Final Exam Study Guide

What is demand curve?

∙ Economics- the science which studies human behavior as a relationship between ends and  scare means which have alternative uses  

∙ Marginalism- “thinking at the margin”: one must analyze the additional or incremental  costs and benefits arising from a choice or decision

∙ Opportunity Cost- idea of tradeoffs: in terms of the value of the next best alternative that  we give up when we make a decision

∙ Microeconomics- focuses on individual decision-making agents such as individuals,  households and firms, and deals with issues such as income, wealth inequality, and poverty  ∙ Macroeconomics- looks at the economy in its entirety- deals with sums or aggregates: is  concerned with 1) aggregate prices, not just the price of one commodity, 2) aggregate labor  supply, not just the labor supplied by one individual or household, and 3) aggregate  national production, not just the output of one firm or industry

It is when price of a good changes ceteris paribus, we move along the supply curve. what is it?

∙ Markets- consist of group of buyers and sellers of particular good or service ∙ Perfect Competitive Market- there are so many buyers and sellers there is no influence over  market price, and buyers and sellers called price takers must accept this price as given ∙ Demand- concerns buyers and sellers and represents quantities of a good that buyers or  consumers are able and willing to buy at various prices

∙ Law of Demand- all other things constant, there is an inverse or negative relationship  between the price of a good and the quantity demanded of good: P↑, Qd ↓ and P↓, Qd ↑ ∙ Demand Curve- graphical representation of Law of Demand: represents market demand  curve, which is made up of all individual demand curves portrayed in demand schedule

What is gross domestic product (gdp)?

Don't forget about the age old question of What are the five radiologic cxr patterns?

∙ Change in quantity demand- when price changes and nothing else, movement along the  demand curve occurs

∙ Change in demand- when other factors besides price are included, we get shifting of the  entire demand curve either outward or inward: outward (right) = increase in demand,  inward (left) = decrease in demand

∙ Demand-Side Shift Factors- change in income, prices of related good, change in consumer  preferences, change in number of producers, expectations  

∙ Normal Good- goods that exhibit a positive or direct relationship between income and  demand- if buyer’s income increases so will the demand for the good and vice versa;  example: new car, new clothes, etc.  

∙ Inferior Good- exhibit negative or inverse relationship between income and demand- when  income increases, demand for the good decreases and vice versa; example: used cars, used  clothes, bus service

∙ Complements- goods or services used together: there is a negative or inverse relationship  between price of one product and demand for the other, if the price of a good increases  there will be a decrease in demand for the other

∙ Substitutes- goods or services used in place of one another: there is a positive or direct  relationship between price of one and demand for the other, if price of a good drops the  demand for the substitute good is going to increase We also discuss several other topics like What is the difference between an interest group and a political party?

∙ Supply- concerns producers and sellers and represents the quantity of a good or service that  producers or sellers are able and willing to put on the market for sale at various prices ∙ Law of Supply- the relationship between price and quantity supplied is positive or direct,  meaning if price (P) increases, quantity supplied (Qs) increases: P↑, Qd ↑ and P↓, Qs ↓We also discuss several other topics like How to measure color temperature?

∙ Supply Curve- graphical representation of Law of Supply: represents market supply curve,  which is made up of all individual supply curves portrayed in supply schedule ∙ Change in Quantity Supplied- when price of a good changes ceteris paribus, we move  along the supply curve  

∙ Change in Supply- when we allow other factors besides price of a good to change, we get  shifting of the supply curve outward or inwardly: outward (right) shift = increase in supply,  inward (left) shift

∙ Supply-Side Shift Factors- changes in costs of inputs, advances in technology, taxes and  production subsidies, changes in prices of related goods and services, number of producers,  expectation  

∙ Supply and Demand Together- Supply curve slopes upward to the right and represents  quantities supplied at various prices of a good or service; Demand curve slops downward  to the right and represents quantities demanded at various prices of a good or service

∙ Market Equilibrium- intersection of supply and demand curves: this intersection results in  quantity demanded being equal to quantity supplied (Qd = Qs) We also discuss several other topics like What is the keynesian model?
We also discuss several other topics like What are the science of behavior and mental processes?

