Ecp - Tarek Buhagiar PDF

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Module 2: (2 – 4 questions) 1. Describe the current local economic condition 2. Identify the components of GDP released by the Bureau of Economic Analysis Gross domestic product (GDP)- market value of (all final) goods/services produced by labor and property in the U.S. Y= C + I + G + NX a. Consumption- measures goods/services purchased by U.S. residents - Consists mainly of purchase of new goods (exception of purchase of new houses) and services by individual from private businesses b. Investment- total spending on goods that will be used in the future to produce more goods –Includes: capital equipment (machines, tools), structures (factories, office buildings, houses), inventories (goods produced, but not yet sold) c. Government Purchases- all spending on the goods/services purchased by government at federal, state, and local levels d. Net Exports- exports – imports; exports represent foreign spending on the economy’s goods/services imports are portions of C, I, and G. 3. Identify the phases of a Business Cycle

Business cycle-the upward and downward movements of levels of GDP and refers to the period of expansions and contractions in level of economic activities around a long-term growth trend a. Trough- lowest point of business cycle; min output b. Expansion/Boom- period between trough and peak; when real GDP grows and usually lasts seven years c. Peak- highest point of business cycle; max output

d. Recession/Contraction- period between a peak and trough; decline in economic activity and can last from a few months to more than a year 4. Not on the test 5. Define an Employed and Unemployed person according to the Bureau of Labor Statistics Civilian noninstitutional population- person of 16+ living in the 50 states or District of Columbia, who are not inmates of institutions and are not on active duty Civilian labor force- all persons in the civilian noninstitutional population classified as employed or unemployed Employed persons- all persons who (a) did any work as paid employees, worked in their own business or profession or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of their family, or (b) were not working but who had jobs from which they were temporarily absent -Each employed person only counted once regardless of number of jobs held Unemployed persons- all persons who had no employment during the reference week, were available for work (except for temporary illness) and had made specific efforts to find employment some time during the 4 week- period ending with the reference week -Person laid off and not looking classified as unemployed Unemployment rate- ratio of unemployed to civilian labor force expressed as a percent ¿ of unemployed ) U-rate = 100 x( labor force Labor force participation rate- percent of adult population that is in the labor force labor force ) Labor force participation rate= 100 x( adult population Frictional unemployment- 2%-3% of labor force caused by movement between -jobs or between regions, transitions from college to position, -searching for right job -occurs even if enough jobs to go around Cyclical unemployment-2%-3% of labor force caused by decline in particular industry, thus less demand for skills used Could be due to: - Technological innovation - Shifts in tastes

- Increased foreign competition - Legal changes Unemployed workers have few marketable skills and require retraining “Bad” unemployment from downturn in business cycles causes the unemployment rate to exceeding the natural rate of unemployment Natural rate of unemployment- the amount of unemployment that the economy normally “healthy” experiences Natural rate of unemployment= frictional rate + structural rate 6. List and identify some of the measures of Inflation Inflation- a general increase in the overall price level of the goods and services in the economy Consumer price index (CPI)- measures the overall cost of goods/services bought by a typical consumer; measures typical cost of living Calculated: 1. Fix the “basket”- Bureau of Labor Statistics uses survey to determine bundle of goods/services purchased by typical consumer 2. Find the prices- price for each good/service in basket must be determined for each time period 3. Computer the basket’s cost- keep basket the same and allow prices to change to isolate effects of price changes 4. Choose base year and computer index cost of basket ∈current year ) CPI= 100 x( cost of basket ∈base year *base year is the benchmark against other years 5. Compute the inflation rate CPI this year−CPI last year x 100 % Inflation rate= CPI last year

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7. Identify Real Vs Nominal data Nominal interest rate- rate banks and financial institutions quote or state and does not consider inflation; actual rate paid Ex) interest paid to you on savings account Real interest rate- interest rate that has been adjusted for inflation Real interest rate= (nominal interest rate) – (inflation rate) Use CPI to compare dollar figure from different times Amount in today’s dollars= price level today ) amount ∈ year T dollars x ( priceleve∈ year T 8. Identify the role of the Federal Reserve

