Econ Test Prep notes
Econ Test Prep notes econe
Popular in econe
Popular in Economcs
This 10 page Test Prep (MCAT, SAT...) was uploaded by Sieva Blitz Test on Tuesday January 19, 2016. The Test Prep (MCAT, SAT...) belongs to econe at University of California Santa Barbara taught by econe in Winter 2016. Since its upload, it has received 35 views. For similar materials see econe in Economcs at University of California Santa Barbara.
Reviews for Econ Test Prep notes
Report this Material
What is Karma?
Karma is the currency of StudySoup.
Date Created: 01/19/16
Important Terms & Definitions | H2 Economics IMPORTANT T ERMS &D EFINITIONS [E CONOMICS ] Microeconomics 1. Introduction to Economics Scarcity Situation where limited resources available unableto satisfy unlimited human wants Opportunity Cost (OC) Cost of any activity measured in terms of next bestalternative forgone Production Possibility Curve Shows all different maximum attainable combinations of goods & (PPC) services produced when all available resources areused efficiently at given state of technology Law of Increasing Opportunity As more of a good is produced, more of another goodhas to be Cost sacrificed in production Comparative Advantage When one can perform an activity at a lower opportunity cost than anyone else Law of Comparative Advantage Trade can benefit countries if they specialize in goods in which they have a comparative advantage 2. Demand & Supply Law of Demand Inverse relationship exists between price of good and quantity demanded of good, ceteris paribus Law of Supply Direct relationship exists between price of good and quantity supplied of good, ceteris paribus Price Elasticity of Demand (PED) Degree of responsiveness of quantity demanded of good to a change in its own price, ceteris paribus Income Elasticity of Demand Degree of responsiveness of demand to a change in income of (YED) consumers, ceteris paribus Cross Elasticity of Demand (XED) Degree of responsiveness of demand for one productto a change in price of another, ceteris paribus Price Elasticity of Supply (PES) Degree of responsiveness of quantity supplied of good to a change in its own price, ceteris paribus Consumer Surplus (CS) Excess of price buyers willing and able to pay for good over actual price paid Producer Surplus (PS) Excess of what producer willing and able to put up for sale for a good over actual price paid Deadweight Loss Loss in welfare not gained by anyone in society Tax Incidence Division of tax between consumers & producers Subsidies Fixed amount of money given to producers for each unit sold that lowers cost of good Price Floor (minimum price) Legally established minimum price above market equilibrium price Price Ceiling (maximum price) Legally established maximum price below market equilibrium price Black Market Market where sellers ignore government’s price restrictions & sell illegally at whatever price equates illegal demand & supply 3. Cost Theory & Size of Firms Fixed Factor Factor of production whose quantity cannot be changed in short run to change output Variable Factor Factor of production whose quantity can be changedwithin time period to change output Copyright © 2008-2010. Woon Wei Seng. 1 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Short Run Production period in which there is / are fixed factor(s) Long Run Production period in which there are no fixed factors Law of Diminishing Marginal As more units of a variable factor are added to anunchanging fixed factor, Returns (LDMR) the marginal product generated by adding the variable factor will eventually decrease Marginal Cost Additional cost from additional output Economies of Scale Unit costs decrease as scale of production increases Diseconomies of Scale Unit costs increase as scale of production increases Minimum Efficient Scale Occurs at where LRAC curve stops falling / lowest point of LRAC curve (MES) Internal Expansion Expanding productive capacity to enjoy internal EOS Horizontal Integration Merger of two firms at same stage of production Vertical Integration Merger of two firms at different stages of production Conglomerate Integration Combination of two firms of different industries with nothing in common 4. Perfect Competition & Monopoly Perfect Competition Market of many buyers and sellers of a homogeneous good Monopoly Market of only one seller of a product without substitutes (absence of competition) Price Taker A firm that takes the price from the market as given, without ability to influence the price Price Setter A firm that has the ability to influence the marketprice Productive Efficiency Occurs when firm is able to produce an output at any point along LRAC curve in long run or least cost at any given period Allocative Efficiency Occurs at where output level when price of good equals marginal cost of producing it Natural Monopoly When it is cost efficient to have a single firm in the industry such that it has lower AC (substantial EOS) over range of market demand Predatory Pricing Selling below cost price to drive out competitors Cartel Agreement among existing suppliers to keep out competitors X-inefficiency Occurs when a firm becomes complacent and suffers from inefficiency due to lack of competition Price Discrimination Charging different prices for the same product or for different units of it when such price differences is not because of costdifferences st 1 Degree Price Monopolist sells each unit to consumers at maximumprice they are willing to Discrimination pay nd 2 Degree Price Monopolist sets uniform price per unit for specificquantity of good and Discrimination lower price per unit for subsequent units rd 3 Degree Price Monopolist charges different prices for