Economics Case Guide

Ch.1 Limits, Alternatives, Choices:
Opportunity costs: to obtain more of one thing, society forgoes the opportunity of getting the next best thing. That sacrifice is the opportunity cost of the choice. Microeconomics: the part of economics concerned with decision making by individual customers, workers, households, and business firms. Macroeconomics: examines either the economy as a whole or its basic subdivisions, such as govt, household of business sector. Economic Resources: land, labor, capital, entrepreneurial ability. Optimal BEST point on production curve is where marginal benefit MB equal its marginal cost MC. The economic perspective stresses:

Resource scarcity and the necessity of making choices
The assumption of purposeful or rational behavior
Comparisons of marginal benefit and marginal cost
Economic Principles:
Generalizations
Other things equal assumption
Graphical expressions
Ch. 3: Demand, Supply & Market Equilibrium.
Demand: buyers plans. schedule or curve (downward) that shows the amounts of a product that consumers are willing and able to purchase (at a series of prices, during a specified period of time). Law of Demand: other things equal, price falls the quantity demanded rises, as price rises demand falls. (Negative inverse relationship) Diminishing marginal utility: consumers will buy additional units only if the price of those units is progressively reduced, each additional purchase will yield less satisfaction to the customer than the first. Income effect: lower price increases the purchasing power of buyers, lower price & buyer will/can buy more. Substitution effect: at a lower price buyers have the incentive to substitute what is now, less expensive product for other products relatively more expensive. Determinants of demand (when change the curve will shift L or R): consumers tastes, number of buyers in market, consumers incomes, prices of related goods, consumer expectations. Change in demand: curve shifts R or L, consumer’s sate of mind about purchasing the product has been altered due to a determinant. Change in quantity demanded: is a movement from one point to another point on a fixed curve, product under consideration.

Supply: schedule or curve showing the amounts of product that producers are willing and able to make available for sale.
Determinants of Supply: resource prices, technology, taxes or subsidies, prices of other goods, expectations of future prices, the number of suppliers.
Change in supply is a shift of the curve, a change in quantity supplied is a movement from on point to another on a fixed supply. Equilibrium price (Market-clearing price): the intentions of the buyers and sellers match. Equilibrium quantity: quantity at which the intentions of buyers and sellers match, and the quantity supplied are equal. If the increase in supply is larger than the decrease in demand, eqil. Quantity will increase. BUT, if the decrease in demand is greater than the increase in supply, the eqil. Quant. Will decrease. Surpluses: Drive price down.

Price ceiling: the max legal price a seller may charge for a product/service. Price floor: a minimum price fixed by the government. A price at or above is legal, below is not. Legally fixed price stifle the rationing function of prices and distort the allocation of resources. Over time, eqil. Price and quantity may change in directs that seem at odds(coffee beans) with the laws of demand and supply b/c the other-things-equal-assumption is violated.

Ch. 4 Elasticity
Demand is elastic: if a specific % change in price results in larger % change in quantity demanded. If consumers are sensitive demand is elastic, insensitive then inelastic.

Price changes 7 total revenue will change in the opposite direction if demand is price-elastic, in the same direction if demand is price-inelastic and not at all if demand is unit-elastic. Demand is typically elastic in the high-price (low-quantify) range of the demand curve. Demand is typically inelastic in the low-price (high-quantity) range of the demand curve. Perfectly inelastic demand is graphed as a line parallel to the vertical axis; perfectly elastic demand is shown by a line above and parallel to the horizontal axis. Elasticity cannot be judged by the steepness or flatness of a demand curve. Price elasticity of demand is greater:

The larger the number of substitutes available.
The higher the price of a product relative to ones budget
The greater the extent to which the product is a luxery
The longer the time period involved.