Federal reserve (Fed)- the central bank of the U.S. created by act of Congress in 1913 -Initiates process before money can be printed by the Treasury department -Buys Treasury bonds in possession of financial institutions, commercial banks, individual people, states, municipalities, and foreign governments -Responsible for making sure sufficient amount of money is available in the economy 9. Describe Monetary Policy Formed by the Board of Governors who sets the reserve requirement and effectively control the discount rate Central bank- institution that oversees the banking system and regulates the money supply Federal funds rate- bank borrows short-term (usually overnight) from a bank that has surplus balances on federal funds Discount rate- interest rank charged when bank borrows directly from the Fed 10. Describe Fiscal Policy Fiscal policy- the government spending and taxation that influences the economy Expansionary policy- intended to increase the level of economic activity and create jobs by increasing aggregate demand Contractionary policy- meant to reduce level of economic activity, presumably to combat inflation, by reducing aggregate demand 1. In the United States, control of the quantity of money is given to the: Federal Reserve System 2. To an economist, the term "inflation" refers to: a continually rising price level 3. "Official" recessions in the United States are declared by: the National Bureau of Economic Research 4. Nominal prices and nominal wages are not adjusted for inflation 5. The CPI is a measure of the overall cost of goods and services bought by a typical consumer 6. Which of the following agencies calculates the CPI? the Bureau of Labor Statistics

7. The interest rate the Fed charges on loans it makes to banks is called the discount rate 8. The Federal Funds rate is the interest rate banks charge each other for short-term loans of reserves 9. The Federal Reserve does all except which of the following? make loans to individuals 10. Renee earned a salary of $60,000 in 2001 and $76909 in 2006. The consumer price index was 183for 2001 and 233 for 2006. By correcting for inflation Renee's 2006 salary in 2001 dollars is Amount in today’s dollars= 60,404.92=76909 x

amount ∈ year T dollars x (

price level today ) priceleve∈ year T

( 183 233 )

Module 3 (5 – 9 questions) 1. Summarize how goals, constraints, incentives and market rivalry affect economic decisions -The first step to making sound decisions is to have well-defined goals because achieving different goals entails different decisions -The second step is knowing the constraints of achieving those goals Constraints include: available technology or prices of inputs used in production -Changes in profits provide incentive to resource holders to change their use of resources Within a firm, incentives impact how resources are used and how hard workers work -Three rivalries: 1. Consumer-producer rivalry- competing interests of consumers and producers - consumers negotiate or locate low prices, while producer negotiates high prices 2.Consumer-consumer rivalry- reduces negotiating power of consumers (scarcity) -consumers willing to pay highest prices for scarce resource 3.Producer-producer rivalry- when multiple sellers of a product compete and given that customers are scarce, products compete -consumers choose best-quality at lowest price 2. Find economic and accounting profits and costs

Accounting profits- total amount of money taken from sales (total revenue) minus the dollar cost of producing goods/services Accounting profit= Total revenue – explicit costs Economic profit- difference between total revenue and total opportunity cost of producing good/service Economic profit= Total revenue – opportunity cost Opportunity cost= Explicit cost + implicit cost Implicit cost- forgone opportunity; cost of giving up the best alternative resource 3. Identify the role of profits in a market economy Economic profits are a signal to resource holders where resources are most highly valued by society -Scarce resources moved toward the production of goods mostly valued by society in attempt to maximize profit; welfare is improved -Economic profits decline as more firms enter the industry and market price falls 4. Identify the five forces framework to analyze the sustainability of an industry's profits -Tool for helping managers see the big picture, but not comprehensive list of all factors that affect industry profitability -Michael Porter organized many complex managerial economic issues into five categories/” forces” that impact the sustainability of an industry profits: 1. Entry- ability of existing firms to sustain profits depends on how barriers to entry affect the ease which other firms can enter a. Primary inducement for new firms to enter is presence of economic profits 2. Power of input suppliers- industry profits tend to be lower when suppliers have the power to negotiate favorable terms for their inputs 3. Power of buyers- industry profits tend to be lower when buys have power to negotiate favorable terms for the products/services produced in the industry 4. Industry Rivalry- nature and intensity of rivalry among firms competing in the industry a. Product differentiation 5. Substitutes and complements- presence of close substitutes erodes industry profit; complementary products also affect industry profit 5. Apply present value analysis to make decisions and value assets Present value (PV)- the amount that would be invested today at the prevailing interest rate to generate the given future value:

