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ECON 2200 Test 2
n/a
110
Economics
Undergraduate 2
03/05/2012

Additional Economics Flashcards

 


 

Cards

Term
What was the 1890 US census the first to report?
Definition
$ value of manufacture output> $ value of agric output
Term
Where was labor force expansion the greatest?
Definition
Manufacturing, especially railroads...agriculture was still growing though. 
Term
What is value added?
Definition
Measures the total value of output minus material costs; value added to products by manufacturing
Term
What product had the largest percent change in value from 1860-1910?
Definition
Mens shoes, they began to standardize sizes and mass produce.
Term
What does value added per worker reflect? (2)
Definition

1. Labor

2. Capital Productivity

Term
By 1900 what was the US the world leader in? Who was second?
Definition

Output of manufactured goods...Germany is second

 

Term
Table 17.3: Changes in the #1 ranked good between 1860 and 1910
Definition

1. Machinery, (used to be cotton textiles manufacturing)

2. Lumber

Flour and meal fall off of the list (low income elasticity)

Term
Income Elastic/Inelastic
Definition

Elastic= Luxuries, >1, double income...consume more than double

Inelastic= Necessity, <1, double income...consume less than double

Term
Examples of invention and innovation and how did they help manufacturing growth?
Definition

Invention: typewriter, machines to seal cans, etc.

Innovation: Refrigerated rail cars, long distance pipelines

ALLOWED FOR MASS PRODUCTION

Term

New methods for steel (2):

 

Definition

1. Bessemer Process: very quick, did not allow for adequate testing...flaws

2. Open-Hearth process: Took longer, but better quality. Cost advantage

(By 1900 primary way of making steel)

Term
Two components of mass production:
Definition

1. Standardized interchangeable parts

2. Continuous flow of operations or assembly line

Term
How does mass production lead to economies of scale?
Definition
Specialization which causes per unit costs to decrease
Term
Mass production on the shoe/clothing industry?
Definition
Every shoes of the same style/size made has the same sole
Term
McCallum management principles (3):
Definition

1. Managers should make decisions only on what they oversee

2. Firms should engage in internal auditing to ID problems and suggest solutions

3. Routine performance evaluations for all employees, even managers

Term
What industry was the first to use management?
Definition
Railroad companies
Term
What is Scientific Management?
Definition
Train employees, rather than let them train themselves. Make workers as efficient as possible
Term
What did scientific management lead to?
Definition
Task specialization and efficiency
Term
How did scientific management techniques impact workers? (4)
Definition

1. Learn more in efficient environment

2. fair and higher wage allocation based output

3. Workforce care program

4. Injured workers are not productive workers

5. Pay based on output

OVERALL: POSITIVE

Term
Advantages of a corporation (3):
Definition

1. Unlimited life

2. Financial capital through stock sales

3. Limited liability

Term

Growth of big businesses:

 

Definition
Falling transportation costs (RR) lead to national markets so firms grew to satisfy expanding market, also urbanization
Term
Legal, Financial, and economic incentives for corporate growth:
Definition

Financial: Growth in commercial banks...find investors/shareholders and gain access to financial capital

Legal: easier and less costly to obtain corporate charter

Economic: output increases, avg. cost decreases so firms could benefit by becoming larger

Term
Economic profit formula(s): (3)
Definition

1. TR-TC

2. (P*Q)-(ATC*Q)

3. Q(P-ATC)

Term
If PRICE falls below ATC than the company is incurring...
Definition
ECONOMIC LOSS
Term
How did firm/market expansion effect competition?
Definition
Only yields profits if you can sells large quantity, must protect market to gain as much monopoly power as possible
Term
What is the selling price in perfect competition? Monopoly?
Definition

1. PC= sell at market equilibrium price and quantity

2. M= higher price, producing less (MR=MC, highest price consumer is willing to pay)

 

Term
How does reduced competition benefit firms?
Definition
Allows them to control the amounts of output and prices and not have to compete with other firms
Term
What type of firm creates deadweight loss?
Definition
Monopoly!
Term
Gentlemen's Agreements:
Definition

1. Price fixing

2. One firm would agree with another firm that neither of them would charge a price above a set amount

(closer to Monopoly price than perfectly competitive)

