×
Log in to StudySoup
Get Full Access to sc - ECON 222 - Study Guide - Final
Join StudySoup for FREE
Get Full Access to sc - ECON 222 - Study Guide - Final

Already have an account? Login here
×
Reset your password

SC / Economics / ECON 222 / Who own factors of production?

Who own factors of production?

Who own factors of production?

Description

School: University of South Carolina - Columbia
Department: Economics
Course: Principles of Macroeconomics
Professor: Pattama shimpalee
Term: Fall 2016
Tags:
Cost: 50
Name: Final Exam Study Guide
Description: Good luck on finals! This is everything that we've covered this semester.
Uploaded: 04/30/2018
21 Pages 186 Views 5 Unlocks
Reviews


Final Exam Study Guide – ECON 222


Who own factors of production?



Unit 1 

Economics: the study of the scarcity in resources and how society manages it Scarcity: limited availability of goods and resources

• Factors of Production (FoP)

o FoP are owned by individuals in the economy (households) → who  lend them to firms → who use them to produce goods and services  → which they households buy

o Labor (L)

▪ Earns wages (w)

o Capital (K)

▪ Earns interest (r)

o Land

▪ Earns rent


How do choices and tradeoffs relate to each other?



o Entrepreneurship

▪ Earns profit (π)

• First Principles

o Choice is a trade off we face due to scarcity in resources

▪ Ex: going to college or work

o Economic behavior is rational.

▪ Weighing cost and benefit of two choices

▪ Pick the choice with the lower cost

o Choices are made at the margin Don't forget about the age old question of Where is antitragus located?

▪ Compare the additional gain vs. the additional cost

▪ Marginal cost of production: cost of producing an  

additional unit

▪ Marginal benefit of production: price received for one  


What comprises an economic thinking?



additional unit produced

▪ Rational decision → marginal cost = marginal benefit for all  choices If you want to learn more check out What is the study of how scarce resources are allocated to satisfy human wants?

o Choices respond to incentives

▪ Reward example: extra credit for attendance

▪ Penalty example: changing iClicker rules to punish late  

students

▪ Public policies example: parking tickets, high tax on  Don't forget about the age old question of Social identity refers to what?

cigarettes If you want to learn more check out What is the category of a new product in marketing?

• Positive and Normative Economics Don't forget about the age old question of What is the main theme of the poem a far cry from africa?

o Positive:

▪ “What is”

▪ Describes the world as it is

o Normative:

▪ What the world should be

• Way of Economic Thinking: What Economists Do

o Observe an occurrence in the economy

▪ Ex: price product is decreasing and product becomes less  popular

o Weighs the causation

▪ Ex: lower price makes a product less popular and vice versa o Build a model

▪ Doesn’t have to mirror reality perfectly (focus on what you  would like to explain, aka the core essence)

o Collect data and test the theoretical model using statistical and  mathematical methods

o Policy advice

▪ Guidance to politicians

• The US Economy

o What is produced (GDP): If you want to learn more check out Where can dna be found in a plant cell?

▪ 75.8% consumption goods

• Bought by households and firms

• Durable and non-durable goods

▪ 24.2% capital goods

• Bought by firms to increase future production

o Goods use to produce consumption foods

o Assembly line, coffee maker, etc

o How are goods and services produced? Factors of Production ▪ Land: natural resources (oil, gas, fresh air)

• 50% used for agriculture in US (farming)

• 45% natural parks and forests

• 5% urban areas

▪ Labor: work time and effort devoted to producing goods and  services

• Capital and labor are combined

▪ Physical capital: tools are instruments used for production • Financial capital NOT included

• For whom are goods and services produced?

o Households that own factors of production and receive income  (wage, interest, rent, profit)

▪ Spend income on goods and services

• Circular Flow Diagram

o Closed economy model

▪ All goods and services produced and all money spent stays  within the economy

o Prices for goods and services sold from firms to households are  determined in goods markets

o Illustrates how:

▪ Income flows from firms to households in exchange for  factors of production

▪ Household income (interest rate, wage, rent, profit) is used to  purchase the goods and services firms produce

• Interdependence and Gains From Trade o Importing: buying goods and services from abroad o Exporting: selling goods and services in another country

