ECON 222 STUDY GUIDE FOR EXAM 1 on Wednesday September 17 th INTRODUCTION Definitions and examples of 1 Economy 2 Microeconomics greek word for one who manages a household individual parts of the economy a Inputs Resources Factors of Production i Land natural resources ii Capital machine tools and factories structures iii Labor physical and mental abilities as workers iv Entrepreneur organizes resources for production introduces new products or techniques of production and reaps rewards b Output goods and services 3 Macroeconomics the economy as a whole a GDP Gross Domestic Product Quantity x Price i Calculated every 3 months by the Bureau of Economic Analysis b Inflation Consumer Price Index CPI measures average price i Measured by Bureau of Labor Statistics every month c Unemployed rate to be unemployed you must be willing and able to work but not able to find a job CHAPTER 1 The Ten Principles of Economics Definitions and Examples 1 People face tradeoffs choices human wants are unlimited economic resources 2 The cost of something is what you give up to get it opportunity costs are scarce a Equity vs Efficiency i Ex unemployment insurance equity at expense of efficiency ii progressive income tax equity 3 Rational people think at the margin people make decision by comparing costs and benefits are the margin or their marginal costs and benefits 4 People respond to incentives 5 Trade can make everyone better off a Trade economically interdependent vs economically self sufficient i Trade allows specialization 6 Markets are usually a good way to organize economic activity a Pure Capitalism Market Economy no government intervention Classical b Command Planned Economy c Mixed Economy Adam Smith s Wealth of Nations invisible hand Keynes Keynesian Economics 1936 The General Theory of Income Employment and Money Mix of public and private property John Manard dictate how resources are allocated 7 Government can sometimes improve market outcomes a Externality Examples of Market Failures bystander impact of one person s actions on the well being of a i Negative pollution gov helps Environmental Protection Agency ii Positive education b Excessive Market Power c Equity monopoly duopoly oligopoly free markets reaches must efficient but not always equal i Gov provides public goods non excludable a person can be prevented from using it and non rival one person diminishes other person s use ii National security Political Stability iii To Enforce Laws and Property Rights 8 The Standard of Living depends on a country s production a Standard of Living can be measured by comparing personal incomes the b Productivity total market value of a nation s production of a worker s time the amount of goods and services produced from each hour c Business Cycle Dating Committee dates peaks and troughs part of Bureau of Economic Analysis Located in National Bureau of Economic Research i RGDP Real GDP Adjusted for inflation Booms Economic Expansion increase in RGDP short run Recessions Economic Contraction decrease 2 or more quarters of a drop The Great Depression Oct 29 1929 The Great Recession Dec 2007 June 2009 9 Prices rise when the government prints too much money a Monetary policy by Federal Reserve bank duration and severity of recession c Contractionary monetary policy b Expansionary monetary policy amount of money circulating in the economy conducted increase money supply shortens the 10 Society faces short run tradeoff between inflation and unemployment Reducing inflation causes a temporary rise in a The Phillips Curve unemployment Inflation vs Unemployment Progressive tax system tax rate increases as the taxable base amount increase decrease money supply CHAPTER 2 Thinking Like An Economist Two Roles of Economists 1 The Scientist use positive statements to explain the world Facts 2 The Policymaker use normative statements to change the world The economic way of thinking developing abstract models from theories and the analysis of the models i Economic Models a The Circular Flow of Income b The Production Possibilities Frontier show trade off Shift in PPF due to increase in resources or technological advances Economic growth occurs when there is an increase of production for both goods The difference between a curved and a linear PPF increasing vs constant opportunity costs What is this difference due to Which is more realistic for countries Straight line PPF means marginal rate of transformation or opportunity cost is constant All factors can use to produce any goods Bowed shape PPF means the opportunity cost is increasing A factor which is good to produce good A might not be good for good B To produce more good B it has to give up more good A 1 Economic self sufficient 2 Economically interdependent 3 Absolute advantage CHAPTER 3 Interdependence and the Gains from Trade quantity on inputs ex labor time dependent on trade with others based on productivity when a producer requires smaller produce individually all goods and services consumed 4 Comparative advantage opportunity cost on producing a good based on opportunity cost producer has a smaller Adam Smith An Inquiry into the Nature and Causes of the Wealth of Nations the ability of producers to benefit though specialization and trade through Absolute Advantage David Ricardo Principles of Political Economy and Taxation develops the theory of comparative advantage and argues against restrictions on free trade The benefits of free trade are generally agreed upon economists Trade benefits everyone because it allows specialization Chapter 4 Market Forces of Market and Demand Market a group of buyers and sellers of a particular good or service Types of Markets 1 Competitive Market a market in which there are many buyers and sellers 2 Not perfectly Competitive Markets a Monopoly ex local electric company b Oligopoly ex auto companies c Monopolistic competition a market with many different sellers offering slightly different products no seller buyer can buy sell below or above market price in when price rises demand decreases Demanded Price takers perfectly competitive markets Law of Demand Change in Quantity Movement along demand curve Caused by a change in price Change in Demand Shift in demand curve Left or Right Caused by anything except price 1 Prices of Related Good a Substitute goods b Complementary goods 2 Consumer Incomes Determinants of Demand factors that shift the demand curve a Normal good demand increases as income increases b Inferior good