Economics is the study of the allocation of scarce economic resources among alternative uses

Positive Relationship- The dependent variable moves in the same direction as the independent variable
Negative Relationship- The dependent variable moves in the opposite direction as the independent variable
Neutral- One variable does not change as the other variable changes
Command Economic System - A system in which the govt largely determines the production, distribution and
consumption of goods and services e.g Communism and socialism
Market (Free-enterprise) Economic System - A system in which individuals, businesses and other distinct entities
determine production, distribution and consumption in an open (free) market e.g Capitalism
Microeconomics - studies the economic activities of distinct decision-making entities, including individuals, households
and business firms
Macroeconomics- studies the economic activities a group of entities taken together, typically of an entire nation or major
sectors of a national economy
International economics - studies economic activities that occur between nations and outcomes that result from these
activities
Demand is the desire, willingness and ability to acquire a commodity
When price is higher – Quantity Demanded is Lower, At Lower prices quantity demanded is Higher……..Why
1. Income Effect -- a given amount of income can buy more units at a lower price
2. Substitution Effect -- lower priced items will be purchased as substitutions for higher priced items
A market demand schedule shows the quantity of a commodity that will be demanded by at different prices
(Negatively Sloped)
Increase demand (shift right)
- Increase in wealth- may increase demand for normal goods and decrease the demand for inferior
- Decreased in interest rates
- Currency depreciates
- Increase in government spending
- Decrease in taxes
Decrease demand (shift left)
- Decrease in wealth- May increase demand for inferior goods, and decrease the demand for normal goods.
- Increase in interest rates
- Currency appreciates
- Decrease in government spending
- Increase in taxes
NOTE;
1.Change in quantity demanded is movement along a given demand curve (for an individual or for the market) as a
result of a change in price of the commodity. Variables other than price are assumed to remain unchanged
2. Change in demand results in a shift of the entire demand curve that is caused by changes in variables other than
price
Supply : The quantity of a commodity that will be provided by an individual producer or by all producers of a good
or service (market supply) at alternative prices during a specified time
Increase supply (shift right)
- Decrease in raw materials/wages cost
- Increase in subsidies
- Technological Advances
- Number of suppliers
- Price of other goods.
Decrease supply (shift left)
- Increase in raw materials/wages cost
- Increase in taxes
- Number of suppliers
- Price of alternative goods.
Change in the quantity supplied is movement along a given supply curve (for an individual provider or for the market)
as a result of a change in price of the commodity. Variables other than price are assumed to remain unchanged.
Change in supply results in a shift of the entire supply curve that is caused by changes in variables other than price
Draw supply & demand curve (do you remember how to label the graph, which goes where?)

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Aggregate Demand Curve -- At the macroeconomic level, demand measures the total spending of individuals,
businesses, governmental entities, and net foreign spending on goods and services at different price levels
Spending on consumable goods accounts for about 70% of total spending (aggregate demand) in the U.S.
Several ratios -- are used to measure the relationship between consumption spending and disposable income
Average propensity to consume (APC): Measures the percent of disposable income spent on consumption goods
Average propensity to save (APS): Measures the percent of disposable income not spent, but rather saved.

APC + APS = 1 (because each measure is the reciprocal of the other)

Marginal propensity to consume (MPC): Measures the change in consumption as a percent of a change in
disposable income
Marginal propensity to save (MPS): Measures the change in savings as a percent of a change in disposable income
MPC + MPS = 1 (because each measure is the reciprocal of the other
Aggregate Supply
At the macroeconomic (economy) level, supply measures the total output of goods and services at different price
levels
Classical Aggregate Supply Curve -- This curve is completely vertical, reflecting no relationship between
aggregate supply and price level (please draw.)
Keynesian Aggregate Supply Curve -- This curve is horizontal up to the (assumed) level of output at full
employment, and then slopes upward, reflecting that output is not associated with price level until full employment is
reached, at which point increased output is associated with higher price levels
Conventional Aggregate Supply Curve -- This curve has a continuously positive slope with a steeper slope
beginning at the (assumed) level of output at full employment, reflecting that at full employment increased output is
associated with proportionately higher increases in price levels
The equilibrium price for a commodity is the price at which the quantity of the commodity supplied in the market is
equal to the quantity of the commodity demanded in the market.
Market Shortage -- The actual price is less than the equilibrium price
Market Surplus -- The actual price is higher than the equilibrium price (
If price is set above the equilibrium (price floor), it will create a surplus, quantity supplied exceeds quantity demanded
 A price floor is a government- or group-imposed limit on how low a price can be charged for a product.[1]
In order for a price floor to be effective, it must be greater than the equilibrium price
 If price is set below the equilibrium (price ceiling), it will create a shortage, quantity demanded exceeds quantity
supplied.A price ceiling occurs when the government puts a legal limit on how high the price of a product can be.
In order for a price ceiling to be effective, it must be set below the natural market equilibrium.
 When a price ceiling is set, a shortage occurs. For the price that the ceiling is set at, there is more demand
than there is at the equilibrium price. There is also less supply than there is at the equilibrium price, thus
there is more quantity demanded than quantity supplied
Elasticity - measure of how sensitive the demand for, or supply of, a product changes to changes in price
Price elasticity is measured in 2 ways:
Point method - measures price elasticity at a particular point of the demand curve
Price elasticity = % change in quantity demanded ÷ % change in price
Midpoint method - measures price elasticity of demand between any two points on a demand curve
Price elasticity = [(Q2 - Q1) ÷ (Q2+Q1)] ÷ [(P2-P1) ÷ (P2+P1)]
 Price Inelastic – Less than One
 Price Elastic – Greater than one
 Unit Elasticity = 1
 More the substitutes more elasticity
 Longer the time period the more elasticity
 High portion of income spent on item- elastic
 Classified as luxury good- Elastic