• Autarky: self-sufficiency; you can only consume what you produce  (consumption = production)

• Production Possibilities Frontier

o Starting point: Robinson Crusoe economy (along on an island) o 2 goods: fish and coconuts; 12 hours/day

▪ Can either catch 8 fish OR harvest 32 coconuts

o

o

o

o

o

o

o

o

o

o

o

o

o Efficient: combining resources available such that maximum  output is produced

o Exchange ratio (opportunity cost): along PPF; increasing  production of one good and decreasing production of another good ▪ Includes explicit and implicit cost

▪ Explicit cost: monetary outlays (accounting costs) ▪ Implicit cost: forgone opportunities (interest rate; forgone  wage)

o Robinson’s opportunity cost:

▪ 1 coconut = ¼ fish

▪ 1 fish = 4 coconuts

o THEN: Friday shows up on the island

▪ PPF: 24 fish OR 48 coconuts in 12 hours

o Absolute and Comparative Advantage

▪ Absolute advantage: who can produce more of what (no  comparison, just facts); in other words, who can produce  more with less input factors

▪ Comparative advantage: who has the lower opportunity  cost in production (comparison)

▪ In this example, Friday has the absolute advantage in both  fish and coconuts because he can catch 24 fish to  

Robinson’s 8 in 12 hours, OR 48 coconuts to Robinson’s 32  in 12 hours

Friday’s PPF

▪ When you solve it out, Friday has an opportunity cost of:

• 1 coconut = ½ fish

• 1 fish = 2 coconuts

▪ Therefore, Robinson has the comparative advantage in  

producing coconuts because he has a lower opportunity cost  (loss of ¼ fish compared to Friday’s loss of ½ fish)

o Specialization

▪ Robinson should specialize in coconuts, and Friday should  specialize in fish AND coconuts

o Gains from Trade

• Economic Growth

o Sustained expansion of the PPF

▪ Scarcity in resources doesn’t change

▪ Factors of production become more effective

• Train or educate human capital (labor, workers)

▪ Develop physical capital with technological progress

• Ex: assembly line, agricultural machinery

• Output in an Economy

o Right half of circular flow diagram: expenditure approach o Left half of circular flow diagram: income approach

o Output in an economy: the sum of all money values of final goods  and services produced in an economy within a specific period of  

time

• GDP: gross domestic product; sum of all production in a country o GDP can be calculated as the sum of the price and quantity of  

each product

o Final goods and services: completed product; price of  

intermediate goods are included in the final price

o Measuring GDP: expenditure approach

▪ Makes use of circular flow in the economy

o Expenditure in the economy:

▪ Consumption (C): private consumption of goods and services  

(car, TV, etc)

▪ Investment (I): purchase of new physical capital (machinery,  

assembly line, etc)

• Inventories: piling up unused goods (produced this  

year but not sold)

• Does NOT include financial capital (stocks, bonds, etc)

• Does NOT include government investments (hospitals,  

buildings, schools, etc)

▪ Government expenditure (G): government investment in  

physical capital and government consumption

• Public projects, national defense, etc

▪ Net Exports (NX): exports (EX) – imports (IM)

o GDP = C + I + G + NX

Unit 2 

• Markets

o Goods and services are exchanged

o Can be physical (stock market) or virtual (Amazon), but the most common  example is an unorganized collection of buyers and sellers (Starbucks)

o Competitive markets are the base model

▪ Large number of producers and consumers

• Producers competing for consumers

• Consumers competing for products

▪ Always some form of competition going on, hence “competitive  

markets”

▪ Identical products from different sellers

▪ Substitute and complementary goods

o Market prices are determined by demand and supply

▪ No party in the market has a stronger position

o Demand

▪ Determined by buyers in the market (people who didn’t have the  

comparative advantage when producing a good or service)

• Cheaper for consumers to buy the product or service instead of  

doing it themselves

• Quantity Demanded (QD)

o Ex: When spring water costs $1 a bottle, you decide to buy 2 bottles a day.  The 2 bottles a day is your quantity demanded of spring water.

