Economic Concepts
Perfect Competition
(1) An industry is perfectly competitive if (a) It is composed of a large number of sellers, each of which are too small to affect the price of the product or service (b) The firms sell a virtually identical product (c) Firms can enter or leave the market easily (no barriers to entry) (2) In this market, the firm's demand curve is perfectly elastic (horizontal). The firm can sell as many goods as it can produce at the equilibrium price but no goods at a higher price. The firm is a price taker. The market demand curve is downwards sloping. Therefore, demand will increase if all suppliers lower prices and will increase if all suppliers raise their prices. (3) In this market there is no product differentiation and the key to being successful is being the lowest cost producer in the marketplace. Innovation is restricted to attempting to make the production or sales process more efficient. (4) Theoretically, no economic profits can be generated in the long run. The price will reflect the costs plus the normal profit of the most efficient producers. (5) In a perfectly competitive market there is no product differentiation and the key to being successful is being the lowest cost producer in the marketplace. Innovation is restricted to attempting to make production, distribution, and sales processes more efficient.
- Consumer Price Index (CPI) - The Producer Price Index (PPI) - The GDP Deflator
(1) The consumer price index (CPI) measures the price that urban consumers paid for a fixed basket of goods and services in relation to the price of the same goods and services purchased in some base period. (2) The producer price index (PPI) measures the prices of finished goods and materials at the wholesale level. (3) The GDP deflator measures the prices for net exports, investment, government expenditures, and consumer spending. It is the most comprehensive measure of price level.
Elasticity of Demand (ED)
(change in quantity demanded / prechange quantity demanded) / (change in price / prechange price) can be expressed as well as ED = % change in quantity demanded / % change in price
The U.S. balance of payments is a summary accounting of all U.S. transactions with all other nations for a calendar year. The United States reports international activity in three main accounts:
1. Current account -- Reports the dollar value of amounts earned from the export of goods and services, amounts spent on import of goods and services, income from investments, government grants to foreign entities, and the resulting net (export or import) balance. 2. Capital account -- Reports the dollar amount of capital transfers and the acquisition and disposal of nonproduced, non-financial assets. Thus, it includes inflows from investments and loans by foreign entities, outflows from investments and loans U.S. entities made abroad, and the resulting net balance. Examples include funds transferred in the purchase or sale of fixed assets, natural resources, and intangible assets. 3. Financial account -- Reports the dollar amount of U.S.-owned assets abroad, foreign-owned assets in the United States, and the resulting net balance. It includes both government assets and private assets and both monetary items (e.g., gold, foreign securities) and nonmonetary items (e.g., direct foreign investments in property, plant, and equipment).
Multiplier effect --
1. Factors that cause a shift in aggregate demand have a ripple effect through the economy. For example, an increase in investment spending by business results in certain increases in personal disposable income, which further spurs demand. This cascading effect on demand is called "the multiplier effect." Simply put, a change in a single factor that causes a change in aggregate demand will have a multiplied effect on aggregate demand. 2. The multiplier effect is caused by, and can be calculated, using the marginal propensity to consume. Recipients of additional income will spend some portion of that new income—their marginal propensity to consume a portion—which will provide income to others, a portion of which they will spend, and so on. 3. The extent of the multiplier effect can be measured as: Multiplier Effect = Initial Change in Spending × (1/(1 − MPC))
Economic Resources
1. Labor 2. Capital (financial resources and man made resources) 3. Natural resources
Leakages and Injections
1. Leakages - The amounts of individual income that are not spent on domestic consumption are called "leakages." As shown in the model, these leakages consist of taxes, savings, and indirectly, imports; 2. Injections - The amounts of expenditures not for domestic consumption added to the domestic production are called "injections." As shown in the model, these injections consist of government spending/subsidies, investment expenditures and exports.
Monetary Policy
1. Reserve requirements. When a bank lends money, it gives the borrower a check drawn on the bank itself. The Federal Reserve controls a bank's ability to issue check-writing deposits by imposing a reserve requirement on checking deposits. The institution must hold in reserve (much of which is on deposit at a Federal Reserve Bank) a certain percentage of their total checking deposits. The Federal Reserve can influence interest rates by changing the reserve requirements and therefore increasing or decreasing the supply of money. However, making changes in reserve requirements is rarely done 2. Open-market operations. A more common instrument of monetary policy is open-market operations (by the Federal Open-Market Committee), which involves the purchase or sale of government securities using the Federal Reserve Bank deposits. If the Federal Reserve purchases government securities, they are able to increase the monetary supply and, therefore, put downward pressure on interest rates. When a central bank is purchasing government securities and expanding the money supply, it is called an expansionary open-market operation. If a central bank is selling government securities it is said to be pursuing a contractionary open-market operation, because this reduces the money supply. 3. The discount rate. When a bank has a reserve deficiency it may borrow funds from a Federal Reserve Bank. By setting the discount rate for such borrowing, the Federal Reserve can influence interest rates in the economy.
