ECON 205 1st Edition Exam 1 Study Guide Chapter Summaries Chapter 4 Assume markets are competitive Law of Demand all other things equal quantity demanded decreases when price increases Market Demand is the sum of quantities demanded by all buyers Factors of Demand cause shifts in the demand curve o Income o Price of related goods Substitute goods and complement goods o Tastes o Expectations Price causes movement along the demand curve Law of Supply all things equal supply increases as price increases Non Price determinants of price shift the curve o Technology o Expectations o Number of Sellers Equilibrium is when supply demand Chapter 6 Price ceiling is a legal maximum on a price and creates a shortage Price Floor is a legal minimum on a price and creates a surplus A non binding price control does not impact the market from reaching its natural equilibrium Incidence of a tax will always be the same regardless of if it is a on the seller or a tax on the buyer Tax on buyers shifts the Demand curve down Tax on sellers shifts the Supply curve up Chapter 7 Welfare economics explains the allocation of resources by answering how much is produced who is the producer and who is the consumer Look up Willingness to pay Consumer Surplus and Producer Surplus on Terms list Allocation in a market is determined by the interactions between self interested buyers and sellers Total surplus is a measure of society s well being since its like an everyone wins situation Efficiency maximizes total surplus o Goods purchase by consumers who value them most highly o Goods produced by producers with the lowest cost Adam Smith said that when individuals act in their own self interest they end up benefiting all of society and are therefore led by an invisible hand Chapter 8 Costs of taxation causes market inefficiencies Chapter 9 If PD PW then a country has a comparative advantage o Export good o Consumer surplus falls o Producer surplus rises o Total Surplus rises If PD PW then a country does not have a comparative advantage o Should import the good o Consumer suplus rises o Producer surplus falls o Total surplus rises A small economy is a price taker in world markets because its actions have so impact of PW Foreign competition decreases the market power of domestic firms and increase total welfare Trade increases the flow of ideas and facilitates the spread of technology worldwide Losses in trade often highly concentrated among small group of people whereas gains are often spread thinly over a large group Tariffs and Import quotas have the same basic effects on the market Chapter 10 Refer to GDP on terms list Diagram omits the government financial system and international sector GDP only considers FINAL goods intended for the end user Refer to GNI Y C I G NX consumption investment government net exports Refer to Inflation nominal GDP and real GDP GDP deflator is a measure of the overall level of prices o 100 X nominal GDP real GDP Real GDP per capita is the main indication of the average person s standard of living Chapter 11 Refer to CPI Steps to calculate CPI o Fix the basket decide what the average consumer buys in a given period of time o Find the prices of items in the basket o Compute the basket s total cost o Choose a base year and compute the index 100 x cost of basket in current year cost of basket in base year o Compute the inflation rate 100 x CPI of current year CPI of comparison year CPI of comparison year o CPI does not have the flexibility to account for switches made to cheaper substitute goods the introduction of new goods or unmeasured quality change o GDP and CPI graphs are typically very similar o GDP and CPI do not account for the underground market o To find out how much a dollar amount in T years would equal now Amount in today s dollar Amount in year T dollars x price level today price level in year T Used to convert nominal dollars to real dollars o Refer to indexation o Refer to nominal and real interest rates Chapter 12 High productivity means real GDP is large and incomes are high Determinants of Productivity and its growth are o Physical Capital K o Human Capital H o Natural Resources N o Technological knowledge o An increase in any of these increases productivity and growth Y L measures productivity L is labor Government implementation K increasing policies only creates temporary growth because of Diminishing returns Refer to the catch up effect Inward oriented trade policies aim to raise living standards by avoiding interaction with other countries Outward oriented policies promote integration with the world economy Technological progress is the main reason why living standards rise over the long run Chapter 15 Labor Force statistics are produced by the Bureau of Labor Statistics BLS o Divide population into the employed unemployed and people not in the labor force Refer to unemployed unemployed and not in labor force Unemployment rate U rate 100 x of unemployed labor force Labor Force participation rate 100 x labor force adult population U rate does not include the discouraged worker and does not distinguish between parttime and full time workers Most unemployment is short term and well under 14 weeks Refer to cyclical unemployment natural rate unemployment frictional unemployment and structural unemployment Government employment agencies provide information about job vacancies to speed up job search Government also has Public training programs to train workers for certain jobs Unemployment insurance partially protects workers incomes when they become unemployed o Increases frictional unemployment because it decreases the motivation to find a new job Refer to minimum wage laws and unions Unions increase wages which decreases the demand for labor increase in unemployment Refer to Efficiency wages o Set for worker health turnover quality and effort Important Terms Chapter 4 Law of Demand other things equal quantity demanded decreases when price increases Market Demand sum of quantities demanded by all buyers at each price Price Ceiling a legal maximum on price Price Floor a legal minimum on price Binding Constraint causes a shortage ceiling or surplus floor Chapter 7 Welfare Economics allocation of resources Willingness to Pay consumer s value for a good Consumer Surplus amount buyer is willing to minus the amount the buyer actually pays Producer Surplus the amount a seller is paid for a good minus the cost of producing that good a k a profit Invisible Hand when individuals