Study Guide for Exam 1
word=topic word=vocabulary/definition word=important rules word= reasons of changes word=important concept word=equation
Production Possibility Frontier:
● illustrates the trade-offs facing an economy that produces only two goods. ● shows the maximum quantity of one good that can be produce for any given quantity produced of the other.
We also discuss several other topics like Communism idea is to get rid of what?
A: feasible but not efficient
B: feasible and efficient in production
C: Not feasible
Slope: opportunity cost
*opportunity cost: what must be given up in order to get that good
Bowed outward: increasing opportunity cost
An outward shift: production possibility are expanded (=economic growth) Reasons:
● Factors of production: resources used to produce goods and serivces ● Technology: the technical means for producing goods and services
Comparative advantage: opportunity cost of producing the good or service is lower Absolute advantage: produce more output per worker
*Comparative advantage, not abosolute advantage, is the basis for natural gain. *A competitive market is a market in which there are many buyers and sellers of the same good or service, none of whom can influence that price at which the good or service is sold.
The quantity demanded is the actual amount of a good or service consumers are willing to buy at some specific price. Don't forget about the age old question of What happens when prb disrupted?
Law of demand: a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service.
A movement along the demand curve: a change in the quantity demanded of a good arising from a change in the good’s price.
A shift of the demand curve: a change in quantity demanded at any given price. Reasons:
● Changes in prices of related goods or services
Substitutes: Price A increase, Demanded B increase, Demand curve B shift to the right Complements: Price A increase, Demanded B decrease, Demand curve B shift to the left ● Changes in income
Normal good: Income increase, Demanded increase, curve shift to the right Inferior good: Income increase, Demanded decrease, curve shift to the left ● Changes in taste Don't forget about the age old question of How video games are developed?
depends on the trends of consumption on the goods
● Changes in expectations
About future price/income
● Changes in the number of consumers
# of consumers increase, demanded increase, curve shift to the right
The quantity supplied is the actual amount of good or service people are willing to sell at some specific price.
A movement along the supply: a change in the quantity supplied of a good arising from a change in the good’s price.
A shift of the supply curve: a change in the quantity supplied of a good or service at any given price.
● Changes in input prices
Input increase, quantity supplied increase, curve shift to the right
● Changes in the prices of related goods or services If you want to learn more check out How the government rules?
Substitute: Price A decrease, supplied B increase, supplied B curve shift to the right Complement: Price A increase, supplied B increase, supplied B curve shift to the right ● Changes in technology Don't forget about the age old question of What does popular sovereignty mean?
Better tech. supplied increase, curve shift to the right
● Changes in expectations
future price decrease, supplied increase, curve shift to the right
● Changes in the number of producers
# of producers increase, supplied increases, curve shift to the right If you want to learn more check out What purpose did such imaginary and idyllic scenes serve for their audience in europe?
Marktet moves toward equilibrium:
A compatitive market is in equilibrum when price at supply=demand.
Surplus: Quantity supplied > Quantity demanded
Shortage: Quantity supplied< Quantity demanded
Self-regulating economy: problems such as unemployment are resolved without government intervention, through the working of the invisible hand.
Keynesian economics: economic slumps are caused by inadequate spending, and they can be mitigated by government intervention.
*Monetary policy: changes in the quantity of money to alter interest rates and affect overall spending
*Fiscal policy: changes in government spending and taxes to affect overall spending *Recessions (contractions): are periods of economic downturn when output and emploment are falling.
● unemployment rate indicates the condition in the labor-market
*Expansions (recoveries): are periods of economic upturn when output and emploment. *Business-cycle peak: the point at which the economy turns from expansion to recession *Business-cycle trough: the point at which the economy turns from recession to expansion *Long-run economic growth: the sustained upward trend in the economy’s output over time. A country can achieve a permanent increase in standard of living of its citizens only through long-run growth. A central concern of macroeconomics is what determines long-run economic growth.