o QD is measure as an amount per unit of time

▪ The number of products you buy has no meaning without a time  

dimension

o Willing and able to buy

▪ Willingness = preferences

▪ Ability = budget

• Law of Demand: Other things remaining the same, if the price of a good rises, the  quantity demanded of that good decreases. If the price of a good falls, the quantity  demanded of that good increases. (Price of a good ↑ Quantity Demanded ↓; Price of a  good ↓ Quantity Demanded ↑)

o People always have an incentive to find the best deals available. If the price of  one item falls and the prices of all other items remain the same, the item with  the lower price is a better deal that it was before, so some people buy more of  this item.

o Only thing that isn’t constant is the price

o Quantity demanded and price have an inverse relationship

• Demand Schedule

o Demand curve shows the relationship between price and quantity demanded  by graphing out the different points in the demand schedule (curve on the  right, schedule on the left)

• Demand Curve

o Demand curve is downward sloping, illustrating the Law of Demand ▪ When prices rise, less people want to buy a product.

• $0.50 → $1.00 = 12 million → 10 million

▪ When prices fall, more people want to buy a product.

• $2.00 → $1.50 = 8 million → 9 million

o If an external factor changes with all else equal, the curve shifts right or left ▪ Increase in demand shifts the curve right

▪ Decrease in demand shifts the curve left

o NOTE: If quantity demanded changes, the point moves along the curve. If  demand changes, then the whole curve shifts.

• Determinants of Demand (PEPIN)

o Price of Related Goods

▪ Substitutes:

• If the price of a good rises, then the demand for its substitute rises  because if the two products can be used interchangeably, then why  

buy the more expensive one?

• If the price of a good falls, then the demand for its substitute falls.

• Demand for a good and the price of one of its substitutes movie in  the same direction.

• Ex: fruits and vegetables, cereal and oatmeal

▪ Complements:

• If the price of a good rises, then the demand for its complement  

falls because if two products are used together, then you won’t  

want to buy them both if one or both become more expensive.

• If the price of a good falls, then the demand for its complement  

rises.

• The demand for a good and the price of one of its complements  

move in opposite directions.

• Ex: cereal and milk, peanut butter and jelly

o Expected Future Prices

▪ If prices of a good in the future are expected to rise, then the current  demand for that good rises. People don’t want to buy more expensive  

products, so they will want to buy more of the product in current day when  it’s at a lower price.

▪ If prices of a good in the future are expected to fall, then the current  demand for that good falls. People don’t want to buy more expensive  

products, so they will want to wait to buy the product when it is less  

expensive.

▪ Expected future prices and current demand have an inverse relationship. o Preferences

▪ Preferences = tastes

▪ When changes in preference occur, such as trends, health research, etc,  changes in demand accompany them.

▪ Ex: New smoking research has come out that says that smoking is actually  good for you. As such, the demand for cigarettes increases.

o Income

▪ Income rising brings an increase in demand because people can afford to  buy more things. Income falling brings an increase in demand because  people can’t afford to buy more things.

• Income and demand have a directly proportional relationship.

▪ When income rises, the demand for normal goods increases.

• QD also rises at every given price

▪ When income falls, the demand for inferior goods rises.

• QD also falls at every given price

o Number of Buyers

▪ The greater number of buyers in a market, the larger the demand. The  smaller number of buyers in a market, the smaller the demand.

• The number of buyers and the demand have a directly proportional  relationship.

• Quantity Supplied (QS)

o Ex: When the price of spring water is $1.50 a bottle, a spring owner decides to  sell 2,000 bottles a day. The 2,000 bottles a day is the quantity supplied of spring  water by this individual producer.

o The quantity supplied is measured as an amount per unit of time.

o QS depends on opportunity cost

• Law of Supply: Other things remaining the same, if the price of a good rises the quantity  supplied of that good increases. If the price of a good falls, the quantity supplied of that

good decreases. (Price of a good ↑ Quantity Supplied ↑; Price of a good ↓ Quantity  Supplied↓

o When goods and services become more expensive, people buy less of them,  causing the quantity supplied to increase and vice versa.

o Factors of production aren’t equally productive in all activities, so as more a good  is produced, the opportunity cost of producing it increases.

▪ A higher price gives producers the incentive to deal with the higher  opportunity cost of production.

▪ A higher price also brings a higher profit, so producers have a greater  incentive to increase production.

o The price of a good and the quantity supplied have a directly proportional  relationship.

