Econ Final Study Guide
How can you measure growth from year to year? (% Change in nominal GDP)
% Change in nominal GDP = (Year 2 - Year 1) / Year 1 x 100
Inflation =
(CPI year 2 - CPI year 1) / CPI year 1 x 100 -must be consecutive years
Percentage change in CPI
(CPIlater year - CPIearlier year) / CPIearlier year x 100
Percentage change in price
(Price in later year - Price in earlier year) / Price in earlier year x 100
CPI current year
(Total dollar expenditure on the market basket in current year) / Total dollar expenditure on the market basket in base year x 100
Change equation
(new number - original number) / original number x 100%
Unemployment rate =
(number of employed) / (number in the labor force) x 100
Labor productivity =
(total output produced) / (total hours it takes to produce total output)
Oligopolistic markets examples
-Automotive big 3: GM, Chrysler, Ford -Toilet paper -Pencils
What happens if you decrease the reserve ratio?
-Banks hold less money and have more excess reserves -Banks create more money by loaning out excess -Money supply increases, interest rates fall, AD goes up (shift right)
What happens if you increase the reserve ratio?
-Banks hold more money and have less excess reserves -Banks create less money -Money supply decreases, interest rates up, AD goes down (shift left)
Sellers in a perfectly competitive market are price takers
-Because there are many buyers and sellers, each buyer or seller is a price taker, so all sellers supply the same identical product. This is the model of supply and demand. -If a seller could influence the price, it would not be acting according to a supply curve. In the long run, we also require that firms can freely enter or exit the market.
Who is helped by inflation?
-Borrowers -A business where the price of the product increases faster than the price of resources
General partnership
-Broadest form of partnerships -Responsible for the management of the firm -They have unlimited liability -If one of the partners makes purchases that puts the firm in debt, both partners are liable for the profits and losses of the firm ex ) google
Monopolists are price searchers
-Can sell their products at a variety of prices -Tries to find best price that makes the most profit -A trial and error process: How much do we produce? How much do we charge? -NOT a price taker
What is not included in GDP: non-market activities
-Can't count/track it Examples: babysitting, yard work, illegal drugs, unpaid work
Capitalist countries have historically had more economic growth.
-Capital (like robots) can produce more than people -Countries with more capital can produce more products than countries without a lot of capital
Perfectly inelastic
-Coefficient of 0 -Vertical line
Perfectly elastic
-Coefficient of infinity -Horizontal line
A corporation is a legal entity that can...
-Conduct businesses in its own name the same way business do -Owned by its stockholders -Share of stock gives purchaser a share of the ownership of the corporation
Discretionary Fiscal Policy
-Congress can create a new bill that is designed to change AD through government spending or taxation (could be Expansionary or Contractionary) -Problem: time lags due to bureaucracy, takes time for Congress to act ie: in a recession, Congress should increase spending
Disadvantages of a franchise
-Contract -Failure to provide financial and training support (franchiser) -Failure to provide the quality of service (franchisee) -Not much room for creativity -One franchisee can affect another franchisee's reputation
Sole proprietorships are taxed only once
-Different US taxes include sales tax, property taxes, corporate income taxes, and personal income taxes -The profit you earn is counted as your income and only personal income taxes apply -You do not have to pay corporate income taxes
What are the flaws with the characteristics of a perfectly competitive market?
-Due to their tiny market share, all buyers and sellers are price takers, therefore they cannot change price -All goods are identical and they're selling the same thing, so there's a lot of competition -There are no barriers to entry or exit, therefore anyone could join the market -Consumers have perfect information-they know everything about the product -All firms have equal access to resources and technology-all of them can easily advance
Why do some countries have higher GDPs than others?
-Economic system -Property rights -Capital -Human capital (knowledge) -Natural resources
How do we know how well the economy is doing?
-Economics collect statistics on production, income, investment and savings -This is called national income accounting
Identifying oligopolistic markets
-Economists look at the sales from the top 4 sellers in the industry -Will be a necessity, popular
General characteristics of inelastic goods
-Few substitutes -Necessities -Use a small portion of income -Required now, rather than later -Elasticity coefficient of less than 1
Free Enterprise versus Socialism: controlling prices
-Free Enterprise: The government allows the prices to fluctuate; the government doesn't control prices. -Socialism: The government sets the prices.
Free Enterprise versus Socialism: income distribution
-Free Enterprise: The government tries to fix the wage gap, but there is not as much attention on distribution as in a socialist economy. -Socialism: The government redistributes income to have an equal amount of poor and wealthy.
Free Enterprise versus Socialism: Economic plan
-Free Enterprise: There is no economic plan. -Socialism: Government decision makers write an economic plan, which specifies the direction economic activities are to take.
Free Enterprise versus Socialism: private property
-Free Enterprise: believes that if you own something yourself, you are more likely to take care of it, and it will encourage you to use your resources in a way that benefits others. -Socialism: Socialists believe that it is better for the government to own most of the nonlabor property in the economy. The government owns the property and gives it to its people.
Free Enterprise versus Socialism: resources
-Free enterprise: resources are owned and controlled by individuals with some government intervention. -Socialism: these resources are controlled by the government
Free Enterprise versus Socialism: the government's role
-Free enterprise: the government plays a small role. It does not make decisions on how to answer the three economic questions. -Socialism: the government plays a larger role.
Unions' Effects on Union and Nonunion Wages
-From 1920-1979, labor unions made an average of 10-15% higher wages than nonunion laborers -An economics study in 2004 showed union workers making 27% higher wages
Historically, what has been money?
-Gold -Silver -Copper -Rocks -Shells -Cattle etc.
Finance government operations
-Government = municipal -Public goods: highways, defense, employee wages -Fund programs: welfare, social security
The government prints too much money
-Governments that keep printing money to pay debts end up with hyperinflation -There are more "rich" people but the same amount of products -Result: banks refuse to lend and GDP falls
Why is it hard for sole proprietorships to raise funds?
-Harder to find and borrow funds because lenders are not eager to lend funds to business firms whose success depends on one person -Sources of money are often limited to personal funds and the funds of close friends and family members
Examples of frictional unemployment
-High schools or college graduates looking for jobs -Individuals that were fired/quit and are looking for a better job
What is not included in GDP: non-production transactions
-If nothing being produced, we are not going to count it -Financial Transactions (nothing produced) Examples: stocks, bonds, real estate, social security -Used goods: it was already counted when it was first bought Examples: old cars, used clothes
Income
-If your income goes up, your demand for items will also go up -The incomes of consumers change the demand, but how depends on the type of good
What factors cause demand curves to shift?
-Income -Buyer preferences -Prices of related goods -Number of buyers -Future price
Time
-Inelastic: have little time to respond to price change -Elastic: have a lot of time to respond Given enough time, the demand will become elastic (will find or create) substitutes
Percentage of income spent on the good
-Inelastic: small percentage -Elastic: large percentage
What does an elastic demand curve look like?
-It is relatively flat -Lower slope
Who is hurt by inflation?
-Lenders -People with fixed incomes -Savers
Advantages of Monopolies
-Low per-unit cost -Reduce waste from creating the same product -Can invest in new technology -The lack of competition allows their prices to be lower, passing the benefits into the consumer
Technological advances
-Make it possible to obtain more output from the same amount of resources
General characteristics of elastic goods
-Many substitutes -Luxuries -Large portion of income (if we buy them) -Plenty of time to decide if you want them or don't want to buy them -Elasticity coefficient of greater than 1
Number of consumers (population)
-Number of people in the area If the number of consumers increases, then the demand will increase. If the number of consumers decreases, then the demand will also decrease.
What determines the elasticity of a certain demand?
-Number of substitutes -Luxuries versus necessities -Percentage of income spent on a good -Time
What is a monopoly?
-One seller -No product substitutes -High barriers to entry
Elastic Demand: Total Revenue
-Price increase causes TR to decrease -Price decrease causes TR to increase
Inelastic Demand: Total Revenue
-Price increase causes TR to increase -Price decrease causes TR to decrease
How much competition does an oligopoly face?
-Products in an oligopoly are not unique -It is difficult to enter the market sellers are shielded from new seller -Competition is so stiff people don't want to enter the market
Disadvantages of Monopolies
-Profit is not guaranteed -Legal barriers
Why is economic growth the goal of every society?
-Provides better goods and services -Increases wages and standard of living -Allows more leisure time -Economy can better meet wants
Benefits of a franchise
-Provides skilled workers and training -National advertising -Less risk: Failure rate is 12 times higher for independent business than franchise -Cost less
Inelastic Demand
-Quantity is INsensitive to a change in price -People will continue to buy it -Necessities
Elastic Demand
-Quantity is sensitive to a change in price -The amount people buy is sensitive to price
What four things work together in a PPF?
-Scarcity -Choice -Efficiency -Opportunity cost
Why is profit not guaranteed for monopolies?
-Sellers will only earn profit if the price if above the total cost -There also has to be a demand for a monopoly seller to make profit
What are the two ways to raise money for corporations?
