ECO Final Exam Study Guide Chapter 3 Changes in Demand v Changes in Quantity Demanded If the change is caused by a change in price it is a change in quantity demanded If the change is caused by anything other than price such as consumer income price change of substitutes etc it is a change in demand Changes in Supply v Changes in Quantity Supplied If the change is caused by a change in price it is a change in quantity supplied If the change is caused by anything other than price such as weather conditions etc it is a change in supply How Market Prices are Determined Supply and Demand Interact When a market is in EQ the decisions of consumers and producers are brought into harmony with one another and the quantity supplied is equal to the quantity demanded In a market economy when the demand for a good increases its price will rise which will motivate consumers to search for substitutes and cut back on additional purchases of the good and motivate producers to supply more of the good These 2 forces will bring the quantity demanded and the quantity supplied back into balance How Markets Respond to Changes in Demand and Supply An increase in demand will cause an increase in the EQ price and EQ quantity A decrease in demand will cause a decrease in both the EQ price and EQ quantity An increase in supply will cause a decrease in EQ price and an increase in EQ quantity A decrease in supply will cause an increase in EQ price and a decrease in the EQ quantity Chapter 6 Similarities Differences The Differences and Similarities between Governments and Markets 1 Competition 2 Scarcity and the opportunity cost of resource use 1 Private sector action is based on mutual agreements public sector is based on majority rule 2 When collective decisions are made legislatively voters must choose among candidates who represent a bundle of positions on issues Income and influence distributed differently 3 4 Public sector organization can break the linkage between payment and consumption of a good When the Political Process Works Poorly The political process works poorly when voters receive benefits in disproportion to the costs they incur then unproductive projects will be passed and productive projects will not Causes of inefficiency i e government failure 1 Special Interest Effects 2 Shortsightedness Effect 3 Rent Seeking 4 Lack of Profit Motive Political Favoritism Crony Capitalism and Government Failure Crony capitalism when political decision makes direct subsidies grants tax breaks and regulatory favors toward businesses willing to provide them with campaign funds and other forms of political support Chapter 7 GDP A Measure of Output The market value of all final goods and services produced within a country during a specific time period usually a year It includes only final goods and services transactions involving production and goods produced within during the current period Adjusting for Price Changes and Deriving Real GDP Nominal values values expressed in current dollars Real values values that have been adjusted for the effects of inflation Use a price index to adjust nominal data into real data Two key price indexes 1 Consumer Price Index CPI measures the impact of price changes on the cost of a typical bundle of goods and services purchased by households 2 GDP Deflator is designed to measure the change in the average price of the market basket of goods included in the GDP It has a broader price index than the CPI includes government investments and is more accurate Inflation rate This year s PI last year s PI last year s PI 100 Using the GDP deflator to derive real GDP Real GDP Nominal GDP GDP Deflator0 GDP Deflator Data on both money nominal GDP and price changes are essential for meaningful comparisons of output between two time periods Chapter 8 The average growth rate is approximately 3 The four phases of the hypothetical business cycle are expansion peak contraction and recessionary trough Swings in the Economic Pendulum Three Types of Unemployment Frictional imperfect information Structural workers don t possess desired skills Cyclical result of business cycle Natural rate of unemployment is the sum of frictional and structural unemployment is approx 5 Actual and Potential GDP Potential output is the economy s maximum sustainable output It occurs when full employment exists Best thought of as the 3 growth rate Actual output can be greater than or less than potential output The Effects of Inflation Inflation is a persistent increase in the general level of prices Why is it bad Chapter 9 1 2 3 It reduces investment It distorts information delivered by prices It results in less productive use of resources Equilibrium in the Goods and Services Market Businesses supply goods and services in exchange for sales revenue Households investors governments and foreigners net exports demand goods Loanable Funds Market The coordination between borrowers and lenders Borrowers demand funds lenders supply funds The interest rate is the price borrowers pay to receive money now and lenders receive a price to wait Foreign Exchange Market Dollar price how many dollars you must give up to get foreign currency The dollar appreciates when you need fewer dollars to receive the same amount of foreign currency Import more export less The dollar depreciates when you need more dollars to receive the same amount of foreign currency Import less export more Trade Deficit imports exports Trade Surplus exports imports Net capital outflow capital inflow capital outflow Chapter 10 Unanticipated Changes and Market Adjustments What if AD surprisingly increases Interest rates will rise as demand for loanable funds increases 1 Firms will increase production move along SRAS 2 Resource prices begin to rise 3 4 Foreigners will purchase more US assets dollar appreciates import more export less 5 SRAS will begin to fall shift left and consumers will buy less move along AD 6 The economy will return to LREQ What if AD surprisingly decreases Interest rates will fall as demand for loanable funds decreases 1 Firms will decrease production 2 Resource prices begin to fall 3 4 Foreigners will purchase fewer US assets the dollar will depreciate export more import less 5 SRAS will begin to rise shift right and consumers will buy more move along AD 6 The economy will return to LREQ Unanticipated Changes Recessions and Booms An economy has a self correcting mechanism 4 key markets are so closely linked 1 Interest rate changes are key
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