ECO 2013 Study Guide Test 2
ECO 2013 Study Guide Test 2 Test 101
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Date Created: 10/18/16
ECO 2013 STUDY GUIDE TEST 2 CHAPTER 3 Supply: The maximum amount of a product that sellers are willing and able to provide over some period at various prices (ceteris paribus, fixing everything but the price). The max amount of a product that sellers are willing to produce Willing and able Supply curve measures both price and quantity supplied (positively related) because producing more units is more expensive, increasing costs cause the positive relationship between the two. As prices rises, producers will make more. Ex: Peanut Butter costs rises from 3 to $5 at publix. At this price, sellers will make more. Consumers will purchase if they agree to the price increase. LAW OF SUPPLY States that higher prices will lead producers to offer more of their products for sale during a given period. However, if prices fall, producers will offer fewer products to the market. Producers need to charge higher prices to increase how much the quantity supplied will profit due to higher opportunity costs. Ex: Publix chocolate milk price falls from $6 to $3 a gallon. More consumers are going to purchase this good but less sellers are going to make more milk at this price. It costs too much to produce an item if it is going to be sold for significantly less, the business won’t make as much money. MARKET SUPPLY CURVE: Horizontal summation of all individual supply curves. In other words, horizontally adding the supplies of individual producers. Supply curves: provide a graphical representation of the law of supply. Shows max amounts of a product producer that will furnish at various prices during a given period of time. DETRIMENTS OF SUPPLY: Nonprice factors that change supply curve: Technology production (new technology can influence production) Cost of resources (how much does it cost to purchase other goods to make the final product, is it worth spending that much money) Prices of commodities (competitors $ prices) Expectations (expectations about future costs rising, dropping) # of sellers (number of sellers in the market) Taxes and subsidies (how much will this product be taxed for, will that affect the supply of that product) Production Technology: supply increases when improvements in technology lower the cost of production. Makes production more efficient, increasing sales, offering more to the market. Shifts right = supply increase, shifts left = supply decrease Ex: An old factory can only produce 50 units per hour, no matter how many other resources you might have, it will only produce 50. If the technology was newer maybe it would produce 100 per hour. Cost of Resources: Supply will increase if the costs of resources used decreases. It it becomes cheaper to make something then more sellers will supply more of their final good. If resources such as raw materials or labor become more expensive, production costs will rise and supply will be reduced (supply curve will shift left). If it becomes too expensive to produce an item, supply will be reduced because it costs more than its worth. Ex: If labor costs rise because immigration is restricted, this drives up production costs of California vegetables (fewer workers) and software (fewer software engineers) leads to a shift to the left Ex: If soybean $ decreases, the supply of the soy milk and tofu increases. PRICES OF OTHER GOODS AND SERVICES (related goods) Most firms have some room for flexibility in the portfolio of goods they produce. Ex: A vegetable farmer might be able to grow celery or radishes, or some combo of the two. A change in the price of one item could influence the quantity of other items. An increase in the profitability of electric cars will decrease the supply of gas cars, keeping other factors constant. Expectations: An expectation of a future rise in prices decreases supply now. Shifts left When sellers expect prices of a good rise in the future, they are likely to restrict their supply in the current period in anticipation of receiving higher prices in some future period. Ex: Homes and stocks. If you believe prices are going up, you’d be less likely to sell today which would decrease the supply of those goods. Ex: If the price of Coke decreases in 2 days then it will become cheaper and supply will decrease. # of Sellers: As more producers enter a market supply increases. If the number of sellers in a particular market increases, the market supply of their product increases. Ex: as more firms produce surf boards, supply increases. Ex: Ten chefs can produce more pizzas in a given period than five chefs. If you have a subsidy (help from the government) supply will increase, shifts right. Higher tax on products, supply decreases, shifts left. Taxes and Subsidies: An increase in taxes (property, other fees) will shift supply to the left and reduce it. Subsidies are the opposite of taxes. Ex: A proposed new tax on expensive health care insurance plans may reduce supply, while today’s subsidies to ethanol producers expand production. Effects subsidies; When subsidies on solar/wind energy expire, supply decreases MARKET EQUILIBRIUM A market will determine the price at which the quantity of a product demanded is equal to the quantity supplied. Occurs when quantity supplied equals quantity