Exam 1 Study Guide
Exam 1 Study Guide Econ 2105
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This 6 page Study Guide was uploaded by chanelkim on Tuesday September 13, 2016. The Study Guide belongs to Econ 2105 at Georgia State University taught by Michelle Smith in Fall 2016. Since its upload, it has received 127 views. For similar materials see Principles of Macroeconomics in Economics at Georgia State University.
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Date Created: 09/13/16
Economics *Functional Definitions of Economics • Economics: is a social science (deals with human behavior) and is concerned with how people, (both individually collectively) and governments make decisions. It is also the study of how forces of supply and demand allocate scarce resources • Microeconomics: the branch of economics the examines how consumers and firms makes decisions and how these decisions interact… “the small picture” • Macroeconomics: the branch of economics that examines the ups and downs of the overall economy (i.e. taxes, inflation, GDP, unemployment, recessions, etc.) “the big picture” *Government ⁃ Decision making is layered (bureaucracy, must go through a big process) ⁃ Not voluntary/taxes ⁃ Not profit oriented ⁃ Creates laws ⁃ Does not have to remain solvent (worth more than your debt) ⁃ No competition/Monopoly ⁃ Incentives are different ($2 million budget, saves $.5 million, budget goes down to $1.5 million the next year. No reward) ⁃ Always operating ⁃ Macro ⁃ the number one goal of the government is protection of the people *Business ⁃ Decision making is streamlined (quick, making change is easier) ⁃ Voluntary participation ⁃ Must earn a profit ⁃ Obeys laws only ⁃ Must remain solvent ⁃ Operates in a competitive market/Rarely a monopoly ⁃ Performance based incentives (All left over money is rewarded) ⁃ Can underperform and close down ⁃ Micro ⁃ the number one concern for business is profit ⁃ maximize stockholders equity (main goal) The Five Foundations of Economics 1. Incentives matter 2. Life is about tradeoffs 3. Opportunity costs 4. Marginal thinking 5. Trade creates value ⁃ People respond to incentives! CEO Ratio Pay aka CEO to worker compensation Calculation of the CEO to worker ratio for a firm CEO Ratio Pay CRP= CEO’s annual pay / lowest paid employee 2,500,000 / 15,080 = 165.78 (CEO makes 166x more than the lowest payed full time employee) the pay gap in America: CEO makes 354x more than the average employer as the CEO’s pay increases, so does the pay of the lower paid employee CRP is an alternate option to minimum wage Basic Business Cycle Federal Reserve: POTUS chooses the FED Chairman; other than that, the president should not be involved in the FED Federal Reserve lends money only to Major Banks the Major Banks lend to consumers and firms consumers go to firms for jobs while firms go to consumers to find people to build products and services it is all a cycle the government is in between regulating the US Government is the largest consumer in the world Demand: think in terms of buyers and consumers yaxis: P for price xaxis: Q for quantity the line in a QP graph is called a Demand Curve (D) each point on the Demand Curve is called the Quantity Demandate (Qd) as the price is increasing, the quantity decreases=law of demand as the price is decreasing, the quantity increases=law of demand Supply: think in terms of suppliers, producers, and sellers yaxis: P for price xaxis: Q for quantity the line in the QP graph is called a Supply Curve (S) each point on the Supply Curve is called the Quantity Supply (Qs) the slope is always upward/positive as the price is increasing, the quantity increases=law of supply 2 as the price is decreasing, the quantity decreases=law of supply Equilibrium: maximum market efficiency very rare occurrence Qd = Qs equilibrium when both the demand and supply graph intersect only one point on the graph Supply Model of Profitability Price x Quantity In order to make a graph…. when you have P and Q, you must know if it is the seller or the buyer; sellers=supply buyers=demand the benefit of CRP is that if the CEO gets a raise, so does everyone else; if minimum wage is used, this does not apply Price Controls: attempt to set prices through government involvement (intervention) • Price Ceiling: legally established maximum price for goods and services (ex: rent control; owner wants to charge max of $2,000 per apartment however, the government sets a price for $700 per apartment and the owner must follow; those who have low income or the elderly who pay the $700 may be told to enter the apartment through the back door) • Price Floor: legally established minimum price a seller can be paid (ex: minimum wage; government is involved her for the protection of the lower income people) • Black Markets: illegal markets that arise when price controls are in place (the building owner will make those who are paying $700 for the apartment building pay extra and/or paint the apartment, remodel the kitchen, etc. under the table and illegally) Alexander Hamilton: born to an unwed mother in the west indies; born poor, a wealthy benefactor sent him to the west; first secretary of treasury; started the coast