Genernal Agreement on Tariffs and Trade (GATT)
1. The original GATT and subsequent negotiated variations are multilateral agreements for the purpose of: a. Liberalizing and encouraging trade by eliminating tariffs, subsidies, import quotas and other trade barriers b. Harmonizing intellectual property laws, and reducing transportation and other costs of international business as a result of group undertakings 2. The World Trade Organization (WTO) was subsequently established (1995) to encompass GATT and related international trade bodies. The WTO also serves to "police" the international trading system
Transaction risk can cause volatility in reported earnings that motivates management to use strategies to minimize the company's exposure. These strategies include:
1.Hedging in the forward exchange market. Companies can use forward contracts to hedge foreign currency transactions. As an example, assume that Company X has agreed to deliver 20,000 units of product in six months to a Japanese company who will pay for the product in yen. To mitigate the risk of losses from devaluation of the yen, Company X could enter into a forward contract to sell the yen for delivery in six months. This contract in effect locks in the price for the sale in terms of U.S. dollars. 2. Money market hedge. A second way to eliminate the transaction risk described in a. is to borrow money in yen when the agreement is executed. This strategy immediately converts the yen to U.S. dollars. Then, when the yen are collected from the sale, the loan can be repaid resulting in no foreign exchange loss or gain over the six-month period. 3. Currency futures market hedge. Futures markets exist that allow a company to purchase or sell contracts to deliver foreign currency. These contracts can be used to hedge a foreign currency transaction much like a forward contract. However, because futures contracts are standard in nature and traded on organized exchanges, they can be readily bought and sold.
U.S. share of worldwide exports
10%
Business Cycle
A business cycle is a fluctuation in aggregate economic output that lasts for several years. Business cycles are recurring but vary in terms of both length and intensity. They are depicted as a series of peaks and troughs. A peak marks the end of a period of economic expansion and the beginning of a recession (contraction) while a trough marks the end of a recession and the beginning of an economic recovery (expansion). The chart below illustrates the nature of the business cycle
A put is an option?
A put is an option that gives its owner the right to sell a specific security at fixed conditions of price and time. A put option is a contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying asset (e.g., security) at a specified price within a specified time.
Aggregate supply curve
A. Classical Aggregate Supply Curve -- This curve is completely vertical, reflecting no relationship between aggregate supply and price level. B. Keynesian Aggregate Supply Curve -- This curve is horizontal up to the (assumed) level of output at full employment, 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. C. 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. Changes other than price level will affect aggregate supply and shift the aggregate supply curve under any of the theoretical assumptions described above. Factors that may change the position of the supply curve include: A. Resource availability -- An increase in economic resources (e.g., increase in working age population) will shift the curve outward (to the right); a decrease would have the opposite effect; B. Resource cost -- A decrease in the cost of economic resources (e.g., lower oil prices) will shift the curve outward (to the right); an increase will have the opposite effect; C. Technological advances -- (e.g., more efficient production processes) will shift the curve outward (to the right). Government prohibitions on the use of an existing technology, in the absence of a comparable alternative, will shift the curve inward (to the left).
