Exam One Study Guide
Exam One Study Guide ECON 222 001
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ECON 222 001
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This 13 page Study Guide was uploaded by Samantha Pruser on Friday September 25, 2015. The Study Guide belongs to ECON 222 001 at University of South Carolina taught by Chandini Sankaran in Summer 2015. Since its upload, it has received 958 views. For similar materials see Principles of Macroeconomics in Economcs at University of South Carolina.
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Date Created: 09/25/15
Exam Date Tuesday September 29 2015 Macroeconomics Exam One Study Guide Lecture One Slope RiseRun Rate of Growth Formula V1 Value 1 V2 Value 2 V2V1 V1 x 100 yields a percentage EXAMPLE In 2010 Runnels County Texas had a population of 2358 AS of 2015 the population jumped to 3764 What is the Rate of Growth 3 764 2 358 x 100 5963 2358 Macroeconomics vs Microeconomics o Macroeconomics the study of the economy as a whole 0 Microeconomics study of how households and firms make choices such as I Quantity Marketing Management Price I How they interact in the market buyers and sellers interact to exchange a good or service I How the government attempts to influence their choices I How specific industries operate Consumer Price Index the overall price level or average of all prices CPI 0 Increase in CPI means inflation o Decrease in CPI means deflation Four Economic Resources 1 Land all natural resources as well as what comes with land 2 Labor workers physical and mental abilities quality as well of number of workers quantity 3 Physical Capital tools machines factories building produced factors of production 4 Entrepreneur Organizes resources for production innovation and risk taking Opportunity Cost 0 Economics is the study of those choices people make as far as what they wantneed vs what they can afford I Process called opportunity cost What you give up to get something you want EXAMPLE Kelsey wants to can either eat her friend s fresh baked cookies and gain weight or refrain from eating and meet her weight loss goals a Eat Cookies Cost Gains weight does not match weight loss goal Benefit Gets to enjoy sweet treats b Do not eat cookies Cost Does not get to enjoy the sugary goodness Benefit Will lose weight and get closer to meeting goal Steps of building an Economic Model Decide on assumptions to use Formulate a testable hypothesis Use economic data to test the hypothesis Revise model Retain the revised model Important Features of Economic Models 1 Assumptions and Simplifications 2 Good models generate testable predictions which can be proven or disproven using data 3 Economic Variable is something measurable that can have different values WPWN Lectu re Two Three Key Economic Ideas 1 People are rational 2 Optimal decisions are made at the margin 3 People respond to economic incentives Three Economic Questions 1 What goods will be produced 2 How will the goods be produced 3 Who will receive the goods and services Key Relationships Demand Increases Price increases Demand Decreases Price decreases Supply Decreases Price Increases Supply Increases Price Decreases Types of Economies Centrally Planned Economies governments decide what to produce how to produce it and who received the goods and services Example Soviet Union USSR North Korea and Cuba Market Economies Result when the decisions of households and firms determine what is produced how it s produced and who receives the goods and services Mixed Economies features of both the previous economies Example United States of America and China Lectu re Three Adam Smith Writer of the quotWealth of Nations 1776 promoted market economies catalyst for early capitalism Efficiencies Market economies promote these forms of efficiencies Productive Efficiency Where goods or services are produced at the lowest possible cost Allocative Efficiency Where production is consistent with consumer preferences the marginal benefit of production is equal to its marginal cost Marginal Cost and Benefit 0 Marginal Cost how much firms are currently spending producing the good 0 Marginal Benefit how much competitors value the good Market Failure 1 Externality the impact of one person s actions on the wellbeing of a bystander 0 Positive Externality Impose external benefits EXAMPLE Finding a lottery ticket on street it wins jackpot 0 Negative Externality Impose external costs EXAMPLE Dumping toxic waste into a public river smoking in a crowded classroom 2 Excessive Market Power Equity Free markets are efficient but not equitable 4 Government Provides goods and services that a private market will not provide called public goods 0 Public good Nonexcludable Cannot prevent a person from using and Nonrival One person s using will not diminish another person s use 0 Private