-Selling bonds / "issuing debt" -Issue, or sell, additional shares of stock: A claim on the assets of the corporation that gives the buyer a share in ownership of corporation
3 essential elements of general partnerships
-Sharing profits and losses -A joint ownership of the business -An equal right in the management
Profit & Loss as "Signals"
-Signals to the firms actually earning the profits or taking the losses -Signals to firms "standing on the sidelines"
Low per-unit cost
-Some firms have such a low average cost that they can lower their price and still earn profits -When the price of their product is so low, other firms cannot compete -This creates a natural monopoly
Benefits of partnerships
-Specialization: two people with different skill sets can work to their strengths to better the firm -Only personal income taxes paid
Examples of cyclical unemployment
-Steel workers laid off during recessions -Restaurant owners fire waiters after months of poor sales due to recession
Corporate structure
-Stockholders are the most important people in corporation. They are its owners and they elect member of the board of directors -Board of directors→ an important decision making body in corporation→ decides corporate policies and goals, among other things
When we say that a product is slightly different (in a monopolistic competitive market) from another product, what do we mean?
-Taste and appearance -Location -How it is packaged -Where it is from -From whom is it from -Whether it is delivered may all make a difference to a consumer
How do you determine the MARKET demand for a particular good?
-The class makes up the market demand. The market demand is made up of many individuals. -Sum of individual curves
What factors make demand for your labor services high?
-The demand for the good you produce -Your productivity
Why should we study the whole economy?
-The field of macroeconomics was born during the Great Depression -Government didn't understand how to fix a depressed economy with 25% unemployment
Costs of limited partnerships
-The general partner who manages the business firm has unlimited liability -Limited partnerships must file a certificate of limited partnership before the business is formed, and state filing fees come with this action
Eventual limits to monopolies?
-The sky is NOT the limit for monopolies -Demand still comes into play -The height of the demand curve is the limit -Searching for the right price to get the highest amount of profits and to sell their entire output
What are the characteristics of a perfectly competitive market?
-There are a large number of buyers and sellers in the industry, and all have such a small market share that they cannot influence the market. Every firm and consumer is a price takers. -All goods are identical (homogenous). -There are no barriers to enter or exit the market. -Consumers have perfect information and know everything about the product. -All firms have equal access to resources and technology and there is a constant or decreasing returns to scale. -Perfect mobility of the factors of production and goods -Absence of price control
How are sole proprietorships easy to form and dissolve?
-There are few government regulations regarding the formation of businesses, such as for a restaurant it must be clean and abide by certain zoning restrictions -To dissolve a business, you just stop doing business
What is the problem with a barter economy?
-They have to have something you want, and you have to have something they want -Trade is very time consuming
Who is answering the three economic questions in each economic system?
-Traditional: head of household/chiefs/elders -Command: government -Market: individuals
Cartels
-Unique to oligopolies -The few major leaders to come together to discuss trade -When they meet - known as collusion
Costs of partnerships
-Unlimited liability: "the state in which general partners are held responsible for all business debts if the business firm cannot pay its liabilities" -Members of partnerships often have different ideas on how to run the firm, and partners sometimes "back-stab" each other
Examples of structural unemployment
-VCR repairman -Carriage makers
Why do some people earn more than others?
-Wage rates can differ because the supply for labor for different types of job is not the same -Wage rates can also differ due to the demand for different types of labor is not the same
Laffer Curve- think Robin Hood
-What did they do? Laugh a lot, they were "laffers" -What was his weapon of choice? BOW and arrow -What did Robin Hood do? Stole from the rich and gave to the poor
two views of labor unions
-With a labor union in place, a company loses its competitive edge -Labor union will create "job exciting," which is the creation of a happier and more productive work environment
Labor
-With more labor, a country can produce more output -However, the productivity is more important -An increase in labor productivity causes economic growth
Natural resources
-With more natural resources, a country can produce more goods and services -They are neither sufficient nor necessary for economic growth -However, it is still more likely for a country rich in natural resources to experience growth
How does decision making power reside in the sole proprietor?
-You alone get to make all the business decisions → you are the boss -No stockholders or partners to tell you that you cannot expand -Decisions can be made quickly and easily
What are the three main types of partnerships?
1) General partnerships 2) Limited partnerships 3) Limited liability partnerships
Disadvantages of sole proprietorships
1) Liability 2) Limited ability to raise funds for a business expansion
What are the two types of wages?
1) Money 2) Real
3 advantages of corporations
1) Owners of corporation (stockholders) have limited liability: Not liable for company debts 2) Corporations existence DOES NOT depend on the existence of its owners, rather the corporation itself is a legal entity: They continue to exist even if one or more of the owners sells their shares 3) Corporations are able to raise large sums of money by selling stock: People are more willing to invest in a corporation than in other businesses forms due to limited liability
3 elements of a franchise
1) The franchisee pays an initial fee 2) The franchisee gives parts of its profits to the franchiser for a certain amount of time 3) Franchisee meets quality requirements or standards
Advantages of sole proprietorships
1) They are easily formed and dissolved 2) Decision making power resides in the sole proprietor 3) Profit of the firm is only taxed once
2 disadvantages of corporations
1) Vulnerable to double taxation: Subject to both corporate and personal income tax 2) Complicated to set up: A number of documents have to be prepared and filing fees must be paid to its state's secretary of state office
What is an oligopolistic market?
1)Has few sellers 2)Firms produce and sell either identical or slightly differentiated products 3)Barriers to entry are significant
When there is a recessionary gap, what two options does Congress have to fix it?
1)Increase spending 2)Decrease taxes Combination?
What are the three indicators of health and sickness of the economy?
1)Leading 2)Coincident 3)Lagging
What are the 3 functions of money?
1)Medium of exchange 2)Unit of account 3)Store of value
What are the two policies we will study?
1)Monetary 2)Fiscal
What are the 2 ways to aggregate demand?
1)Monetary policy 2)Fiscal policy
What are the three major stock markets?
1)New York Stock Exchange (NYSE) 2)National Association of Securities Dealers Automated Quotations (NASDAQ) 3)American Stock Exchange (AMEX)
What are the five stages of the business cycle?
1)Peak 2)Contraction 3)Trough 4)Recovery 5)Expansion
What are the 5 characteristics of money?
1)Portable 2)Durable 3)Divisible (into smaller units) 4)In limited supply 5)*Acceptability
What are the three types of taxes?
1)Progressive 2)Proportional 3)Regressive
For all countries, what are their three economic goals?
1)Promote economic growth 2)Limit unemployment 3)Keep prices stable (limit inflation)
What are the three economic goals of every country?
1)Promote economic growth 2)Limit unemployment 3)Keep prices stable (limit inflation)
What are the two types of total reserves?
1)Required 2)Excess
What are the three shifters of money supply?
1)Setting Reserve Requirements (Ratios) 2)Lending money to banks and thrifts: by increasing or decreasing the discount rate 3)Open Market Operations: buying and selling government securities (bonds)
Who rates bonds?
1)Standard & Poor's 2)Moody's
What are the three ways a company, government, or government agency can borrow money?
1)Stock 2)Bond 3)Go to a bank and get $
What are the 3 laws that influence law of demand?
1)Substitution effect 2)Income effect 3)Law of diminishing marginal utility
What are the 3 types of reserves?
1)Total 2)Required 3)Excess
According to our text and the new way of thinking, what are the two major economic systems?
1)free enterprise 2)socialism
How much competition a seller faces depends on
1)how close to unique a seller's product is 2)how easy it is for new sellers to enter the market
What are the two definitions of economics?
1. A social science that studies the choices of people trying to satisfy their wants in a world of scarcity 2. Studies how people use their limited resources to satisfy their unlimited wants
What are the determinants of supply and what will happen to supply?
1. COSTS (prices/availability of inputs (resources)): If price of resources increases, costs increase and supply decreases. If price of resources decrease, costs decrease and supply increases. 2. NUMBER OF SELLERS: If the number of sellers increases, then the supply will increase 3. TECHNOLOGY: supply increases 4. GOVERNMENT ACTION: taxes-usually decrease supply; subsidy-usually increase supply; quota-decrease supply 5. EXPECTATIONS OF FUTURE PROFIT: If sellers expect the price to be higher in the future, supply will decrease. If sellers expect the price to be lower in the future, supply will increase.
Determinants of Supply
1. Costs (price or resources, weather, availability of resources) 2. Number of Sellers 3. Technology 4. Government Action: Taxes, Subsidies, and Quotas 5. Future price
There are four economic systems throughout the world (old way of thinking). In the last 10-15 years many economist are beginning to narrow those four down to two major economic systems which are...
1. Free enterprise 2. Socialism
What are the two major economic systems?
1. Free enterprise 2. Socialism
What are the determinants of demand and what will happen to demand?
1. TASTES AND PREFERENCES: If your tastes for something increases, then your demand for it increases 2. NUMBER OF CONSUMERS (population): If the number of consumers increases, then the demand will increase 3. PRICE OF RELATED GOODS: Substitutes-demand moves in opposite directions; Complements-demand moves in the same direction 4. INCOME: If your income goes up, your demand for items will also go up 5. FUTURE EXPECTATIONS: ie-gas prices are going to increase soon, so you go get gas today and the demand will increase
What are the 5 shifters (determinants) of demand?
1. Tastes and preferences 2. Number of consumers (population) 3. Prices of related goods 4. Income 5. Future expectations
Determinants of Demand
1. Tastes and preferences 2. Number of consumers (population) 3. Prices of related goods (substitutes and complements) 4. Income (normal/inferior/neutral goods) 5. Future expectations
Why was macroeconomics created?
1. To measure the health of the whole economy 2. To guide government policies to fix problems
What are the four economic systems that are known throughout the world based on the old way of thinking?
1. Traditional 2. Command 3. Market 4. Mixed
Sole proprietorship
A business that is owned by one individual that makes all the business decisions, receives all the products or takes all the losses of the firm and is legally responsible for all the debts of a firm
What is a stock?