Strategic Planning Process
A. Establish the entity's mission, values and objectives. B. Assess the entity and the environment in which it operates; also called environmental scanning. - External = Pest and Five Forces Model - Internal = SWOT C. Establish goals. - Goals should be (SMART) specific, measurable, attainable, relevant, and time-bound D. Formulate strategies. - In a sense, it is the linkage between what an entity wants to achieve and how it seeks to accomplish its goals. E. Implement strategies. - The entity would develop the programs and activities needed to carry out its strategy F. Evaluate and control strategic activities
The World Bank and The International Monetary Fund
A. The World Bank (formally the International Bank for Reconstruction and Development) -- With the objective of promoting general economic development, (including lending to developing countries) primarily for infrastructure, agriculture, education and similar development needs. B. The International Monetary Fund (IMF) -- With the objective of maintaining order in the international monetary system, largely by providing funds to economies in financial crises, including: 1. Currency crisis—When speculation in the exchange value of a currency causes a dramatic depression in its value 2. Banking crisis—When a loss in confidence in the banking system of a country leads to a run on banks 3. Financial debt crisis—When a country cannot meet its foreign debt obligations
Michael Porter developed a model for industry analyses that focuses on five forces:
A. Threat of entry into the market by new competition B. Threat of substitute goods or services C. Bargaining power of buyers (customers) of the industry good or service D. Bargaining power of suppliers of the inputs used in the industry E. Intensity of rivalry
Aggregate demand curve
An aggregate demand curve depicts the demand of consumers, businesses, and government as well as foreign purchasers for the goods and services of the economy at different price levels. The aggregate demand curve looks like the demand curve for a single product; it is inversely related to price level. The price level affects aggregate demand for several reasons.
Resources-based model
An alternative variation of the strategic planning process, especially as it relates to strategy formulation, is the Resources-Based Model (RBM). 1. RBM assesses each entity as a unique collection of resources and capabilities. The uniqueness of the set of resources and capabilities is the basis on which an entity should develop its strategy. 2. Using the RBM approach, the following set of interrelated activities would be carried out in developing an entity's strategy: a. Identify the entity's resources and its strengths and weaknesses. b. Determine the entity's capabilities; that is, what can the entity do better than its competitors? c. Determine the potential of the entity's resources and capabilities in terms of competitive advantage(s). d. Locate an attractive industry or market. e. Select a strategy that best allows the entity to use its resources and capabilities to take advantage of opportunities in the industry or market.
Tariffs and Quotas
An import tariff is a tax on an imported product. An import quota is a restriction on the amount of a good that may be imported during a period.
Collusive pricing
Collusive pricing occurs when the few firms in an oligopolistic market (or industry) conspire to set the price at which a good or service will be provided. Such collusion typically is carried out to establish a price higher than would exist under normal competition. Overt collusive pricing is illegal in the U.S.A.
Monopolistic competition
Common in the U.S. economy, especially in general retailing where there are many firms selling similar (but not identical) goods and services. Because their products are similar, monopolistic competitive firms engage in extensive non-price competition, including advertising, promotion, and customer service initiatives, all of which are common in the contemporary U.S. economy. Some examples are Fast Food, Cosmetics
The two basic generic strategies that provide competitive advantage identified by Porter are: Porter develops a third strategy based on competitive scope:
Cost Leadership Strategy -- 1. Under this strategy, an entity will seek to be the low cost provider in an industry for a given level of output. 2. An entity will sell its product or service either at the average industry price and earn a profit higher than that of other competitors in the industry or below the average industry price so as to gain market share. Differentiation Strategy -- 1. Under this strategy, an entity will seek to develop a product or service that offers unique features that are valued by customers, and that those customers perceive to be better than or different from the products of competitors in the industry. 2. An entity expects that the value added by the quality or uniqueness of the product or service will allow the entity to charge a premium price which will more than cover the extra cost of providing the good or service. a. Features b. Functionality c. Durability d. Service support Focus Strategy -- 1. Under this strategy, an entity will focus on a narrow segment of an industry (a "niche"), and within that segment, seek to achieve either a cost advantage or differentiation. 2. An entity seeks to identify a distinct subgroup within an industry and focuses on providing goods or services that meet the distinctive needs of that subgroup. 3. Characteristics of entities following a focus strategy -- Entities that successfully carry out the focus strategy typically have the following kinds of strengths: a. Outstanding market research and understanding, especially of the target subgroup b. Ability to tailor product or service development strength to the target subgroup c. High degree of customer satisfaction and loyalty
Oligopoly
Exists in markets where there are few providers of a good or service. Such markets exist for a number of industries in the U.S. The markets for many metals (steel, aluminum, copper, etc.) are oligopolistic. So, also, are the markets for such diverse products as automobiles, cigarettes and oil. Firms in oligopolistic markets tend to avoid price competition for fear of creating a price war, but do rely heavily on non-price competition. However, during economic downturns and periods of overcapacity, price competition in an oligopolistic market can turn fierce. The kinked-demand-curve model seeks to explain the price rigidity in oligopolistic markets. This model holds that the demand curve is kinked down at the market price because other oligopolists will not match price increases but will match price decreases. Generally, in the oligopolistic market there is a price leader that determines the pricing policy for the other producers. Some examples are oil, cigarettes, airplanes.