• Supply Schedule

o Supply curve shows the relationship between price and quantity demanded by  graphing out the different points in the supply schedule (curve on the right,  schedule on the left)

• Supply Curve

o Upwards slop illustrates the Law of Supply

▪ When the price of a good rises, the quantity supplied increases.

• Ex: $0.50 → $1.00 = 8 million → 10 million

▪ When the price of a good falls, the quantity supplied decreases.

• Ex: $2.00 → $1.50 = 11.5 million → 11 million

o If an external factor changes with all else equal, the curve shifts right or left ▪ Increase in supply shifts the curve right

▪ Decrease in supply shifts the curve left

o NOTE: If quantity supplied changes, the point moves along the curve. If supply changes, then the whole curve shifts.

• Determinants of Supply (RIPEN)

o Prices of Related Goods

▪ Substitutes in production:

• The supply of a good decreases if the price of one of its substitutes  in production rises because people want to buy the less expensive

option.

• The supply of a good increases if the price of one of its substitutes  in production falls.

• The supply of a good and the price of one of its substitutes in  

production have an inverse relationship.

• Ex: skinny jeans and boot cut jeans, trucks and SUVs

▪ Complements in production:

• The supply of a good increases if the price of one of its  

complements in production rises because both of the items are  

made together, so their prices are related.

• The supply of a good decreases if the price of one of its  

complements in production falls.

• The supply of a good and the price of one of its substitutes in  

production have a directly proportional relationship.

• Ex: skim milk and cream

o Prices of Resources and Other Inputs

▪ The supply of a good decreases when the price of a resource or other input  used to produce the good increases because producers are only able to  produce so much with a certain amount of money, so if one of the inputs  becomes more expensive than the overall production cost of the product  rises.

▪ The supply of a good increases when the price of a resource or other input  used to produce the good decreases.

▪ The supply of a good and the price of a resource or other input have a  directly proportional relationship.

▪ Ex: wage rate of bottling-plant workers rises, causing an increased  production cost for the water bottles that decreases the supply of bottled  water

o Productivity

▪ Also known as “shocks”

▪ An increase in productivity lowers the cost of producing the good,  increasing its supply.

• Positive shock

• Ex: technological change, increased use of capital, etc

▪ A decrease in productivity raises the cost of a producing the good,  

decreasing its supply.

• Negative shock

• Ex: natural events such as severe weather and earthquakes

o Expected Future Prices

▪ If the price of a good is expected to rise, the supply decreases because  sellers will want to wait until the price is higher before selling their  

product so they can make more money.

▪ If the price of a good is expected to fall, the supply increases.

▪ The expected price of a good and the supply have an inverse relationship. ▪ Ex: If a frost wipes out Florida’s citrus crop, the production later on in the  year is decreased because there aren’t as many oranges. Orange juice  

sellers will expect the prices to rise in the future because there won’t be as  many oranges, so some sellers will increase their inventory of frozen juice. o Number of Sellers

▪ The greater the number of sellers in a market, the larger the supply. ▪ The smaller the number of sellers in a market, the smaller the supply. ▪ The number of sellers and supply have a directly proportional  

relationship.

▪ Ex: Many new sellers have developed springs and water-bottling plants in  the US, and the supply of bottled water has increased.

• Equilibrium

o Equilibrium occurs where the demand curve and supply curve intersect o In the graph below, equilibrium occurs when the bottle costs $1.00 and has 10  million bottles demanded and supplied a day.

• Surplus and Shortage

o When a surplus occurs, the quantity supplied is higher than the quantity  demanded.

▪ As such, the point on the supply curve moves to the right, illustrating the  increased quantity supplied.

▪ The point on the demand curve shifts left to illustrate the decreased  quantity demanded.

▪ However, the surplus also causes the price to rise, as illustrated above. In  order for equilibrium to be restored, the price must fall. Sellers will choose  to lower their prices so that they can sell more of their product, and buyers  will agree because buyers always like lower rather than higher prices. This  causes the price to fall.

▪ The surplus in this situation is 2 million (11 million – 9 million)

o If there is a shortage the quantity demanded is higher than the quantity supplied. ▪ The point on the demand curve shifts to the right to illustrate the increased  quantity demanded.