Cross elasticity - the % change in the quantity demanded (or supplied) of one good caused by the price change of another
good
Cross elasticity = % change in number of units of X demanded (or supplied) ÷ % change in price of Y
 If the coefficient is positive, then the two goods are substitutes
 If the coefficient is negative, then the commodities are complements
Marginal Utility
The more of each commodity an individual the greater total utility derivesd. However, while total utility increases as
acquisition increases, the utility d derived from each additional unit of a commodity decreases
Indifference Curves
When the various quantities of two commodities that give an individual the same total utility are plotted on a graph,
the result is an indifference curve

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Short-run the time period during which the quantity of at least one input to the production process can not be varied
Long-run -- the time period during which the quantity of all inputs to the production process can be varied
In the long-run all costs are considered variable, including plant size

Perfectly competitive market

- A large number of independent buyers and sellers, each of which is too small to separately affect the
price of a commodity- a firm is a "price taker
- All firms sell homogeneous products or services;
- Firms can enter or leave the market easily;
- Resources are completely mobile;
- Buyers and sellers have perfect information;
- Government does not set prices.
A market (or industry) meeting all of these criteria is virtually impossible to identify
Monopolistic competition
- Many firms with differentiated products similar but not identical), for which there are close substitutes
- Few barriers to entry
- Ability to exert some influence over the price and market
- Competition to increase brand loyalty
Oligopoly
- Few firms with differentiated products
- Fairly significant barriers to entry
- Ability to fix prices

Monopoly
- A single firm with a unique product
- Significant barriers to entry
- The ability of the firm to set output and prices
- No substitute products
Exists Because;
 Control of raw material inputs or processes (e.g., a patent);
 Government action (e.g., a government granted franchise);
 Increasing return to scale (or natural monopolies) (e.g., public utilities).
Despite the market type In the short-run a firm will maximize profit where marginal revenue is equal to (rising)
marginal cost
GDP - the total market value of all final goods and services produced within the borders of a nation in a particular time
period. (GM has a factory in China, doesn't count in GDP, Toyota has a factory in US, counts as GDP)
Does not include:
- Goods or services which require additional processing before sold for final use (i.e., raw materials or
intermediate
- Activities for which there is no market exchange (i.e., do-it-yourself productive activities
- Goods or services produced in foreign countries by U.S.-owned entities
- Adjustment for changing prices of goods and services over time
There are two ways to measure GDP
1. Expenditure Approach - calculates the sum of the four components (GICE)
Government Purchases of goods and services
+ Gross private domestic investment
+ Personal consumption expenditures
+ Net Exports
= GDP

2. Income Approach - sum of resource costs and incomes (IPIRATED)

Income of proprietors
+ Profits on corporations
+ Interest (net)
+ Rental income
+ Adjustments for net foreign income and miscellaneous items
+ Taxes
+ Employee compensation
+ Depreciation
= GDP