Monopoly
Exists where there is a single provider of a good or service for which there are no close substitutes. Monopolistic firms do exist in the U.S. economy. Historically, public utilities have been permitted to operate as monopolies with the justification that market demand can be fully satisfied at a lower cost by one firm, rather than by two or more firms. To limit the economic benefits of such monopolies, governments generally impose regulations which affect pricing, output and/or profits. Monopolies also can exist as a result of exclusive ownership of raw materials or patent rights. In most cases, however, exclusive ownership monopolies are of short duration as a result of the development of close substitutes, the expiration of rights, or government regulation
political risk
Foreign direct investments are usually quite large and many are exposed to political risk. Repatriation (transfer) of a foreign subsidiary's profits may be blocked. In the extreme case a foreign government may even expropriate (take) the firm's assets. Strategies to reduce risk include the use of joint ventures, financing with local-country capital, and the purchase of insurance.
Fiscal Policy
Government can also affect economic activity. Fiscal policy influences taxes, subsidies, and government spending. As an example, a reduction of taxes increases personal disposable income that will serve to stimulate economic activity. Increased government spending also serves to stimulate the economy. An increase in deficit, either due to an increase in government spending or to a decrease in taxes, is called a fiscal expansion. On the other hand, increase in taxes to reduce a deficit is called fiscal contraction
Interpretation of the demand elasticity coefficient
If ED is greater than 1, demand is said to be elastic (sensitive to price changes). If ED is equal to 1, demand is said to be unitary (not sensitive or insensitive to price changes). If ED is less than 1, demand is said to be inelastic (not sensitive to price changes). The price elasticity of demand coefficient allows management to calculate the effect of a price change on demand for the product. In the example above, a 10% decrease in the price of a hot dog results in a 13.34% (10% × 1.334) increase in demand. The elasticity of demand is greater for a product when there are more substitutes for the good, a larger proportion of income is spent on the good, or a longer period of time is considered. For example, the demand for luxury goods tends to be more elastic than for necessities.
marginal propensity to save (MPS) and Marginal propensity to consume (MPC)
MPS - is the percentage of additional income that is saved. Since a consumer can either spend or save money, the marginal propensity to consume plus the marginal propensity to save is equal to one as shown below. The marginal propensity to save is calculated as follows: Change in savings / Change in income MPC - describing how much of each additional dollar in personal disposable income that the consumer will spend. The marginal propensity to consume is calculated as follows: Change in consumption / Change in income
Does any market structure assure a firm of a profit in either short or long run.
No market structure
The percentage change in an account balance is calculated as follows:
Percentage change = (current balance − prior balance) ÷ prior balance
Profit or loss in market structures depends on
Price and Average Total Cost (ATC)
Price ceiling and Price floor
Price ceiling. A price ceiling is a specified maximum price that may be charged for a good. If the price ceiling is set for a good below the equilibrium price, it will cause good shortages because suppliers will devote their production facilities to producing other goods. Price floor. A price floor is a minimum specified price that may be charged for a good. If the price floor is set for a good above the equilibrium price, it will cause overproduction and surpluses will develop.
Product Differentiation
Product differentiation. Product differentiation involves modification of a product to make it more attractive to the target market or to differentiate it from competitors' products. Products may be differentiated in the following ways: a. Physical characteristics (e.g., higher quality, additional features, etc.) b. Perceived differences (e.g., advertising, brand name, etc.) c. Support service differences (e.g., exchange policies, assistance, after-sale support, etc.) By differentiating its products, the firm may be able to charge higher prices than its competitors or higher prices for the same products sold in different market segments.
If the dollar price of the euro rises, which of the following will occur?
The dollar depreciates against the euro This answer is correct because if the euro increases in value in terms of dollars, the dollar depreciates
The discount rate
The rate that the central bank charges for loans granted to commercial banks
Spot rates and forward rates.
The spot rate for a currency is the exchange rate of the currency for immediate delivery. Forward rate is the exchange rate for a currency for future delivery.
In the short run, firms have both fixed and variable costs.