demanded. Equilibrium: the amount of the product that consumers are willing and able to purchase is matched exactly by the amount that producers are willing and able to sell. Consumers want to buy exactly how much producers offer Ex: Video games are priced at $80, above their equilibrium price ($60) sellers are willing to supply more games at this price than consumers are willing to buy. Consumers and sellers are both happy at $60. Surplus: An excess of supply. Ex: At $80 sellers make 40 games, consumers will only be willing to buy at least 20. There is a surplus of 20 unbought games. Shortage: A price is too low and a shortage results. Ex: Video games at $40, buyers want to purchase more because it is cheaper. Say they purchase 40 games, but sellers can only provide 20 games. Shortage would be 20 games. Higher demand of something equals higher supply of something. Equilibrium quantity: The output at which quantity supplied equals quantity demanded. Buyers and sellers are both happy, benefitting both, no one wants to move away from this price. Invisible hands market: secret force to figure out where the price should be. CHAPTER 5 The scope of macro Unemployment GDP Inflation Economic growth Interest rates Business cycles: Shortrun fluctuations/changes in the macroeconomy known also as booms and busts. Alternating increases and decreases in economic activity. Business cycles vary in intensity and education. Emphasize the idea that markets are intertwined with each other. Generally, they show a longterm upward trend. (How much did we produce?) The 4 phases include Peak: (boom) the economy is operating at its highest point Recession: (downturn) Trough: bottom of the cycle Recover: expansion to another peak How intense/long is that recession. Business cycles are like roller coasters. Recessions are very common How long do recessions last? Depends on unemployment rate loss of money interest rate. Fiscal policy: control government spending Monetary policy: change currency Dating Business Cycles The NBER (National Bureau of Economic Research) officially dates the U.S business cycles. Looks for turning points: at what point does the economic switches from peak to recession, from recession to trough to recovery to peak Recession: begins after 2 consecutive quarters of negative growth (after 6 months of downward trends) Double Dip: Happens when recession occurs when a recovering economy does not reach its former peak. After recovering from initial recession you never hit the same peak. An economy’s recovery falls short and enters another recession before it fully recovers. If our economy is doing well we will create unemployment, people will spend less. Jobless Recovery: Macroeconomy experiences growth while maintaining/decreasing its employment level. NATIONAL INCOME AND PRODUCT ACCOUNTS (NIPA) Most common for GDP Measures nation’s economic performance, Compare US income and output to those or other nations Track the economy’s condition throughout the business cycle. Core of NIPA: The economy can be measured in two ways: Adding up all of the income produced Spending AKA expenditure Circular Flow Diagram Going to measure how NIPA is used, every dollar spend becomes every dollar earned. Shows how business and households interact through the product and resource markets. Ex: Household spends $3 to get coffee at Starbucks. Starbucks makes a $3 revenue but then uses it to pay the business costs. Such as, salaries for employees, rent fee’s, etc. The $3 goes into different channels. Those dollars spent become someone else’s income. 1 dollar spent = 1 dollar earned GDP: (Gross Domestic Product) most common measure for national output (economy’s total output), spending, most common measure of economy’s size. Value of all the goods + services produced by resources in the U.S in a given year. Technically the nation’s GDP = the total market value of all final goods and services produced by resources within the United states in a given year. Does not include intermediate goods going into the production of the final good. Ex: A firm producing toothpicks must first purchase a supply of cottonwood for 0.22 cents. The firm breaks this wood down into the form of a toothpick and puts it into a small box that costs 8 cents. The toothpicks are sold to Publix for 60 cents, Publix marks up its value to 89 cents. Ex: Iphone 7 from At&t within the U.S GNP: Gross National Product, the market value of all goods and services produced domestically and abroad using resources supplied by US citizens. These goods will NOT be counted if produced within the U.S by foreign owned businesses. Final goods + services: final goods and services produced, for consumers purchase. Opposite is intermediated goods and services (goods you need to make your goods and services). Ex: Cottonwood needed to make toothpicks Ex: Sugar and Cocoa needed to make chocolate. Ex: Sugar. Candy company purchases sugar to produce their candy bars. Candy bars sold for $4. Candy company paid sugar company (inputs) $1 to produce their candy bars. Sugar costs $1, Candy bars $4. Final good = Candy bar, Intermediated good = Sugar Must have Market Value (price) for goods and services to be goods and services. Ex: Drugs don’t have a market price, drug dealers won’t tell you how much they produced, not counted in GDP because it is illegal. However, if Weed is legalized and now counted for in GDP, it can be taxed, because it has market value. GDP measure is a common measure used in our economy, excludes underground activities such as selling drugs. GDP EQUATION: GDP = C+I+G+(xm) subtracting exports and imports if they are different. 