Category: 101 concepts

Concept 20: Perfect Competition, Monopolistic Competition, Oligopoly & Monopoly

            Perfect competition Monopolistic competition Oligopoly Monopoly Number of firms Many firms Many firms Few firms Single firm Barriers to entry Very low Low High Very high Nature of substitute products Very close substitutes Substitutes but differentiated Very close substitutes or differentiated No good substitutes Nature of competition Price only Price, marketing & features Price, marketing & features Advertising Pricing power None Some Some to significant Significant Demand curve for the firm Perfectly elastic (Horizontal) Downward sloping, yet elastic Downward sloping Downward Sloping Example Rice market Soap Aircraft manufacturers Utility companies Key points Overall market supply and demand, determine the… Read More

101 concepts

Concept 21: Concentration Measures

The two concentration ratios used to measure the market power of the firm. N-Firm Concentration Ratio Sum of the market shares of the N largest firms in an industry. Market share = firm revenue / total market revenue. Advantage: Simple to calculate and understand. Disadvantages: Ignores barriers to entry, does not directly measure market power or elasticity of demand. Herfindahl-Hirschman Index (HHI) HHI = sum of squared market shares of N largest firms in a market. Ranges from 0 to 1: where 0 indicates perfect competition and 1 indicates a perfect monopoly. Consider the market share of the following firms:… Read More

101 concepts

Concept 22: Gross Domestic Product (GDP)

Gross domestic product refers to the market value of all final goods and services produced in a country over a specific time period, usually one year; government transfers and goods/services without market value are not included. There are two approaches to calculate GDP: The income approach computes GDP as the total income earned by households, businesses and the government in the country during a time period. The expenditure approach Can be computed through the sum-of-value-added approach where GDP is calculated by summing the additions to value created at each stage of production & distribution Can be computed through the value-of-final-output… Read More

101 concepts

Concept 23: Aggregate Supply Curve

The aggregate supply curve shows the positive relationship between GDP and the price level In the very short run, companies change output to some degree without changing prices. In the short run input prices are fixed so businesses expand real output when output prices increase. In the long run aggregate supply is perfectly inelastic (vertical) and represents the potential GDP which is the full-employment level of economic output. Shifts in the SRAS are cause by changes in input prices, expectations about the future, changes in business tax rates, changes in subsidies, currency exchange rates. Shifts in the LRAS are caused… Read More

101 concepts

Concept 24: Business Cycle

Business cycles refer to the fluctuation in economic activity where the real GDP and unemployment vary through time. The four stages of the business cycle are: expansion, peak, contraction and trough. Business cycle characteristics Trough: GDP growth rate changes from negative to positive. High unemployment rate and a moderate or declining inflation. Increasing production to meet the pickup in sales with more flexible methods like overtime or increasing utilization levels. Housing activity starts to pick up coupled with an increase in consumer spending. Expansion: GDP growth rate increases. Reduction in unemployment rate as hiring rises. Inflation may begin to rise…. Read More

101 concepts

Concept 25: Theories of The Business Cycle

Theory Causes of Business Cycles Recommended Policy Neoclassical Changes in technology. No action is necessary; wages and prices adjust through demand-supply characteristics pulling or pushing the economy form expansion or recession level to its full-employment level. Keynesian Shifts in AD due to changes in business expectations can lead to over or under investments. Downward sticky wages prevent a self-recovery from contraction (SRAS curve is slow to move down). Authorities should use fiscal and/or monetary policy to shift the AD curve directly to get the GDP to its full employment level. New Keynesian In addition to Keynesian beliefs, this theory believes… Read More

101 concepts

Concept 26: Unemployment

Unemployment types Frictional unemployment is caused by the time lag necessary to match employees seeking work with employers seeking their skills. Structural unemployment is caused by long-run changes in the economy that eliminate some jobs and require workers to gain new skills to be capable of the available jobs. Cyclical unemployment is caused by changes in the business cycle. Measures of unemployment To be considered unemployed, a person must be actively searching for work. Labor force includes employed and unemployed people. Participation ratio (Activity ratio) = Labor Force / working-age population (Age group: 16 – 64). Unemployment rate is the… Read More

101 concepts

Concept 27: Inflation, Hyperinflation, Disinflation & Deflation

Inflation is the persistent increase in general price levels over time. The inflation rate refers to the percentage increase in price level over a period. Disinflation refers to the decrease in the inflation rate over time i.e. price levels are increasing at a lower rate (e.g. from 6% to 4%). Deflation is the persistent decrease in general price levels over time. Hyperinflation refers to out of control acceleration of inflation which can destroy a country’s monetary system and bring about social and political upheavals.

101 concepts

Concept 28: Inflation Measures

Laspeyres index is the most common type of index; which uses a constant basket of goods and services. The three factors that cause the index to biased upwards are: New goods: Older goods are replaced by newer goods that are initially more expensive. Quality changes: Quality improvements can cause the increase in basket price without any inflation. Substitution: Consumers prefer substitute products. Paasche index uses the current weights of basket to derive the base year basket price while determining the rate of change.  It is used to address the issue arising from substitution. Fischer index is a geometric mean of… Read More

101 concepts

Concept 29: Monetary v/s Fiscal Policy

Both policies are used to maintain stable prices and promote positive economic growth. Monetary policy: Refers to central bank actions aimed at influencing the money supply and credit in an economy through interest rates, repo rates, open market operations and other methods. Expansionary or accommodative or easy monetary policy: Increases money supply and credit in the economy. Contractionary or restrictive or tight monetary policy: Decreases money supply and credit in the economy. Fiscal policy: Refers to government actions aimed at influencing economic activity through taxation and spending. Balanced budget: Tax revenues equal government spending. Budget surplus: Tax revenues exceed government… Read More

101 concepts