Price elasticity directly varies with the amount of time producers have to respond to the price change. Ch. 6, Consumer Behavior), 7 (Business & the costs of production), 8 (pure competition in the short run), 9 (pure comp in the long run), 10 (pure monopoly), 11 (monopolistic competition and oligopoly) Marginal product: The change in total product divided by the change in the quantity of labor explicit costs: Are money payments a firm makes to outside suppliers of resources. Implicit costs: the opportunity costs associated with a firms use of resources it owns. In the short run, a firms plant capacity is fixed; in the long run, a firm can vary its plant size and firms can enter or leave the industry. Fixed costs: do not vary with changes in output.

Variable costs: change with the level of output.
Average fixed, average variable and average total costs are fixed, variable and total costs per unit of output, marginal cost is the extra cost of producing one more unit of output. most firms have U-shaped long run ATC curves, reflecting economies and then diseconomies of scale. Economies of scale are the consequence of greater specialization of labor and management, more efficient capital equipment, and the spreading of start-up costs over more units of output. Diseconomies of scale are caused by the problems of coordination and communication that arise in large firms. MES( minimum effient scales) are the lowest level of output at which a firms long-run ATC is at a min. 4 basic market models:

Pure competition: large number of firms producing a standardized product (cotton), new firms can enter and exit the mkt easily. Pure Monopoly: one firm is the sole seller of a product or service (local electric utility), entry of additional firms is blocked. Monopolistic competition: large number of sellers producing different products(clothes, furniture, books). Here; nonprice competition (selling strategy to distinguish the product). Oligopoly: few sellers of a standardized or differentiated product, each firm is affected by the decisions of its rivals.

Conditions required for purely competitive markets
Very large numbers- large number of sellers, stock market ex. Standardized product: identical product, if the price is the same, the consumer will look at each seller. Price takers – individual producer is at the mercy of the market, it cannot change the market price, but only adjust to it. MR curve is horizontal. Free entry and exit –free to enter or exit.

The entry of firms will compete away any economic profits and the exit of firms will eliminate economic losses, so price and minimum ATC are equal. describe why firms in any structure use the MR = MC rule of profit maximization: in a compeditive market, profit maximization in the short run. If MR exceeds MC, the firm should product it. MR=MC is output-determining key, where in the short run they will max profit and minimize costs. Ch 18 Antitrust Policy & Regulation

natural monopoly: ex: public utilities. Alternatives are public ownership, and public regulation. It exists when a single firm can supply the entire market at a lower ATC than could a nuber of competing firms, rare, but exist (Tennessee valley authority). Sherman act 1890 restraints trade and monopolization; Clayton act of 1914 outlaws price discrimination, anticompetitive mergers. optimal level of social regulation : If MB of social regulation exeeds its MC, then there is too little social regulation, but if MC exceeds MB there is too much. Antitrust policy: consists of laws and govt actions designed to prevent monopoly and promote competition. Industrial regulation: govt regulation of firms prices/rates within industries Social regulation: govt reg of conditions under which goods are produced, physical characteristics of goods, and impact of the production and consumption on society. The underlying purpose of antitrust policy (antimonopoly policy): is to prevent monopolization, promote competition and achieve allocative efficiency.

Measuring Domestic output and national income define gross domestic product (GDP): defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year. It is the value of what has been produced, not sold. distinguish between nominal GDP and real GDP: real is adjusted for inflation throughout the year, real is the distinction between real vs nominal. Real GDP accounts for price changes that may occur due to inflation. GDP includes only the market value of final goods and ignores….intermediate goods altogether. Expansionary fiscal policy: this policy consists of government spending increases, tax reductions or both, designed to increase aggregate demand and therefore raise real GDP. Push country out of recession. Ch 25 (economic growth), 26 (business cyles, unemployment and inflation) -what happens to GDP when interest rates have fallen= it will fall Economic growth is defined or measured as either:

An increase in real GDP occurring over some time period.
An increase in real GDP per capita occurring over some time period. Real GDP per capita = the amount of real output per person in a county. (real GDP/population define the business cycle: alternating rises and declines in the level of economic activity, sometime over several years. Typical 4 phases: Peak: temp. max., economy is near or full employment and level of real output is at or very close to economys capacity, the price level is likely to rise during this phase. Recession: period of decline in total output, income and employment. Lasts 6 months or more. Declines in real GDP, increase in unemployment. Trough