2 ways to measure GDP 1) Expenditure Approach: measures total spending, including consumption, investment, government spending and net exports. (Where we spend currency) 2) Income Approach: measures income to various factors of production. How much is wage/profit in our economy? Expenditure Approach All spending on final goods and services are added together 4 Categories of spending Personal consumption expenditures: goods and services purchased by residents and business of the US. - Goods/Services divided into 3 categories o Durable goods: Goods that last at least 3 years. Ex: Cars, DVDs o Nondurable goods (tangible goods, goods that should not last more than 3 years) Ex: toothbrushes, frozen pizza, coffee creamer, eggs o Services: Commodities that cannot be stored and are consumed at the time and place of purchase. Ex: repair services, barber, nails. Gross private domestic investment (GDPI): fixed investments, investments in such things as structures both residential and nonresidential (hotels, motels, fast food restaurants), equipment, software. Government spending. Ex: taxes, wages at federal, state, and local levels, spending on new structures and equipment. Net Exports (exports – imports) o Exports: all things we sell overseas, what we buy from others. Ex: Military equipment o Imports: items we bring into the country, what others buy from us. Ex: vegetables from Mexico, coffee from Colombia. Equation: Y=C+I+G+Nx C= personal consumption expenditures I= Gross Private Domestic Investment (GPDI) How much we change in our production G= Government spending Government spending is 20 % of our economy at both city, broad, and state level. Ex: City of Boca Raton wants to build another airport. (gov. spending) Ex GDPI: FAU wants to produce new buildings. Includes spending on adding new technology like computers, copy machines, new projectors Ex: Government spending Hiring new employees State of FL gives FAU $100 dollars towards education Going to war Includes wages at federal, state, and city level Tax revenue = spending Personal Consumption Expenditures: Durable/non durable goods (purchases) and services by consumers and businesses. Ex: getting a haircut, nails done (services) Ex: iPhone 7 AT&t (services, goods) Ex: Buying a fridge (durable good) Ex: Buying Nike shoes (durable good) Ex: Buying a car (durable good) Ex: Toothbrush, frozen ice cream (nondurable good) Gross Private Domestic Investment (GDPI) includes: investment in structures (residential, and business) Equipment/software purchases Changes in Business Inventory A % of GDP, volatile, it causes changes in the business cycle. Ex of GDP: House made 20 years ago, counted 1 time in GDP of that year. Selling it now years later that would count in GDP for that year it was sold. Income Approach to GDP GDP also can be calculated as the compensation to factors of production: Compensation of employees: payments for work including wages, salaries, and benefits (Social security, Medicare) Proprietor’s income: current income of all sole proprietorships, partnerships, and taxexempt cooperatives in the country. Corporate profits (how much they are making): income that flows to corporations Rental income: Individuals who rent property. Ex: Renting a house for 4 years. Ex: Office rented to another company, how much is that company making? Net interest (rental on land, interest of that) Ex: home mortgages, equity loans Miscellaneous Adjustments Add all income to find the GDP Disposable Personal Income: equals personal income – taxes How much money you’re able to use, how much is in your pocket Disposable income can be spent or saved therefore: Y=C+S A higher GDP = a higher standard of living Does not take into account environmental quality. Doesn’t measure informal or non market activities, such as tutoring other students for cash. Informal market constitutes 10% Sometimes recovery feels worse than an actual recession because you’re building from the ground up. Trough: rock bottom of the economy REVIEW Example question: The value of the cars that the Ford Motor Company produces in a German plant is: B) part of U.S GNP Review for GDP Measurement - Expenditure approach - Y=C+I+G+EX-IM Which of the following is NOT included in gross private domestic investment? C) purchases of common stock by investors - in economics purchasing stock is just purchasing ownership of that item, its not part of the investment in the expenditure approach. CHAPTER 6 NOTES Inflation: a general increase in prices of goods and services. - Although prices have risen significantly over time, wages rose even faster for most workers. - Ex: Putting money into a bank for a college fund and accessing the fund 10 years later. The interest rates have fluctuated, changing the value of the money in the fund. What could have been worth 30,000 is now worth 20,000. Inflation measures changes in the cost of living. Causes included: - Demand factors: consumer confidence income wealth. - Ex: a busy mall is not going to decrease the prices of their items in order to attract more customers. Keeping the prices higher than consumers can pay for, creating inflation. - Supply shocks: price fluctuations on items such as food and oil and other natural resources. Ex: Gas being more expensive now than it was 10 years ago due to high demand in other countries for oil. - Government Policy: its ability to borrow and print money. - Ex: The government borrows money to pay for new buildings and schools, when the money is due the government does not have enough, thus printing sheets of money, creating inflation. Inflation is measured against a market basket. Some prices rise and some fall but overall the prices level increases. 