Kacy Stein Econ Exam 1 Study Guide Definitions uses Economics the study of how to allocate scarce resources among competing Resources are scarce for households and scarce for economies Opportunity costs whatever must be given up to obtain an item Quantity demanded the amount of the good that buyers are willing and able to purchase at alternative prices Law of demand the claim that the quantity demanded of a good falls when the price of the good rises other things equal Demand schedule a table that shows the relationship between the price of a good and the quantity demanded Market QD the sum of the quantities demanded by all buyers GDP the market value of all final goods and services produced within a country domestic within a given time period The Circular Flow Model Firms earn revenue when households purchase goods and services in the market for goods and services Earning money occurs in markets for factors of production Spending money on a good service occurs in the market for goods and services and the money goes from households to firms In the circular flow model the GDP measures 1 the economy s flow of money 2 total expenditures by households on goods and services and 3 total income Supply Demand right Factors that influence buyers to change their demand 1 Number of buyers more buyers will increase demand curve shift to the 2 Income a higher income means a higher demand 3 Price of related goods as price of related goods goes down the demand for the original goes down and vice versa 4 If two goods are compliments an increase in the price of one causes a fall in the demand of the other 5 Taste when a product is tasteful and popular the demand goes up 6 Expectations affects consumer buying decisions Example if people expect their incomes to rise their demand for expensive things may increase If the economy goes bad and people expect to lose their jobs the demand for new cars may go down The equilibrium is the point where supply and demand meet when both buyers and sellers happy This point is where we get the price Surplus is when quantity supplied is greater than quantity demanded GDP Whenever you spend money it goes to GDP GDP the total income of every person in the economy AND the total expenditure on the economy s outputs of goods and services Market value price foods re values at market price so all foods are measured in the same unit dollars Things that don t have a market value are excluded like housework Final good intended for the end user Intermediate goods components in production of other goods Total spending GDP consumption households investment firms Government Net Exports exports imports often negative Note for consumption houses are not included Real vs Nominal GDP real is taking into account the change in prices as the years go on but nominal is without factoring in the price increase The Gross Nation Product GNP is the total income earned by the nations factors of production regardless of where they are located Inflation Stability of Prices Inflation the average increase in price level Alternative measures of inflation 1 GDP Deflator 100 x nominal GDP real GDP One way to compute the economy s price changes is to compute change in the GDP deflator from one year to the next 2 Consumer price index the BLS surveys consumers to determine what is in the typical basket finds the prices of these goods and services and computes a total cost The CPI is calculated by 100 x cost of current basked cost of base year basket The inflation rate is CPI this year CPI last year CPI last year x 100 Problems with CPI 1 Substitution bias sometimes the CPI rate of inflation doesn t match she actual pain felt by people due to inflation People have the power to substitute purchases for cheaper ones so the pain isn t the same as the CPI says it is Introduction of new goods consumers find products that closely meet their needs dollars become more valuable CPI overstates inflation 3 Unmeasured quality changes quality increases dollar becomes more 2 valuable CPI overstated The CPI and GDP Deflator are similar measures but they have some differences 1 Imported consumer goods they are included in CPI but excluded from GDP Deflator 2 Capital goods like a tractor they are excluded from CPI but included in GDP Deflator Inflation makes it difficult to compare dollar amounts over time Example 1 15 was the minimum wage in 1964 CPI 31 3 in year T CPI 211 7 Today Amount in todays amount in year T dollars x price level today price level in year T SO 1 15 x 211 7 31 3 7 78 A dollar amount indexed for inflation means that it is automatically corrected for inflation by law or in a contract Example social security payments federal income tax brackets Real interest rates nominal interest rate inflation rate The real interest rate in the purchasing power and it can grow with inflation Unemployment The BLS divides the population into 3 groups 1 Unemployed not working but have been looking for work 2 Employed paid or self employed 3 Not in the labor force a student retired person in prison etc The labor force is the number of workers employed unemployed Unemployment rate unemployed labor force Participation rate 100 x labor force adult population Mock Exam GDP Deflator Nominal GDP Real GDP x 100 When the price of one substitute increases the demand for the other increases as well Changes in the producer price index are often thought to be useful in changes in the consumer price index If prices change for producers they will surely change for consumers Investment is spending on new capital inventories and structures including houses Basically what firms buy and houses A weaker demand and a stronger supply will result in a lower price To calculate price change old price x new CPI old CPI For inflation rate you will have a base year and a new year To calculate it is New year old year old year x 100 GDP consumption investment Government Spending Net Exports Exports Imports Real interest rate nominal interest rate inflation rate Inflation rate is the percentage change in the price level from the previous period When calculating CPI for two or more consecutive years you have to assume that the number of neither goods bought by the typical customer changes from year to year In order to calculate CPI there needs to be some stability Price change is not an issue with the measure of CPI because it is taken into account by the BLS If wages were lower unemployment would be lower Higher wages can cause higher
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