Either approach will yield the same GDP

Nominal GDP - unadjusted, measures the value of all final goods and services in current prices
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Real GDP - adjusted to account for changes in the price level by removing inflation by using a price index (called GDP
deflator)
Real GDP = (nominal GDP ÷ GDP deflator) * 100
Net Domestic Product (NDP) - is GDP minus depreciation
Gross National Product (GNP) - includes goods and services produced overseas by U.S. firms and excludes goods and
services that are produced domestically by foreign firms. (GM has a factory in China, counts as GNP, Toyota has a
factory in US, does not count in GNP)
Disposable income (DI) - personal income less personal taxes. It is the amount of income households have available to
either spend or save
Business cycles is the term used to describe the cumulative fluctuations (up and down) in aggregate real GDP,
generally that last for two or more years
Business cycle phases: Expansionary, Peak, Contractionary, Trough and Recovery
Peak A point in the economic cycle where rising aggregate output end and the beginning of a decline in output begin
Trough A point in the economic cycle where of a decline in aggregate output end and the beginning of an increase in
output begin
Economic Expansion or Expansionary Period -- Periods during which aggregate output is increasing
Economic Contraction or Recessionary Period -- Periods during which aggregate output is decreasing
Recession - the economy experiences negative real economic growth (declines in national output) for two consecutive
quarters
Depression - a sever recession, long period of stagnation in business activity and high unemployment rates

Leading indicators tend to predict economic activity

- Consumer expectations
- Initial claims for unemployment
- Weekly manufacturing hours
- Stock prices
- Building permits
- New orders for consumer goods
- Real money supply
Lagging indicators tend to follow economic activity
-Changes in labor cost per unit of output
-Ratio of inventories to sales
- Duration of unemployment
-Commercial loans outstanding
-Ratio of consumer installment credit to personal income

The multiplier effect - increase in spending generates income for firms, which in turn spend that income, which gives
other firms or households income and so on. an increase in spending produces an increase in national income and
consumption greater than the initial amount spent. For example, if a corporation builds a factory, it will employ
construction workers and their suppliers as well as those who work in the factory. Indirectly, the new factory will
stimulate employment in laundries, restaurants, and service industries in the factory's vicinity.

Economic measures and reasons for changes in the economy

The combined economic output of these four sectors comprise the GDP
- Households (consumers)
- Businesses
- Federal, State and local governments
- The Foreign sector
To be counted as unemployed a person must be actively looking for work
Unemployment rate = (number of unemployed ÷ total labor force) * 100

Types of Unemployment
• Fictional unemployment - normal unemployment resulting from workers changing jobs or being temporarily laid
off
• Structural Unemployment - Jobs available do not correspond to the skills of the work force, or workers do not
live where the jobs are located
• Seasonal unemployment - is the result of seasonal changes in the demand and supply of labor
• Cyclical unemployment - amount of unemployment resulting from declines in real GDP during a contraction or
recession
Fictional, structural and seasonal will always occur regardless of the economic state.

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Natural rate of employment - normal rate of employment around which the unemployment rate fluctuates due to cyclical
unemployment = Natural Rate of Unemployment = Frictional + Structural + Seasonal Unemployed/Size of Labor Force

Full employment - there is no cyclical unemployment

Price indexes
convert prices of each period to what those prices would be in terms of prices of a specific prior (or sometimes
subsequent) reference period
Consumer Price Index (CPI-U) -- Prices paid by consumers for a "basket" of goods and services during a period
to the price of the "basket" in a prior reference period
Wholesale Price Index (WPI) Prices paid for a "basket" of raw materials, intermediate goods, and finished goods
at the wholesale level to prices for comparable goods in a reference (base) period.Gross Domestic Product (GDP)
Deflator -- The GDP Deflator relates nominal GDP to real GDP
Nominal GDP/Real GDP) x 100 = GDP Deflator
Inflation (or inflation rate) is the annual rate of increase in the price level;
deflation (or deflation rate) is the annual rate of decrease in the price level
Demand-induced (demand-pull) inflation -- Results when levels of aggregate spending for goods and services
exceeds the productive capacity of the economy at full employment- Excess demand increasing price level.
Supply-induced (cost-push or supply-push) inflation -- Results from increases in the cost of inputs to the
production process - raw materials, labor, taxes, etc. - which are passed on to the final buyer in the form of higher
prices. Increasing price level.
Inflation rate = [(CPI this period - CPI last period) ÷ CPI last period] * 100
Inflation causes purchasing power to decrease. Inverse relationship
Consequences of Inflation
Lower current wealth and lower future real income, Higher interest rates, Uncertainty of economic measures.