Good excludable Can prevent a person from using and rivalOne person s use will diminish another person s use I For a private market to produce a good it needs to be excludable 5 Enforce Laws Contracts and Property Rights The rights individuals or firms have to the exclusive use of their property Market Power Types 0 Monopoly One seller of a good or service price maker 0 Oligopoly A few sellers of a good or service 0 Natural Monopoly Happens naturally due to high startup costs EXAMPLE utility companies electricity Analysis Types 0 Positive the study of quotwhat is Factual and can be supported by evidence describes world as it is o Normative Study of quotwhat ought to be How you think the world should be prescriptive personal values views and judgements cannot be tested in order to be proven true or false 5 EXAMPLES Diana has 9 cats Positive Kourtney is not my favorite Kardashian Normative Mason Plumlee has a subparjumpshot Normative Clarence is from Houston Texas Positive Lecture Four Entrepreneurs are a virtual part of economy because 1 Respond to consumer demand 2 Introduce new products 1 Circular Flow Diagram Assumptions 1 2 3 Two economic Agents Households and firms does not factor in government No savings Closed Economy no foreign trade No imports goods produced abroad and sold domestically No exports goods produced domestically and sold abroad Households own all resources factors of production and inputs Firms employ resources in the production of output good or service i Market for goods and services or ii Market for output product market Circular Flow Diagram Factors of Production Land Labor Physical Capital Entrepreneurs Rent 1 T Wages l T Loans 1 T Profit Interest Firms Firms IIrms Firms gt Blue arrow Input to firms Red Arrow Output of firms Back to householdconsumer Modern Economy Groups Two 1 Households consists of individuals who provide the factors of production 2 Firms Markets 0 Product Market markets where goods like computers and services such as medical treatment are offered Firms are sellers and households are buyers 0 Factor Markets Markets where Factors of Production such as land labor capital etc are traded Basic Circular Flow Diagram Lecture Five Sedans 80 Production Possibilities Frontier PPF Productivity A 800 40 1 hour 2 sedans 1 hour 2 SUV s 40 work hours available Not possible production 080 A 80 sedans and 0 SUVs C 40 sedans and 40 SUVs E O sedans and 80 SUVs SUVs Opportunity Cost OC 0 The highest valued alternative that must be given up in order to engage in an activity what you give up to get something 0 Opportunity costs are normally increasing shown in chart below 0 The more resources already devoted to an activity the smaller the payoff to devoting additional resources to that activity 0 Further Marginal Opportunity cost is increasing I Because resources are not equally proficient in the production of both goods Example Columbia can only produce a limited number of soda cans and gameday towels the chart shows the opportunity cost of producing less tanks in return for more automobiles Plotted Points Soda Cans Gameday Towels Opportunity Cost A 400 O B 350 200 50 soda cans C 200 400 150 soda cans D 0 500 200 soda cans Shifts in the PPF on One Axis 0 New technology or an additional resource that is limited to the production of an item on ONEa s o PPF will also shift when the country has experienced economic growth Shifts in the PPF on BOTH axes o Caused by general technological breakthrough EXAMPLE assembly line or better machinery Lecture Six How humans supply wantsneeds o Economically Self Sufficient Consuming only goods that you produce no trade 0 Economically lnterdependent Specialize in the production of one good and trade with others for other goods trade allows us to consume more Marginal Opportunity Cost 0 Again Marginal Opportunity Cost is increasing 0 Increasing Marginal Opportunity Cost is the reason PPF is curved not R straight A 0 As more economic resources become available production moves from 39 Curve A to B Absolute Advantage Gigi can produce 1 cherry in 8 hours Bubba can produce 1 cherry in 4 hours 1 apple in 1 hour 1 apple in 2 hours 40 work hours available for both the girl and the boy 4O 20 20 10 25 A 40 apples and O cherries B 20 apples and 25 cherries C O apples and 5 cherries 3 the production point and consumption point without trade A 20 apples and O cherries B 10 apples and 5 cherries C O apples and 10 cherries 3 the production point and the consumption point without trade Without Trade Gigi Bubba Production Point 20 apples and 25 cherries 10 apples and 5 cherries Consumption Point 20 apples and 25 cherries 10 apples and 5 cherries With Trade Gigi Bubba Production Point 40 apples and 0 cherries 0 apples and 10 cherries Consumption Point 20 apples and 5 cherries 20 apples and 5 cherries Lectu re Seven Comparative