guard; began the notion of the first national bank called the fed; started a system of tariffs; secretary of treasurer to George Washington Democratic Capitalist Republic Democratic: political Capitalist: economic Republic: constitution FACTA Foreign Account Compliance Transaction Act: anyone in the U.S. with over $50,000 per account abroad must report to the IRS to report taxes; this is a major factor in the high 3 numbers of Americans leaving the U.S. in the past decade; targeting people who make $10200 million Exit Tax Even after you leave the country, you are taxed; tax you as an expatriot; use this in order to prohibit people from leaving Bill and Malinda Gates (501C3: as long as you are helping people, you are tax exempt; churches) Warren Buffett: 3rd richest person in the world; donated $31 billion (from his stock) to the Bill and Malinda Gates Foundation to help people; if he cashed the $31 billion, he would’ve been taxed 39.5%; the Bill and Malinda Gates Foundation is tax exempt and he is basically “keeping” his money because he has control of the money in the foundation; if someone has $500 billion in the foundation, they receive interest and as long as they spend that interest amount on the greater good, their money stays the same at $500 billion, and also, they can take out the money that they donated out of the foundation whenever they want; basically a money holding tank for billionaires and multimillionaires ⁃ you DO NOT spend your principle, you live off of you interest in order to be rich; you make $1,000,000, taxes are 3%=$30,000, if you can live off of only the $30,000, you are rich; However, if you spend you principle money of the $1,000,000 then you are NOT rich Factors that Shift Demand 1. Change in income (if income increases, the demand curve increases; if income decreases, the demand curve decreases) 2. Change in the number of consumers (increase of consumers, increase in demand curve, decrease of consumers, decrease in demand curve) 3. Change in consumer preferences (preference increase, demand curve increase; preference decrease, demand curve decrease) 4. Change in future expectations (expectations positive, increase in demand; expectation negative, decrease in demand) 5. Change in complements (inverse relationship; as gas prices increase, the selling of cars decrease); Change in substitutes (direct relationship; as jeans of up, khakis go up) Factors that Shift Supply 1. Change in cost of inputs (if cost of inputs increase, supply curve goes down; viceversa) 2. Change in advances in technology (if technology advances increase, supply curve increase; viceversa) 3. Change in the number of producers (if number of producers increase, supply curve increase; viceversa) 4. Change in future expectations from a producers standpoint (if expectations are positive, 4 supply increase; viceversa) 5. Change in related goods (if production of related goods in their field increase, supply increase; viceversa) Salient Economic Definitions Normal Good: a good for which, other things equal, an increase in income leads to an increase in demand (Most goods) Inferior Good: a good for which, other things equal, an increase in income leads to a decrease in demand (bus ride versus taxi or uber, McDonald’s versus Houston’s restaurant) Substitutes: two goods for which an increase in the price of one good leads to an increase in the demand for the other good (jean & khakis, coffee & tea, muffing & doughnuts) Complements: two goods for which an increase in the price of one good leads to a decrease in the demand for the other good. These goods are consumed together (computers & software, cars & gasoline) Inputs: any good or service that is used to produce another good or service (vanilla beans to make ice cream; flour to make cupcakes) GDP (Gross Domestic Product) includes all goods and services produced within a nation’s borders (measure of economic activity of the USA) each state has their own GDP (GSP) GNP (Gross National Product) includes all good and services produced by a nation, including those produced overseas/outside the borders (subset of the GDP) Highest GDP 1. USA 2. China 3. Japan EXAM 1 TOPICS 1. Chapter 1 Foundations 2. Basic Business Cycle 3. Government vs. Business 4. CEO Ratio Pay (CRP) 5. Price Controls/Black Markets (Surplus/Shortage Graph) 6. Demand/Supply/Equilibrium/Laws/Schedule 7. Factors that Shift Supply/ Demand (the first 4) 8. Alexander Hamilton 5 9. Democratic Capitalist Republic 10.P x Q Supply Profitability Model 11.FACTA/Exit Tax/Bill and Malinda Gates Foundation 12.Definition and Examples of Economics/Normal Goods/Etc. 13.GDP ⁃ With the demand curve, as the price increases, the quantity decreases ⁃ Price controls are seen as beneficial to society from an economic perspective (False) (Whole purpose is to reach equilibrium however price controls only benefit in surplus) ⁃ the number one fact is people respond to incentives ⁃ The highest valued alternative that must be sacrificed in order to get something else is OPPORTUNITY COST ⁃ marginal > one additional ⁃ When the number of sellers decreases, what happens to the supply curve? Shifts to the LEFT 6
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