A claim on the assets of a corporation that gives the purchaser a share of the corporation
What is a mutual fund?
A collection of stocks Investment strategies that allow you to pool your money together with other investors to purchase a collection of stocks, bonds, or other securities that might be difficult to recreate on your own
Unit of account
A common measurement used to express values
Comparative Advantage (know how this is determined)
A country has a comparative advantage when it can produce a good at a lower opportunity cost than another country. They should specialize in the good that is cheaper for them to produce. -Outside Over Other (OOO)
Absolute Advantage
A country has an absolute advantage in a production of a good when it can produce more of a good than another country can produce with the same quantity of resources More efficient
Imports
A good produced in a foreign country that is purchased by residents of a domestic country
Exports
A good that is produced in the domestic country and sold to residents of a foreign country
Money
A good that most people will accept in exchange for goods and services and in the repayment of debt
Law of diminishing marginal returns
A law that states that if additional units of one resources are added to another resource in a fixed supply, eventually the additional output will decrease.
What do the determinants of demand and/or supply cause?
A left or right shift of demand or supply
Quotas
A legal limit on the amount of a good that may be imported
How much competition does a perfectly competitive market face?
A lot -Sellers produce identical products -In a competitive position -If a seller raises their prices slightly, the consumer can easily buy somewhere else
The Wage Price Cycle
A macroeconomic theory used to explain the cause-and-effect relationship between rising wages and rising prices, or inflation.
What is the European Common Market?
A major common market Common market: the member nations trade without restrictions, and all share the same trade barriers with the outside world
What is a bear market?
A market in which prices are falling, encouraging selling
What is a bull market?
A market in which share prices are rising, encouraging buying
What is a perfectly competitive market?
A market structure characterized by 1)many buyers and sellers 2)all firms selling identical goods 3)all relevant information about buying and selling activities available to buyers and sellers 4)easy entry into and exit out of the market
Rationing device
A means to decide who gets what portion of the available resources and goods
What is the FED?
A nonpartisan government office that sets and adjusts the money supply to adjust the economy The central bank of the U.S.
Because of scarcity, what do we need?
A rationing device
Inflation
A rising general level of prices
Price Taker
A seller can sell all its output at the equilibrium price but can sell none of its output at any other price
Demand increases, but supply stays the same. What is the result?
A shortage drives prices up
Recession
A slowdown in the economy marked by real GDP falling for two consecutive quarters
What happens if the FED decreases the money supply?
A temporary shortage will occur
What happens if the FED increases the money supply?
A temporary surplus of money will occur at 5% interest
Quantity Theory of Money
A theory that predicts that changes in the price level will be strictly proportional to changes in the money supply.
What creates globalization?
Absolute and comparative advantage
Barter economy
An economy in which trades are made in goods and services instead of in money
What does hedging require?
An expenditure of resources
Demand-side inflation
An increase in the price level that originates on the demand side of the economy
Supply-side inflation
An increase in the price level that originates on the supply side of the economy
Absolute real economic growth
An increase in the real GDP from one period to the next
Excess Reserves
Any reserves held beyond the required amount. This is usually used to create and make loans
Assets
Anything of value that the firm has a legal claim over
Oligopolistic markets occur...
Anytime 2-5 companies control 60% or more of the market
How do you get on the Board of Governors for the Fed?
Appointed by the President, approved by the Senate
What does it mean if a dollar appreciates?
Appreciation: an increase in the value of one currency relative to other currencies The value of the dollar increases
The responsibility attached to the right to compete is that one must compete in a truthful, legitimate manner.
Being truthful
Capital
Capital can increase labor productivity and increase output or real GDP
Increase taxes or decrease government spending- does what to demand?
Decrease aggregate demand
If there is a recession, what should the Fed do to the reserve requirement?
Decrease the Reserve Ratio
The resources used to produce goods and services fall into four different categories known as the
Factors of Production (FoP)
T/F: A good is intangible. Services are tasks that you pay other people to perform for you.
False
T/F: A higher GDP always means a happier life for individuals in that country.
False
T/F: A nonrenewable resource is a resource that can be drawn on indefinitely if it is replaced.
False
T/F: A trade-off is anything that satisfies a person's wants. A good brings a person satisfaction, utility, or happiness. A good can be tangible or intangible.
False
T/F: If real GDP is higher in one year than another, it means the price for the good has increased.
False
T/F: Land resources are all the unnatural resources—such as water, minerals, animals, and forests.
False
T/F: Price is the only rationing device that can be used in economics.
False
T/F: The final calculation of the GDP is known as Real GDP.
False
Law of Demand
If price increases, then quantity demanded decreases. If price decreases, then quantity demanded increases.
What is the Law of Demand?
If price increases, then quantity demanded decreases. If price decreases, then quantity demanded increases.
Is the state gasoline tax regressive, progressive, or proportional? Why?
It is a regressive tax because it is a sales tax. The government wants to limit the consumption of gasoline by raising the price.
Do you think that excise taxes on such consumer products as automobile tires, jewelry, cosmetics, and travel would be regressive, progressive, or proportional? Why?
It is regressive because it is a sales tax.
What is the velocity of money?
It is the average times a dollar is spent and re-spent in a year. Dollars can be spent and exchanged more than once.
What is conspicuous consumption?
It is the spending of one's money on luxuries to strengthen one's reputation and prestige.
Why do we care about PED?
It is used by firms to help determine prices and sales and by the government to decide how to tax
How is the circular diagram useful?
It is useful because it helps us see how a change in one economic activity (such as paying taxes) will lead to a change somewhere else in the economy (such as the amount households spend on goods and services produced by businesses)
Disadvantage of Limited liability partnerships
It is very complex to form and is listed as a partnerships, sole proprietorship, or corporation for tax purposes
Clayton Act
It made certain business practices illegal when their effects "may be to substantially lessen competition or tend to create a monopoly." This act prohibited price discrimination and tying contracts.
Contractionary Fiscal Policy (the BRAKE)
Laws that reduce inflation, decrease GDP -Close an inflationary gap -Graph: AD is too high (too much to the right), space between AD on SRAS and LRAS is inflationary gap
Expansionary Fiscal Policy (the GAS)
Laws that reduce unemployment and increase GDP -Close a recessionary gap -Graph: AD is too low (too much to the left), space between AD on SRAS and LRAS is recessionary gap
Leading
Lead economic upturns or downturns (in real GDP) -Rise before an upturn in real GDP -Fall before a downturn in real GDP
More on Non-Discretionary Fiscal Policy: The U.S. Progressive Income Tax
Legislation that act counter cyclically without explicit action by policy makers The U.S. Progressive Income Tax system acts counter cyclically to stabilize the economy -The higher your income, the more you get taxed
If we want to know how much money is in circulation, look at...
M1
What is the most basic money supply known as?
M1
Profit Maximization
MR=MC
Which of the following is NOT part of the Circular Flow Diagram?
Machinery
Capital stock
Machinery, tools, man-made resources
The big picture; the study of the whole economy
Macroeconomics
What is Macroeconomics?
Macroeconomics is the study of the large economy as a whole. It is the study of the big picture.
Price Elasticity of Demand (PED)
Measurement of consumers responsiveness to a change in price
Are stay-at-home parents counted in the workforce?
No because they are not willing
What does full employment mean?
No cyclical unemployment
What would happen if the highest tax bracket was 100%?
No one would work because you wouldn't get any money.
Do partnerships always only have two people involved?
No, there can be numerous partners who have ownership in firm
Are banks allowed to print currency?
No. However, banks can create account deposits.
What does the demand for money show an inverse relationship between?
Nominal interest rates and the quantity of money demanded
a public good that individuals cannot be excluded from consuming; roads, traffic lights, military
Non-excludable public good
OOO formula
Outside Over Other
Excess Reserves x mm =
PDE
Federal Reserve note
Paper money issued by the Federal Reserve system
What happens when the money supply increases?
People buy more, leading to an economic expansion.
What happens when the absolute money supply drops or the growth rate in the money supply declines?
People end up buying fewer goods and services, and the economy falls into an economic contraction.
What is a free rider and why is he/she called that?
People who benefit from goods, services, or resources but don't pay for them. This person is called a free rider because they get something for free.
Stockholder
People who buy shares of a stock in a corporation
Entrepreneurs, Profit, & Risk
People will not risk their time and money to develop new products unless they can potentially earn a profit. Not all entrepreneurs are successful. However, a few end up as millionaires and even billionaires, and it is the prospect of such success that motivates entrepreneurs.
What is the best measure of the nation's standard of living?
Per capita GDP
The situation prevailing in market in which buyers and sellers are so numerous and well informed that all elements of monopoly are absent and the market price of a commodity is beyond the control of individual buyers and sellers
Perfectly competitive market
a good in which one person's consumption takes away from another person's consumption; ie food, gas
Private good
How do you calculate real GDP (constant prices)?
Production x previous year's prices
the amount of money left over after all costs of production have been paid; it exists whenever total revenue is greater than total cost
Profit
What kind of tax?: Federal income tax where richer citizens pay higher percentage
Progressive
What kind of tax?: $0.45 tax on cigarettes
Regressive
What kind of tax?: 4% Georgia sales tax
Regressive
Economic growth can come from a position below the PPF
Some resources in the economy are unused. It the point moves so that it is on the curve, then there is economic growth. Real GDP is higher on the curve than below the curve.