Total fixed costs are those that are committed and will not change with different levels of production. An example of a fixed cost is the rent paid on a long-term lease for a factory. Variable costs are the costs of variable inputs, such as raw materials, variable labor costs, and variable overhead. These costs are directly related to the level of production for the period. In the short run, costs behave as follows: • Average fixed cost (AFC)—Fixed cost per unit of production. It goes down consistently as more units are produced. • Average variable cost (AVC)—Total variable costs divided by the number of units produced. It initially stays constant until the inefficiencies of producing in a fixed-size facility cause variable costs to begin to rise. • Marginal cost (MC)—The added cost of producing one extra unit. It initially decreases but then begins to increase due to inefficiencies. • Average total cost (ATC)—Total costs divided by the number of units produced. Its behavior depends on the makeup of fixed and variable costs.
The foreign exchange risk for a multinational company is divided into two types
Translation risk is the exposure that a multinational company has because its financial statements must be converted to its functional currency. Transaction risk relates to the possibility of gains and losses resulting from income transactions occurring during the year. The example above involving the sale of goods for a receivable in euros illustrates transaction risk. Transaction risk can cause volatility in reported earnings that motivates management to use strategies to minimize the company's exposure.
International purchasing power effect
When domestic price levels increase relative to foreign currencies, foreign products become less expensive causing an increase in imported goods and a decrease in exported goods. This decreases the aggregate demand of domestic products.
Indifference Curve
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.
Causes of Inflation
a. Demand-pull inflation occurs when aggregate spending exceeds the economy's normal full-employment output capacity. It generally occurs at the peak of a business cycle and is characterized by real GDP exceeding potential GDP. Because labor is short companies bid up the price and inflation occurs. b. Cost-push inflation occurs from an increase in the cost of producing goods and services. It is usually characterized by decreases in aggregate output and unemployment because consumers are not willing to pay the inflated prices.
Two major global capital markets
a. Eurodollar market Eurocurrency market (Euromarket) i. Eurodollars are created when a U.S. dollar deposit is made outside the United States and is maintained in U.S. dollars. ii. Eurodollars provide short-term and intermediate-term loans, less than five years in maturity, denominated in U.S. dollars. iii. Provides an alternative to domestic banks for financing by international firms. iv. Generally, the cost of borrowing in the Euromarket will be less than through a domestic bank because such lending activity is less regulated. b. International bond market (Eurobonds) i. Offers long-term loans outside the home country of the borrower ii. Bonds are offered in most major currencies iii. Bonds avoid most government regulation
Types of Unemployment
a. Frictional Unemployment: Members of the labor force who are not employed because they are in transition or have imperfect information. For example, members of the labor force who are in search of a job that is in line with their talents (education, skills, experience, etc.), or who are moving to a different part of the country. b. Structural Unemployment: Members of the labor force who are not employed because their prior types of jobs have been greatly reduced or eliminated, and/or because they lack the skills needed for available jobs. For example, the advent of computers and accounting software has greatly reduced the demand for bookkeepers in the economy. c. Seasonal Unemployment: Members of the labor force who are not employed because their work opportunity regularly and predictably varies by the season of the year. For example, school teachers are regularly unemployed during summer months when school is not in session. (This category sometimes is viewed as a kind of temporary structural unemployment.) d. Cyclical Unemployment: Members of the labor force who are not employed because a downturn in the business cycle (i.e., an economic contraction) has reduced the current need for workers.
Inflation and Deflation
a. Inflation is the rate of increase in the price level of goods and services, usually measured on an annual basis. b. Deflation is a term used to describe a decrease in the price levels. While Japan has experienced deflation in prices recently, the United States has not experienced an annual rate of decrease in price level since the 1930s. Deflation is very damaging because businesses do not want to borrow money and pay it back with money that has more purchasing power, and they do not want to invest in plant and equipment given that the cost of plant and equipment is declining.
following factors will affect the exchange rate of a particular currency:
a. Inflation. Inflation tends to deflate the value of a currency because holding the currency results in reduced purchasing power. b. Interest rates. If interest returns in a particular country are higher relative to other countries, individuals and companies will be enticed to invest in that country. As a result there will be increased demand for the country's currency. c. Balance of payments. Balance of payments is used to refer to a system of accounts that catalogs the flow of goods between the residents of two countries. If country X is a net exporter of goods and therefore has a surplus balance of trade, countries purchasing the goods must use country X's currency. This increases the demand for the currency and therefore its relative value. d. Government intervention. Through intervention (e.g., buying or selling the currency in the foreign exchange markets), the central bank of a country may support or depress the value of its currency. e. Other factors. Other factors that may affect exchange rates are political and economic stability, extended stock market rallies, or significant declines in the demand for major exports
Real interest rate vs Nominal interest rate
a. Real interest rate—Interest rate in terms of goods. These rates are adjusted for inflation. b. Nominal interest rate—Interest rate in terms of the nation's currency. These are the rates that are quoted by financial institutions and in the financial pages of newspapers (also the rate for U.S. Treasury obligations). The difference between the real rate and the nominal rate is the inflation premium, which represents the expected inflation rate. The higher the expected inflation rate the larger the inflation premium. The interest rate charged to a particular business or individual will be higher than the nominal rate due to credit risk, which is the risk that the firm will not pay the interest or principal of the loan.