▪ The point on the supply curve shifts to the left to illustrate the decreased  quantity supplied.

▪ However, the shortage also causes the price to fall, as illustrated above. In  order for equilibrium to be restored, the price must rise. Buyers must pay a  higher price in order to get more of a product. Sellers are happy to sell  

their product for more, causing them to increase production because of an  increased profit. This causes the price to rise.

▪ The shortage is 2 million (11 million – 9 million)

Chapter 5 

• Expenditure Approach

o Measures GDP by using data on consumption expenditure (C), investment (I),  government expenditure on goods and services (E), and net exports (NX)

o GDP = C + I + G + NX

▪ C is always the largest (United States)

▪ I and G are the next largest (United States)

• I = investment + inventories

▪ NX is smallest (United States)

o Total expenditure (and GDP) doesn’t include all the things that people and  businesses buy

▪ Spending that isn’t on final goods and services

▪ Spending on intermediate goods and services

▪ Used Goods

• Used goods were part of GDP in the period in which they were  

produced and when they were new goods

• Ex: If a car is produced in 2015 but sold as a used car in 2017, the  

amount paid for the car isn’t part of GDP in 2017.

▪ Financial Assets

• Ex: When households buy bonds and stocks, they are making  

loans, NOT buying goods and services.

• The expenditure on newly purchased capital goods is part of GDP,  but the purchase of financial assets isn’t.

• Income Approach

o Bureau of Economic Analysis (BEA) uses income data collected by the Internal  Revenue Service and other agencies and adds them together

▪ Wages for labor services

▪ Interest for the use of capital

▪ Rent for the use of land

▪ Profits for entrepreneurship

o This approach is like attaching a meter to the circular flow diagram on all the  flows running through factor markets from firms to households and measuring the  magnitudes of those flows

o Income is divided into 2 big categories:

▪ Wage income

• Also called “compensation of employees”

• Net wages and salaries

• Fringe benefits paid by employers (healthcare insurance, Social  

Security contributions, pension fund contributions, etc)

▪ Interest, rent, and profit income

• Also called “net operating surplus”

• Total income earned by capital, land, and entrepreneurship

o Interest income is the interest that households receive on  

capital

▪ Household’s capital is equal to its net worth (assets  

– borrowing)

o Rent income includes payments for the use of land and  

other rented factors of production

▪ Includes payments for rented housing, imputed rent  

for owner-occupied housing, etc

o Profit income includes profits of corporations and the  

incomes of proprietors who run their own businesses

▪ Mix of interest and profit

o In short: wages + interest + profit + rent = net domestic product (NDP) of factor  prices

▪ NDP of factor prices + (taxes – subsidies) = net domestic product

Unit 3 

Market Equilibrium:

The equilibrium point is where the supply and demand curves intersect on  the graph.

When the supply and/or demand curve(s) shift, the equilibrium point shifts as  well.

When given a situation where the equilibrium point shifts, you must determine  whether the supply and/or demand curve shifts and in which direction (left or  right).

In order to determine which curve (supply or demand) shifts, you must figure  out which of the determinants of supply or demand the situation matches.

Once you have determined whether the situation indicates a determinant of  supply or demand, then you alter the curve accordingly. Shifting the curve  rightward indicates an increase in supply and/or demand. Shifting the curve  leftward indicates a decrease in supply and/or demand.

Example:

A new study says that drinking juice is unsafe.

Step 1: Determine which curve is effected (supply or demand).  If juice is deemed unsafe, then people aren’t going to want to drink it  anymore. This is an example of preferences, meaning that the demand  curve is affected.

Step 2: Determine whether the curve is affected positively or negatively.  Since people do not want to drink juice, the demand is going to  decrease. This means that the demand curve is being affected  negatively.

Step 3: Shift the curve.

CPI 

CPI: Consumer Price Index; a measure of the average of the prices paid by  urban consumers for a fixed market based of consumption goods and services → The Bureau of Labor Statistics (BLS) calculates the CPI every month   by measuring the GDP of randomly assigned urban households → CPI reference base period: a period for which the CPI is defined to   equal 100; currently 1982 – 1984

Steps to Determine CPI:

Step 1: Selecting the CPI Market Basket.