Cost-of-Living-Adjustment (COLA)
Some workers have salaries that mirror inflation. They negotiated wages that rise with inflation. COLAS are generally equal to the percentage increase in the consumer price index for urban wage earners and clerical workers (CPI-W) for a specific period.
Market basket
Something that a family of four would buy in a month's time
Store of value
Something with the ability to hold value over time
If the tax rate becomes too high, what will happen?
Tax revenue will fall since workers have no incentive to work harder.
What did the textbook say about taxation as it relates to externalities?
Taxation means producing less of something
Explain or show what will happen to the price of ecobits if the government imposes new taxes on the company.
Taxes- supply will decrease, therefore price will decrease
National debt
The accumulation of all the budget deficits over time
What are the differences between stockholders and bondholders?
The corporation has no legal obligation to pay stockholders -Bond purchases must be repaid -Stockholders do not lend funds, they buy a part of it
What does the size of the Lorenz curve show?
The degree of income inequality
What is the difference between a good and a service?
The first is that a service is an intangible process that cannot be weighed or measured, whereas a good is a tangible output of a process that has physical dimensions. The second is that a service requires some degree of interaction with the customer for it to be a service.
Identify which people are helped and which are hurt by unanticipated inflation: A man who lent out $500 to his friend in 1960 and is still waiting to to be paid back.
The friend is helped, and the man is hurt.
Process of the Lorenz Curve
The government divides all income earning families into five equal groups (quintiles) from poorest to richest. Each group represents 20% of the population. If there was perfect equality, then 20% of the families should earn 20% Perfect equality is on the line, and see how much the actual data deviates, and draw the curve
What is the substitution effect connected to according to the law of demand?
The income effect You would only use the substitution effect if the price is too high- from income effect
Trough
The low point in the real GDP, just before it begins to turn up
Required Reserves
The minimum amount of reserves a bank MUST hold against its deposits as mandated by the Fed
Give an example of the law of diminishing marginal utility.
The more Nike shoes you buy, the less satisfied you are
What is the Dow Jones Industrial Average (DJIA)?
The most popular, widely cited indicator of day-to-day stock market activity. It is a weighted average of 30 widely traded stocks on the New York Stock Exchange.
Who pays (what entity) interest on the national debt?
The people of the country; we do
The unemployment rate
The percent of people in the labor force who want a job but are not working
Creative Destruction
The permanent loss of jobs from structural unemployment is called creative destruction because people create the destruction of jobs- they create robots to take over your job.
Explain or show what will happen to the price of ecobits if the nation enters into a depression with unemployment rate rising from 6.8% to over 20%?
The price of ecobits will decrease because income decreases-can't buy as much
What is a popular model used to illustrate the concept of opportunity?
The production possibilities frontier
Market structure
The setting in which a seller finds itself. Market structures are defined by their characteristics, such as the number of sellers in the market, the product that sellers produce and sell, and how easy or difficult it is for new firms to enter the market
Total Reserves
The sum of the bank's deposits in its reserve account at the Fed plus its vault cash
If scarcity did not exist, everyone would get everything that he or she wanted. Why is this not possible?
There would not be enough resources
What does it mean if a bond has a low rating?
They are low-quality bonds and most likely don't make payments on time.
What are open market operations?
They are when the Fed buys or sells government securities (bonds)
What do antitrusts help to do?
They help retain lower prices and higher quality with more choices
Countries should trade if they have a relatively low opportunity cost
They should specialize in the good that is "cheaper" for them to produce.
How many stages are in the Law of Diminishing Returns?
Three: increasing marginal returns, decreasing marginal returns, negative returns
How might the government negate some negative externalities?
To analyze the costs and benefits of things, to think about the unintended effects of things
Why would we use ceteris paribus?
To draw a correct demand or supply curve-want to keep out determinants
Why do countries trade?
To make their citizens better off
According to Marx, where should the surplus value go?
To the workers
Hedge
To try to avoid or lessen a loss by taking some counterbalancing action
What would happen if the government printed money to pay off the national debt all at once?
Too much inflation and money loses its value
What two things cause prices to increase? Use supply & demand.
Too much money, demand has increased, supply has decreased
If your company needed to calculate profit or loss, which equation will be used?
Total Revenue - Total Cost
Profit/Loss formula
Total Revenue - Total Cost = Profit/Loss
Average total cost equation
Total cost divided by the quantity of output
Total cost equation
Total costs= fixed costs + variable costs
How can a business determine if they are making a profit or taking a loss?
Total revenue - total cost = If it is positive- profit If it is negative- loss If it is 0- Break Even Point
Where do resources flow?
Toward profit and away from losses
Negative Balance of Trade
Trade deficit (imports exceed exports)
Positive Balance of Trade
Trade surplus (exports exceed imports)
What does making choices lead to?
Trade-offs and opportunity cost
As we move from the old way of thinking which categorized four different economic systems to two now which system is still understood but not mentioned in the new way of thinking?
Traditional
an economic system that answers the three economic questions based on customs, cultural beliefs, and skills
Traditional
T/F: According to the GDP figures, every good that is produced by the economy is sold.
True
T/F: Entreprenuership is the special talent that some people have to develop new business opportunities, new products, and new ways of doing things.
True
T/F: If a person living in Sweden purchases a U.S. produced television, that will be counted in the US GDP.
True
T/F: Labor resources are the physical and mental talents that people contribute to producing goods and services.
True
T/F: Real GDP is more accurate because it holds prices constant.
True
T/F: Some things people want are tangible and some are intangible.
True
T/F: The government has the right to build a road through your front yard as long as they claim eminent domain.
True
T/F: To find real GDP you must know a good's final price.
True
In free enterprise, individuals have the right to make exchanges or trades that they believe will make them better off.
Voluntary Exchange
Something that we desire to have; anything that is not a need
Want
Give an example of the income effect.
Want 5 bananas, and you can only afford 2. The price of bananas goes on sale, so you can buy more bananas.
Individuals and Market Demand Curves
We can look at individual or market demand curves; these are different. An individual demand curve represents one person's demand for a good. A market demand curve is the sum of all the individual demand curves for a good.
Who ultimately pays for excessive government spending?
We do
Investments
When businesses put money back into their own businesses Example: machinery or tools
What is a budget deficit?
When government expenditures exceeds its revenue; when the government spends more than it gains
What is stagflation?
When high inflation and high unemployment occur at the same time, stagnant demand in country's economy
What is crowding out?
When increases in government spending leads to reduction in private spending
Limited partnership
When one owner has unlimited liability and manages the business, while the other owners are "silent partners" and are basically investors in the company ex) shark tank investors
When does scarcity occur?
When our wants are greater than the resources available to meet them
Disequilibrium
When quantity demanded is more/less than the quantity supplied
Ceteris paribus
When reading a demand curve, assume all outside factors, such as income, are held constant
Contraction
When real GDP decreases
Recovery
When real GDP is rising; it begins at the trough and ends at the initial peak
Budget deficit
When the government's expenditures exceeds its revenue
Equilibrium wage rate
When the number people employers are willing and able to hire equals the number of people willing and able to be employed
If aggregate supply increases, then prices will
decrease, and deflation will occur
Buyers who expect the price of a good to be lower in the future may wait until the future to buy the good, thus
decreasing the current demand for the good
If the government increases spending without increasing taxes, they will...
increase the annual deficit and the national debt
To decrease the money supply, the Fed should
increase the discount rate. Contractionary or Tight Money Policy
If aggregate demand increases, then prices will
increase, therefore inflation will occur
If aggregate supply decreases, prices will
increase, therefore inflation will occur
When the Fed increases money supply, it
increases the amount of money held in bank deposits.
When a customer deposits money in a checking account, that deposit
increases the amount of money that the bank has on hand in its vault.
Buyers who expect the price of a good to be higher in the future may buy the good now, thus
increasing the current demand for the good
Since 2006, M3...
is not longer tracked by the U.S. central bank
Proponents of free enterprise argue that no economic system can be ethical if...
it limits people's freedom.
When a major car company lowers its prices, other car makers will probably react in what way?
lower their prices
Goods and services cannot be produced without
resources
Quota
restrictions on the number of units of a foreign-produced good (import) that can enter a country
No one can create money except
the banks in the Federal Reserve
A person will want to do a particular activity only if
the benefits are greater than the costs
Long run
the conceptual time period in which there are no fixed factors of production, so that there are no constraints preventing changing the output level by changing the capital stock or by entering or leaving an industry; a period of time in which all factors of production and costs are variable
Supply
the different quantities of a good that sellers are willing and able to sell (produce) at different prices
What is the result of globalization?
the emergence and operation of a single worldwide economy
Some economists say the erratic behavior of the monetary authorities or the Fed causes
the ups and downs of the business cycle
Any good that is owned by an individual or a business, such as a car, a house, or a piece of machinery
Private property or good
Why do governments impose restrictions to trade?
Producers want to protect themselves from foreign competition & the government hears more from people who want tariffs than from those who do not
Which market does the expenditures approach look at?
Product
A graphical representation of all possible combinations of two goods that an economy can produce
Production Possibilities Frontier (curve)
Fiscal policy
actions by Congress to stabilize the economy
labor union
an organized association of workers, often in a trade or profession, formed to protect and further their rights and interests; want to raise wage and improve working conditions
Transaction costs
any costs associated with the time and effort needed to search out, negotiate, and complete an exchange
Demand for labor is dependent on
the demand for the good or service that labor produces
What does "guns and butter" represent?
guns- military; butter- social programs
Real wage equation
money wage/cpi
We have a trade-off when ______ of one thing means less of something else.
more
Knights of Labor
the first labor union, an organization to pursue better benefits for skilled workers
Inelastic
there is a minor change in quantity demanded when the price changes; less than 1
Income distribution
the way all the income earned in a country is divided among different groups of income earners
Factors influence your productivity
-Innate inability -Effort put into developing skills -Quality and length of education More education = more income
What is NOT included in GDP?