M1 -- Includes paper and coin currency held outside banks and check-writing deposits M2 -- Includes M1 items
plus savings deposits, money-market deposit accounts, certificates of deposit (less than $100,000), individual-owned
money-market mutual funds, and certain other deposits. This measure of money is the primary focus of Fed actions
to influence the economy.
M3 -- Includes M2 items plus certificates of deposit (greater than $100,000), institutional-owned money-market
mutual funds and certain other deposits
Banking System
The U.S. does not have a central bank, but rather a central banking system, the Federal Reserve System, consisting
of;
Board of Governors -- The seven-member policy-making body of the Federal Reserve System
Federal Open Market Committee -- The 12-member body responsible for implementing monetary policy through
open-market operations to affect the money supply

Federal Reserve Banks -- The twelve district banks, each responsible for a specific geographical area of the U.S.
Within their area, each federal bank supervises, regulates, and examines member institutions, provides currency to
and clears checks for those institutions, and holds reserves and lends to those institutions. The Federal Reserve
Banks are owned by its member institutions, but they operate under uniform policies of the Federal Reserve System.
Member institutions, which function as financial intermediaries, include:
Commercial banks, Savings and loan associations, Mutual savings banks, Credit Unions
Monetary policy is concerned with managing the money supply to achieve national economic objectives, including
economic growth and price level stability. The Federal Reserve System can regulate the money supply by;
Reserve-requirement changes -- A bank's ability to issue check-writing deposits is limited by a reserve-
requirement by the Fed on check-writing deposits
Open-Market Operations -- The Fed engages in open-market operations by purchasing and selling U.S. Treasury
debt obligations (e.g. Treasury Bonds) from/to banks
Discount Rate -- The rate of interest banks pay when they borrow from a Federal Reserve Bank in order to
maintain reserve requirements is called the "discount rate
Increase government spending and reducing taxes are Fiscal policys- Increasing and decreasing money supply are
monetary policys.
Monetary policies are easier to implement than fiscal policies that must be approved by the congress.
Comparative Advantage- the ability of one country (A) to produce a good or service at a lower cost (or with lower
opportunity cost) relative to what the good or service would cost in another country

The U.S. balance of payments is a summary accounting of all U.S. transactions with all other nations for a calendar
year
Current Account -- Reports the dollar value of amounts earned from export of goods and services, amounts spent
on import of goods and services, and government grants to foreign entities, and the resulting net (export or import)
balance
Capital Account -- Reports the dollar amount of inflows from investments and loans by foreign entities, amount of
outflows from investments and loans U.S. entities made abroad, and the resulting net balance
Official Reserve Account the net dollar amount that results from the Current Account and the Capital Account
taken together

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When the sum of earnings and inflows exceeds the sum of spending and outflows, a balance of payment surplus
exists. Results in an increase in U.S. reserves of foreign currency or in a decrease in foreign government holdings of
U.S. currency.
When the sum of spending and outflows exceeds the sum of earnings and inflows, a balance of payment deficit exits.
This deficit would result in a decrease in U.S. holding of foreign currency reserves or in an increase in foreign
government holdings of U.S. currency

Monetary assets and liabilities (cash, A/R, Notes payable, etc) are fixed in dollars and are not affected by inflation- If you
owe me $200 you have to pay me $200 whether or not it has lost value is only applicable if I choose to spend the
$200

Non-monetary assets and liabilities (buildings, land, machinery, etc) will fluctuate with inflation and deflation

During a period of inflation, those receiving money (its worth less) will be hurt because purchasing power as eroded.
Firms that lend money at fixed interest rates will be hurt by inflation

During a period of inflation, those with a fixed amount of debt will be aided because they will repay the debt will inflated
dollars. Thus inflation tends to benefit firms with a large amount of outstanding debt

Stagflation - falling national output and inflation ( Increase of both unemployment and inflation at the same time.)

The Phillips curve - illustrates the inverse relationship between inflation and the unemployment rate
It stated that there could never be an increase in both
Proved wrong by stagflation.
Makes sense because high unemployment means low demand so prices should fall

Cyclical budget deficit - caused by temporary low activity (poor economy means less income for people so government
gets less in revenues)

A structural budget deficit - caused by a structural imbalance between government spending and revenue

Nominal interest rate - interest rate in current prices

Real interest rate - is defined as the nominal interest rate minus the inflation rate

Real interest rate = nominal interest rate - inflation rate

Monetary policy is the use of the money supply to stabile the economy. The fed controls the money supply through 3
main ways:
1. Open Market Operations - purchase (increase M1) and sale (decrease M1) of government securities (T-bills
and bonds)
2. Discount rate - the rate the fed charges banks. Raising rates discourages borrowing and decreases money
supply and visa versa
3. Required Reserve Ratio (RRR) - fraction of total deposits banks must hold in reserve. Raising the RRR
decrease money supply

Money demand and interest rates are inversely related. As interest rates rise, it becomes more expensive to hold money
(because holding money rather than saving or investing it means you do not earn interest), thus reducing the demand for
money

An increase in money supply will cause interest rates to fall, leading to increase in investment, increasing demand,
causing GDP to increase, unemployment to fall and price level to rise

Market influences on business strategies

Mission statement - one or two line descriptions of what the organization is in business to do

SWOT - Strength and Weakness are internal, Opportunities and Threats are external

Implementing a plan can occur on various levels; Corporate lvl, Business lvl, Functional lvl, Operating lvl.
[Strategic] ----------------------------------- [Tactical]
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.