Expansion
Inflation: a rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. What is used to calculate inflation rates? : CPI(consumer price), gdp deflator, price index,. Commodity price index, cost of living index, producer price index. CPI (consumer price index): main measure of inflation in the US. 3 types of unemployment:

Frictional “between jobs”
Structural: changes over time in consumer demand and in technology alter the “structure” of the total demand for labor, occupationally and geographically. Cyclical : caused by a decline in total spending. As the demand for goods and services decreases, employment falls and unemployment rises. Ch 28 Aggregate demand and aggregate supply

describe aggregate demand: schedule or curve that shows the amount of a nations output (real GDP) that buyers collectively desire to purchase at each possible price level. Buyers are households, businesses and govt along with those abroad. when the price level rises, the quantity of real GDP demanded decreases, when price level falls, the quantify of real GDP increases. aggregate supply: schedule or curve showing the relationship between nations price level and the amount of real domestic output that firms in the economy produce. Immediate short run: both input prices as well as output prices are fixed. In the short run: input prices are fixed, output prices vary In long run, input prices and output prices vary.

To measure aggregate output accurately, all goods and services produced in a year must be counted….once and only one. Decreases in aggregate demand cause…recession and cyclical unemployment. Decreases in aggregate supply cause..cost-push inflation.

Cost-push inflation: explains rising prices in terms of factors that raise per-unit production costs at each level of spending. A per-unit production cost is the average cost of a particular level of output. Demand-pull inflation: when resources are already fully employed, the business sector cannot respond to excess demand by expanding output. The essence of this type of inflation is “too much spending chasing too few goods” ***what happens when aggregate demand and aggregate supply decrease by 20%?8* price decreases Ch 30 Fiscal policy, deficits & debt

The crowding-out effect indicates that an expansionary fiscal policy may increase the interest rate and reduce investment spending. Budget deficit: government spending in excess of tax revnues. Contractionary fiscal policy: this policy consist of government spending reductions, tax increases or both, designed to decrease aggregate demand and therefore lower or eliminate inflation. This happens when demand-pull inflation occurs. Discretionary fiscal policy: purposeful change in government expenditures and tax collections to promote full employment, price stability and economic growth. US public debt -11.9 trillion in 2009, is accumulated all past federal budget deficits and surpluses. 29% held by foreigners. What option identifies two fiscal policy tools? …changes in the composition of taxation and government spending. What action might congress take to contract economic growth? Incrase reservic requirement ratio or reduce corporate tax rate? Ch 31(money, banking and financial institutions), Ch 32 (Money creation) the functions of money:

medium of exchange:usable for buying and selling
Unit of account-dollars
Store of Value: transfer purchasing power.
know what backs the U.S. dollar: The Federal Reserve.
The “FED” has three tools to manipulate the money supply: The reserve requirement, open market operations, discount rate. These refer to Monetary policy not fiscal policy. The narrowest definition of the US money supply is called M1. In consists of currency in the hands of the public and all checkable deposits (all deposits in banks). M2: includes M1+ savings deposits, money market deposit accounts, small denominated (less than 100,000) time deposits and money market mutal funds (MMMF) balances held by individuals. understand the functions of the Federal Reserve Bank: blend private and public control, service as the nations “central bank”, also serving as bankers’ banks. Scarcity: not enough, nor never can be enough goods and services to satisfy the wants and needs of society. Driving force of economics. TINSTAAFL: There is no such thing as a free lunch.