the same commodity in different Discrimination markets 5. Oligopoly & Monopolistic Competition Oligopoly Market where few large firms have large market share Monopolistic Competition Market where many small firms exist, each providingdifferent products or services Price Rigidity Tendency for prevailing market prices to remain stable over a long time Mutual Interdependence Each firm affects rival firms’ decisions and are also affected by rival firms’ decisions Copyright © 2008-2010. Woon Wei Seng. 2 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Product Innovation Differentiation of product in consumer’s viewpoint through improvements to product Process Innovation Reducing AC without sacrificing profits through streamlining processes Brand Proliferation Firms produce many brands to saturate market, leaving no gaps for rivals Market Segmentation Segmenting market into sub-markets / market nicheswith different needs catered through product innovation Kinked Demand Curve Theory Explains price rigidity; TR falls when prices rise / fall as rivals will match price decreases but not price increases Price Wars Used to eliminate new competitors, when a firm lowers its price, other firms start lowering prices and keep undercutting competitors price Collusive Oligopoly When there are tacit / explicit agreements among firms on operations Cartel Theory Formal arrangement by sellers to fix prices through manipulating supply to the market Price Leadership Theory Oligopolists agree to set same price as price leader in industry, allowing price adjustments without price wars Dominant Firm Price Others in industry follow largest producer in industry in price changes Leadership Barometric Firm Price Others in industry follow price changes of producermost sensitive to market Leadership conditions Contestable Market Theory In a market of free entry & exit, number of firms in industry unimportant since firms always behave as if competition is verystrong (no matter number of firms) Differentiated Product Product that is slightly different from and yet close substitute to product of other firms in industry Product Development Production of good with potentially high demand anddifferent from products of rival firms or provision / improvementof service to better / differ from rivals Excess Capacity Theorem Firms inefficient in using society’s & own resources, thus not producing at socially ideal output 6. Alternative Theories of the Firm Profit Satisficing Where managers of firm make enough profit to satisfy shareholder demands instead of profit maximizing Managerial Theories Managers, with discretionary power and freedom to run the firm, maximize their own utility instead of profit Revenue Maximization Firms aim to maximize sales revenue instead of profits Growth Maximization Firms aim to maximize growth instead of profits Organizational Slack Tendency of firms in non-competitive markets to produce at higher than AC (X-Inefficiency) Nationalization Industry put under ownership and control of the state Privatization Returning state-owned corporations to private sectors, involving transfer of assets from public to private sector 7. Market Failure & Government Intervention Social Efficiency / Pareto Achieved when no one can be made better off withoutsomeone being made Optimality worse off External Benefits Benefits from production / consumption experienced by people other than the producer / consumer (third parties) External Costs Costs from production / consumption experienced bypeople other than the producer / consumer (third parties) Copyright © 2008-2010. Woon Wei Seng. 3 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Private Marginal Benefit Value the consumer places on last unit of good produced, equal to price and (PMB) of good thus represented by demand Private Marginal Cost (PMC) OC of resources used up in making additional unit of good, represented by of good supply Social Marginal Benefit Sum of PMB and External Benefit to represent marginal benefit on society (SMB) Social Marginal Cost (SMC) Sum of SMC and External Cost to represent marginal cost on society Underproduction When in the production of the good, SMB > SMC (production can be increased to socially optimum output) Overproduction When in the production of the good, SMC > SMB (production can be decreased to socially optimum output) Market Failure Free markets, operating without government intervention, fail to deliver socially efficient allocation of resources to produce good & services Public Good Good / service with characteristic of non-excludability and non-rivalry Positive Externalities Benefits from production or consumption experiencedby society but not by producers or consumers themselves Negative Externalities Costs from production or consumption experienced bysociety but not by producers or consumers themselves Merit Goods Goods or services deemed socially desirable by government and seen as underproduced and thus underconsumed Demerit Goods Goods or services deemed socially undesirable by government and seen as overproduced and overconsumed Geographical Immobility Where barriers to people moving from one region toanother thus disallowing resources to respond to incentives to produce more goods & services demanded Occupational Immobility Mismatch of skills as labour is not transferable across industries as demanded, leading to waste of resources Government Failure Allocative efficiency is reduced following government intervention aimed to correct market failure Copyright © 2008-2010. Woon Wei Seng. 4 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Macroeconomics 1. National Income Accounting National income Total value of an economy’s final output