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ECON 104: EXAM 1
Scarcity
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a situation in which unlimited wants exceed the limited resources available to fulfill those wants
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economics
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the study of choices people make to attain their goals, given their scarce resources
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economic model
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a simplified version of reality used to analyze real-world economic situations
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three key economic ideas
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1. People are rational
2. People respond to economic incentives
3. Optimal decisions are made at the margin (Marginal analysis)
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Marginal Analysis
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analysis that involves comparing marginal benefits and marginal costs
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The Economic Problem That Every Society Must Solve
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1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
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trade-offs
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because of scarcity, producing more of one good means producing less of another good
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opportunity cost
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highest-valued alternative given up to engage in an activity
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Centrally planned economy
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an economy in which the government decides how economic resources will be allocated
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Market Economy
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an economy in which the government decides how economic resources will be allocated
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Market economy
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an economy in which the decisions of households and firms interacting in markets allocate economic resources
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mixed economy
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an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
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Productive Efficiency
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a situation in which a good or service is produced at the lowest possible cost
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Allocative efficiency
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a state of the economy in which production is in accordance with consumer preferences; every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
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voluntary exchange
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a situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction
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Economic variable
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something measurable that can have different values, such as the incomes of doctors.
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Positive analysis
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analysis concerned with what is
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Normative analysis
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analysis concerned with what ought to be
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Microeconomics
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the study of how households make choices, how they interact in markets, and how the govt attempts to influence their choices.
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macroeconomics
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the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
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business cycle
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alternating periods of economic expansion and economic recession
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expansion |
period of a business cycle during which total production and total employment are increasing
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recession |
period of a business cycle during which total production and total employment are decreasing
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economic growth
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ability of economy to produce increasing quantities of goods and services
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inflation rate
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percentage increase in the price level from one year to the next
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gross domestic product (GDP)
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the market value of all final goods and services produced in a country during a period of time, typically one year
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final good or service
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a good or service purchased by a final user
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intermediate good or service
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a good or service that is an input into another good or service, such as a tire on a truck
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transfer payments
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payments by the govt to households for which the govt does not receive a new good or service in return
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consumtion
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spending by households on goods and services, not including spending on new houses
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investment |
spending by firms on new factories, office building, machinery, and additions to inventories, plus spending by households and firms on new houses
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govt purchases
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spending by federal, state, and local govt on goods and services
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net exports
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exports minus imports
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value added
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the market value a firm adds to a product
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underground economy
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buying and selling of goods and services that is concealed from the govt to avoid taxes or regulations or because the goods and services are illegal
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Nominal GDP
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value of final goods and services evaluated at current-year prices
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Real GDP
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value of final goods and services evaluated at base-year prices
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price level
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a measure of the average prices of goods and services in the economy
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GDP deflator
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measure of the price level, calculated by:
Nominal GDP/Real GDP * 100
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Nominal GDP (2014 II)
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$17.3 Trillion
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Real GDP (2014 II)
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$16 trillion
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Economic Growth (2013 II- 2014 II)
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2.6%
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CPI: consumer price index
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237.9
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Inflation (by the % change in the CPI over the last year)
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2.0%
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Per capita
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per person
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capital
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(K): manufactured goods owned by firms to produce other goods and services
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Considered Investment?
United Airlines buys new Boeing 787
United Airlines buys fuel for jets
Buying new house
Buying used house
Putting $ in bank for spring break
Person investing stocks for retirement
Ski store stocking up for winter
Factory
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YES: United Airlines buys new Boeing 787
NO: United Airlines buys fuel for jets
YES: Buying new house
NO: Buying used house
NO: Putting $ in bank for spring break
NO: Person investing stocks for retirement
YES: Ski store stocking up for winter
NO: Factory
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True or False:
One difference btwn a capital good and an intermediate good is that an intermediate good is used up and transformed in the production process while a capital good is not.
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True
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True or False
Every time a $ is used to make a purchase in a country, this will show up in GDP.
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False: think underground economy
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Which of these would be considered money in the U.S.?
Corporate Stock
US Savings Bonds
Capital Owned by Boeing (K)
Investment by Ford in a Factory
Funds in checking accounts
US Currency (Cash)
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NO: Corporate Stock
NO: US Savings Bonds
NO: Capital Owned by Boeing (K)
NO: Investment by Ford in a Factory
YES: Funds in checking accounts
YES: US Currency (Cash)
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Currently, the FED is concerned about the number unemployed, underemployed, and have quit looking. Thus, what do you think the value of the federal funds rate might be?
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LOW
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If the Federal Funds Rate falls, all else equal, GDP will most likely _______ and ____(#)______ components of GDP will change.
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RISE
2- Consumption and Investment
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GDP=
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Consumption+ Investment+ Govt purchases+ Net Exports
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Monetary Policy:
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Who: Federal Reserve (Central Bank)
Goal: Promote employment and stabilize prices (around 2% inflation is good!)
How: by changing interest rates of changing money supply
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Fiscal Policy:
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Who: President and Congress
Goal: Increase demand & economic growth
or
reduce demand, reduce inflation, and lower budget deficit
How: influence over federal expenditures and taxes
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GDP Deflator
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measure avg price of all goods and services in an economy.
=(nom GDP/Real GDP) * 100
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CPI
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Consumer Price Index:
an average of the prices of the goods and services purchased by the typical urban family of 4
Used to correct nominal prices and wages over time for the impact of inflation
(P2/P1) *100
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Nominal Price Wage:
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CPI
how many dollars does it take to buy or pay them
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Real price/ wage
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CPI
Nominal value with inflation removed
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GDP Limitations
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GDP does not measure well-being
Value of leisure is not included
Not adjusted for pollution or other negative effects of products
Not adjusted for crime and other social problems
Does not measure "how the pie is divided up"
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CPI Limitations
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Substitution Bias: consumers will buy cheaper
Increase in quality bias: price increases overstate the pure inflation in some products
New product bias: prices of new products drop drastically
Outlet bias: CPI did not reflect prices actually paid when a sale was in place
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Money is an asset that:
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Medium of exchange
Store of value (assets away for future; gold inventory, bonds, stocks)
unit of account
Standard of deferred payment (loans in terms of $)
**Credit Cards do not equal money!**
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Efficiency Wage
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a higher than market wage that a firm pays to increase worker productivity
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price level
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a measure of the average prices of goods and services in the economy
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inflation rate
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the percentage increase in price level from one year to the next
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Producer Price Index
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an avg of the prices received by producers of goods and services at all stages of the production process
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