Advantage Absolute Advantage Apples Gigi Absolute Advantage Cherry Bubba 0 Lowest opportunity cost of producing a good Gigi 1 apple 1 hour 1 cherry 8 hours Bubba 1 apple 20 hours 1 cherry 10 hours 0 Gigi has absolute advantage in both apples and cherries Gigi Without Trade With Trade Production Point 20 apples and 25 cherries 40 apples and 0 cherries Consumption Point 20 apples and 25 cherries 3O apples and 3 cherries Bubba Without Trade With Trade Production Point 1 apple and 2 cherries 0 apples and 4 cherries Consumption Point 1 apple and 2 cherries 10 apples and 1 cherry 40 work hours available for both Gigi Bubba 8 hours 1 cherry 10 hours 1 cherry 1 hour 1 apple 20 hours 1 apple Equalize hours 1 cherry 8 hours 1 cherry 10 hours 1 apple 1 apple 1 apple 20 hours Find Opportunity Costs 1 cherry 8 apples 1 cherry 12 apple 1 apple 18 cherry 1 apple 2 cherries o Gigi has comparative advantage apples 0 Bubba has comparative advantage in cherries Gains from Trade Steps Step One If a graph is provided look at the axis If a table is provided carefully read the table Item Labor hours needed to produce 1 unit Baskets 5 hours 6 hours Sweets 8 hours 12 hours US 5 hours 1 Basket Venezuela 6 hours 1 Basket 8 hours 1 Sweet 12 hours 1 Sweet Pounds Production Item Pounds Production per hour Baskets 5 Baskets 6 Baskets Sweets 8 Sweets 12 Sweets Step Two Absolute Advantage Who produces more in the same amount of time or Whoever takes less time to produce the same amount of the good Step Three Comparative Advantage If one producer has an absolute advantage in both goods calculate opportunity cost The lower opportunity cost producer of a good has comparative advantage in that good If one producer has an absolute advantage in one good the other producer has an absolute advantage in the other good 0 Then that is what they will have their comparative advantage in Step Four Compare consumption point before and after trade to calculate the gains from trade Economists 0 David Ricardo quotPrinciples of Political Economy and Taxation 1817 0 Adam Smith quotWealth of nations 1776 0 Generally all economists agree upon the massive benefit that is free trade Lecture Eight Comparative v Absolute Advantage Review Carlos 1 quilt 90 hours Hilda 3 quilts 90 hours 2 dresses 90 hours 9 dresses 90 hours Who has an absolute advantage in quilts Hilda Who has an absolute advantage in dresses Hilda Carlos 1 quilt 2 dresses Hilda 1 quilt 3 dresses 1 dress 12 quilt 1 dress 13 quilt Who has a comparative Advantage in quilts Carlos Who has a comparative advantage in dresses Hilda Types of Goods 0 Normal goods I Demand for normal goods increases as income increases 0 Complement Goods I Increase in price of complement good makes demand for normal goods go down 0 Substitute Goods I Increase in price of a normal good makes the demand for a substitute good increase Law of Supply an increase in price causes an increase in the quantity supplied and a decrease in price causes a decrease in the quantity supplied Lecture Nine Gross Domestic Product GDP Reported by the bureau of economic analysis BEA part of the department of commerce measured quarterly total market value of all final goods and services produced in a country during a specific period of time Inflation Rate The percentage increase in the price level consumer price index CPI The Bureau of Labor Statistics BLS which is part of the US Labor Department measures on a monthly basis 0 Increase in CPI inflation o Decrease in CPI deflation Business Cycles Short Run GDP Peak high point Peak of a business cycle top of a curve Trough low point Final Goods vs Intermediate Goods 0 Final Good Good or service purchased by the final user at it s end use 0 Intermediate Goods goods used up in the production of another good EXAMPLE Katy buys sugar cookie mix at the grocery store for 5 She then goes to her friend Randy s house and they bake them and proceed to sell them at a bake sale for 7 Intermediate Good Raw Cookie Dough 5 Final Good Bakes Cookies 7 How much does this add to the GDP 7 I Not 12 because that would be double counting Requirements to be included in GDP Produced in the boundaries of our county Includes exports Newly produced Sold legally in markets Rent and estimated Rental Value of owner occupied houses Final goods services household buys things for consumption physical capital final Value Added Method the value added at each stage of production Difference between the price the firm sells the good for and the price paid to other firms for the intermediate good U PWNI EXAMPLE Farmer grows peaches for 050 Grocer sells for 1 Baker buys peaches and bakes into peach cobbler sells for 2 Lecture Ten Final Goods and Physical Capital Calculation Excludes Value of intermediate goods Second hand goods wewwr 1 2 Illegal production Items produced at home and never enters