of goods &services in a year (NNP at Factor cost) Households Basic consumers of finished products & owners of factors of production Firms Basic producers of finished products & buyers of factor services Gross Domestic Product (GDP) Total market value of all final goods & services newly produced within country Gross National Product (GNP) Total market value of all final goods & services newly produced by productive factors of country’s citizens (GDP + NPIA) GDP/GNP per capita GDP / GNP divided by population Net Property Income from Difference between property income from abroad & factor income paid Abroad (NPIA) abroad Market price Value of output at shop level / price purchasers pay for goods & services sold Factor cost What factors of production received for goods & services produced GDP at Factor cost (GDP at market price – Indirect tax + Subsidies) Capital depreciation Loss in value of physical assets due to wear & tear Net National Product (NNP) (GNP – Depreciation) Real GNP Level of output in terms of physical quantities without price changes (Nominal GNP⁄GNP deflator) Nominal GNP Value of output measured at current prices Purchasing Power Parity (PPP) How much goods & services can be bought by a unit of currency at home compared with purchasing power of other countries’ currency 2. National Income Determination Keynesian Theory Fundamental problem causing depression is insufficient demand for goods & services, so fiscal policy can revive the economy Desired Aggregate Expenditure Total planned expenditure on goods & services in aneconomy (C + I + G (AE) + X – M for 4-sector economy) Equilibrium NI Level of NI once reached will be maintained unless the economy is disturbed Leakage / withdrawal Siphoning off of expenditure from income flow between firms & households Injection Additional expenditure into domestic income flow Autonomous consumption Minimal consumption households will still spend when income is zero Induced consumption Amount of consumption changing when income changes Average Propensity to Consume Proportion of total income consumed (C⁄Y) (APC) Average Propensity to Save Proportion of total income saved (S⁄Y) (APS) Marginal Propensity to Change in consumption as income changes (∆C⁄∆Y or 1 – MPS or 1 - Consume (MPC) MPW) Marginal Propensity to Save Change in saving as income changes (∆S⁄∆Y) (MPS) Marginal Propensity to Change in withdrawals as income changes (MPS + MPM + MPT) Withdrawal (MPW) Investment Expenditure on production of capital goods and netadditions to goods Copyright © 2008-2010. Woon Wei Seng. 5 Distributed on Erpz.net Important Terms & Definitions | H2 Economics stocks Marginal Efficiency of Negative relationship between interest rates & level of investment Investment (MEI) Government expenditure Current spending & capital spending by the government on provision of goods & services Full-employment level of NI Level where there is no deficiency in demand / fullemployment of production factors / production on PPC Deflationary gap Shortfall of AE below NI at full-employment level,causing demand- deficient unemployment Inflationary gap Excess of AE above NI at full-employment level, causing demand-pull inflation Multiplier (k) Number of times income changes as injection changes(∆I⁄∆AE) Aggregate Demand (AD) Inverse relationship between price level & real equilibrium output where planned spending = actual output Aggregate Supply (AS) Amount of goods & services all firms in economy willing to supply at different price levels 3. Unemployment & Inflation Unemployment Number of people of working age without work, but willing & able to take up employment Overheating Economy growing too quickly that high inflation occurs Labour force All within working age (15<) who are able & willing to work and are either employed or seeking employment Frictional unemployment Unemployment occurring as workers change jobs / look for jobs after completing studies Seasonal unemployment Unemployment varying with season / weather Structural unemployment Unemployment resultant from geographical immobilityof labour & occupational immobility of labour Geographical immobility of Labour unwilling to move to another region where prospects are better labour Occupational immobility of Labour that do not have the necessary skills required by the employer labour Technological unemployment Unemployment from labour made redundant as a resultof increased automation Cyclical / Demand-deficient / Unemployment as workers are retrenched in a recession / depression Keynesian unemployment (as part of the business cycle) Full employment Occurs in economy when there is no cyclical unemployment Inflation Sustained increase in general price level of a country, as prices rise and value of money falls Consumer Price Index (CPI) Measures average price level of basket of goods & services consumed by typical household Hyperinflation Prices rise so fast that money ceases to be a medium of exchange & normal economic activity breaks down Demand-pull inflation Prices rise as supply cannot expand to meet demand Cost-push inflation Prices rise as production costs rise Wage-push inflation Inflation caused by wages rising faster than productivity gains Import-price-push inflation Inflation caused by inflation in other countries where goods are imported from or when local currency depreciates Profit-push inflation Inflation caused by firms use market power to raiseprices above what is required to offset increases in cost of production to increase profits Copyright © 2008-2010. Woon Wei Seng. 6 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Tax-push inflation Inflation caused by increases in indirect taxes adding to cost of living Wage-price spiral