*Inflation: a rising overall level (aggregate price level)
● discourages people from holding onto cash because cash loses value over time ● tends to rise when the economy is booming
● tends to fall when the economy is depressed and jobs are hard to find *Deflation: a falling overall level (aggregate price level)
The economy has price stability when the overall level of prices changes slowly or not at all. In the long run, the overall level of prices is mainly determined by changes in the money supply, the total quantity of assets that can be readily used to make purchases. *Disinflation: the process of bringing the inflation rate down. (opposite of inflation) *A open economy is an economy that trades goods and services with other countries. *Trade deficit (surplus): the value of goods and services bought from foreigners is more(less) than the value of goods and services it sells to them.
*GDP (Gross domestic product): is the total value of all final goods and services produced in the economy during a given year.
*Real GDP: the total value of all final goods and services produced in the economy during a given year, calculated using the prices of selected base year
*Nominal GDP:the value of all final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced. *GDP per capita: GDP divided by the size of the population; it is equivalent to the average GDP per person. It is not a sufficient measure of human welfare, nor is it an appropriate goal
in itself, because it does not reflect important aspects of living standards within an economy. Calculating GDP:
1.adding up the total value of all final goods and services produced
*Final goods and services: goods and services sold to the the final, or end, user. 2.adding up spending on all domestically produced goods and services. The value added of a producer is the value of its sales minus the value of its purchases of intermediate goods and services.
(=consumer spending+investment spending+government purchases+exports-imports) 3.addind up total factor income earned by households from firms in the economy *Factor income: wages, interest payments, rent, profit
Calculating price index:
*Price index measures the cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the selected base year.
Price index in a given year = (cost of market basket in a given year)/ (cost of market basket in a base year) *100
Calculation of inflation rate: the percent change per year in a price index, typically the consumer price index.
Inflation rate = (Price index in year 2 - Price index in year 1)/(Price index in year 1) *100 Bias (substitution bias, New Product bias, quality bias)
*Employment: the number of people currently employed in the economy , either full time or part time.
*Unemployment: the number of people who are actively looking for work but aren’t currently employed.
*Labor force = employment + unemployment
*Labor force participation rate: the percentage of the population aged 16 and older that is in the labor force.
Labor force participation rate = (labor force)/(population aged 16 and older) *100% *Unemployment rate: the percentage of the total number of people in the labor force who are unemployed
unemployment rate = (# of unemployed workers)/(labor force) * 100% ● It always rises during recessions. It usually but not always, falls during expansion. It is a good indicator of how easy or difficult it is to find a job given the current state of the economy, but not a literal measure.
● Overstate the true level of unemployment
People who still looking for a job that is suitable / accepted is counted as unemployed. ● Understate the true level of unemployment
a. Discourage workers are non-working people who are capable of working but have given up looking for a job given the state of the job market.
b. Marginally attached workers would like to be employed and have looked for a job in the recent past but are not currently looking for work.
c. Underemployment is the number of people who work part time because they cannot find full-time jobs.
a+b+c: these types of workers are not counted in the unemployment rate. Two types of unemployment
● Frictional unemployment: the unemployment due to the time workers spend in job search (a+b+c).
● Structural unemployment: the unemployment that results when there are more people seeking jobs in a particular labor market than there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle.
Factors lead to a wage rate in excess of WE:
● Minimium wages
● Labor union
● Efficiency wages
● Side effects of government policies
● Mismatches between employees and employers
*Natural rate of unemployment is the unemployment rate that arises from the effects of frictional plus structural unemployment.
Natural unemployment = Frictional unemployment + Structural unemployment Factors that change the natural rate of unemployment
● Changes in labor force characteristic
- # of new workers increase; women workers increases, natural rate increase ● Changes in labor market Institutions
-Institutions help people find jobs, natural rate decrease
-Technological change (increase the demand for skilled workers) natural rate increase ● Changes in governement policies
-high minimum wage, natural rate increase
-job trainning and employment subsides, natural rate decrease
*Cyclical unemployment: the deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle.
