macro econ exam 1

Allocative efficiency

"right amount", producing right mix of goods most highly valued by society

Net domestic product

(NDP) = GDP - CFC

O - a change in prices of other goods in production

-*substitutes in production. Ex. if price of mini vans increases with no change in price of SUV, supply of SUV will decrease -Supply of mini vans will increase because price acts as incentive, more profitable because can sell at higher price

I - change in income

-As income increases, demand for normal goods increases -As income increases, demand for inferior goods decreases

changes in demand

-At every price, people are willing to buy more of a good

Expenditure approach

-Count sum of money spent buying the final goods -Consumption by households (C) + gross private investment (Ig) + government purchases (G) + net exports (Xn (X-M))

Economic effect of protective tariffs

-Direct effects: -Decline in consumption, increase in domestic production, decline in imports, tariff revenue -These tariffs make imported products expensive. Therefore, consumers are likely to opt for locally produced goods available at a lower price

Gross domestic product: transactions

-Exclude financial transactions: public transfer payments, private transfer payments, stock market transactions -Exclude secondhand sales

nominal GDP

-GDP is a dollar measure of production, -Nominal GDP: based on prices that prevailed when output was produced, shows inflation

Four categories of economic resources

-Land: includes all natural resources used in the production process -Labor: physical actions and mental activities that people contribute to production -Capital (investment): all manufactured aids used in production -Entrepreneaurial ability: special human resource distinct from labor

law of supply

-Other things equal, as the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls -Price acts as an incentive to producers

GDP Price Index

-Price index in given year: (price of market basket in specific year/price of same basket in base year) x 100 -Real GDP = nominal GDP/price index (in hundredths)

Price floor

-Prices are set above the market price, lowest price one can legally charge for a good/service -Chronic surpluses -Ex. minimum wage law

price ceiling

-Set below equilibrium price -Rationing problem - creates a shortage -Black markets (underground economy) - producers that sell consumers products at prices higher than the price ceiling

Production possibilities model

-an economic model that shows different combinations of two goods that an economy can produce -Assumptions: Full employment, fixed resources, fixed technology, two goods: consumer goods, capital goods

Market equilibrium

-occurs where the demand and supply curve intersect -Equilibrium price and equilibrium quantity: amount people willing and able to buy = amount producers are willing and able to supply

Law of demand

-other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls -Price acts as an obstacle to buyers -

Gross domestic product

-total amount of goods and services produced in an economy in a given year -To avoid multiple counting of goods, GDP includes only the market value of final goods and ignores intermediate goods -Count only value added at each stage

absolute advantage vs comparative advantage

Absolute advantage - produce more overall vs Comparative advantage - other countries can produce goods relatively cheaper

demand

Amount consumers are willing and able to purchase at a given price assuming Other things equal, Individual demand, Market demand

supply

Amount producers are willing and able to sell at a given price

S - change in prices of substitute goods

An increase in the price of a good will increase demand for the substitute good

N - change in the number of sellers

As number of sellers increases, the supply increases, shifting curve to the right

Economic impact of quotas

Decline in consumption, increase in domestic production, decline in imports, quotas do not provide any government revenue but instead transfer it to foreign producers

World price < domestic price

Domestic shortage Import demand curve

World price > domestic price

Domestic surplus Export supply curve

Function of entrepreneurs

Employ the other factors of production, take initiative, make strategic business decisions, innovate, take risk

T - change in technology

Ex. if a new oven is created, capital more productive, so willing to supply more at every price

R - change in resource prices

Ex. if price of labor increases, supply decreases because it costs more to produce

E - change in producer expectations

Ex. supply decreases today because better to wait and sell at higher price in future

T - change in taxes

Ex. tax on pizza, supply decreases

Law of diminishing marginal utility

Falling extra satisfaction, Willing to buy more as price falls. As price falls, more units have higher satisfaction

E - change in consumer expectations

Future prices, future income Buy today at lower price

GDP with national income

GDP = NI - NFF + Stat + CFC

C - change in prices of complementary goods

Goods you consume at same time - as price increases, demand for complementary goods decreases

Determinants of demand

INSECT I - change in income N - change in the number of buyers S - change in prices of substitute goods E - change in consumer expectations C - change in prices of complementary goods T - changes in consumer tastes and preferences

money

Makes trade easier, Medium of exchange

imports

Qd-Qs

Surplus

Quantity supplied greater than quantity demanded, too much being produced, price too high (above equilibrium)

shortage

Quantity supplied lower than quantity demanded, not enough being produced, price too low (below equilibrium)

real GDP

Real GDP: reflects changes in the price level, uses base year price Deflated or inflated to reflect changes in price levels Base year must be selected and then current year prices adjusted accordingly Inflate before base year and deflate after base year

The fact that international specialization and trade based on comparative advantage can increase world output is demonstrated by the reality

a nation's trading possibilities line lies to the right of its production possibilities line

Rationing function of prices

ability of competitive forces of demand and supply to establish a price at which selling and buying decisions are consistent

Embargo

absolute, no more trade

Law of increasing opportunity costs

as more of a particular good is produced, its marginal opportunity costs increase

Income effect

as price decreases, your limited income can buy more (income stays the same)

Substitution effect

as price falls, people substitute towards that good because other goods are relatively more expensive

In order for mutually beneficial trade to occur between two otherwise isolated nations:

each nation must be able to produce at least one good relatively cheaper than the other

Positive economics

economic statements that are factual

Normative economics

economic systems that involve value judgements

N - change in the number of buyers

if N increases, demand increases and curve shifts out

markets

interaction between buyers and sellers and price is discovered

Import quota

limit amount of imports

Economizing problem

limited income and unlimited

Change in quantity demanded

movement along the curve, price change

determinants of supply ROTTENS

non-price factors that shift supply ROTTENS R - change in resource prices O - a change in prices of other goods in production T - change in technology T - change in taxes E - change in producer expectations N - change in the number of sellers

Export subsidy

opposite of tariff, government pays companies to produce so it is cheaper

Productive efficiency

produced in least costly way, using best technology, using right mix of resources

if nominal GDP rises

real GDP may either rise or fall because we do not know if output has gone up or down

"No free lunch"

schools could be using labor to do something else, what could have been produced instead, there are always hidden costs to something

Trade bariers/things that impeded free trade

tariffs - excise tax on imports, Import quota - limit amount of imports, Nontariff barrier (NTB), Voluntary export restriction, Export subsidy, Embargo

Tariffs

tax on imports

voluntary export restriction

when a nation agrees to restrict the number of goods it exports ex. sets upper limit to the total amount of a product that is exported