SWOT Analysis
develops a profile of the internal S trengths and W eaknesses of the entity, and the O pportunities and T hreats faced by the entity in the external environment.
Effective management must analyze and forecast the general environment to identify opportunities and threats to the firm. In doing so, the following techniques are used:
a. Scanning—A study of all segments in the general environment. The objective is to predict the effects of the general environment on the firm's industry. Management can use this information to modify its strategies and operating plans. Scanning of the general environment is critical to firms in volatile industries. Sources of information for scanning include trade publications, newspapers, business publications, public polls, government publications, etc. b. Monitoring—A study of environmental changes identified by scanning to spot important trends. As an example, the trend in aging of the population in this country would definitely be important to firms that provide services to retired individuals. Effective monitoring involves identifying the firm's major stakeholders (e.g., customers, investors, employees, etc.). c. Forecasting—Developing probable projections of what might happen and its timing. As an example, management might attempt to forecast changes in personal disposable income or the timing of introduction of a major technological development. d. Assessing—Determining changes in the firm's strategy that are necessary as a result of the information obtained from scanning, monitoring, and forecasting. It is the process of evaluating the implications of changes in the general environment on the firm.
Globalization of Capital Markets consist of:
a. Stock market b. Bond market c. Money market
There are two ways to calculate GDP
a. The income (output) approach adds up all incomes earned in the production of final goods and services, such as wages, interest, rents, dividends, etc. b. The expenditure (input) approach adds up all expenditures to purchase final goods and services by households, businesses, and the government. Specifically, it includes personal consumption expenditures, gross private investment in capital goods (e.g., machinery). It also includes the country's net exports. The tables below illustrate these computations.
Official Unemployment, natural rate of unemployment, full employement
a. The official unemployment rate is the percentage of the labor force that is not employed, not the percentage of the population that is not employed. The calculation would be: Unemployment Rate = Unemployed (including all categories)/Size of Labor Force b. The natural rate of unemployment is the percentage of the labor force that is not employed as a result of frictional, structural and seasonal unemployment. The calculation would be: Natural Rate of Unemployment = Frictional + Structural + Seasonal Unemployed/Size of Labor Force c. Officially, full employment is when there is no cyclical unemployment. Even with frictional and structural unemployment, officially full employment can exist. Said another way, if unemployment is due solely to frictional, structural and seasonal causes (i.e., the natural rate of unemployment), the economy is in a state of full employment.
Business risks
are conditions that threaten management's ability to execute strategies and achieve the firm's objectives. A comprehensive understanding of the firm's internal and external environments is necessary for management to understand the firm's present condition and its business risks. This understanding includes comprehension of both the general and industry environments.
PEST analysis
is an assessment of the Political, Economic, Social and Technological elements of a macro-environment. Its purpose is to provide an understanding of those elements of an environment, typically a country or region, in which a firm operates or is considering operating.
Where do firms seek to produce in all market structures
where marginal revenue = marginal cost
- Nominal Gross Domestic Product (GDP) - Real GDP - Potential GDP - Gross National Product (GNP)
• Nominal Gross Domestic Product (GDP)—The price of all goods and services produced by a domestic economy for a year at current market prices. • Real GDP—The price of all goods and services produced by the economy at price level adjusted (constant) prices. Price level adjustment eliminates the effect of inflation on the measure. (Gross Domestic Product (GDP Deflator) -- The GDP deflator is a comprehensive measure of price levels used to derive real GDP. The calculation would be: Real GDP = (Nominal GDP/GDP Deflator) × 100 ) • Potential GDP—The maximum amount volume of production that could take place in an economy without putting pressure on the general level of prices. The difference between potential GDP and real GDP is call the GDP gap. When it is positive it indicates that there are unemployed resources in the economy and we would expect unemployment. Alternatively, when it is negative, it indicates that the economy is running above normal capacity and prices should begin to rise. • Gross National Product (GNP)—The price of all goods and services produced by labor and property supplied by the nation's residents.
