Econ 202 Final Exam Study Guide 1 Law of Demand 2 Law of Supply 3 Production Possibilities Curve Chapter 2 shows the possible combinations of products that an economy can produce give that its productive resources are fully employed and efficiently used the higher the price the larger the quantity supplied the higher the price the less the quantity demanded Points on the curve are efficient and indicate economy is utilizing all Points inside the curve are inefficient and indicate an economy is not resources utilizing all resources Points outside the curve are not feasible given current technologies and resources Shifts in the PPC show how points outside are feasible in the future if it shifts out due to increases in resources or technological innovation 2 Marginal Principle consume up to the point where MB MC Marginal Benefit additional benefit resulting in a small increase in activity i Slope increases to the right ii Slope decreases to the left Marginal Cost additional cost resulting in small increase in activity people act in their own self interest are 3 The Principle of Voluntary Exchange 4 The Principle of Diminishing Returns better off increased while all others are held constant production will eventually increase at a decreasing rate 5 The Real Nominal Principle what matters not its face value real value or purchasing power of money income is in the short run if use of one input is Nominal Value Real Value face value value in terms of what it can buy two goods for which an increase in the price of one good increases the 4 Complements a good for which an increase in income increases demand a good for which an increase in income decreases demand Chapter 4 1 Normal Good Inferior Good 2 3 Substitutes demand for the other good As the price of a good falls people are likely to substitute their normal good for that one instead the demand for the other good Income Effect of a good falls people are likely to buy more of all normal goods consumer price expectations expectations 6 Determinants of Demand 7 Determinants of Supply input costs technology of firms producer price income price of related goods population taste 5 two goods for which a decrease in the price of one good increases affects all goods not just the one whose price has fallen As the price 8 Demand vs Supply Shifts Demand both move in the same direction move in the opposite direction Supply Chapter 5 1 Macroeconomics is the study of the nation s economy as a whole Focuses on inflation unemployment and economic growth NO INDIVIDUAL FOCUS Inflation 2 3 GDP given time period the sustained increase in the average prices of all goods and services total market value of all final goods and services produced in the economy in a GDP sum of consumption investment government spending and net peak trough expansion depression a good used only in the production of other products controls price change holds price constant and can only increase if exports Fluctuations in GDP Does not include intermediate goods 4 5 Real GDP Intermediate Good output goes up 6 Nominal GDP increase because prices go up and or output goes up households 7 Consumption Expenditure purchases of newly produced goods or services by the value of GDP in current dollars FINAL goods and services can Include durable goods non durable goods and services 8 Durable Goods something that lasts over a year refrigerator 9 Non 10 Depreciation 11 Trade Surplus exports imports the wear and tear on private investment something that doesn t last a long time food Durable Goods Trade Surplus excess of exports 12 Trade Deficit imports selling assets to individuals or governments in foreign countries Trade Deficit excess of imports exports 13 Growth Rate Year 2 Year 1 inflation Year 1 2 Frictional Unemployment occurs during fluctuations in real GDP including Chapter 6 1 Cyclical Unemployment recessions and booms occurs with the normal workings of the economy such as workers taking time to search for suitable jobs and firms taking time to search for qualified jobs 3 Structural Unemployment 4 Natural Rate of Employment 5 Full Employment occurs when the unemployment rate the natural rate occurs when there is a mismatch of skills and jobs when there is no cyclical employment When cyclical unemployment rate is at zero 6 Consumer Price Index represent the consumption pattern of individuals measures the cost of a fixed basket of goods chosen to The price index is always 100 in the base year 7 8 Primary Cost of Deflation Inflation percent change in a price index repaying debts 1 Classical or Full employment Economics Chapter 7 operates at or near full employment prices adjust fluctuations in economic activity explains why recessions and booms occur concerned with business cycle or economic fluctuations explains how shocks to technology causes 2 Keynesian Economics 3 Real Business Cycle Theory 4 Principle of Diminishing Returns output increase at a decreasing rate the study of economics when it No change in capital but doubles its labor input its output increases by less 5 Labor Curve inverse relationship between the real wage and the amount of labor than 50 hired 6 Demand of Labor firm behavior Capital Stock Inverse relationship between the real wage and the amount of labor hired Increases in the capital of stock determined by net exports consumer choice between work and leisure ONLY SHIFTS DEMAND SUPPLY REMAINS SAME 7 Supply of Labor Tax shifts labor of demand to the left If labor supply is vertical tax increase will have no effect on output 8 Substitute effect 9 Income effect 10 Full Employment Output equilibrium 11 Crowding Out 12 Short run Production Function 13 Real Wage level of output produced when the labor market is at decline in GDP components caused by government spending period of time which at least one input is fixed the wage rate paid to employees adjusted for changes in the price level Quantity of labor demanded quantity of labor supplied 1 GDP per Capita 2 Capital Deepening per person grows over time because of capital deepening and Chapter 8 technological progress increase in capital per worker while holding constant number of workers which increases the demand for labor and shifts the production upward 3 Technological Progress occurs when the economy gets more output without any more capital or labor how much one country s currency could buy in another in order to make comparisons between countries we need to know 4 Exchange Rate 5 Strong currency vs weak currency