Term
Pooling arrangements (cartels)
Definition

1. Divide up regions and only sell in your own territory

2. Restrictions on output

Term
Disadvantage of Gentlemen's agreements and pooling arrangements:
Definition
Illegal, someone would usually cheat and produce more or set a lower price to earn a SR profit...ultimately lead the market back down to competitive eq.
Term
What is a trust?
Definition
A legal arrangement by which trustee holds the property interest of another person
Term
What is a holding company?
Definition
A firm that exists to hold the shares of other companies
Term
What is the problem with a holding company?
Definition
When they start to exercise monopoly powers by purchasing shares of competing firms
Term
What were trusts and holding companies referred to as?
Definition
"multi-firm monopolies"
Term
What is a horizontal merger?
Definition
A combination of firms that produce similar/identical products. Reduces competition within the industry.
Term
What is excess capacity?
Definition
producing at LESS THAN capacity. Excess ability to produce that you are unable to utilize!
Term
Why were horizontal mergers popular in the late 19th century?
Definition
Increased competition (P dec.) and excess capacity (avg. cost inc.) prices dropped below per unit production cost so firms used mergers to keep from failing
Term
Standard Oil merger:
Definition
Lots of excess capacity, Rockefeller bought up refineries and shut down the least efficient firms allowing the remaining firms to operate at FULL capacity. 
Term
Problems with Standard Oil:
Definition
Rockefeller used trust to consolidate industry (ILLEGAL), so after court orders it became a holding company for 20-30 years
Term
Why were the owners of firms acquired by Rockefeller often glad to sell?
Definition
They were struggling and dealing with excess capacity and falling prices
Term
Explain Rockefeller's predatory pricing:
Definition
He paid firms more than what they were worth based on long run estimates of shutting them down in order to control the market
Term
What is a vertical merger?
Definition
The combination of firms that formerly bought from/sold to each other; combines stages of production as departments within a single firm
Term
Forward vertical merger:
Definition
A manufacturer purchases or adds a wholesale or retail unit (Singer sewing machine co.)
Term
Backward vertical merger:
Definition
A manufacturer purchases or adds a unit that provides inputs (Carnegie Steel co.)
Term
Urbanization lead to increased demand for...(2)
Definition

1. Processed consumer goods

2. Infastructure

Term
Processed consumer goods
Definition
firms began to both produce and market (forward vertical merger)
Term
Infrastructure:
Definition

firms producing the inputs consolidated the ownership of resources (backward vertical merger)

Ex: steel industry

Term

Why would firms that rely on continuous flow of operations be inclined to vertically merge?

 

Definition
They must change flow of inputs which is an incentive to vertically merge. 
Term
Carnegie Steel vertical merge (3):
Definition

1. Backwards vertical merger

2. Net assets went from 700 mil. to 1.4 bil.

3. Controlled half of steel making in US

Term
Cigarettes vs. Cigar industries (Alfred Chandler):
Definition

1. Cigarettes could be mass produced (continuous stream of inputs), lead to vertical integration

2. Cigars had to be rolled (could not be mass produced)

Term
Do the markets of the Reunification era generally exhibit the price and output trends that economists associate with monopoly markets?
Definition
No because they usually expect monopolies to increase prices and decrease quantity of output, which was not the case.
Term
Why P and Q were not following monopoly trends (6):
Definition

1. Firms grew, but so did markets (monopoly power depends on size of firm relative to market)

2. IN some local markets, competitions actually increased (trans. costs dec., face more comp.)

3. Few firms managed to maintain monopoly power (SR monopoly power is often eroded by entrance of competing firms in LR)

4. Most markets were closer to oligopolies (few firms that produce similar products and services)

5. Diversification meant availability of substitutes (more subs. reduce market power of monopoly)

6. Technological change meant the opening of barriers to entry (tech. change reduces MC, which benefits both existing firms and new entrants) 

Term
In the Reunification era competition actually increased/decreased?
Definition
INCREASED
Term
Sherman Antitrust Act (1890):
Definition

Declared illegal every contract combination in the form of trust or conspiracy in the restraint of trade among the states

**Did not clearly define types of activities that are illegal...left up to judges**

Term
United States vs. E.C. Knight
Definition
Knight took control of ~98% of nations sugar refining industry but Sherman could not interfere because Knight MANUFACTURED, not TRADED. 
Term
United States vs. Addyston Pipe and Steel:
Definition

Companies were working together as a merger to control the industry but were in "reasonable" restraint of trade so the did not violate SAA.

