x change in spending
Economic contraction decrease in real GDP due to reduced spending
Economic expansion increase in real GDP; getting to the peak of real GDP causes scarcity of labor and material ==> inflation
Okum’s law high output growth is generally associated with a decrease in the unemployment rate
Recession at least two consecutive quarters of negative GDP growth ; depression is a long lasting recession
Leading economic indicators 1) average weekly hours 2)average weekly initial claims for unemployment 3) mnft’s new orders 3) vendor performance 4) mnft’s new orders,capital 5) building permits 6) stock prices 7)money supply 8) interest rate spread, 9)index of consumer expectations
Coincident e economic indicators 1) employees on nonagricultural payrolls 2) personal income less transfer payments 3) industrial production 4) manufacturing and trade sales
Lagging economic indicators 1) average duration of unemployment 2)inventories to sales ratio 3)labor cost per unit of output 4) average prime rate 5) commercial and industrial loans 6) consumer installment credit to personal income ratio 7) consumer price index for services
Factors affecting investment spending rate of technology growth, real rate of interest, stock of capital goods, actions by the government, acquisition and cost of capital goods
Accelerator theory as economic activity increases, capital investment must be made to meet the level of demand. Increased investment leads to increased economic demand which leads to increased economic activity
Unemployment frictional- temporary due to people changing jobs/new entrants; structural - due to changes in demand or technical advances causing not as many individuals with certain skills to be needed; cyclical-when real GDP is less than potential GDP
Deflation decrease in price levels
Consumer Price index ( CPI) measures the price that urban consumers paid for a fixed basket of goods and services in relation to the price of hose same goods and services purchased in some base period.
Producer Price Index ( PPI) measures the prices of finished goods and material at the wholesale level
GDP Deflator measures the prices for net exports, investment, government expenditures, and consumer spending.
Cause of inflation demand pull- aggregate spending exceeds the economy’s normal full employment output capacity; cost push- increase in the cost of producing goods and services
Phillip’s curve inverse relationship between inflation and unemployment. ( downward sloping curve). When unemployment rate is low, inflation tends to increase.
Interest rates real interest rate- interest rates in terms of goods (adjusted for inflation) nominal interest rate- interest rate in terms of the nation’s currency. Difference between real and nominal is the inflation premium
Monetary policy Federal reserve to affect the money supply/to sustain economic growth while controlling inflation; 1)reserve requirements 2)purchase(expansionary) or sale (contractionary) of government securities using Federal Reserve Bank deposits 3) discount rate
Fiscal policy government actions to achieve economic goals 1) reduce/increase taxes 2) reduce/ increase government spending
Classic economic theory market equilibrium will eventually result in full employment over the long run without government intervention. Does not support use of fiscal policy
Keynesian theory economy does not necessarily move to full employment on its own. Focuses on use of fiscal policy
Monetarist theory does not support fiscal policy; focuses on use of monetary policy to control economic growth
Supply side theory economy’s ability to supply more goods is the most effective way to stimulate growth- decrease in taxes for businesses and individuals with high income
Neo- Keynesian theory- focus on both fiscal and monetary policy to stimulate the economy
Absolute advantage incentive for a county to produce more than its citizens need to be able to export to other countries with higher production costs.
Comparative advantage a county has no alternate uses of its resources that would involve a higher return( the opportunity costs are less). In the long term, production of specific goods and services will migrate to counties that have a comparative advantage.
Balance of payments an account summary of a nation’s transactions with other nations. Current account, capital account, official reserve account.
Factors influencing exchange rates 1) inflation 2) interest rates 3) balance of payments 4) government intervention 5) other factors- political and economic stability, extended stock market rallies, decline in demand for exports
Pure competition 1) composed of a large number of sellers , each are too small to affect prices 2) identical products 3) no barriers to entry; demand curve is perfectly elastic ( horizontal); key to success is to be the lowest cost producer in the market
Pure monopoly 1) increasing returns to scale 2) control over the supply of raw materials 3) barriers to entries 4) little incentive to innovate or control costs==> subject to government regulation
Monopolistic competition 1) many sellers selling differentiated products and services 2) focus on product development and service innovation
Oligopoly 1) significant barriers to entry 2) few sellers of the product ===> actions of one influence/ affect the others.3) if unregulated they can establish cartels to engage in price fixing
Created by: tsp7c



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