1+i ¿ ¿ (Single FV) PV= (¿ n¿¿) FV ¿ ¿ 1+i ¿ ¿ 1+i ¿ ¿ 1+i ¿ ¿ (¿ n¿) (Steam of FV) PV= FVn ¿ (¿ 2¿¿ )+ ¿ FV 2 ¿ (¿ 1¿¿ )+ ¿ FV 1 ¿ ¿ −n 1−( 1+ i) Or PV= FVx( ) i Present value reflects the difference between the future value and the opportunity cost of waiting: PV = FV – OCW Net present value- present value of the income stream generated by a project minus the current costs of the project 1+i ¿ ¿ 1+i ¿ ¿ 1+i ¿ ¿ (¿ n¿¿)−cost NPV= FVn ¿ (¿ 2¿¿ )+ ¿ FV 2 ¿ (¿ 1¿¿ )+ ¿ FV 1 ¿ ¿

-If NPV positive, then project is profitable because present value of earnings exceeds current costs -If NPV negative, then reject project because project exceeds the present value of income stream that project generates Maximizing profits -> maximizing value of firm -> maximizing the present value of all future profits-> maximizing current profits if growth rate (g) in profits is less than the interest rate (i) No dividends paid out; gI, profits will grow faster than interest rate therefore value of firm would be infinite 6. Apply marginal analysis to determine the optimal level of a managerial control variable Marginal benefit MC(B)- change in total benefits arising from a change in the managerial control variable Q Marginal (incremental) cost MC(Q)- change in total costs arising from a change in the managerial control variable Q To maximize the net benefits: N(Q)= B(Q) – C(Q) B= total benefit C= total cost MB(Q)= derivative of B(Q) -Find Q that maximizes total benefit by setting MB(Q)=0 and solving for Q MC(Q)= derivative of C(Q) -Find the Q that minimizes total cost by setting MC(Q)=0 and solving for Q Marginal net benefit: MNB(Q)= MB(Q) – MC(Q) -To maximize net benefit, increase control variable to point where marginal benefit equals marginal cost MB>MC “thumbs up” decision MB 0 good y is substitute of good x Px is the price of good a y < 0 good y is complement of good x P y is price of related good am < 0 good x is inferior good M is income H is value of any other variable - Inverse demand function- solve for Px in equation to see how much consumers willing to pay for each additional unit Law of supply- as price of good rises quantity supplied with rise (right shift); as price of good falls quantity supplied falls (left shift) Market supply curve- indicating the total quantity all producers are willing and able to produce at each price Change in quantity supplied- change in price leads to a change in quantity supplied; causes movements along supply curve Change in supply- changes in factors other than price leads to changes in supply; shifts the entire supply curve “Supply shifters”: 1. Input prices- input prices fall increase in supplies (right shift) 2. Technology/Government determines how much inputs required for outputs; increase in technology increase in supply (right shift) 3. Number of firms a. Entry of more firms, more output (right shift)

