Economics: Breakeven, Market Structures, Cycles, and Policy Flashcards

Flashcards covering the fundamentals of market structures, business cycles, fiscal and monetary policy, geopolitics, and international trade based on SchweserNotes.

Short run

The time period over which some factors of production are fixed, typically capital such as plant and equipment.

Long run

The time period where all factors of production are variable, allowing a firm to avoid fixed costs by letting licenses expire or selling equipment.

Breakeven output quantity

The quantity at which total revenue just covers both fixed and variable costs, meaning price equals average total cost and economic profit is zero.

Short-run shutdown point

The condition where average revenue (price) is less than average variable cost ($P < AVC$) in the short run.

Long-run shutdown point

The condition where average revenue (price) is less than average total cost ($P < ATC$).

Economies of scale

Represented by the downward-sloping segment of the LRATC curve where increasing production scale reduces average total costs.

Diseconomies of scale

Represented by the upward-sloping segment of the LRATC curve where average unit costs rise as the scale of business increases.

Minimum efficient scale

The scale or plant size at which the average total cost of production is at its minimum on the LRATC curve.

Perfect competition

A market structure with many firms producing identical products, low barriers to entry, and no individual firm pricing power.

Monopolistic competition

A market structure with many firms producing differentiated products, low barriers to entry, and some pricing power.

Oligopoly

A market structure with few firms where decisions are interdependent and barriers to entry are typically high.

Pure monopoly

A market characterized by a single seller of a product with no good substitutes and very high barriers to entry.

Price-taker

A firm in perfect competition that faces a perfectly elastic (horizontal) demand curve at the market price.

Price-searcher

Firms in imperfect competition that face downward-sloping demand curves and must choose a price/output combination.

Kinked demand curve model

An oligopoly model suggesting competitors will match price decreases but are unlikely to match price increases.

Cournot duopoly model

An oligopoly model where two firms with identical marginal costs choose prices simultaneously, eventually sharing the market equally.

Stackelberg model

An oligopoly model where pricing decisions are sequential; a 'leader' sets the price first followed by 'followers.'

Nash equilibrium

A state where no firm can increase its profits by unilaterally changing its strategy, given the choices of other firms.

Collusion

A joint agreement among competitors to charge a specific price or agree to specific levels of output to increase total profits.

Cartel

A group of producers who enter into a collusive agreement to restrict output and increase market prices, such as OPEC.

Dominant firm model

A model where a single large firm with a lower cost structure sets the price, and smaller competitors take that price as given.

N-firm concentration ratio

A measure of market power calculated as the sum of the percentage market shares of the largest $N$ firms in a market.

Herfindahl-Hirschman Index (HHI)

A measure of market concentration calculated as the sum of the squares of the market shares of the largest firms.

Business cycle

Fluctuations in economic activity characterized by expansion, peak, contraction (recession), and trough.

Expansion

A phase of the business cycle where real GDP is increasing, typically featuring growth in employment and consumer spending.

Peak

The point in the business cycle where real GDP stops increasing and begins decreasing.

Contraction

A phase of the business cycle where real GDP is decreasing, often associated with declining inflation and employment.

Trough

The point in the business cycle where real GDP stops decreasing and begins increasing.

Credit cycle

Cyclical fluctuations in interest rates and the availability of loans, which may amplify the business cycle.

Inventory-sales ratio

A business cycle indicator that typically increases late in expansions and decreases near the end of contractions.

Durable goods

High-value products such as appliances or automobiles that are highly sensitive to phase changes in the business cycle.

Nondurable goods

Everyday household products like food that remain relatively stable in demand over the business cycle.

Leading indicators

Economic indicators that tend to change direction before peaks or troughs in the business cycle (e.g., S&P 500 Index).

Coincident indicators

Economic indicators that change direction at roughly the same time as the business cycle (e.g., personal income).

Lagging indicators

Economic indicators that tend to change direction after the business cycle turning points have occurred (e.g., average duration of unemployment).

Fiscal policy

A government's use of spending and taxation to influence economic activity.

Monetary policy

Central bank actions that affect the quantity of money and credit to influence economic activity.

Balanced budget

A state where government tax revenues equal government expenditures ($T = G$).

Budget surplus

Occurs when government tax revenues exceed expenditures ($T > G$).

Budget deficit

Occurs when government expenditures exceed tax revenues ($G > T$).

Keynesian economists

Believe fiscal policy can have a strong effect on economic growth by influencing aggregate demand when the economy is below full employment.

Monetarists

Believe that fiscal stimulus effects are temporary and that monetary policy should be used only for inflationary pressure management.

Discretionary fiscal policy

Active spending and taxing decisions made by a national government intended to stabilize the economy.

Automatic stabilizers

Built-in fiscal devices, such as unemployment insurance and tax receipts, that trigger automatically based on the state of the economy.

Crowding-out effect

The phenomenon where increased government borrowing raises interest rates, reducing private-sector borrowing and investment.

Ricardian equivalence

The theory that private-sector savings increase to offset government deficits in anticipation of future tax liabilities.

Transfer payments

Entitlement programs that redistribute wealth, such as Social Security or unemployment insurance, but are not included in GDP.

Capital spending

Government expenditure on infrastructure projects like roads and schools to boost future productivity.

