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NCSU ARE 201 - Final Exam Study Guide

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ARE 201 1st EditionFinal Exam Study GuideStudy guide for the ARE 201 non-cumulative final exam.Chapter 81. There are four main types of market structure: - perfect competition - monopoly - oligopoly- monopolistic competition2. A monopolist is a producer who is the sole supplier of a good without close substitutes. This industry is called a monopoly.3. The key difference between a monopoly and a perfectly competitive industry is that a single perfectly competitive firm faces a horizontal demand curve but a monopolist faces a downward-sloping demand curve. This gives the monopolist market power, the ability to raise the market price by reducing output. 4. To persist, a monopoly must be protected by a barrier to entry. This can take the form of control of a natural resource or input, increasing returns to scale that give rise to natural monopoly, technological superiority, or government rules that prevent entry by other firms, such as patents or copyrights.5. The marginal revenue of a monopolist is composed of a quantity effect (the price received from the additional unit) and a price effect (the reduction in the price at which all units are sold). Because of the price effect, a monopolist’s marginal revenue is always less than the market price, and the marginal revenue curve lies below the demand curve.6. At the monopolist’s profit-maximizing output level, marginal cost equals marginalrevenue, which is less than market price. In comparison to perfectly competitive industries, monopolies produce less, charge higher prices, and earn profits in both the short run and the long run.7. A monopoly creates deadweight losses by charging a price above marginal cost: the loss in consumer surplus exceeds the monopolist’s profit.8. Natural monopolies can still cause deadweight losses. To limit these losses, governments sometimes impose public ownership and at other times impose price regulation.9. An Oligopoly is an industry with a small number of producers. 10. The market structure of Monopolistic competition is where there are many competing producers, each producing a differentiated product, and there is free entry and exit in the long run. Product differentiation takes three forms: by style or type, by location, and by quality.11. Both oligopoly and monopolistic competition are types of imperfect competition.Chapter 101. Macroeconomics is the study of the behavior of the economy as a whole. Macroeconomics differs from microeconomics in the type of questions it tries to answer and in its strong policy focus. Keynesian economics, which emerged during the Great Depression, advocates the use of monetary policy and fiscal policy to fight economic slumps. Prior to the Great Depression, the economy was thought to be self-regulating.2. One key concern of macroeconomics is the business cycle, the short-run alternation between recessions, periods of falling employment and output, and expansions, periods of rising employment and output. The point at which expansion turns to recession is a business-cycle peak. The point at which recession turns to expansion is a business-cycle trough.3. Another key area of macroeconomic study is long-run economic growth, the sustained upward trend in the economy’s output over time. Long-run economic growth is the force behind long-term increases in living standards and is importantfor financing some economic programs.4. When the prices of most goods and services are rising, so that the overall level of prices is going up, the economy experiences inflation. When the overall level of prices is going down, the economy is experiencing deflation. In the short run, inflation and deflation are closely related to the business cycle. In the long run, prices tend to reflect changes in the overall quantity of money. Because inflation and deflation can cause problems, economists and policy makers generally aim for price stability.5. Although comparative advantage explains why open economies export some things and import others, macroeconomic analysis is needed to explain why countries run trade surpluses or trade deficits. The determinants of the overall balance between exports and imports lie in decisions about savings and investment spending.Chapter 111. Economists keep track of the flows of money between sectors with the national income and product accounts, or national accounts. 2. Gross domestic product, or GDP, measures the value of all final goods and services produced in the economy. It does not include the value of intermediate goods and services. It can be calculated in three ways: add up the value added by all producers; add up all spending on domestically produced final goods and services; or add up all the income paid by domestic firms to factors of production.These three methods are equivalent.3. Real GDP is the value of the final goods and services produced, calculated using the prices of a selected base year. Except in the base year, real GDP is not the same as nominal GDP, the value of aggregate output calculated using current prices. Analysis of the growth rate of aggregate output must use real GDP. Real GDP per capita is a measure of average aggregate output per person but is not in itself an appropriate policy goal. U.S. statistics on real GDP are always expressed in chained dollars. 4. To measure the aggregate price level, economists calculate the cost of purchasinga market basket. A price index is the ratio of the current cost of that market basket to the cost in a selected base year, multiplied by 100. 5. The inflation rate is the yearly percent change in a price index, typically based on the consumer price index, or CPI, the most common measure of the aggregate price level. A similar index for goods and services purchased by firms isthe producer price index, or PPI. Finally, economists also use the GDP deflator,which measures the price level by calculating the ratio of nominal to real GDP times


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