Econ 202 Final Exam Study GuideChapter 2:1. Law of Demand: the higher the price the less the quantity demanded2. Law of Supply: the higher the price the larger the quantity supplied3. Production Possibilities Curve: shows the possible combinations of products that an economy can produce, give that its productive resources are fully employed and efficiently used.- Points on the curve are efficient and indicate economy is utilizing all resources- Points inside the curve are inefficient and indicate an economy is not 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 innovation2. Marginal Principle: consume up to the point where MB=MC- Marginal Benefit: additional benefit resulting in a small increase in activityi. Slope increases to the rightii. Slope decreases to the left- Marginal Cost: additional cost resulting in small increase in activity3. The Principle of Voluntary Exchange: people act in their own self-interest are better off4. The Principle of Diminishing Returns: in the short run, if use of one input is increased while all others are held constant, production will eventually increase at adecreasing rate.5. The Real-Nominal Principle: real value or purchasing power of money/ income is what matters, not its face value- Nominal Value: face value- Real Value: value in terms of what it can buyChapter 41. Normal Good: a good for which an increase in income increases demand2. Inferior Good: a good for which an increase in income decreases demand3. Substitutes: two goods for which an increase in the price of one good increases the demand for the other good. As the price of a good falls, people are likely to substitute their normal good for that one instead4. Complements : two goods for which a decrease in the price of one good increases the demand for the other good5. Income Effect: affects all goods not just the one whose price has fallen. As the price of a good falls, people are likely to buy more of all normal goods6. Determinants of Demand : income, price of related goods, population, taste, consumer price expectations7. Determinants of Supply: input costs, technology, # of firms, producer price expectations8. Demand vs. Supply Shifts: - Demand: both move in the same direction- Supply: move in the opposite directionChapter 51. Macroeconomics: is the study of the nation’s economy as a whole- Focuses on inflation, unemployment, and economic growth- NO INDIVIDUAL FOCUS2. Inflation: the sustained increase in the average prices of all goods and services3. GDP: total market value of all final goods and services produced in the economy in agiven time period- GDP= sum of consumption, investment, government spending and net exports- Does not include intermediate goods - Fluctuations in GDP: peak, trough, expansion, depression4. Intermediate Good : a good used only in the production of other products5. Real GDP: controls price change, holds price constant and can only increase if output goes up6. Nominal GDP : the value of GDP in current dollars (FINAL goods and services), can increase because prices go up and/or output goes up7. Consumption Expenditure : purchases of newly produced goods or services by households- Include durable goods, non-durable goods, and services 8. Durable Goods : something that lasts over a year (refrigerator)9. Non - Durable Goods: something that doesn’t last a long time (food)10. Depreciation: the wear and tear on private investment11.Trade Surplus: exports>imports- Trade Surplus= excess of exports imports12. Trade Deficit: selling assets to individuals or governments in foreign countries- Trade Deficit= excess of imports exports13. Growth Rate=(Year 2 – Year 1) - inflation Year 1Chapter 61. Cyclical Unemployment: occurs during fluctuations in real GDP including recessions and booms2. Frictional Unemployment: occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search forqualified jobs3. Structural Unemployment: occurs when there is a mismatch of skills and jobs4. Natural Rate of Employment: when there is no cyclical employment 5. Full Employment: occurs when the unemployment rate= the natural rate- When cyclical unemployment rate is at zero6. Consumer Price Index: measures the cost of a fixed basket of goods chosen to represent the consumption pattern of individuals- The price index is always 100 in the base year7. Inflation: percent change in a price index8. Primary Cost of Deflation: repaying debtsChapter 71. Classical or Full employment Economics: the study of economics when it operates at or near full employment (prices adjust)2. Keynesian Economics: concerned with business cycle or economic fluctuations3. Real Business Cycle Theory: explains how shocks to technology causes fluctuations in economic activity, explains why recessions and booms occur4. Principle of Diminishing Returns : output increase at a decreasing rate- No change in capital but doubles its labor input, its output increases by less than 50%5. Labor Curve: inverse relationship between the real wage and the amount of labor hired6. Demand of Labor: firm behavior - Inverse relationship between the real wage and the amount of labor hired- Capital Stock: ONLY SHIFTS DEMAND, SUPPLY REMAINS SAME- Increases in the capital of stock determined by net exports7. Supply of Labor: consumer choice between work and leisure- Tax shifts labor of demand to the left- If labor supply is vertical, tax increase will have no effect on output8. Substitute effect : 9. Income effect: 10. Full-Employment Output: level of output produced when the labor market is at equilibrium11. Crowding Out: decline in GDP components caused by government spending 12. Short-run Production Function: period of time which at least one input is fixed13. Real Wage: the wage rate paid to employees adjusted for changes in the price level- Quantity of labor demanded= quantity of labor suppliedChapter 81. GDP per Capita: “per person” grows over time because of capital deepening and technological progress2. Capital Deepening: increase in capital per