-Intermediate goods -Non-production Transactions -Non-Market (Illegal) Activities
What causes the business cycle?
-Money supply -Business investment, residential construction, government spending -Politics -Innovation -Supply shocks
What causes economic growth?
-Natural resources -Labor -Capital -Human capital -Technological advances -Incentives
What are the characteristics of oligopolies?
-Nearly identical products -Difficult to enter the market -Few sellers
What is not included in GDP: intermediate goods
-No multiple counting, only final goods -We do not want to double count Examples: price of finished car, not the radio, tire, etc.
What's are the three types of business firms?
1) Sole proprietorships 2) Partnerships 3) Corporations
From the old way of thinking, what are the four economic systems?
1)Traditional 2)Command 3)Free Market 4)Mixed
What three ways can the government borrow money?
1)Treasury bills (T-bills) 2)Notes 3)Bonds
What are the three causes of inflation (theoretically)?
1)the government prints too much money 2)demand-pull inflation 3)
What is a balanced federal budget mean?
A budget in which revenues are equal to expenditures; when the government spends as much as it gains
Tariff
A tax on imports
Partnerships
A type of business owned by two or more co-owners
Medium of exchange
Anything that is generally acceptable in exchange for goods and services
What kind of option contracts are there?
Call Options & Put Options
Standard of living (quality of life)
Can be measured, in part, by how well the economy is doing
the produced goods that can be used as resources for further production. Factories, machines, and farm tractors are all this.
Capital
What is the most important type of unemployment?
Cyclical- we look at this type to measure unemployment/come up with unemployment rate
How were the locations of the 12 financial districts decided?
Geographically by population in 1913
When there is a surplus in the market, where is the price located in relationship to equilibrium price?
Higher than the equilibrium price- need to decrease
Wages also depend on supply
If the demand is high for you, but so is the supply, you will likely not earn a high wage
The small picture; the study of small economic units
Microeconomics
What class benefits from the Lorenz Curve?
Middle class
What is the substitution effect?
If the price goes up for a product, consumers will buy less of that product and more of another substitute product (and vice versa)
Explain the double shift rule.
If two curves shift at the same time, either price or quantity will be indeterminate. Trick: draw it out separately and combine the results, see if price or quantity is moving the same way If arrows are moving opposite ways=indeterminate If arrows are moving same ways=increase/decrease
Tastes and preferences
If your tastes for something increases, then your demand for it increases. If your tastes for something decreases, then your demand will also decrease.
Something that is unable to be touched
Intangible
Tangible or Intangible: services
Intangible
What will this surplus cause?
Interest rate to fall (to 2%)
What relationship does the Law of Demand have?
Inverse
A good for which the demand remains unchanged as income rises or falls
Neutral good
Infant-Industry Argument
New industries must be protected from older, more established foreign companies. -Argument for trade restriction
What would life be like if cities couldn't trade with cities or states couldn't trade with states?
Limiting trade would reduce people's choices and make people worse off The Point: More access to trade means more choices and a higher standard of living
Identify which people are helped and which are hurt by unanticipated inflation: An elderly couple living off fixed retirement payments of $2000 a month.
The couple is hurt.
National Income Accounting
Measuring how an economy is doing A bookkeeping system that a national government uses to measure the level of the country's economic activity in a given time period
What is a federal funds rate?
The interest rate one bank charges another for a loan
What is the discount rate?
The interest rate that the Fed charges commercial banks
Human capital
The knowledge and skill that people use in the production of goods and services, also includes honestly, creativity, and perseverance-traits that lend themselves to finding work -Increases in human capital can lead to economic growth (the greater the human capital, the greater the economic growth)
Why does the Law of Demand occur?
The law of demand is the result of three separate behavior patterns that overlap (intertwine)
Expansion
Increases in the real GDP beyond recovery
Antitrust law
government action to prevent the monopoly's complete control over prices
CPI formulas
(price of market basket) / (price of market basket in base year) x 100 (Nominal GDP) / (Real GDP) x 100
Luxuries versus Necessities
-Inelastic: necessity -Elastic: luxury
Number of substitutes
-Inelastic: not a lot of substitutes -Elastic: lots of substitutes
Frictional Unemployment
"Temporarily unemployed" or being between jobs -Individuals are qualified workers with transferable skills but they aren't working
Consumer Spending example
$7 Little Caesar's Pizza
Demand-Pull Inflation
-"Too many dollars chasing too few goods" -Demand pulls prices up -Derived demand can cause inflation
Franchise
-A contract in which a firm (usually a corporation) lets a person or group use its name and sell its goods and services -In return, the group or person (franchisee) must meet certain requirements and payments
Benefits of limited partnerships
-A limited partner will only be liable for the amount of capital they contributed to the business -Attracts investors due to the less liability on the firm -Limited partners share in the profits and losses without having to manage the business itself
Who is in the labor force?
-Above 16 years old -Able and willing to work -Not institutionalized (people in jail, long-term hospitalization) -Not in military, in school full time, or retired
Monopolistic competitors go about trying to become monopolists by...
-Advertising -Celebrity endorsements
What does an inelastic demand curve look like?
-An "I" -Steep slope
Board of directors
-An important decision making body in corporation→ decides corporate policies and goals, among other things -Decides what products the corporation will produce and sell -Chooses the corporation's top officers
What is economic growth?
-An increase in real GDP over time -An increase in real GDP per capita over time
Currency
-Coins -Paper money
What do monopolistic competitive firms do?
-They produce the quantity of output at which marginal revenue equals marginal cost -They figure out what price they charge by searching for the highest price per unit at which they can sell their entire output
Non-Discretionary Fiscal Policy
-Things that happen regardless of what Congress does (aka Automatic Stabilizers) -Permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy -Based on where we are in the business cycle ie: welfare, unemployment, minimum wages, etc.
Seasonal Unemployment
-This is a specific type of frictional unemployment which is due to time of year and the nature of the job -These jobs will come back -Examples: professional santa impersonators, construction workers in Michigan, lifeguarding
What are the four economic systems?
-Traditional -Command -Market -Mixed
What does economic growth refer to?
1)Absolute real economic growth 2)Per capita real economi growth
What are the two major financial markets in our economy?
1)Bull 2)Bear
What are the money demand shifters?
1)Changes in price level 2)Changes in income 3)Changes in taxation that affects investment
How do you use GDP?
1)Compare to previous years (Is there growth?) 2)Compare policy changes (Did a new policy work?) 3)Compare to other countries (Are we better off?)
What are the four components of GDP?
1)Consumer spending 2)Investments 3)Government Spending 4)Foreign
What does the FED do?
1)Control the money supply 2)Supply the economy with paper money 3)Hold Bank Reserves 4)Provide check-clearing services 5)Supervise member banks 6)Serve as the lender of last resort for banks suffering cash management problems
Two worries about future economic growth
1)Costs of growth 2)Relationship between economic growth and the future availability of resources
What are the three components of M1?
1)Currency 2)Checking accounts 3)Traveler's checks
What are the two types of fiscal policy?
1)Discretionary Fiscal Policy 2)Non-Discretionary Fiscal Policy
What are the two ways of calculating GDP?
1)Expenditures Approach 2)Income Approach
Why does the government tax?
1)Finance government operations 2)Influence economic behavior of firms and individuals
What two unemployments make up the natural rate of unemployment (NRU)?
1)Frictional 2)Structural
What types of unemployment are unavoidable?
1)Frictional 2)Structural
5 Shifters (Determinants) of Supply
1. Costs 2. Number of Sellers 3. Technology 4. Government Action: Taxes, Subsidies, and Quotas 5. Future price
People in a free enterprise economy usually share three sets of rights and responsibilities
1. Open disclosure 2. Obeying the law 3. Being truthful
What are the five characteristics of free enterprise?**(Know them)
1. Private property & Public property 2. Freedom of Choice 3. Voluntary Exchange 4. Economic Incentive 5. Competition
Since the end of WWII, the US has gone through how many business cycles?
10
What index is the base year given?
100
How many Federal Reserve districts are there in the U.S.?
12
How many members are a part of the FOMC?
12
How long are the terms for the Board of Governors for the Fed?
14 years
Before a bank lends out a loan, they check someone's
2 Cs 1)Credit 2)Collateral
If the exchange rate is 50 Russian rubles per U.S. dollar, we know that there are
2 cents in every ruble
How many members are in the European Common Market?
27
How many stocks make up the DJIA?
30
How many measurements can be used to measure the supply of money in our country?
4
Economics generally agree that an unemployment rate of around ? is full employment
4-6% (= NRU) If unemployment rate gets below 3.5% = no open jobs, can't move up or get a raise- not getting raises is bad since the prices of good are most likely increasing
How long does the chairperson for the Board of Governors of the Fed serve?
4-year term
How many corporations are in the United States?
5.1 mil. Corporations in the US ex) apple, berkshire hathaway
How many people are on the Board of Governors for the Fed?
7
Number of years for a variable to double/ Rule of 72 =
72 / Growth rate
What is the highest rating for a bond?