• The BLS collects data on household expenditures

• Basket = goods and services represented in the index and the relative  importance, or weight, attached to them

Step 2: Conduct the month price survey.

• The BLS checks the prices of the 80,000 goods and services in the CPI  market basket every month.

Step 3: Calculating the CPI.

It’s 2018. Pizzas are $8 each and you’re buying 10. Haircuts are $10 each and  you’re buying 2.

2010 is the base year. In 2010, pizzas cost $6 and haircuts cost $8. The cost of the CPI market basket at base period prices = Pricebase x  Quantitybase for each good or service.

CPI market basket = ($6/pizza x 10 pizzas) + ($8/haircut x 2 haircuts) = $76

The cost of the CPI market basket at current period prices = Pricecurrent x  Quantitybase for each good or service.

CPI market basket = ($8/pizza x 10 pizzas) + ($10/haircut x 2 haircuts) = $100

CPI = ���������� ���� �������������� ������ ������������ 

���������� �������� ������ �������������� 100

CPI in 2010 = $76 

$76 �� 100 = 100

CPI in 2018 = $100 

$76 �� 100 = 131.6

This means that prices increased by 31.6% (131.6 – 100). In other words, the  growth rate is 31.6%.

Growth rate = ������(��������������)−������(��������) 

������(��������)�� 100

= 131.6−100 

100�� 100 = 31.6%

CPI Bias:

Why isn’t CPI perfect?

→ CPI doesn’t try to measure all the changes in the cost of living → Even the components of the cost of living that ARE measured by the CPI   aren’t always measured accurately because of bias

• New Good Bias

o You have to compare the different prices of goods and services, but  new goods have been invented since the base year.

o To make comparisons, the BLS tries to measure the price of the  service performed by yesterday’s goods and today’s goods.

o It’s believed that the arrival of new goods puts an upward bias into  the CPI.

• Quality Change Bias

o If the price of a good or service rises because the quality of the  good or service increases, then it isn’t inflation

o However, the fixed basket doesn’t take this into consideration o BLS tries to estimate the effects of quality improvements on price  changes, but the CPI probably counts too much of any price rise as  inflation and so overstates the inflation rate (upward bias)

• Commodity Substitution Bias

o Changes in relative prices lead consumers to change the items they  buy

▪ People cut back on items that become relatively more costly  and increase their consumption of items that become  

relatively less costly

o Example: If you buy both carrots and broccoli and the price of  carrots rises while the broccoli price remains constant, you are  more likely to buy more broccoli than carrots. The CPI says that  the price of vegetables has increased because it ignores your  switch (substation) of broccoli from carrots in the CPI market  basket

o This causes an upward bias

• Outlet Substitution Bias

o Same thing as Commodity Substitution Bias, but with cheap and  expensive stores

What are the problems with CPI bias?

→ Price contracts use the CPI to account for price changes

→ Government outlays (Social Security, food stamps, etc are linked to   CPI and if CPI is overestimated, then payments are too high)

Alternatives to CPI:

• PCEPI: Personal Consumption Expenditure Index

o Focus on the consumption component of GDP (current  

consumption basket updated)

▪ Takes very long to get reliable numbers

o PCEPI without food and energy prices

▪ Food and energy are the most volatile prices

o Chained CPI

▪ Linked to consumption expenditures in the previous period ▪ As if basket was updated every year or month depending on  what calculation is linked to

GDP Deflator 

Another alternative to CPI; makes use of the monthly calculated nominal GDP  (value of production within an economy at current prices evaluated at current  prices)

Determining the GDP Deflator:

Step 1: Take current production and evaluate it at previous prices (real GDP)  and current prices (nominal GDP).

Real GDP, 2018 with 2010 as base year = P2000 x Q2018

Nominal GDP in 2018 = P2018 x Q2018

Step 2: Take the ratio and multiply it by 100.

Say nominal GDP = $171,400 and real GDP = $147,000.

GDP Deflator = �������������� ������ 

�������� �������� 100

 = $171,400 

$147,000�� 100

 = 116.6

This means that prices have increased by 16.6% (116.6 – 100) since the base  year. This is the inflation rate.

Inflation rate = new value – old value

Page Expired
5off
It looks like your free minutes have expired! Lucky for you we have all the content you need, just sign up here