Basic economic questions: Who to produce for, what to produce, how to produce
it. Good: Tangible
Durable good: last a long time (Car, washing machine)
Non durable goods: doesn’t last long (3 years or less, clothing, toothpaste, food)
Consumer goods: good used on an individual basis. “I need this.”
Capital goods: goods used in the production. Ex:factory, robot on assembly line. Paradox of value: What do you value and why do you value it? GDP: measures the value of all finished products ready to sell. If its high, it means productivity is rising. Productivity: measure of output by given amount of inputs over a specific period of time. Given amount of input=limited. INTERNATIONAL BUSINESS

How is international business affected by the Internet?
Which product type provides a competitive advantage in the global mkplace? (utility, substitutable, monopoly, rare?) Risk and advantage of global outsourcing.
Situation, advantage/disadvantage of offshoring.
Components of sociocultural.
Ch 2 international trade & foreign direct investment
Balance of trade: exports minus imports
Absolute advantage: ability to product a good better, faster, quicker than a competiro Compariative: ability to product a good at a lower opportunity cost of resources used. Quotas: legal restriction on the amount of a good coming into the country. Ch 10. Understanding the International Monetary System & financial forces Foreign exchange (FX) markets: most transations are over the counter (OTC), meaning there is no actual trading floor; trades are done electronically. Made of up banks and large financial institutions. Balance of payment (BOP): record of a country’s transations with the rest of the world…this interests international business people giving them a tool to measure the risk within the country. Tariffs: a tax on imported goods.

General Agreement on Tariffs and Trade(GATT): initial membership in 1947 of 23 nations. Basic principle is knowsn as the most favored nation (MFN) clause, was that member-nations would treat all GATT members equally. If 2 member-nations agreed to reduce a tariff, that tariff reduction was extended to all GATT members. GATT was extremely successful in reducing tariffs, subsidies, quotas, and nontariff barriers wuch as employment law and export subsidies. Taxes: A tax (from the Latin taxo; I estimate) is a financial charge or other levy Imposed upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many administrative divisions.

Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent. Uncontrollable forces: external forces over which, mgmt. has no direct control, although it can exert an influence. Inflation: a trend of rising prices. Some economists hold that it is supply exceeding demand, while other views the cause is an increase in money demand. Fiscal and monetary policies: higher or lower taxes, decisions on how to spend available revenue, growth or contraction of the money supply, and rate of its growth or contraction. Foreign exchange quotation: the price of one currency expressed in terms of another.

Currency exchange risks: to avoid any risk, people like to conduct business in their own currency. Currency exchange controls: basically taking the risk of exchange rate movement into consideration by using three methods Efficient market approach: assumption that current market prices fully reflect all available relevant information. The fundamental approach: exchange rate prediction based on econometric models that attempt to capture the variables and their correct relationships The technical approach: analyzes data for trends then project these trends forward. Ch 3 Probability Distributions

Variance: a measure of the dispersion or variability in the random variable. It is a weighted average of the squared deviations from the mean. Probability function: a function denoted f(x), that provides the probability that a discrete random variable X takes on some specific value. Random variable: a numerical description of the outcome of an experiment Discrete probability distribution: a table, graph, or equation describes the values of the random variable and the associated probabilities. Expected value: A weighted average of the values of the random variable, for which the probability function provides the weights. If an experiment can be repeated a large number of times, the expected value can be interpreted as the ‘long-run-average”. Binomial probability distribution: the probability distribution for a discrete random variable, used to compete the probability of X successes in N trials.

Poisson probability distribution: the probability distribution for a discrete random variable, used to compute the probability of X occurrences over a specified interval. Uniform probability distribution: a continuous probability distribution in which the probability that the random variable will assume a value in any interval of equal length is the same for each interval. Probability density function: the function that describes the probability distribution of a continuous random variable. Normal probability distribution: a continuous prob.dist. whose prob. Density functions is bell-shaped and determined by the mean, and stardard deviation o. Standard normal distribution: a normal dist w/ a mean of O and a standard deviation of 1. Cumulative probability: The probability that a random variable takes a value less than or equal to stated value. Exponential probability distribution: a continuous probability distribution that is useful in describing the time to complete a task or the time between occurrences of an event. Ch 4 Decision Analysis

Decision alternative: options available to the person making the decision Chance events: uncertain events that could occur in the future. States of nature: possible outcomes for a chance event, defined so only 1 of the possibilities will occur. Influence diagram: graphic device, shows relationship.