A
Reserve requirement
A Fed regulation, requiring a bank to keep a certain percentage of its deposits in its reserve account with the Fed or in its vault as vault cash -Usually referred to as the RRR
Smith believed that if people wanted to service their own self-interest, they had to serve others first. According to Smith, we are led by an "invisible hand" to do good for others. The invisible hand is the belief that a market economy can run itself without any government intervention. Consists of self-interest and competition
A Wealth of Nations (1776)
Deflation
A decrease in the price level, or average level of prices
Corporate charter
A written document filed with US state by the founders of a corporation describing the major components of a company -Signals birth of a new company -Once filed and approved, corporation becomes legitimate and legal -Can take up to 7 years to be approved
the producer that can produce the most output or requires the least amount of inputs (resources)
Absolute Advantage
an eighteenth-century economist whose ideas are fundamental to free market. He believed that a free market is not only the economic system that produces the goods and services, but that is also the most ethical economic system.
Adam Smith
Income Approach
Add up all the income that resulted from selling all final goods and services produced in a given year
Expenditures Approach
Add up all the spending on final goods and services produced in a year
What is marginal cost?
Additional cost of producing an additional unit of a good→ refers to the change in total cost that results from producing an additional unit of output
Real
Adjusted for inflation
Prices enable a market economy to adjust to unexpected events by...
Adjusting consumption and production
What is a futures contract?
Agreement to buy or sell a specific amount of something (commodity, currency, financial instrument) at a particular price on a stipulated future date
What is a bond?
An IOU, or a promise to pay, issued by companies, governments, or government agencies for the purpose of borrowing money
states that "no tax or duty shall be laid on articles exported from any State." To preserve competition, it was important to allow free trade of goods across state lines.
Article 1, Section 8, of the U.S. Constitution
When the CPI rises, this means that a dollar buys less than it used to buy
As CPI rises, the value of the dollar falls
Law of Supply
As price increases, the quantity producers make increases. As price decreases, quantity producers make goes down.
What is the law of supply?
As price increases, the quantity producers make increases. As price decreases, quantity producers make goes down.
Explain how the law of diminishing marginal utility causes the law of demand.
As you consume more of anything, your satisfaction is going down, so your demand is also decreasing.
Why does printing money lead to inflation?
Assume velocity is relatively constant because people's spending habits are not quick to change. Assume that output (Q) is not affected by the amount of money because it is based on production, not the value of the stuff produced
Which of the following will cause the demand for milk to decrease? A: Increase in the price of a substitute B: A decrease in income assuming that milk is a normal good C: A decrease in the price of milk D: An increase in the price of milk E: A decrease in the price of the complementary good
B.
Following a prolonged power outage, the price of flashlights normally increases significantly. If cities had passed laws prohibiting price increase for flashlights, during power outages such as laws would most likely A: Make flashlights more available B: Create a shortage of flashlights C: Shift the demand curve for flashlights to the right D: Shift the supply curve for flashlights to the left E: Have no effect on the availability of flashlights
B: Create a shortage of flashlights
How much competition does a monopoly seller face?
Basically none -Less than either a perfect competitor or a monopolistic competitor -Sells products that have no close substitutes -It's not easy to walk away from a monopoly when it raises its prices because no sellers sell a close substitute for that product
Why do most economists agree that budget deficits are a necessary evil?
Because forcing a balanced budget would not allow Congress to stimulate the economy
Supply & Demand Analysis
Before the change: Draw supply and demand before the change Label original equilibrium price and quantity The change: Did it affect supply or demand first? Which determinant caused the shift? Draw increase or decrease. After change: Label new equilibrium. What happens to price? (increase or decrease) What happens to quantity? (increase or decrease)
Benefits of Globalization
Benefits include expanded trade with new people and products. Income per person has increased in countries that have opened up their economies to globalization. In addition, developing countries have seen the benefit of reduced hunger and child labor, along with increased life expectancy.
Government spending example
Bombs, tanks, airplanes NOT social security- nothing was produced
How do you know if a bond is good?
Bonds are rated or evaluated. The more likely the bond issuer will pay the face value of the bond at maturity and will meet all scheduled coupon payments, the higher the bonds rating.
What must be present to have demand?
Both willingness and ability
What is defined if tax revenues exceed government expenditures?
Budget surplus
Buy - Big
Buying bonds increases money supply
How do you determine income distribution?
By using decile ratios
Which of the following will cause the quantity supplied for milk to decrease? A: Decrease in the price of a key resource B: A decrease in the number of milk producers C: A decrease in the price of milk D: An increase in the price of milk E: A subsidy for milk producers
C.
Which of the following statements about price control is true? A: A price ceiling causes a shortage if the ceiling price is above the equilibrium price B: A price floor causes a surplus if the price floor is below the equilibrium price C: Price ceilings and price floors result in a misallocation of resources D: Price floor above equilibrium cause a shortage
C: Price ceilings and price floors result in a misallocation of resources
What do the variables mean in GDP = C + I + G + Xn?
C= consumer I= investment G= government spending Xn= X - M (exports - imports)
National-Defense Argument
Certain industries should be excluded from international trade. These industries usually include aircraft and weapons. -Argument for trade restriction
"all other things held constant"
Ceteris paribus
Structural Unemployment
Changes in the structure of the labor force make some skills obsolete -When a robot or new technology takes your job -Workers DO NOT have transferable skills and these jobs will never come back- Workers must learn new skills to get a job.
What does scarcity result in?
Choices
Which economic model best illustrates the interactions of production in a free enterprise?
Circular flow diagram
Coincident
Coincide with economic upturns or downturns -Reaches its high point at the peak of the business cycle -Reaches its low point at the trough of the business cycle
the producer with the lowest opportunity cost
Comparative Advantage
Consumers are likely to benefit from competition between sellers. Workers can also benefit from competition. The competition between employers for labor services will often result in higher wages.
Competition
What is the most important characteristic of free enterprise?
Competition
What is a consequence of scarcity?
Competition (because people compete for the rationing device)
A good that is consumed jointly with another good. With these, the price of one and the demand for the other move in opposite directions.
Complement
CPI
Consumer Price Index Average price of goods
What is the most commonly used measurement of inflation for consumers?
Consumer Price Index (CPI)
an agreement between two or more people to do something
Contract
What is an option contract?
Contract that gives the owner the right, but not the obligation, to buy or sell shares of a good at a specified price on or before a specified date
Weighing the costs and benefits of a decision
Cost-benefit analysis
Fixed cost
Costs, or expenses that are the same no matter how many units of a good are produced ex) rent, insurance
Variable costs
Costs, or expenses, that vary or change with the number of units of a good produced
a public good that individuals can be excluded (physically prohibited) from consuming; ie a college lecture, which is available only to enrolled students of that college
Excludable public good
Which of the following will cause the quantity demanded of milk to decrease? A: Increase in the price of a substitute B: A decrease in income assuming that milk is a normal good C: A decrease in the price of milk D: An increase in the price of milk E: A decrease in the price of the complementary good
D.
Which of the following will cause the supply for milk to decrease? A: Decrease in the price of a key resource B: A decrease in the price of milk C: An increase in the price of milk D: A decrease in the number of milk producers E: A subsidy for milk producers
D.
Which of the following is NOT included in government purchases? A: Federal B: Local C: State D: Regional
D: Regional
Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium? A: Surpluses will develop B: Shortages will develop C: Underground markets will develop D: The equilibrium price and quantity will remain the same E: The quantity sold will increase
D: The equilibrium price and quantity will remain the same
written by communist Karl Marx, detailing his beliefs in the failures and injustices of free enterprise
Das Kapital (1867)
What does the Board of Governors of the FED do?
Decide what M1 will be - how much money will be in supply
What is wrong with having a combination of increasing spending and decreasing taxes?
Deficit spending (1996-2000)
What is a decrease in the average level of prices called?
Deflation
The willingness and ability of buyers to purchase different quantities of a good, at different prices, during a specific time period
Demand
Checking accounts are also known as
Demand deposits
What does it mean if a dollar depreciates?
Depreciation: a decrease in the value of one currency relative to other currencies The value of the dollar decreases
Car analogy: Driving 20 mph is too slow. The car can easily go faster.
Depression High unemployment
Outsourcing
Describes work done for a company by another company or by people other than the original company's employees
Brings dissatisfaction or unhappiness
Disutility
Face value (par value)
Dollar amount specified on a bond. The total amount the issuer of the bond will repay to the buyer of the bond.
Based on the law of demand, a demand curve will slope in which direction? Why?
Downward from left to right because price and quantity demanded have an inverse relationship
Since we use prices to allocate goods and services, money acts as an incentive to produce. If you produce goods and services that people are willing and able to buy, you receive money in return.
Economic Incentive
a plan that specifies the direction economic activities are to take. This plan may outline how many manufactured goods or agricultural goods are to be produced, and the prices that are to be charged for them.
Economic plan
Inelastic or Elastic? Soda Boats Beef Real estate Pizza Gold
Elastic
Sometimes the government may have a need for private property. Under this right, the government can take ownership of private property even without the consent of the owner.
Eminent domain
Wheeler-Lea Act
Empowered the Federal Trade Commission (FTC) to deal with false and deceptive acts or practices by businesses
Influence economic behavior of firms and individuals example
Excise taxes on tobacco raises tax revenue and discourage the use of cigarettes
Who is the most important person in a free enterprise system?
Entrepreneur
Most people are not entrepreneurs
Entrepreneurs are a tiny minority of the population
the special talent that some people have for searching out and taking advantage of new business opportunities and for developing new products and new ways of doing things.