**Court made it clear that SAA did apply to collusive agreements among firms who were supposed to be in competition, however mergers were still legal

Term
United States vs. US steel:
Definition
-Judge found that the company possessed neither the power nor intent to exert monopoly power even though it controlled 50% of output. Merger was acceptable because it was not deemed predatory
Term
What two companies to Roosevelt dissolve?
Definition

1. Standard Oil

2. American Tobacco Company

Term
Why do economic historians believe that the courts rulings actually encouraged firms to merge?
Definition
In US vs. Addyston Pipe and steel the court said SAA did apply to collusive agreements between competing firms, but merger between firms was still legal. 
Term
How did Standard Oil Co. gain power (2)?
Definition

1. RR rebates

2. Acquiring refining companies through price wars

Term
What was the purpose of the Clayton act (1914)?
Definition
To remove ambiguities in SAA and force the courts to take a stronger action against big corporations
Term
What did the Clayton Act make illegal (4)?
Definition

1. Price discrimination among buyers

2. Exclusive selling and tying contracts

3. Acquiring stock of a competitor

4. Interlocking directories

Term
What was the purpose of the federal trade commission?
Definition
to enforce the Clayton act but was weakly drawn so they could not take action unless there was injury to customers.
Term
Were the Clayton act and Federal Trade commission effective?
Definition
NO
Term
What is a fractional reserve banking system?
Definition
Commercial banks only hold a portion of deposits as reserves
Term
What is a bank run?
Definition
When depositors lose confidence in a bank and they withdraw their money in fear that the bank does not actually have it. 
Term
What is the bimetallic standard? When?
Definition
The mint coined both gold and silver coins of equal monetary value in 1792 and was the value of silver to gold. 15:1 means that gold is 15 times more valuable than silver and silver is in circulation.
Term
When was the OVERVALUED metal circulated?
Definition
When the market ratio deviated from the mint ratio.
Term
Mint ratio of 15:1 and market ratio of 16:1...which is overvalued and circulated?
Definition

over: silver

circulated: silver

Term
Mint ratio of 15:1 and market ratio of 14:1...which is overvalued and circulated?
Definition

over: gold

circulated: gold

Term
What is the dual banking system?
Definition

Charted banks by both states and federal government and each issued their own bank notes (bank created paper money)

-No interstate branch banking was allowed so both bank operations were limited to states

Term
Goals for the National Bank Act (2):
Definition

1. Congress wanted to stimulate the sale of US Treasury Bonds to help finance the civil war

2. Conservatives in congress wanted to provide uniform national currency, also decentralizing control of money supply

Term
Why were national banks attractive to depositors (2)?
Definition

1. Legal reserve requirement (must hold % of deposits)

2. Double liability on stock

-operations limited to one state

Term
Why congress implemented a tax on state banks' notes?
Definition
 To encourage National bank charters
Term
Impact on banks from tax on state banks' notes:
Definition

SR: decreased number of state banks and increased number of national banks

LR: State banks began to increase and then had more state banks than national banks and greater total assets

**Reduced the need for bank notes by creating checking accounts to avoid tax

Term
Why did national banks increasingly issue demand deposits (checking accounts) rather than bank notes in the late 19th century?
Definition
Interest rates on US bonds were decreasing, thus making the return on treasury bonds lower and thus were less inclined to hold treasury bonds. Instead relied heavily on checking accounts.
Term
What are investment banks?
Definition
A financial institution that raises capital, trades in securities and manages corporate mergers and acquisitions.
Term
Why did investment banking grow more rapidly in the US than England?
Definition
because of limits on interstate banking. Investment emerged as an alternate way for firms to access financial capital
Term
What is a "lender of last resort"?
Definition
An institution that lends to banks when banks don't have adequate reserves to meet the withdrawals of its depositors. Can help stop bank runs
Term
What is a clearinghouse?
Definition
If all of the banks have an account at some central place, at the end of the day if anyone has check from any of those banks, then the clearinghouse sends these checks and notes to the fed to clear all balances
Term
How does a clearinghouse make the banking system operate more efficiently?
Definition
Without one, every balance has to be cleared individually within each bank.
Term
Problems with the dual banking system (7)?
Definition

1. No centralized control

2. Limited restrictions on National Banks

3. Regulations on State banks varied by state

4. No nation-wide banking system

5. Little ability to regulate money supply

6. Uneven distribution of bank/bank notes 

7. Susceptibility to panics and runs

Term
What is a call loan?
Definition
A loan that can be recalled by the lender for payment at any time
Term
Benefits to country banks holding reserves at larger city banks:
Definition
City banks were probably paying them to do this so they could take some of the reserves and lend them at a greater interest rate
Term
Problem with country banks holding reserves at city banks:
Definition
They were call loans so if the country banks decided they needed some of these reserves, the city banks had to issue the money immediately. Country bank bank run=go to the city banks
Term
What is the quantity theory of money?
Definition

MV=PY where V is constant

M=money supply

V=Velocity 

P=Price level (measures inflation)