Nodes: found in an influence diagram – represent the decisions, chance events and consequences. Decision nodes: rectangles or squares
Chance nodes: circles or ovals
Consequence nodes: diamonds
Arcs: lines connecting nodes in influence diagram.
Payoff: the consequence resulting from a specific comb. Of dec alternations. Can be expressed in terms of profit, cost, time, distance. Payoff table: table showing all payoffs for all combinations of decision alternatives and states of nature. Decision Tree: gives a graphical representation of the decision-making process. Shows the natural/logical progression that occurs over time. If you have a payoff table, you can develop this. Square – decision tree: represents decision nodes.

Circle-decision tree: represents chance nodes.
Branches: connect nodes in a decision tree. Leaving the decision node correspond to decision alternative. Leaving the chance node correspond to state of nature. Optimistic approach: evaluates each possible decision alternative in terms of best payoff that can occur. Recommend one with best possible payoff. Conservative approach: evaluates in terms of worst payoff that can occur. Minimax regret approach: approach to chose a decision alternative without using probabilities. Must calculate the max regret for each alternative and then choose the alternative that minimizes the max regret. Opportunity loss/regret: difference between the payoff for best decision alternative and payoff for decision chosen: Expected value approach: the one with best expected value.

Expected value: for chance node, weighted average of payoffs, weights are state-of-nature probabilities. Risk analysis: assist decision maker identify the difference between expected value of decision alt and payoff. Sensitivity analysis: describes how changes in state-of-nature probabilities and/or changes in payoffs affect the recommended decision alternative. Helps understand which inputs are critical to choice of best decision alternatives. Risk profile: shows possible payoffs and respective probabilities for decision alt. Prior probability: assessments for states of nature that are best probability values available at the time. Sample info: new info gathered through research or experiments that enables and update of state—of-nature probabilities. Posterior probabilities: probabilities of states of nature after revising the prior probabilities based of the sample info. Ch 5 Utility & Game Theory

What does the utility function for a risk taker show?…an increasing marginal return for money. What does the utility function for a risk avoider show?…a diminishing marginal return for money. What property do all utility functions posess?….more money leads to more utility. Decision analysis: a single decision maker seeks to select an optimal decision alternative after considering the possible outcomes of one or more chance events. Game Theory: two or more decision makers are called players, and they compete as adversaries against each other. Each player selects a strategy independently w/o knowing in advance the strategy of the other palyers.

The combination of the competing strategies provides the value of the game to the players. Saddle point: Whenever the max of the row minimums, equals the minum of the column maximums, the players cannot improve their outcomes by changing strategies. Pure strategy: maximum(row minumums)=minimum (column maximums)-optimal for both players. Optimal solution for mixed strategy: optimal solution for each player is to randomly select among the alternative strategies A dominated strategy exists if: another strategy is at least as good regardless of what the opponent does.

Two person, constant-sum game: occurs when the payoffs for the strategies chosen sum to a constant other than zero.Forecasting know the various components of a time series use smoothing techniques such as moving averages and exponential smoothing use the least squares method to identify the trend component of a time series understand how the classical time series model can be used to explain the pattern or behavior of the data in a time series and to develop a forecast for the time series determine and use seasonal indexes for a time series understand how regression models can be used in forecasting Ch 10 Distribution & Network Models  become familiar with the types of problems that can be solved by applying a transportation model develop network and linear programming models of the transportation problem become familiar with the types of problems that can be solved by applying an assignment model develop network and linear programming models of the assignment problem.

 Waiting Line Models identify where waiting line problems occur  explain how the Poisson distribution is used to describe arrivals and how the exponential distribution is used to describe services times use formulas to identify operating characteristics of the following waiting line models: single-channel model with Poisson arrivals and exponential service times, single-channel model with Poisson arrivals and arbitrary service times, single-channel model with Poisson arrivals, and exponential service times and a finite calling population demonstrate how to incorporate economic considerations to arrive at decisions concerning the operation of a waiting line