∙ Surplus- excess quantity supplied: if actual price is above equilibrium, producers would be  willing to supply more but consumers would be willing to buy less

∙ Shortage- excess quantity demanded: if price is below equilibrium, producers are less  willing to supply the market while consumers are more willing to buy

∙ Producer Surplus- producer supplies market at price below equilibrium, so firm receives  premium- calculated as difference between minimum price producers are willing to accept  for a good and market price

∙ Consumer Surplus- consumers are willing to purchase good at price greater than market  price; since consumer only must pay market price, they gain consumer surplus which is  equal to the difference between maximum price the buyer is willing and able to pay for the  product and the market price

∙ Global Equilibrium- in open economies, it is the price that equates excess quantity supplied  in exporting countries (quantity of exports supplied) with excess quantity demanded in  importing countries (quantity of imports demanded)  

∙ Gross Domestic Product (GDP)- measure of country’s output of goods and services; market  value of all final goods and services produced within a country in a given time period ∙ Market Value- in order to add all goods we must first multiply the quantity of all goods by  their respective market prices to obtain market value We also discuss several other topics like What is the definition of premises?

∙ Final goods and services- a final good is an item bought by its final or end user ∙ Calculating GDP- Expenditure approach- adding up values of all final goods: ∙ GDP = C + I + G + (X-M) 

∙ GDP Limitations- GDP concerned only with new or current production, sales of stocks and  bonds not counted in GDP, goods and services not sold in formal marketplace not included  in GDP, not all market activity included in GDP (underground economy), GDP may not  be a good measure of economic well-being of individuals in a country, GDP says nothing  about income distribution  

∙ GDP per capita- GDP of nation divided by that nation’s population

∙ Human Development Index (HDI)- better indicator of economic development than GDP  per capita because it takes more factors into account

∙ Nominal GDP- when GDP is calculated using current year prices

∙ Real GDP- calculated using constant prices (chosen set of prices) applied in valuation of  output of all the years in question  

∙ GDP deflator- is a price index used to measure changes in general price level; statistic used  to deflate nominal GDP to account for price changes  

∙ Inflation- persistent increase in overall price level

∙ Deflation- year-to-year CPI falls- occurs when economy slows, and unemployment rises ∙ CPI- weighted average of price of basket of goods

∙ Bureau of Labor Statistics- report CPI monthly using bundle of goods as “market basket” ∙ Demand Pull- occurs when economy is expanding- economy producing capacity but  consumers still want more

∙ Cost Push- result from large increase in price of key intermediate products that are used  extensively in an economy  

∙ Stagflation- unemployment down and inflation up resulting from cost push ∙ Hyperinflation- extreme uncontrolled printing of money by government due to demand  pull- extremely high run-up in price and concurrent rapid decline in purchasing power ∙ Production Possibilities Frontier (PPF)- shows combinations of 2 goods that can be  produced with available resources and existing technology

∙ Opportunity Cost and PPF- tradeoffs in production- how much of a good is given up when  one unit of another good is produced

∙ Efficiency and PPF- productive efficiency- getting maximum amount of output with given  amount of resource

∙ Economic Growth and PPF- outward movement signifies economy can produce more as  result of combo of goods once considered unattainable now may be attainable ∙ Law on Increasing Opportunity Cost- not all resources are equally suited to production of  both goods

∙ Absolute Advantage- ability to produce more with given amount of resources or produce  given amount with smaller amount of inputs

∙ Comparative Advantage- produce something at lowest opportunity cost ∙ Gains from Trade- economy can get more of what they want through trade than they could  if they decided to be self-sufficient

∙ Globalization- process by which economies of world are becoming increasingly integrated ∙ Economic Globalization- integrating and interdependence of economies around the world seen by cross-border capital flows  

∙ Social Globalization- social and cultural interconnectedness across countries facilitated by  personal travel and sharing of information and ideas

