ECON 2000: FINAL EXAM
101 Cards in this Set
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Economics
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The social science that analyzes the production, distribution, and consumption of goods and services.
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Cost - Benefit Principle
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An individual will take an action if the additional benefits are at least as great as the additional costs.
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Equation for Economic Surplus
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Benefits - Cost
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Opportunity Cost
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Value of the next best alternative that must be given up to undertake an activity.
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Positive Economics
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Seeks to understand economic behavior without making judgments
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Normative Economics
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(policy economics) Evaluates the outcomes of economic behavior as good or bad and prescribes courses of actions
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Economic Theory
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Develop models that describes how the economy works
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Capital
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Things used/produced in order to produce other things
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Comparative Advantage
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if the producer can produce that product at a lower opportunity cost than another producer
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Absolute Advantage
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if the producer can produce that product using fewer resources than another producer.
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Production Possibilities Frontier (PPF)
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shows combination of 2 goods/services that can be produced if all of society's resources are used efficiently.
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Law of Increasing Opportunity Cost
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To produce more and more of one good, production of the other good must be given up at a faster and faster rate.
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"Low-Hanging Fruit Principle"
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The more resources already devoted to an activity, the smaller the payoff is from devoting additional resources to that activity (diminishing returns)
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2 Ways for an Economy to be Efficient
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1. Not waste resources (productive efficiency).... 2. Produce what society wants (allocative/output efficiency).
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"Gains from Trade"
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Gains trade in economics refers to net benefits to agents from voluntary trading with each other.
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The Law of Demand
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Negative relationship between price and quantity demanded
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Quantity Demanded
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The amount of a product a purchaser would buy in a given time period if it could buy all that it wanted to at the current market price.
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Horizontal Interpretation for a Demand Curve
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Price determines quantity demanded
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Vertical Interpretation for a Demand Curve
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For each quantity, the corresponding price shows the maximum amount a buyer would pay for that unit of the good/service. (Marginal utility from that unit)
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Why is there a negative relationship between price and quantity demanded?
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1. Income Effect.... 2. Substitution Effect.... 3. Diminishing Marginal Utility
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Variables that shift demand
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1. Income and Wealth.... 2. Prices of Related Goods.... 3. Tastes & Preferences.... 4. Population... 5. Expectations.
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Supply Curve
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Shows positive relationship between Price and Quantity Supplied
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Horizontal Interpretation for Supply Curve
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Price Interprets/determines quantity supplied
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Vertical Interpretation for Supply Curve
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For each quantity the corresponding price shows the minimum amount a seller would accept for that unit of the good or service. (Marginal cost to produce that unit)
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Increase in Supply
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For each unit of good, seller will accept lower price... At every price, sellers will offer more of the good/service.
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Decrease in Supply
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For each unit of good, seller requires higher price.... At every price, sellers offer less of good/service.
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Individual Demand
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one buyers demand for a product
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Market Demand
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Demand for all consumers in a market
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Increase in Demand
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At every price, quantity demanded is higher... For every unit of the product, buyers will pay a higher price.
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Decrease in Demand
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At every price, quantity demanded is lower... For every unit of the product, the price buyers are willing to pay is lower.
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Law of Supply
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In economics, the law of supply is the tendency of suppliers to offer more of a good at a higher price.
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Variables that will shift the supply curve
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1. Change in the cost of production.... 2. Prices of related products.... 3. Number of Suppliers.... 4 Weather, wars, natural disasters, etc....
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Three Possibilities of Price & Quantity Determination
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1. Equilibrium (market).... 2. Shortage (excess Demand).... 3. Surplus (excess supply)
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Equilibrium (Market)
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Occurs Automatically
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Shortage (Excess Demand)
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Shortage: Qd - Qs......Quantity of Supply increases up to equilibrium (if reaching a shortage).
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Surplus (Excess Supply)
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Surplus = Qs - Qd...... As growing price in market falls, firms don't want to produce as much.
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Changes in Equilibrium (8)
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1. Increases in Demand... 2. Decreases in Demand... 3. Increase in Supply... 4. Decrease in Supply... 5. Increase in Demand & Decrease in Supply.... 6. Decrease in Demand & Decrease in Supply... 7. Increase in Demand & Decrease in Supply... 8. Decrease in Demand & Increase in Supply.
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Rationing Mechanism
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The system by which goods and services are allocated within an economy.
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In Free Markets, ____ serves as the rationing mechanism.
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Price
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The Price System does what 3 things?
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1. Provides an automatic mechanism to distribute goods and services... 2. Determines the final mix of outputs.... 3. Determines the allocation of resources among producers...
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Alternative Rationing Mechanisms (3)
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1. Queuing (waiting)... 2. Ration Coupons.... 3. Favored Customers...
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Price Ceiling
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Maximum price set by law.
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Price Controls
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Price controls are governmental impositions on the prices charged for goods and services in a market, usually intended to maintain the affordability of staple foods and goods, and to prevent price gouging during shortages, or, alternately, to insure an income for providers of certain good…
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Price Floor
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The minimum price set by law... ex. min. wage, alcohol, tobacco...
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Consumer Surplus
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The difference between the maximum amount a person is willing to pay for a good/service and it's current price.
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Marginal Utility
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Maximum price a person would pay
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Producer Surplus
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Difference between the price and the minimum amount a seller would accept for a unit of the good/service (Marginal cost of production for that unit)
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Deadweight Loss
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Net loss of producer and consumer surplus.... Not enough resources to maximize benefits... Caused by price Ceiling
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When was Macroeconomics developed?