Entrepreneurship
consists of the principles of conduct, such as right and wrong, morality and immorality, and good and bad
Ethics
What is the European Common Market better known as?
European Union (EU)
Who pays for public goods?
Everyone in the public
What does M2 include?
Everything in M1 + -Savings deposits -Small-denomination time deposits -Money market deposit accounts -Retail money market mutual fund accounts
Assume people didn't trade. What things would you have to go without?
Everything you don't produce yourself The Point: Everyone specializes in the production of goods and services and trades it to others
Foreign
Exports (X) Imports (M) Exports - Imports (X - M)
What are economic side effects known as?
Externality, unintended effect
The most important people are those on the...
FOMC
Money appeared because marginal costs were to high.
False
What is an example of a perfectly competitive market?
Farmers Each farmer has very little say over what price they can charge for their harvest because there is a market price they have to meet, and if they don't, no one will buy their product.
The official name of a dollar bill is
Federal Reserve Note
What is another name for paper money?
Fiat money
How do you calculate velocity?
Find the sum of the times each dollar changed hands and then divide by the number of dollars
Supply shocks are major supply-side changes in the economy that reduce the capacity of the economy.
Firms end up producing less, so they fire some of their workers. Real GDP goes down and the unemployment rate goes up.
Fiscal year vs Physical year
Fiscal year: based on business Physical year: 1/1-12/31
an economic system in which individuals own all or most of the resources and control their use. also known as capitalism or a market economy
Free enterprise
Workers have the right to choose what they want to do and whom they will work for. Businesses have the right to choose the products they will produce and offer for sale. Likewise, buyers have the right to choose the products they will buy.
Freedom of Choice
What is the most important measurement of growth?
GDP
Expenditures Approach Equation
GDP = C + I + G + Xn
GDP: final goods
GDP does not include the value of intermediate goods.
Real GDP
GDP expressed in constant, or unchanging, dollars. It does adjust for inflation.
GDP: dollar value
GDP is measured in dollars (American dollars)
Nominal GDP
GDP measured in current prices. It does not account for inflation from year to year.
GDP: one year
GDP measures annual economic performance
Call options
Give the owner of the option the right to buy shares of a stock at a specified price within the time limits of the contract
Put Options
Give the owner the right, but not the obligation, to sell (rather than buy, as in a call option) shares of a stock at a strike price during some period of time
a process by which individuals and businesses in any part of the world are much more affected by events elsewhere in the world
Globalization
Price floor effects
Goal: keep price high by keeping price from falling to equilibrium Government has to pay a subsidy Create surpluses
Price ceiling effects
Goal: make affordable by keeping price from reaching equilibrium Create shortages Help consumers Result: black market
Anything that satisfies a person's wants or brings satisfaction
Good
Intermediate goods
Goods used in the production of final goods and services
The "banana" of the curve gets smaller when...
Government redistributes income
Contractionary Fiscal Policy: what increases & decreases
Government spending DECREASES Taxes INCREASE
Expansionary Fiscal Policy: what increases and decreases
Government spending INCREASES Taxes DECREASE
Crowding-Out Effect
Government spending might cause unintended effects that weaken the impact of the policy -The government "crowds out" consumers and/or investors -An increase in government spending decreases the amount spent on private expenses
What are the economic sectors?
Government, businesses, households
How does the government deal with negative externalities?
Governments can tax an externality or introduce regulation, to reduce or eliminate the amount of externality
Franchiser
Head of the franchise
Are transaction costs high or low for barter economies?
High
an economic unit of one person or more that sells resources (Factors of Production) and buys goods and services (Products).
House hold
What does the Product Market show on a Circular Flow Diagram? What is being exchanged?
Households pay for goods and services they buy from businesses. Businesses sell goods and services to households.
What does the Factor Market show on a Circular Flow Diagram? What is being exchanged?
Households sell resources to businesses. Businesses pay for resources they buy from households.
Limited liability partnership (LLP)
Hybrid between a large partnerships and a group of sole proprietors -A group of specialists work under the same company or firm name but work independently from the other partners -Liability is limited to the amount invested ex) doctors office→ in a doctors office, multiple doctors work under the same office name but if one gets busted for malpractice, only that single doctor is in trouble
The Tit-for-Tat Argument
If a foreign country uses tariffs or quotas against American goods, then the United States should use tariffs and quotas against that foreign country in the hope that the foreign country will lower or eliminate its trade restrictions. -Argument for trade restriction
When do treasury bonds mature?
In 10-30 years
When do treasury bills mature?
In 13, 26, or 52 weeks
When do treasury notes mature?
In 2-10 years
If you were looking at a "Circular Flow Diagram" what key element would show you if it is a "Market Economy" or a "Free Enterprise (Mixed)"?
In a market economy, the government has no control over the circulation of resources and goods produced, but in a free enterprise, there is some government intervention to help regulate.
How do the graphs of substitutes move?
In opposite directions
How do the graphs of complements move?
In the same direction
Something that encourages or motivates a person to take action
Incentive
refers to how all the income earned in a country is divided among different groups of income earners. Government decision makers under socialism are more likely to use the government's powers to redistribute income, usually directing it away from society's high earners; equal number of poor and wealthy
Income distribution
Where does the largest source of tax revenues for the federal government come from?
Income taxes
Decrease taxes or increase government spending- does what to demand?
Increase aggregate demand
Changes in income
Increase income, shift right Decrease income, shift left
Changes in price level
Increase price, shift right Decrease price, shift left
Changes in taxation that affects investment
Increase taxes, shift right Decrease taxes, shift left
If there is inflation, what should the Fed do to the reserve requirement?
Increase the Reserve Ratio
What would happen if the demand and the supply shifted simultaneously?
Indeterminant
To be a free enterprise system, who must be able to answer the three economic questions?
Individuals
In a free enterprise system, who owns resources?
Individuals, until businesses buy them
Inelastic or Elastic? Gasoline Milk Diapers Chewing gum Medical care Toilet paper
Inelastic
What demand do you want your goods to be?
Inelastic
Use the coefficient formula for demand for the following: A company is currently selling Ecobits at a price of $ 40.00 with Qd set at 200. The company will be increasing the price to $ 80.00 and it is projected that the Qd will be 125. What type of elasticity does Ecobits have for the company? Should they increase the price? Why?
Inelastic. Yes because even with the price change, people will still buy the product.
A good for which the demand falls as income rises and rises as income falls
Inferior good
Car analogy: You can drive 120 mph, but it is not sustainable.
Inflation Extremely low unemployment
What is a determinant of demand?
It causes the curve to shift.
Federal Trade Commission Act
It declared illegal "unfair methods of competition in commerce." In particular, it was designed to prohibit aggressive price-cutting acts.
When there is a recession, what happens to the overall material standard of living?
It declines
What was the controversial Supreme Court case Kelo v. New London about?
It involves the use of eminent domain to transfer land from one private owner to another private owner to further economic development.
What is the Laffer curve?
It is a graph showing the relationship between tax rate and tax revenue. Think Robin Hood
What is a monopolistic competitive market?
It is a hybrid between a perfectly competitive market and a monopoly. 1)many buyers and many sellers 2)the production and sale of slightly differentiated products 3)easy entry into and easy exit from the market
How does a decrease in demand shift a demand curve?
It shifts left.
How does an increase in demand shift a demand curve?
It shifts right.
What do aggregate demand curves and aggregate supply curves show?
It shows if we are at full employment, experiencing unemployment, or experiencing inflation. It shows short term aggregate supply, long term aggregate supply, and demand.
Sherman Antitrust Act
It states that attempting to become a monopolist or trying to restrain trade is illegal
Why will the market always push towards equilibrium?
It wants to be at equilibrium. Interactions between buyers and sellers pushes the market toward equilibrium.
A product such as hamburgers has elastic demand. How will a small increase in price affect demand?
It will greatly influence quantity demanded. If the price increases, the demand will greatly decrease.
If the government increased spending by $1 billion and complete crowding out did occur, what would happen to total spending?
It would decrease.
How a society answers the three economic questions will define what?
Its economic system
What does GDP tell us?
Just like calculating your own income, GDP measures how well the U.S. is doing financially
a nineteenth-century economist who pointed out what he believed to be many of the failures and injustices of free market. This ideas are at the heart of socialism and communism. He did not see self-interest as leading to good things. Instead, he saw it as hurting others. He believed that capitalists, in pursuing their self-interests, actually exploited the workers.
Karl Marx
What comes after M3?
L
refers to the physical and mental talents that people contribute to the production of goods and services. They do it for payment.
Labor
Marx argued that all value in produced goods comes from labor. Therefore, the value of any item is determined by the necessary labor time needed to produce that item. Produced goods get their value from labor (depends how much time you spend on that good)
Labor Theory of Value
Lagging
Lag behind economic upturns and downturns -Reaches its high sometime after the peak -Reaches its low sometime after the trough
What FOP do animals fall into?
Land
includes all the natural resources found in nature. An acre of land, mineral deposits, and water in a stream are all this.
Land
What are the factors of production?
Land, labor, capital, entrepreneurship
If demand Lessens
Left
Where are the interest rates for borrowing money from the Fed determined?
Loanable Funds Market
occurs when the total cost exceeds total revenue
Loss
When there is a shortage in the market, where is the price located in relationship to equilibrium price?
Lower than the equilibrium price- need to increase
When there's a surplus, what will producers do to prices?