b. Exit of firms, less supply (left shift) 4. Substitutes in production 5. Taxes a. Excise tax- tax on each unit of output sold; shift by amount of tax b. Ad valorem tax- percentage of tax; rotates supply curve counterclockwise 6. Producer expectations a. Firm expects higher future prices and product not perishable (left shift) Supply function- describes how much of good will be produced at alternative prices of goods and alternatives Linear supply function s Q x =β 0+ β x P x + β w W + β r Pr Q x s is # units produced β x > 0 by law of demand; Px price of good β w < 0 good y is substitute of good x W price of input β r > 0 good y is complement of good x Pr price of technologically related good H value of other variable - Inverse supply function- Solve for Px in equation to show how much producers must receive to be willing to produce each additional unit 2. Calculate consumer surplus and producer surplus, and describe what they mean. Consumer surplus- extra value consumer gets from a good, but doesn’t have to pay; tells how much extra consumers would be willing to pay - Area under the demand curve and over the price paid is amount consumers willing to pay 1 (base)(height) CS= 2 Producer surplus- amount producers receive inn excess of amount necessary to induce them to produce good - Area above supply curve and under the market price - Net benefit derived by producers from production 1 PS= (base)(height) 2 3. Explain price determination in a competitive market, and show how equilibrium changes in response to changes in determinants of demand and supply

Equilibrium in a competitive market is determined by the intersection of market demand and supply curves Q d ( Pe ) =Q s (Pe ) 4. Explain and illustrate how price floors and price ceilings impact the functioning of a market Price ceiling- maximum legal price that can be charged - Results in a shortage; producers willing to produce less at lower price and consumers wishing to buy more at lower price d s Q >Q Shortages caused by price ceiling hurt people with high opportunity costs and benefit people with low opportunity cots Price floors- minimum legal price that can be charged - Results in a surplus; more is produced than consumers are willing to purchase at that price Ex) minimum wage 1. The demand curve for product X is given by QXd = 362 - 3PX. How much consumer surplus do consumer receive when Px=$ 31 1 (base)(height) 2 Base= 269 = 362-3(31) CS=

Height = inverse demand curve = 120.67 –

1 d Q 3 x

1 (269)(120.67-31) 2 2. Which of the following would not shift the demand for good A? Drop in price of good A 12060.62 =

3. Suppose the demand for good X is given by Qdx = 10 + axPx + ayPy + aMM. If aM is negative, then good x is M is Income. an inferior good

4. Advertising can influence demand by altering tastes of consumers. This type of advertising is known as persuasive advertising 5. Producer surplus is the area above the supply curve but below the market price of the good 6. Suppose both supply and demand increase. What effect will this have on the equilibrium Quantity? It will rise 7. Suppose supply decreases and demand increases. What effect will this have on the price? It will rise

Module 5 (5 – 8 questions) 1. Apply various elasticities of demand as a quantitative tool to forecast changes in revenues, prices, and/or units sold. Elasticity- the percentage change of one variable “caused” by a percentage change in another variable change ❑❑ −¿ Elasticity= ❑ ❑ ¿ 2. Find various Arc Elasticities. 3. Describe the relationship between the Elasticity of Demand and Total Revenues 4. Discuss three factors that influence whether the demand for a given product is relatively elastic or inelastic. 5. Describe the relationship between Marginal Revenue and the Own Price Elasticity of Demand

Module 6 (6 – 8 questions) 1. Explain alternative ways of measuring the productivity of inputs and the role of the manager in the production process. 2. Calculate input demand and the cost-minimizing combination of inputs and use isoquant analysis to illustrate optimal input substitution. 3. Calculate a cost function from a production function and explain how economic costs differ from accounting costs.

4. Explain the difference between and the economic relevance of fixed costs, sunk costs, variable costs, and marginal costs. 5. Calculate average and marginal costs from algebraic or tabular cost data and illustrate the relationship between average and marginal costs. 6. Distinguish between short-run and long-run production decisions and illustrate their impact on costs and economies of scale. 7. Find the Degree of Operating Leverage and the breakeven quantity...