Y=real output

PY=Nominal GDP

**MONEY MATTERS**

Term
"Commercial banks tend to feed booms and starve recession."
Definition
A "boom" is an increase in real output (Y). Banks can feed "Booms" by increasing the number of loans which increases the money supply (M). Bans can also starve recessions by decreasing the money supply
Term
What is a countercyclical monetary policy?
Definition
In a boom it decreases growth rate in money supply to avoid inflation and in a recession it is to increase money supply to encourage economic growth
Term
Outcomes of more lenient requirements for National Bank charters:
Definition

1. Reduced the amount of treasury bonds

2. Scaled reserve requirements to city size

3. Ineffective attempt to bring more banks under national bank rules

Term
Bank Panic of 1893:
Definition

1. Worst recession the country has experienced up until this point

2. Decrease in money supply and decrease in real output

3. No lender of last resort

Term
Bank Panic and depression of 1907:
Definition

Same as 1893, but this time DEPRESSION. 

**Lead to Aldrich-Vreeland act**

Term
Two main features of the Aldrich-Vreeland Act:
Definition

1. Provided "national currency associations" -no fewer than 10 banks with in sound financial condition

2. National monetary commission to make recommendations for reforms (central bank)

Term
Original Structure of the federal reserve system:
Definition
Headed by the federal reserve board composed of 7 members including the secretary of the treasury, comptroller of the currency ex officio and five appointees of the president. 
Term
Requirements for commercial banks to join the Federal Reserve System:
Definition

1. Purchase shares of capital stock of the district of the Fed

2. Deposit cash reserves with district bank

3. National Banks must join 

Term
What are typical functions of a central bank (4)?
Definition

Fiscal Agent of government: Gov. receives payments and makes payments so they need a bank to perform these actions

Clearing house: If all of the banks have an account at some central place, at the end of the day sends checks to the fed to clear balances

Lender of Last Resort: Holds reserves and are able to make loans to banks who are having shortages of reserves

Exercise Counter Cyclical Monetary Policy: raise money supply in recession

**Early fed operated well!** 

Term
What type of money circulated in the late 1800s (4)?
Definition

1. State bank notes

2. National bank notes

3. Greenbacks

4. Demand deposits

Term
Why did the US operate on a De facto gold standard for most of the late 1800s?
Definition
Only the metal overvalued circulated, which was gold so it seemed like the us was on de facto
Term
Relationship between money supply and price level in the late 19th century:
Definition

Avalanche of new paper money and upwards zoom of prices (due to greenbacks) 

**When Y is stable a large increase in M will lead to a large increase in P)

Term
Why was the US forced to suspend payment of specie during the civil war?
Definition
US prices were higher than international prices which led to a decrease in exports and increase in imports (US trade deficit) Gold flowed out to pay for deficit and payments because suspended
Term
What had to happen in order for specie payment to resume?
Definition
US prices would have to decrease from their high levels.
Term
Democrats vs. Republicans views on resuming specie payment:
Definition

Rep: contraction of money supply to bring prices down (burn greenbacks and take as many as possible out of circulation)...sharp dec. in P

Dem: Moderate contraction, holds M stable and gradual increase of Y brings prices down

Term
Actual events that led to resumption of specie payment:
Definition
Contraction act which followed republican policy but was abolished because of severe effect on debtors. Moderate policy like democrats wanted, resumes payment in gold for greenbacks. de facto gold standard
Term
Why was the coinage act of 1873 called a crime?
Definition
It had no provision for minting silver coins. It demonetized silver as money. 
Term
Silver market after 1874?
Definition
Discovery of silver in US western mines. Market price of silver decreased and silver was now overvalued at the mint, but not yet circulating.
Term
What groups supported the sound money position?
Definition
Republicans, the northeast, and urban manufacturer, They wanted to maintain and increase the value of the dollar. stay de facto
Term
What groups supported the free silver movement?
Definition
Democrats, southerners, westerners and rural farmers. free coinage of silver which would increase money supply and increase inflation. could ease farmers debt burden.
Term
Legislative response of congress to the silver controversy:
Definition

Bland Allison act: limited coinage of silver but required treasury to purchase 2 to 4 million of silver per month at market price. Price of silver continued to fall and supply was increasing more rapidly than the demand. Price drop.

GRAPH: Demand and supply shift right but supply shifts more

Term
What happened to US money supply after Sherman Silver Purchase Act:
Definition
Market price of silver continued to fall and treasury gold reserves declined. Act was repealed.
Term
Why did price level begin to increase in 1896?
Definition

Gold flowed into the US because of favorable international trade situations (increased X and decreased IM) and new gold in California, Alaska, and South Africa. Expansion in money supply which raised prices. 

**Adopted gold standard and money was backed by gold!**

Term
Was the gold standard controversial?
Definition
No, by this point there were new discoveries of gold which could be used to create more money. money supply prices began to rise which was what most free silver people wanted anyways
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