Direct taxes

Taxes levied directly on income or wealth, such as corporate or income taxes.

Indirect taxes

Taxes levied on goods and services, such as sales taxes, value-added taxes, or excise taxes.

Fiscal multiplier

A formula used to determine the potential increase in aggregate demand from an increase in government spending: $1 / [1 - MPC(1 - t)]$.

Marginal propensity to consume (MPC)

The proportion of an additional dollar of income that is spent on consumption rather than saved.

Recognition lag

The time it takes for policymakers to recognize the nature and extent of an economic problem.

Action lag

The time required for a government to discuss, vote on, and enact fiscal policy changes.

Impact lag

The time elapsed between the enactment of fiscal policy and the point when its impact is felt in the economy.

Structural budget deficit

The deficit that would occur under current policies if the economy were operating at full employment; also called cyclically adjusted deficit.

Fiat money

Money that is not backed by any tangible value but is deemed legal tender by law.

Lender of last resort

Occurs when a central bank provides credit to banks experiencing shortages to prevent bank runs.

Price stability

The primary objective of a central bank, typically seeking an inflation target of 2% to 3%.

Policy rate

The base interest rate set by a central bank to influence the quantity of money and credit in the economy.

Discount rate

The specific policy rate in the United States at which banks can borrow reserves directly from the Federal Reserve.

Reserve requirements

The percentage of deposits that banks are legally required to retain as reserves rather than lend out.

Open market operations

The buying and selling of government securities by the central bank to influence the money supply.

Monetary transmission mechanism

The process through which a change in the central bank's policy rate affects asset values, expectations, and the price level.

Operational independence

A central bank's ability to independently determine the policy rate.

Target independence

A central bank's ability to define its own inflation targets and the horizon for achieving them.

Liquidity trap

A condition where the demand for money becomes highly elastic, making expansionary monetary policy ineffective at lowering rates.

Quantitative easing

A policy involving large-scale purchases of government bonds or other assets to encourage lending and reduce long-term interest rates.

Geopolitics

The study of interactions among state and nonstate actors and how geography affects those interactions.

Globalization

The long-term trend toward the integration of worldwide economic activity and cultures.

Autarky

A geopolitical archetype involving noncooperation and nationalism, representing a goal of national self-reliance.

Hegemony

A geopolitical archetype involving noncooperation and globalization, where a large country influences others without formal cooperation.

Bilateralism

Political or economic cooperation occurring specifically between two countries.

Multilateralism

Extensive cooperation among many different countries, often through international treaties or organizations.

International Monetary Fund (IMF)

An organization that promotes international monetary cooperation and expansion of trade while providing resources for balance of payments difficulties.

World Bank

An organization that provides financial and technical assistance to developing countries with a mission to fight poverty.

World Trade Organization (WTO)

The only international organization dealing with global rules of trade and the settlement of trade disputes between nations.

Event risk

Geopolitical risk involving events where the timing is known but the outcome is uncertain, such as a national election.

Exogenous risk

Unanticipated geopolitical events that occur suddenly, such as an outbreak of war or a rebellion.

Thematic risk

Geopolitical risks resulting from known factors with long-term effects, such as climate change or cyber risks.

Soft power

The ability of a country to influence others through cultural exchange, laws, and institutions rather than force.

Comparative advantage

The ability of a country to produce a good at a lower relative cost (opportunity cost) than other countries.

Tariffs

Taxes collected by the government on imported goods, which increase domestic prices and producer surplus.

Quotas

Government-imposed limits on the physical quantity of a good that may be imported during a specific period.

Export subsidies

Government payments made to domestic firms that export goods, aimed at increasing their competitiveness abroad.

Voluntary export restraint (VER)

A voluntary agreement by a government to limit the quantity of a good it exports to another country.

Quota rents

The extra profit earned by foreign exporters who receive import licenses under a quota system when the government does not charge for the licenses.

Free Trade Area

A trading bloc where all barriers to the import and export of goods and services among member countries are removed.

Customs Union

A trading bloc where members remove internal trade barriers and adopt a common set of trade restrictions for nonmembers.

Common Market

A trading bloc that allows free movement of labor and capital in addition to meeting the criteria of a customs union.

Economic Union

A trading bloc where member countries establish common institutions and economic policies.

Monetary Union

An economic union where members adopt a single common currency, such as the Eurozone.

Nominal exchange rate

The price of one currency in terms of another at a specific point in time.

Base currency

The currency that is being priced in an exchange rate quotation (the denominator in a price/base quote).

Real exchange rate

The nominal exchange rate adjusted for price levels in both countries to measure relative purchasing power: $Nominal \times (CPI_{base} / CPI_{price})$.

Spot exchange rate

Represented as the currency exchange rate for immediate delivery, typically involving exchange within two days ($T + 2$).

Forward exchange rate

The specified exchange rate for a currency transaction that will occur at a set future date.

Cross rate

The exchange rate between two currencies that is calculated based on each currency's value relative to a common third currency.

Formal dollarization

A regime where a country stops issuing its own currency and adopts the currency of another country as legal tender.

Currency board arrangement

A commitment to exchange domestic currency for a specific foreign currency at a fixed rate, where the domestic currency is fully backed by foreign reserves.