Economic Concepts Flashcards
Law of Demand
-higher prices reduce the demand for an item and lower prices increases the demand for an item. -there is an inverse relationship between the price consumers are willing to pay for an item and the amount they are willing to purchase. -The demand curve slopes down and to the right, indicating that as a price drops, the quantity demanded will increase.
Elastic
-a small price change causes a rather large change in the amount purchased. -common with goods that have many substitutes. -Perfect elasticity results in a horizontal demand curve.
Inelastic
-a large price change may not cause much of a change in the quantity demanded. -there are not many substitutes. -Perfect in-elasticity is represented by a demand curve the is vertical.
Second law of demand
-time has the greatest effect of elasticity. -when the price of a product increases, consumers will reduce their consumption more in the long run than in the short run. -the demand for goods is more elastic in the long run than in the short run.
Factors causing a shift in the demand curve
-changes in consumer income (consumers will buy more if they have more money) -Changes in the price of related goods. The price of substitute goods influences demand. If the price of one good rises, the demand for the other good will rise. -Changes in consumer expectations. If the price is expected to rise in the future, the consumer will buy more now. -Changes in the number of consumers in the market. When cities increase, there are more people affecting demand. -Demographic changes. -changes in consumer tastes and preferences.
Law of Supply
- a higher price will increase the supply of a good. -there is a direct relationship between the price of a good and the amount of the good supplied in the market place. -the supply curve slopes up and to the right
Change in quantity supplied
-represented as a movement along the supply curve. - it is the willingness of producers to offer a good at different prices.
Factors resulting in a shift of the supply curve
-factors that increase the opportunity cost of producing a good will discourage production and shift the supply curve inward and to the left. -Changes in resource prices -changes in technology -Natural disasters and political disruptions
Income elasticity
-the sensitivity of demand to change in consumer income. -a inferior good has negative income elasticity which means when income increases, the quantity demanded decreases. When income decreases, the quantity demanded increases. -a normal good has positive income elasticity.
Expansionary Fiscal Policy
-reducing taxes -increasing government spending -results in higher GDP and higher price levels
Restrictive Fiscal Policy
-decreasing spending -increasing taxes -will slow the economy down
3 ways the Federal Reserve uses monetary policy to influence the money supply
1) increasing or decreasing the reserve requirements 2)increasing or decreasing the discount rate 3)Open market operations
Leading Economic Indicators
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Housing starts/building permits
- Housing starts versus cancellations. If a builder starts building 100 homes but cancels two of them, his cancellation rate is 2%, which isn’t bad. However, if that builder cancels 20 of those planned homes, his cancellation rate grows to 20%, which indicates wider problems within the economy.
- Real estate is a significant component of the economy, as are construction jobs. When this sector weakens, everyone feels it.
- Most cities issue the permit two to three months after the buyer signs the new home sale contract. That’s six to nine months before builders complete the new home. When permits start to fall, it’s a clue that demand for new housing is also down.
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orders for durable goods
- The Durable Goods Orders Report tells you when businesses order new big-ticket items. Examples are machinery, automobiles, and commercial jets. Why is this important? When the economy weakens, companies delay purchases of expensive new equipment. They’ll just keep the old machines running to save money. The first thing they do when they regain confidence about the future is to buy new equipment. This isn’t the same as consumer purchases of durable goods, such as washing machines and new cars. That’s important, but business orders pick up first when a downturn ends.
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changes in consumer sentiment
- this is based on a survey of consumers. It asks for their future expectations. It tells you whether consumers think business conditions, jobs, and incomes will improve in six months. Most respondents base their future predictions on how well they are doing now.
- Inverted Yield
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DIJA Utility Average
- Pay particular attention to the Dow Jones Utility Average. It measures the stock performance of utilities. These companies have to borrow a lot to finance their expensive energy generation facilities. As a result, their earnings are dependent upon interest rates. When rates are down, their earnings are up, and so is the utility index.
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Interest rates are the most important indicator for the average person to follow.
- Falling and low interest rates create liquidity for businesses and consumers. That means money is cheap, and both are more likely to buy as soon as the economy improves. When interest rates rise, you know the economy will slow down soon. It costs more to take out a loan, making everyone buy less.
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Manufacturing Jobs (as opposed to employment which is coincident)
- The number of manufacturing jobs tell you manufacturers’ confidence level. Although headline employment is a coincident indicator, factory jobs are an important leading indicator.
Conference Board Leading Economic Index
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- ISM® Index of New Orders
- Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less federal funds
- Average consumer expectations for business conditions
Coincident Economic Indicators
-unemployment rate -level of industrial production -corporate profits
Lagging economic indicators
-prime rate -changes in CPI -Average duration of unemployment