Actual unemployment = Natural unemployment + Cyclical unemployment High rates of inflation impose significant economic costs:
● Shoe-Leather Cost: the increased costs of transactions caused by inflation ● Menu Cost: the real cost of changing a listed price
● Unit-of-account Cost: arise from the way inflation makes money a less reliable unit of measurement.
*Interest rate on loan is the price, calculated as a percentage of the amount borrowed, that lenders charge borrowers the use of their savings for one year.
*Nominal interest rate: the interest rate expressed in dollar terms.
*Real interest rate= the nominal interest rate - the rate of inflation
According to the savings-investment spending identity, savings and investment spending are always equal for the economy as a whole.
*The budget surplus (deficit) is the difference between tax revenue and government spending when tax revenue exceed (lower than) government spending.
*Budget balance: the difference between tax revenue and governemnt spending SGovernment=T-G-TR
(Government saving=value of tax revenues-government purchase-value of government transfer)
*National savings, the sum of private savings and the budget balance, is the total amount of savings generated within the economy
=Investment ---in a closed economy
*Net capital flow is the total inflow of funds into a country minus the total outflow of funds out of a country
=SNational+NCI ---- in an open economy
*Equilibrium interest rate, the interest rate at which the quantity of loanable funds supplied equals the quantity of loanable funds demanded
@A: only projects that are profitable at rE or higher are funded
@B: offers not accpected from lenders who demand r > rE
@C: offers accpected from lenders willing to lead at r </= rE
@D: Projects are profitablt only when the r < rE are not funded
Shifts of the Demand for Loanable Funds
● Changes in perceived business opportunitites
beliefs about the payoff of investment spending can increase/decrease the amount of desired spending at any given interest rate
● Changes in governemnt borrowing
Government budget deficit, shift the demand curve to the right
*Crowding out occurs when a government budget deficit drives up the interest rate and leads to reduced investment spending
Shifts of the Supply of Loanable Funds
● Changes in private saving behavior
Savings decrease, supply curve shift to the left
● Changes in net capital inflows
Shrink capital inflows, supply curve shift to the left
*Fisher effect: an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged. Three tasks of a financial system
● Task 1: Reducing Transaction Costs
● Task 2: Reducing Risks
● Task 3: Providing Liquidity
Types of Finanacial Assets
● Loan-Backed Securities
● Mutual funds
● Pension Funds and Life Insurance Companies
The key statistic used to track economic growth is real GDP per capita. According to the Rule of 70, the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable’s annual growth rate. # of years of variable to double = (70) / (Annual growth rate of variable) ---The Rule of 70 can only be applied to a positive growth rate
Sustained economic growth occurs only when the amount of output produced by the average worker increases steadily.
*Labor productivity (=productivity) is output per worker (per hour)
For the economy as a whole, productivity = real GDP divided by the # of people working. What leads to higher productivity?
● Increase in physical capital
physical capital consists of human-made resources such as buildings and machines ● Increase in Human capital
human capital is the improvement in labor created by the education and knowledge embodied in the workforce
● Technological Progress
-is an advance in the technical means of the production of goods and services -probably the most important driver of productivity growth
The aggregate production function is a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker, and human capital per worker as well as the state of technology.
An aggregate production function exhibits diminishing returns to physical capital when, holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.
Natural resources are less important today than physical and human capital as sources of productivity growth in most economies.
The convergence hypothesis seems to hold only when other things that affect economic growth such as education, infrastructure, property rights and so on, are held equal. According to convergence hypothesis, international differences in real GDP per capita tend to narrow over time.
*Sustainable long-run economic growth is long-run growth that can continue in the face of the limited supply of natural resources and the impact of growth on the environment.
*Positive economics: the branch of economics analysis that describes the way the economy actually works.
*Normative economics makes prescriptions about the way the economy should work. *Economist disagree because:
● which simplifications to make in a model
● about values