∙ Political Globalization- interdependence among national government observed through  internal relations like memberships in international organization and treaties ∙ International Monetary Fund (IMF)- monitors macroeconomic policies in member  countries, conducts regular economic surveillance, offers training and technical assistance,  provides financial assistance; funded by quotas, borrowing, and gold reserves ∙ The World Bank (WB)- has 5 agencies (IBRD, IDA, ICSID, MIGA, IFC) dedicated to  helping member countries in financial need  

∙ General Agreement on Tariffs and Trade (GATT)- multilateral treaty signed in 1947 by 23  countries; establishes rules that govern international trade in goods

∙ World Trade Organization (WHO)- principles of trade without discrimination, moving  toward freer trade through negotiations, fair competition, and development of countries

∙ Import Tariff- levied on imports by an importing country: increases price of good in  importing country, beneficial for domestic producers but hurts domestic consumers;  domestic production of good increases while domestic consumption of good falls, amount  of imports falls

∙ Ad Valorem Tariff- levied as fixed percentage of value of imports; taxes owed change with  changes in price or value of product- easier to tax goods of different values but may be  costlier for government to collect

∙ Specific Tariff- levied as fixed amount of currency units per unit of imports; calculated by  counting number of units of good imported and multiply number by tariff per unit; taxes  owed do not change with changes in value of imported good

∙ Combination Tariff- combo of ad valorem and specific tariff

∙ In general, tariff rates are increased in developing economies

∙ Developed countries have relatively higher tariff rates on agriculture products and lower  tariff rates on industrial products  

∙ Effects of import tariffs

- Small Country Tariff- small country takes world price of good as a given, domestic  consumers pay entire tariff in forward-shifted tax

- Large Country Tariff- tariff imposed by large country reduces world price of imported good, domestic price increases, higher price increase domestic quantity supplied and

reduces domestic quantity demanded, volume of imports falls, domestic consumers  only pay portion of tariff while remainder is paid by foreign producers

∙ Import Quotas

- Import Quota- quantifiable limit on amount of good that can be imported into country  in effort to reduce imports

- Absolute Quota- limits amount of good that may enter country in given period of time - Tariff-Rate Quota- allows specified amount of good (quota) to be imported into country  at reduced tariff rate and higher tariff rate for imports exceeding quota in given quota  period  

∙ Voluntary Export Restraints (VERs)

- Voluntary Export Restraints- trade quotas imposed by exporting countries usually at  request of importing country: specifies limit on shipments of goods from exporting  country to importing country, holds down imports from perspective of importing  country, goal is to protect domestic producers from foreign competitors  

- Foreign exporter view: VER preferred to government-imposed import restrictions  - Other effects: restrict imports and total domestic supply of good in importing country,  domestic price of good increases due to limited supply, domestic quantity demanded  falls while domestic quantity supplied increases, domestic consumer surplus falls while  domestic producer surplus increases, loss in welfare in importing country ∙ Export Subsidy

- Export Subsidy- subsidy granted by government to producers who ship prodcuts to  foreign markets: either a specific subsidy (amount of $ per unit) or ad valorem subsidy  (% of monetary value of goods exported)

- Used to stabilize domestic price of subsidized good to encourage producers to ship  products abroad

∙ Local Content Requirements

- Local Content Requirements- type of government regulation that requires domestic  producers of good to use specified percentage of domestic inputs in their production  process: limits import of intermediate products, benefits domestic producers of input  products at expense of domestic producers of final product and consumers of final good

- Goal is to boost local industries that produce inputs by guaranteeing portion of market  for products, associated with more local jobs, do not explicitly limit import of goods  rather a domestic producer is free to import as much foreign inputs as long as it uses  domestic inputs in required proportion

∙ Other Government Bureaucratic Regulations

- Government Procurement Regulations- require government departments and agencies  to purchase only locally (domestically) made products: directly limits amount of  imports, regulations related to product safety and quality standards may limit volume  of trade especially when coupled with customs requirements and quality standards;  inconvenience, time, and other resources required to meet regulation requirements  could be major impediment to international trade