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Final Study Guide: Econ 203
Scarcity |
the condition of peoples’ wants being greater than available resources |
economics |
the study of how people manage resources. |
Microeconomics |
Study of individuals and firms |
Macroeconomics |
Study of the economy on a regional, national, or international scale |
economic costs |
include both the direct cost and indirect costs |
opportunity costs |
the value of what you have to give up in order to get something |
opportunity cost |
represents the trades offs between costs and benefits |
incentive |
something that causes a change in the tradeoffs that people face. |
incentive |
changes the trade offs that people far when making decision |
positive incentive |
Makes people more likely to do something by lowering their opportunity cost |
negative incentive |
–Makes people less likely to do something by raising their opportunity cost. |
efficiency |
use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society (
produce the things that people want at the lowest possible costs.) |
positive analysis |
the way things are |
normative analysis |
the way things should be |
economic models |
show how people, firms, and governments make decisions about managing resources, and how their decisions interact. |
–Makes clear assumptions.
–Describes the real world accurately.
–Predicts cause and effect. |
what makes models useful? |
correlation |
A consistently-observed relationship between two events |
causation |
A relationship between two events in which one brings about the other |
Correlation without causation |
Two events may be extremely correlated, making it appear that a causal relationship exists. |
omitted variables |
Two events may be extremely correlated due to a third event causing the two |
reverse causation |
Sometimes it is unclear whether Event A causes Event B or if Event B causes Event A |
production possibility frontier curve |
the line or curve that shows all possible combinations of two outputs that can be produced using all available resources. |
absolute advantage |
the ability to produce more of a good or service than others can with a given amount of resources. |
comparative advantage |
a good if it can produce it at a lower opportunity cost than other countries. |
quantity demanded |
the amount of a particular good or service that buyers are willing and able to purchase at a given price |
demand schedule |
displays the quantities demanded at various prices |
demand curve |
illustrates the relationship between the quantity demanded and the price of the good, holding all of the other non-price determinants constant. |
law of demand |
•the lower the price, the higher the quantity demanded, all other things equal. |
preferences, number of buyers, incomes, expectations, price of related goods |
5 most important non-price determinants of demand |
quantity supplied |
•the amount of a particular good or service that producers are willing and able to offer for sale at a given price. |
supply schedule |
displays the quantities supplied at various prices |
law of supply |
•the higher the price, the higher the quantity supplied, all other things equal. |
technology, number off producers. price of inputs, expectations, price of related goods |
non-price determinants of supply |
equilibrium |
where the supply curve intersects the demand curve. |
surplus |
If the price is too high, excess supply occurs |
shortage |
If the price is too low, excess demand occurs |
standardized good, no transaction costs, full information, participants are price takers |
four characteristics of perfectly competitive markets |
Gross Domestic Product |
•the sum of the market values of all final goods and services produced in a country within a given period of time. (measured with a country) |
gross domestic product |
the sum of the market values of all final goods and services produced within a country in a given period of time |
Gross National Product |
measures output produced by permanent residents (nationals) of the country. |
gross national product |
the sum of the market values of all final goods and services produced and capital owned by the permanent residents of a country for a given period of time |
market value |
–Used so there are common units to add up goods and services. |
final goods and services |
Only count expenditures on goods and services sold to the consumer |
the expenditure approach |
C + I + G +NX |
the income approach |
•the income earned by everyone (households and firms) in a country.
= Wages + Interest + Rental income + Profits |
the value added approach |
calculates the value that each transaction adds to the economy. |
consumption |
spending on goods and services by private individuals and households |
investment |
spending on productive inputs, such as factories, machines, and inventory |
inventory |
stock of goods that a company produces now but does not sell immediately |
government purchases |
spending on goods and services by all levels of government |
real GDP |
GDP calculation in which goods and services are valued at constant prices |
nominal GDP |
GDP calculation in which goods and services are valued at current prices |
GDP deflator |
a measure of the overall change in prices in an economy, using the ration between real and nominal GDP |
GDP deflator |
ngdp/rgdp X 100 |
GDP deflator |
measure of the overall change in prices in an economy using the ratio between real and nominal GDP |
Green GDP |
an alternative measure of GDP that subtracts the environmental costs of production from the positive outputs normally counted in GDP |
In cities that have more police, crime rates are higher |
reverse causation |
many retired people live in states where everyone uses air conditioning during the summer |
omitted variable |
more people come down with the flu during the winter olympics than during the summer olympics |
correlation without causation or omitted variable |
for the last five years, Punxsutawney Phil has seen his shadows on Groundhog Day, and spring comes late |
correlation without causation |
time spent studying and test scores |
positive correlation |
vaccination and illness |
negative correlation |
soft drink preference and music preference |
uncorrelated correlation |
income and education |
positive correlation |
people behave rationally |
assumption |
if the price of a good falls, people will consume more of that good |
prediction of cause & effect |
mass starvation will occur as population outgrows the food supply |
prediction of cause & effect |
a good economic model includes |
predicts that A causes B
Make approximately accurate assumption
predicts things that are usually true |
people who pay their bills on time are less likely than other to get into debt |
positive statement |
hard work is a virtue |
normative statement |
everyone should pay his/her bills on time |
normative statement |
china has a bigger population than any other country |
positive statement |
china's one child policy helped to spur the country rapid economic growth |
positive statement |
lower taxes are good for the country |
normative statement |
constraints |
affect decision making because you have to think about time, activities, and expenses |
why a product isn't efficient |
innovation
market failure
interventions
goals other than profit |
sunk cost |
cost that has been incurred and is not recoverable |
non-price determinants of demand |
income
prices of related goos
population
tastes
expectations of future prices |
non-price determinant of supply |
technology
price of related goods
numbers of firms in the market
expectations of future prices
shift vs movement |
a point above the ppt line |
is inefficient and unattainable |
a point below the ppt line |
is inefficient and attainable |
a point on the ppf line |
is efficient and attainable |
calculating opportunity cost |
slope of line |
If the price of a substitutes increases |
demand increases |
If the price of Complement increases |
demand decreases |
movement demand |
change price of good (change in quantity demanded) |
shift demand |
a non price determinant changes (change in demand) |
Advertising causes individuals to prefer cellphones over home phones |
shift to the right |
cellphones go on sale |
movement downward |
cellphone calling plans become more expensive |
compliment - shift to left |
competitive market |
A market in which no buyer or seller has market power. |
If a decrease in the price of laptops causes the demand for cell phones to increase, are laptops and cell phones substitutes or complements? |
complements |
If rising incomes cause the demand for beer to decrease, is beer a normal or inferior good? |
inferior good |
Perfectly competitive markets |
full info
no transaction costs
price takers
standardized good |
GDP formula |
GDP=C+I+G+NX |
Nominal GDP formula |
NGDP=Qyr1 X Pyr1 |
Real GDP formula |
Real GDP =\Sigma (Price from Base year)*(Quantity from current year) |
inflation formula |
(deflator current year - deflator previous year/ deflator previous year )X 100% |
gdp per capita |
gdp/population |
gdp growth rate formula |
(GDPt-GDPt-1/GDPt-1) x 100 |
price index |
a measure of how much a market basket has changed relative to cost in a base time period or location |
consumer price index (CPI) |
a measure that tracks changes in the cost of a basket of goods and services purchased by a typical U.S. household |
CPI vs. GDP |
prices of goods/services bought by customers vs all goods/services produced domestically |
substitution bias |
basket of goods remains fixed even in consumers substitute for similar goods |
producer price index (PPI) |
measures the prices of g/s purchased by firms |
purchasing power parity (PPP) |
theory that purchasing power between countries should be the same with common currency |