1) Consumer price index (PP!) 2) GDP 3) Producer price index Disinflation: a reduction of the rate of inflation raise at a decreasing pace. The economy will still experience disinflation but at a slow pace. Deflation: a decline in overall prices in the economy (opposite of inflation, below the 0 line on a graph) Ex of Disinflation: the price level is 100 in the year 2014 in the year 2015 130 and 2016 it increases more to 150. From 100 to 130 there is a 30% increase. Find the percentage between 130 and 150. 150/130 x 100-100 = 15.4% Consumer Price Index (CPI) (aka cost of living) - Measures the average change in prices paid by urban consumers and urban wage workers for a market basket of consumer goods and services. - Cost of living: compares cost of maintaining the same standard of living in the current base periods - Cost of goods: measures the cost of a fixed bundle of goods/services from one period to the next. CPL: is a cost of goods index. It compares the cost of a fixed bundle of goods and services from one period to the next. Producer Price Index (PPI): measures the average changes in the prices received by domestic producers for their output. Compiled of extensive sampling of every mining industry and manufacturing sectors of our economy. - Example: 2014 20 lb beef charged at $5 a pound, Chicken 10 lb goes down $3 a pound. In 2015, beef increased $7, chicken increased by 1$ = $4 Calculating CPI and INFLATION - Define a base year and find the cost - Find the current cost and use the following formula to compare the costs: CPI = (cost in current period divided cost in base period) x 100 - Ex: Price of market basket goods in 2008 are $5,000, the same basket now costs 5,750. Base year is 2008. 115.0=(5,750/5,000) x 100 - % change in price= [(CPI in current year/CPI in original year) x 100]- 100 - Ex: CPI price in 2013 was 233.8 and in 2008 was 215.3, the average change in prices. - 8.6%=[(233.8/215.3)x100]-100 Ex: Cost of consumption basket increases from $130 to $180. 180/130 multiplied by 100 minus 100. PROBLEMS WITH CPI - CPI measures only private goods - CPI tends to overstate inflation because it uses a fixed market basket. Market surveys are 3-5 yrs old It doesn’t account for product substitution, quality improvements, or new products. - CPI measures only consumers’ out-of-pocket health care expenditures. Doesn’t account for government spending It doesn’t measure the overall rise in health care costs Must know how to calculate inflation rate, deflation rate, disinflation, CPI - GDP deflator: The broadest measure of inflation. An index of the average prices for all goods and services in the economy, including all components of GDP: consumption, investment, government spending, and net exports. - To calculate this, you must know the difference between real GDP and the nominal GDP. True measure of the value of that company’s production. - Ex: Nominal GDP: Produced $1 each 100 apples = $100 in 2013 $2 120 apples in 2014, nominal GDP = $240 of production ($2 x 120) - Ex: Real GDP: First year 2013 numbers and base will be the same. $1 each 100 apples =$100 2014 $2, 120 apples = $120 - How to calculate GDP deflator - Real=Nominal x (base year index/ current year index - Ex: in the apple example in the year 2013, $100 (nominal) $100 (real) divide both numbers and multiply by 100. - Apple production 2014, 240/120 x 100 = 200 - GDP measures the final production of goods and services. ADJUSTING FOR INFLATION - Price indexes are used to modify payments to account for inflation. Used to convert nominal values to real values - Escalator clauses are designed to adjust payments or wages for changes in the price level. Commercial rental agreements Labor union contracts Social Security payments ADJUSTING NOMINAL VALUE TO REAL VALUE - Nominal value is converted to real values using: - Real value = nominal value x (base year index/ current year index) Hyperinflation: an extremely high rate of inflation (at least 100 % per year) Ex: when the prices of everything doubles throughout time. People are expecting future price to increase even more each day. Everyone will use their money to purchase those goods and services. Not enough for everyone, too expensive. Ex: In 2008, Prices in Zimbabwe were more than doubling every day, inflation rate of 231 mil % even $100 trillion billion became worthless. CONSEQUENCES OF HYPERINFLATION - Hyperinflation: typically caused by excessive government spending over tax revenues and the printing of money to finance deficits. - Workers are paid frequently, and purchases are made immediately. - Eventually the monetary system breaks down and the barter system is used. Foreign currencies become extremely valuable. - O Unemployment: describes