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During the Great Depression
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The Roots of Macroeconomics
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Falling output/income... High Unemployment (Up to 20%)
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Classical (Market Cleaning) Models
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Hold that the economy should correct itself
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The first major work in Macroeconomic Theory
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The Keynesian Revolution
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Keynesian Model
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The level of aggregate demand for goods & services determines the level of economic growth and unemployment
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Keynesian explanation for economic fluctuations
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The Keynesian model implies that the gov't should spend more during a recession/depression to boast aggregate demand.
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Measuring the Health of an Economy (3)
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1. Aggregate Output.... 2. Inflation..... 3. Unemployment
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Aggregate Output
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otal Amount/quantity of goods and services produced in an economy in a given period of time.
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Recession
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Negative GDP growth for 2 consecutive quarters
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Depression
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Prolonged and deep recession
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Inflation
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increases in overall price level
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Deflation
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Decreases in the overall price level
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Disinflation
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Decrease in the rate of inflation
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Unemployment
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Rate of the percent of labor force that is not working but would like to be.
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Three types of Economic Policy
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1. Fiscal.... 2. Monetary... 3. Supply-Side
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Fiscal Policy
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Monetary Policy
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...
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Supply-Side Policy
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....
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Gross Domestic Product (GDP)
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Market value of all final goods and services produced within a nation's borders during a given time period.
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Rules for calculating GDP (4)
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1. Use market value... 2. Count all final goods & services PRODUCED, not total sales... 3. Only count FINAL goods & services produced for the end user.... 4. Include productive non-market activities (goods/services produced/consumed but not traded.)
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What items are not counted in GDP
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1. Sales of Used goods... 2. Gov't Transfers.... 3. Private transfers... 4. Purchases of stocks & bonds... 5. Bank Loans.
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Two methods for Calculating GDP
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1. Expenditure Approach... 2. Income Approach
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Expenditure Approach
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Calculates GDP by adding up spending on newly produced goods and services.... GDP = C + I + G + (EX - IM)
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Income Approach
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Calculates GDP by adding up income received by an economy's factors of production.... GDP = National Income + Capital Stock Depreciation + Net Factor Payments to ROW
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Nominal GDP
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Output is valued at current prices
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Real GDP
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output is valued at constant prices (prices of a base year)
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Limitations of GDP as a Measure of Well Being (5)
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1. Tradeoff between leisure & GDP.... 2. Says nothing about the distribution of income.... 3. Does not account for environmental damage.... 4. Money spent after disasters to rebuild will increase GDP..... 5. Doesn't account for underground economic activity.
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Measuring Unemployment
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Bureau of Labor Statistics... Survey 65,000 households monthly, aged 16+
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Employed
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Has worked one or more hours for pay or 15 or more hours in a family business in the past week.
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Unemployed
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Without a job and actively looking for work
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Labor Force
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Employed + Unemployed
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Those NOT in the Labor Force
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Full time students, Retirees, Homemakers, Disabled, and Discouraged workers.
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Calculating the Unemployment Rate
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Unemployed/Labor Force x 100
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Types of Unemployment (3)
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1. Frictional Unemployment.... 2. Structural Unemployment....3. Cyclical Unemployment
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Frictional Unemployment
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Jobs exist and workers have the correct skills, they have just not found work yet
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Structural Unemployment
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Jobs exist, but workers do not have the correct skills yet.
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Cyclical Unemployment
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Jobs no longer exist for unemployed workers.
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Discourage Worker Effect
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Reduction in the stated unemployment rate that occurs when people stop looking for work.
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Consumer Price Index (CPI)
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Average price of a basket of goods & services purchased by a typical household relative to the price of the same basket in a base year.
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Equation for finding CPI
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CPI = value of basket in current year/value of basket in base year x100
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Real Interest Rates
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Inflation adjusted interest rate
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Calculating Real Interest Rate
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Real Interest Rate = Nominal Interest Rate - Inflation Rate
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Short Run Keynesian Model
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Isolate the impact of changes in spending behavior on GDP.
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*Equilibrium Condition for the Short Run Keynesian Model
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Aggregate Expenditure = Aggregate Output (GDP)..... If this holds, there is no tendency for GDP to change..... If there is a mismatch, GDP will adjust up or down to reach equilibrium.
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Consumption Functions
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Show the relationship between spending (c) and income (y).... C = a + bY
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Autonomous Consumption (a)
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consumption that is dependent of income... when income = 0
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Marginal Propensity to consume (b)
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Fraction of a change in income that is spent..... Slope of consumption function.
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Marginal Propensity to Save
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Fraction of a change in income that is saved.... slope of the saving function. .... MPC + MPS = 1
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Aggregate Expenditure in the Short Run Keynesian
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AE = C + I + G + (EX - IM) ****ASSUME NO GOV'T NO ROW. SOOOOO AE = C + I
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2 Methods Finding Equilibrium Output
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1. Expenditure Approach... 2. Leakage/Injection Approach
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Equilibrium Condition for Keynesian Model
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Aggregate Output (Income/GDP) = PLanned Aggregate Expenditure..... Y = AE..... Y = C + I
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Leakage/Injection Approach in Equilibrium
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1) Y = AE.... 2) Y = C + S.... 3) AE = C + I....... substitute (2) and (3) into (I) so S = I
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Autonomous Spending Multiplier
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Ration of the change in equilibrium output to the changes in autonomous expenditures.
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ECON 2000: Exam 3