Prices keep rising in vicious cycle as wages rise to offset higher costs of living & firms increase prices to cover appreciating costs of production Anticipated inflation Where rise in general price level is expected Shoe leather costs Costs incurred by people & firms trying to minimizeholdings of cash 4. Public Finance Current / Ordinary expenditure Expenditure incurred in day-to-day routine work andrecurrent year after year Development / Capital Spending on public investment expenditure Progressive tax As income increases, proportion of tax on one's income increases Regressive tax As income increases, proportion of tax on one's income decreases Proportional tax As income increases, proportion of tax on one's income remains the same Income tax Tax on 'earned' & 'unearned' income, taxed progressively Corporation tax Tax on firm's profits, usually taxed proportionally Capital gains tax Tax on capital gains and capital appreciation of assets (land, shares etc) Property tax Tax on annual rental value of land & buildings, usually proportional tax Stamp duty Tax on legal & commercial down payments Ad valorem tax Tax on fixed proportion of value of good or service(%) Specific tax Tax on fixed amount per unit of good or service ($) Value-added tax (VAT) Multi-stage tax levied on net value added at each stage of production Excise duty Tax on manufacturer of goods so as to curtail domestic consumption Customs duties / Tariffs Tax on goods imported from outside the country, toraise revenue or for protectionist reasons 5. Fiscal Policy Government budget Estimate of government revenue & expenditure for coming year Balanced budget Estimated revenue = Estimated expenditure Deficit budget Estimated revenue < Estimated expenditure Surplus budget Estimated revenue > Estimated expenditure Deficit financing Financing extra spending by government through other methods (e.g. borrowing) Fiscal policy Government policy where government expenditure is increased & taxes are reduced to stimulate economy Automatic fiscal stabilizers Built-in features of economy operating automatically to smooth out fluctuations in disposable income over business cycles, without government intervention Disposable income Income households have available to spend after paying income taxes & receiving transfer payments (e.g. unemployment benefits) Crowding-out effect Government cuts taxes or expands borrowing to finance increased expenditure, crowding out private investment due tohigher interest rates 6. Interest Rate Determination & Monetary Policy Money supply Quantity / Stock of money held by households & firms in economy Copyright © 2008-2010. Woon Wei Seng. 7 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Demand deposits Money deposits in checking accounts (for checks) Nominal money Amount of money in dollars & cents Real money Amount of goods & services one can purchase with the money Money substitutes Items serving as temporary medium of exchange but not stores of value Fiat money Notes & coins determined as legal tender but not backed by gold, circulated by faith alone Interest rates (Rate charged) Cost of borrowing & reward for lending Nominal interest rate Interest rate charged by lender Real interest rate Nominal interest rate minus inflation rate Demand for money Desire to hold money rather than spend it or for financial investment Liquidity preference Desire to hold non-interest bearing cash balances as part of wealth portfolio instead of interest-bearing bonds Transactions motive Cash balances to meet planned expenses Precautionary motive Cash balances to meet unforeseen expenses Speculative motive / Idle Cash balances to purchase assets & bonds to make capital gains balances Total demand for money Active balances (Transactions motive & precautionary motive) + Idle balances Loanable funds Funds available for lending Central bank Institution supervising monetary system, implementing monetary policy & ensuring banks & financial institutions operate efficiently Monetary policy Deliberate attempt by Central Bank to regulate money supply or manipulate interest rates Irrational exuberance Consumers continue to spend regardless of high interest rates because of high consumer confidence Velocity of money Rate at which money supply turns over each year 7. Economic Growth Economic growth Annual percentage increase in real value of goods and services produced by economy Actual economic growth Annual percentage increase in national output Potential economic growth Speed at which economy could grow / Percentage annual increase in economy's capacity to produce Human capital Accumulated skill & knowledge of workers 8. Supply-side Policy Supply-side policy Focusing on adjusting AS such that the AS curve expands outwards Prices & income policy Direct or indirect intervention by government on wage-price setting to influence inflation rate Earnings Wages + Overtime payments + Bonuses 9. International Trade Trade Exchange of goods & services between two parties International trade Exchange of goods & services across national borders Factor price equalization Prices of factor inputs brought closer to each other Absolute advantage Where a country can produce more of a good using the same amount of resources Copyright © 2008-2010. Woon Wei Seng. 8 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Comparative advantage Where a country can produce a good at a lower opportunity cost than another country Law of comparative advantage Trade can benefit all countries if they specialize in goods in which they have a comparative advantage Terms of trade (TOT) Rate at which one good can be exchanged for another Terms of trade index Comparison of export price index with