persons not working but able and willing to work and actively seek a job. (does not include college kids) MEASURING UNEMPLOYMENT - Each month the BLS reports: Size of labor force # of people employed # of people unemployed - The unemployment rate is equal to: # of unemployed people/labor force - A person is counted as employed if any of the following applies: Works full or part time Works a temporary job Has a job but is on vacation, ill, maternity leave, strike, etc. Is an unpaid family worker working at least 15 hours per week. Ex: Working on a family farm, not getting actual dollars worth of work. Common in developing countries. (usually determined by survey) Unemployed: person does not have a job but has been actively looking but unsuccessfully seeking work in the past four weeks. - Marginally employed: people who have had a job but they are unemployed and tried applying for months and gave up looking, applying for unemployment assistance from the government. Labor force: total number of those employed and unemployed - Full time students without a job are neither employed nor unemployed, not in the labor force at all. - Full time students who work part time jobs are considered employed. Labor force/population MONTHLY EMPLOYMENT SURVEYS - Both surveys are needed for a complete picture of unemployment. Household survey, payroll survey. - Household survey: A BLS canvass of 60,000 households - Payroll: Covers 400,000 companies and government agencies. EMPLOYMENT TRENDS - Investors and economists are interested in employment trends and how they affect the overall health of the economy. - Weekly jobs report - Released by the Department of Labor each week (Thursday) - Provides an estimate of the number of persons filing for unemployment for the first time. CHANGES IN THE LABOR FORCE OVER TIME - The labor force is constantly changing - Population growth: overall rise in the number of available workers - Demographic changes: average age of population, birth rates, immigration - Socioeconomic reasons: more women working, delayed retirement - Economic conditions: more discouraged workers people could have stopped looking, workers going back to school. PROBLEMS WITH UNEMPLOYMENT STATISTICS - The official U.S unemployment rate does not account for: - Underemployed workers: those working part-time or seeking a better job, has a job that is no where near or barely utilizing their skill set - Discouraged workers: those who haven’t looked for a job in the past four weeks - Marginally attached workers: those who actively looked for work in the past 12 months 1 year, stopped in the past four weeks. - The BLS provides unemployment statistics that include underemployed and discouraged workers. COMMON CAUSES OF UNEMPLOYMENT - Job searching and matching: It takes time to find a job and for employers to find the right employees, what will fit your skill set best. - Efficiency wages: Wages are kept above market equilibrium to reduce turnover and to improve productivity. - High minimum wages: If wages are too costly, hiring is likely to be reduced - Business cycle: Recessions reduce consumer demand, leading to layoffs. TYPES OF UNEMPLOYMENT - Frictional unemployment: results from workers who voluntarily quit to search for a better position, a better job, short term. - Structural unemployment: is caused by changes in consumer demand or technology. Some industries lose their demand. Long term. Ex: Toll passes are out of demand, those people are getting replaced by SunPass, loss in jobs due to change in consumer demand or technology. Music store jobs that sell CDs - Cyclical unemployment: caused by fluctuations in the business cycle. The difference between current employment rate and what it would be at full employment - Ex: recessions NATURAL RATE OF UNEMPLOYMENT - Frictional and structural unemployment always exists. - Cyclical unemployment is the focus of most public policy - The natural rate of unemployment is equal to: frictional unemployment + structural unemployment. NAIRU - At the nonaccelerating inflation rate of unemployment (NAIRU): Inflationary pressures are at their minimum Actual inflation is = to expectations Price and wage decisions are consistent Cyclical unemployment is 0 - The natural rate of unemployment has ranged from 5-6% for the past 50 years Ex question for exam: A small country has 1,200 citizens: 800 are employed, 200 are unemployed, 100 are retired, and 100 are kids in school. The unemployment rate is: 200/100 x 100 = 20% - Must know the determinants of supply - Ex: if someone increased their income what would happen to the market equilibrium price? Goes down - Exam will cover Ch 3 (11 questions) part 2, Ch 5 (16 questions), Ch 6 (13 questions) must know unemployment and inflation and the types - Must know 4 components of GDP calculation - Must know expenditure approach and the income approach - GDP deflator calculation = nominal gdp/real gdp x 100 - Percentage calculation= number/number x 100 – 100 Ex: 240/200 x 100 - 100 - GDP measure: NX= EX-IM (exports minus imports) - Disposable income (money you can actually spend) can make consumption decision. Disposable income is $80 and you only want to spend 60 so you’ll have 20 left. Whatever you don’t spend becomes your savings. Y= C+S - Bring calculator, bring green scantron
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