Explicit costs - are documented out-of-expenses (wages, materials and utilities)

Implicit costs - opportunity costs, the profits that are lost from following one business strategy vs another

Accounting costs - measure the explicit costs of operating a business

Economic costs - accounting (explicit) costs plus opportunity (implicit) costs

Accounting profits - difference between total revenue and total accounting costs
Economic profits - difference between total revenue and total economic costs, which include opportunity costs

Marginal costs (incremental cost) - is the change in total cost associated with a change in output quantity over a period of
time

MC = change in total costs ÷ change in quantity

Economies of scale - are reductions in unit costs resulting from increases size of operations
Diseconomies of scale - size becomes inefficient and they are no longer cost productive

Regardless of the model, the firm will operate best/ maximize short run profits, Price = Marginal Revenue = Marginal
Cost (P=MR=MC)

B2-50 comprehensive chart showing differences between the market structures

Cartels - a group of firms acting together to coordinate output decisions and control prices as if they were a single
monopoly

Boycotts - organized group of refusals to conduct market transactions with a target group

Factors of production
- Land (natural resources)
- Labor (human capital)
- Capital (non-human physical capital accumulated through past investment)

Minimum wage causes a surplus of workers because a firm can't or don't want to pay works (minimum wage is set above
equilibrium price). So it increases unemployment.

Best cost provider combines the cost leadership strategy benefits with the differentiation strategy

Implications of dealing in foreign currencies

3 types of exchange rate risks
Transaction risk - single transaction
Economic risk - government instability, nationalization
B2-74 chart of currency effect on foreign currency inflows and outflows
Translation risk - translation of financial statements
- Temporal method (remeasurement method) - assumes function currency of the sub is that of parents
- translation gains and losses flow through the income statement
- if we are converting from the 3rd currency to functional, those gains flow through I/S
- Current method (translation method) - functional currency of the sub is different from parent
- translation gains and losses flow through other comprehensive income
- if we are converting from functional to reporting currency, those gains flow through other
comprehensive income

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 Factors influencing exchange rates
• Relative inflation rates - when country A inflation exceeds country B inflation, country B currency appreciates as
country A residents try to protect their money from eroding
• Relative income levels - when country A's income increases compared to country B, country B currency
appreciates as country A residents buy more of B's goods and services
• Government controls - Tariffs or taxes on country B's goods will decrease the demand for B's currency,
depreciating it compared to A
• Relative interest rates - when country A's interest rates are lower than country B's, country B's currency
appreciates as country A residents seek better returns in country B

There are 3 theories explaining exchange rate risk

• Purchasing Power Parity - the price of identical goods should cost the same in two different countries when
measured in the same currency
- Absolute form - prices will be exact between countries
- Relative form - prices will be approximately equal (accounts for transportation and govt reg)
• International Fischer effect - explains the fluctuation in FX rates through analysis of interest rates.
• Interest Rate Parity - holds that foreign and domestic interest rates will reach equilibrium once covered interest
arbitrage is no longer possible

Types of hedges
• Futures - trade on an exchange, smaller transaction and are denominated in standard amounts
• Forwards - trade over-the-counter, larger transaction and denominated in standard amounts
• Money Market Hedge - uses domestic currency to purchase a foreign currency at spot rates and invest them in
securities times to mature at the same time as the payable is due
B2-79 example of money market hedge

Transfer pricing - transaction between subsidiaries to minimize taxation while still being legal

Other

SCOR Model (Supply Chain Operations Reference)

• Plan – consists of developing ways to balance demand and supply
(planning inventory levels, purchase of raw materials, etc)
• Source – procure the resources required to meet and manage the infrastructure for the sources
(selecting vendors, collecting vendor payments, quality assurance, etc)
• Make – all activities that turn raw materials into finished products
(manufacturing the product, changes in engineering, performing quality assurance tests)
• Deliver – all activities that get the product to the consumers
(managing orders, forecasting, pricing, A/R, shipping)