ECO Final Exam Study GuideChapter 3Changes in Demand v. Changes in Quantity DemandedIf 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 SuppliedIf the change is caused by a change in price, it is a change in quantity supplied. If the change is caused byanything other than price, such as weather conditions, etc., it is a change in supply. How Market Prices are Determined: Supply and Demand InteractWhen 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 SupplyAn 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 6The Differences and Similarities between Governments and MarketsSimilarities:1. Competition2. Scarcity and the opportunity cost of resource useDifferences:1. Private sector action is based on mutual agreements, public sector is based on majority rule2. When collective decisions are made legislatively, voters must choose among candidates who represent a bundle of positions on issues.3. Income and influence distributed differently4. Public sector organization can break the linkage between payment and consumption of a goodWhen the Political Process Works PoorlyThe 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 Effects2. Shortsightedness Effect3. Rent Seeking4. Lack of Profit MotivePolitical Favoritism, Crony Capitalism, and Government FailureCrony 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 7GDP- A Measure of OutputThe 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 GDPNominal values: values expressed in current dollarsReal values: values that have been adjusted for the effects of inflationUse 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 bundleof 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 GDPReal 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 8Swings in the Economic PendulumThe average growth rate is approximately 3%. The four phases of the hypothetical business cycle are expansion, peak, contraction, and recessionary trough.Three Types of UnemploymentFrictional- imperfect informationStructural- workers don’t possess desired skillsCyclical- result of business cycleNatural rate of unemployment is the sum of frictional and structural unemployment (is approx. 5%)Actual and Potential GDPPotential 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 InflationInflation is a persistent increase in the general level of prices.Why is it bad?1. It reduces investment2. It distorts information delivered by prices3. It results in less productive use of resourcesChapter 9Equilibrium in the Goods and Services MarketBusinesses supply goods and services in exchange for sales revenue. Households, investors, governments, and foreigners (net exports) demand goods.Loanable Funds MarketThe 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 MarketDollar 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 outflowChapter 10Unanticipated Changes and Market AdjustmentsWhat if AD surprisingly increases?1. Firms will increase production (move along SRAS)2. Resource prices begin to rise3. Interest rates will rise as demand for loanable funds increases4. 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 LREQWhat if AD surprisingly decreases?1. Firms will decrease production2. Resource prices begin to fall3. Interest rates will fall as demand for loanable funds decreases4. 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 LREQUnanticipated Changes, Recessions, and BoomsAn economy has a
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