import priceindex (Export Price Index/Import Price Index X 100%) Balance of trade (BOT) Difference between value of commodity exports & imports (Export revenue-Import spending) Free trade Exchange of goods & services between countries without any artificial restrictions Protectionism Policy of sheltering domestic industries from foreign competition through tariff & non-tariff barriers Infant industry Industry with potential comparative advantage but too young / undeveloped to realize potential Dumping Selling of goods in foreign market below cost price/ price sold in home market Import quota Legal limit on quantity of imports over given time period Subsidy Indirect protection of domestic producers so they become more competitive against more efficient foreign producers Voluntary restraint agreement Agreement to reduce trade volume in specific good (VRA) Exchange control Government's buying & selling of foreign exchange to regulate imports & exports to ensure healthy BOP and prevent undue fluctuations in country's foreign exchange value Embargo Total ban on certain imports Economic integration Neighboring countries integrate as an economic unitto take advantage of extended market & allow better allocation of resources Free trade area (FTA) Agreement where member countries agree to remove tariff & non-tariff barriers among themselves but retain restrictions against non-member countries Trade deflection Imports enter FTA via country with lowest externaltariff Customs union (CU) Agreement where member countries remove all trade barriers among themselves & adopt common external tariff for non-member countries Common market Member countries operate as a single market, lifting all restrictions on trade in services, capital & labour movements and adopting laws & regulations on trade, production & employment Trade diversion Trade diverted from more efficient non-member producer to less- efficient but tariff-free member nation Balance of payments (BOP) Summary statement of money value of economic transactions between country residents & rest of world Credit item (+) International transaction earning foreign currency,providing demand of domestic currency Debit item (-) International transaction requiring foreign currency to make payments, providing supply of domestic currency Current account Flow of goods & services + incomes & net transfer of money flowing into & out of country Trade in goods account Import & export of tangible goods Trade in services account Import & export of services (invisibles) Income flows Investment income in forms of rent, interest, profits & dividends (net property income from abroad) Copyright © 2008-2010. Woon Wei Seng. 9 Distributed on Erpz.net Important Terms & Definitions | H2 Economics Current transfers Unilateral flows such as government contributions &receipts from international organizations & remittances Capital account Records debt forgiveness, migrant transfers & acquisition & disposal of non-financial assets such as patents & copyrights Financial account Records purchase & sales of assets in terms of direct investment, portfolio investment & monetary flows Direct investment Purchase & sale of real assets (capital goods) Portfolio investment Purchase & sale of shares & bonds (long-term investment) Monetary flows Bank deposits, loans & debts (short-term investment) Balancing item Statistical adjustment to record errors & omissions in calculations Official Reserves Account (ORA) Accommodates surpluses or deficits in overall balance BOP equilibrium Trade & capital flows into & out of country equal over number of years BOP disequilibrium Persistent tendency for outflows to be greater or less than corresponding inflows Expenditure-reducing policies Contractionary demand-side policies to reduce imports and hence AD & NI of country Expenditure-switching policies Policy that raises import prices relative to domestic-produced goods Marshall-Lerner (ML) condition Sum of PED X PED > M for devaluation of currency to be successful in correcting adverse BOP J-curve effect Where current account worsens in short-run after currency devaluation before improving Foreign exchange (Forex) Trading of one country's currency for another foreign currency Exchange rate Rate at which one currency is exchanged for another Nominal exchange rate Exchange rate based on nominal value of currency before adjustment to price changes Bilateral exchange rate Exchange rate between two currencies Trade-weighted / Effective Value of currency against basket of other currencies of major trading exchange rate partners Derived demand for currency Currency demand stems from foreigners' demand for our goods, services & financial assets Depreciation One currency weakens relative to another, when demand for it falls or supply for it rises Appreciation One currency strengthens relative to another, whendemand for it rises or supply for it falls Purchasing power parity (PPP) Equilibrium rate of exchange between two currenciesdetermined by theory relative domestic purchasing power; exchange ratesbetween two currencies in equilibrium when equivalent domesticpurchasing power Fixed exchange rate Government of country fixes & guarantees official price of currency in terms of other foreign currencies Devaluation Government declares lowering of fixed exchange rate Revaluation Government declares raising of fixed exchange rate Freely-floating / Flexible Exchange rate determined freely by market forces of demand & supply exchange rate in forex market Managed float exchange rate Government lets market forces determine exchange rate but will interfere to change it if beyond certain band Copyright © 2008-2010. Woon Wei Seng. 10 Distributed on Erpz.net