the market Transfer payments Social Security Check GDP Calculation methods Resource Cost or Income Approach Wage Rent Profits Interest Expenditure Method Y C I G NX GDP Consumption Investment Government Purchases Net Exports 3 Output Method total dollar value of output produced PXQGDP Circular Flow Model and the Measurement of GDP Households Expenditure on goodsand services Wages Rent and Interest Profits Firms D Circular Flow Model adding government Rest of the World Payment payment of wages Ie Households social security and transfer payments I TaxI Expenditure on goodsand services I Government Wages Rent and Expenditure k GampS Interest Profits Tax Firms Rest of World Circular Flow Model adding Financial Systems Households Rest of World Firms Borrowing Key Terms Banks Financial System Microeconomics the study of how households and firms make choices Macroeconomics the study of the economy as a whole Consumer Price Index CPI the overall price level or average of all prices Technology the processes a firm uses for turning inputs into outputs of goods and services Scarcity a situation in which unlimited wants exceed the limited resources available to fulfill those wants Centrally Planned Economies governments decide what to produce how to produce it and who received the goods and services Examples include Soviet Union USSR North Korea and Cuba Market Economies Result when the decisions of households and firms determine what is produced how it s produced and who receives the goods and services Mixed Economies Features of both a centrally planned economy and a market economy mix of two Productive Efficiency where goods or services are produced at the lowest possible cost Allocative Efficiency Where production is consistent with consumer preferences the marginal benefit of production is equal to its marginal cost Marginal Cost how much firms are currently spending producing the good Marginal Benefit how much competitors value the good Market Failure Market does not reach the best outcome on its own government intervention can improve a market s outcomes Externality the impact of one person s actions on the wellbeing of a bystander Monopoly One seller of a good or service in a market Price maker Oligopoly a few large firms control a market Public good Nonexcludable Cannot prevent a person from using and Nonrival One person s using will not diminish another person s use Private Good excludable Can prevent a person from using and rival One person s use will diminish another person s use Positive Analysis the study of quotwhat is Factual and can be supported by evidence describes world as it is Example Clothes protect humans from the cold Normative Analysis Study of quotwhat ought to be How you think the world should be prescriptive personal values views and judgements cannot be tested in order to be proven true or false Free market one with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed Entrepreneur Someone who brings together the factors of production land labor and capital to produce goods and services Closed Economy no foreign trade markets do not allow importingexporting Product Market markets where goods like computers and services such as medical treatment are offered Firms are sellers and households are buyers Factor Markets Markets where Factors of Production such as land labor capital etc are traded Circular Flow Diagram CFD Model that illustrates how participants in markets are linked Opportunity Cost DC the highest valued alternative that must be given up in order to engage in an activity what you give up to get something Economically Self Sufficient Consuming only goods that you produce no trade Economically Interdependent Specialize in the production of one good and trade with others for other goods Trade the act of buying and selling Law of Supply an increase in price causes an increase in the quantity supplied and a decrease in price causes a decrease in the quantity supplied Ceteris paribus quotall else equal is literal translation Latin phrase Inflation Rate The percentage increase in the price level consumer price index CPI The Bureau of Labor Statistics BLS which is part of the US Labor Department measures on a monthly basis Gross Domestic Product GDP total market value of all final goods and services produced in a country during a specific period of time typically a quarter or a year Reported by the Bureau of Economic Analysis BEA which is a part of the US Department of Commerce Final Good Good or service purchased by the final user at its end use Intermediate Goods goods used up in the production of another good Value Added Method the value added at each stage of production Difference between the price the firm sells the good for and the price paid to other firms for the intermediate good
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