Lower them
GDP = P x Q, therefore
M x V = GDP
Quantity Theory of Money =
M x V = P x Q M = money supply V = velocity P = price level Q = quantity of output
Clayton Act
Made price discrimination and tying contracts illegal
Taxes
Mandatory payments made to the government to cover costs of governing
Additional
Marginal
What is marginal analysis?
Marginal analysis is figuring out marginal revenue and marginal cost. Companies use marginal analysis as a decision-making tool to help them maximize their potential profits.
A street that has many vendors selling similar and identical products would most closely represent which type of economy?
Market
Adjusting M1 is called
Monetary policy
How does the government stabilize the economy?
Monetary policy or Fiscal policy
What is the story of The Wizard of Oz really about?
Monetary policy; overall message: William Jennings Bryan (Democratic candidate for the U.S. presidency), farmers, manufacturers, the Populist Party, and the Democratic Party travel along the gold standard to Washington D.C. to fix things.
There are two types of benefits in a job...
Money benefits- income Non-money benefits- perks
Monopoly Sellers vs Competitive Seller
Monopolists are price searchers: -Sometimes this can be more difficult -Setting a price that consumers will be willing to pay without a point of reference can be difficult -Monopoly sellers control the market, but they still have to appeal to the consumer Competitive sellers are price takers: -They must base their prices around the prices of the competition -Although it is easier to determine prices, price takers have little to no control of the market and have lower profits
Monopolistic competitors vs monopolies
Monopoly: 1)market consists of one seller; 2)the single seller sells a product that has no close substitutes; 3)the barriers to entry are high, entry into the market is difficult Monopolistic competitors: 1)many buyers and many sellers; 2)the production and sale of slightly differentiated product; 3)easy entry into and easy exit from the market
Are entrepreneurs successful?
Most entrepreneurs will fail; 51% fail
Why would monopolistic competitors want to become monopolists?
Most monopolistic competitors would rather be monopolists because it would be easier to make a profit if you were the only seller of a product. There would be less competition.
What happens when the ceteris paribus assumption is dropped?
Movement no longer occurs along the demand curve. Rather, the entire demand curve shifts.
What is an accumulation of deficits called?
National debt
Something that we must have for survival: 1.Food and water 2.Shelter 3.Clothing
Need
an adverse side effect of an act that is felt by others; tends to be environmental
Negative externality
Are all entrepreneurs inventors?
No
Could the free enterprise system function without a government to enforce contracts, verbal and written?
No
Does price shift the curve?
No
Included in GDP?: $10K profit from selling stocks
No
Included in GDP?: $120 Social Security payment to Bob
No
Included in GDP?: $45 for used economic textbooks
No
Included in GDP?: Babysitting by neighbor last weekend for Mr. Henry's children
No
Included in GDP?: House built in Alpharetta in 1990 and resold by realtor in 2013
No
Included in GDP?: Sale of marijuana on Peachtree Street in Atlanta
No
Included in GDP?: Sale of wine in US, produced in France by a US company
No
Included in GDP?: Tires produced by Firestone in Ohio for new Ford truck
No
Is there an inflation rate for the base year?
No
Does GDP accurately measure standard of living?
No All we can say based on a higher GDP is that greater production exists.
Are credit cards money?
No Money must be acceptable as a form of payment and repayment; a credit card cannot be used to repay debt.
A good for which the demand rises as income rises and falls as income falls
Normal good
What is NAFTA?
North American Free Trade Agreement A major free trade area including Canada, Mexico, and United States Free trade area: trade barriers are eliminated; each country sets its own trade rules
Non-partisan
Not Republican or Democrat
Nominal
Not adjusted from inflation
One has the right to use private property as one wishes, within the limits of the law.
Obeying the law
What is a monopoly?
One seller No product substitutes High barrier to entry
What is the most important and widely used monetary policy?
Open Market Operations
The right to sell an item comes with the responsibility to disclose any relevant facts about the item in question.
Open disclosure
Per Unit Opportunity Cost =
Opportunity Cost / Units Gained
The best alternative/trade-off
Opportunity cost
Business firm
Organizations that use resources to produce goods and services that are sold to consumers, other businesses, or the government
Franchisee
Person who buys part of the franchise
What does using a credit card do?
Place a person in debt, which he or she then has to repay with money
a beneficial side effect of an action that is felt by others
Positive externality
What factor can cause a change in quantity demanded?
Price
What is the most widely used rationing device in our society?
Price
What are the two variables that make up GDP?
Price and Quantity
What are the two variables of demand?
Price and quantity demanded
Unit-elastic: Total Revenue
Price changes and TR remains the same
Give an example of the substitution effect.
Price of hamburger goes up, buy chicken sandwich instead
If everyone suddenly had a million dollars, what would happen?
Prices would go up.
Robinson-Patman Act
Prohibited sellers from offering discounts to bigger companies unless they also offered them to small businesses
Federal Trade Commission Act
Prohibits unfair methods of competition, specifically cutthroat pricing
What kind of tax?: Medicare tax of 1% of every dollar earned
Proportional
What kind of tax?: Peach Pass
Proportional
Robinson-Patman Act
Protects small businesses from the competition of large and growing chain stores
What are the legal barriers to monopolies?
Public franchises, patents, and copyrights make entry into a monopolistic market more difficult
a good in which one person's consumption does not take away from another person's consumption; ie movie in a movie theater
Public good
Any good that is owned by the government
Public property or good
If demand Rises
Right
PRICE INFLUENCES
QUANTITY DEMANDED/SUPPLIED, NOT DEMAND/SUPPLY
What happens when there is a surplus in the market?
Qd < Qs
What happens when there is a shortage in the market?
Qd > Qs
When there is a shortage of labor, meaning the quantity of supplied labor is less than the quantity of demanded labor, the wage rate rises
Qs labor < Qd labor = shortage of labor = wage rate rises
When there is a surplus of labor, meaning the quantity of supplied labor is greater than the quantity of demanded labor, the wage rate falls
Qs labor > Qd labor = surplus of labor = wage rate falls
The number of units of a good purchased at a specific price
Quantity demanded
What happens to the quantity demanded of money when interest rates increase?
Quantity demanded falls because individuals would prefer to have interest earning assets instead
What happens to the quantity demanded of money when interest rates decrease?
Quantity demanded increases
When there's a shortage, what will producers do to prices?
Raise them
It determines who gets what portion of all the resources and goods available
Rationing device
Real GDP per capita
Real GDP / Population
What is the best measure of economic growth and why?
Real GDP because it has been adjusted for inflation, therefore, we get to see if there is really economic growth.
Peak
Real GDP is at a temporary high
Business cycle
Recurrent swings (up and down) in real GDP
? transaction costs would make trading easier
Reducing
What is the RRR?
Reserve Requirement Ratio
Goods and services that we use/buy to satisfy all of our needs and wants
Resources
Low-Foreign-Wages Argument
Restriction on international trade based on the cheap labor costs -Argument for trade restriction
Averages
Reveal absolutely nothing about how income is distributed
Why is sales tax a regressive tax?
Sales tax is regressive because, for example, if someone making $50,000 and someone making $500,000 buy the same car at the same percentage, they will both be spending the same amount. The percent of income spent will be higher for the person with an income of $50,000. Amount spent / total income
Insufficient resources to satisfy everyone's needs and wants
Scarcity
Sell - Small
Selling bonds decreases money supply
Antidumping Argument
Selling goods in foreign countries below their costs and especially below the home countries prices -Argument for trade restriction
Tasks that you pay other people to perform for you
Services
Increase RRR
Shift left
Increase discount rate
Shift left
Sell government securities
Shift left
Supply Curve: decrease in supply
Shift left
Buy government securities
Shift right
Decrease RRR
Shift right
Decrease discount rate
Shift right
Supply Curve: increase in supply
Shift right
Anytime you are below equilibrium, what do you create?
Shortage: Qd>Qs
Elasticity
Shows how sensitive quality is to a change in price; how responsive people are to change in price
Production Possibilities Frontier (PPF)
Shows us all possible combinations of two goods that an economy can produce in a certain period of time
a different kind of economic system, in which the government may control or own many of the resources. sometimes referred to as a command economy
Socialism
Liability for sole proprietorships
Sole proprietorship involves UNLIMITED LIABILITY This means that a person's personal assets- house, car, etc. - can be used to pay off business debt
How much competition does a monopolistic competitive seller face?
Some -Does not face as much competition from current sellers because it produces products that are slightly different from that of other sellers -If a seller raises their prices slightly, all of their consumers will not leave them -Easy entry- new sellers can quickly join the market and add more competition
What is a bond?
Statement of debt issued by a corporation, or in other words an IOU, piece of paper on which is written a promise of pay
Deficiency payments are part of a federal program to assist...(what government action?)
Subsidy
A similar good. With these, the price of one and the demand for the other move in the same direction.
Substitute
The difference between the total value of production and these subsistence wages paid to workers
Surplus value
Anytime you are above equilibrium, what do you create?
Surplus: Qd<Qs
What is the money leftover to spend after all deductions have been made from people's earnings called?
Take-home pay, net income, disposable income
Progressive Taxes
Takes a larger percent of income from high income groups (takes more from rich people) ie: current federal income tax system
Regressive Taxes
Takes a larger percentage from low income groups (takes more from poor people) ie: sales tax, any consumption tax
Proportional Taxes (flat rate)
Takes the same percent of income from all income groups, fair tax ie: state of Georgia- 6% tax on all income groups
Something that can be touched
Tangible
Tangible or Intangible: goods
Tangible
What does the Laffer Curve show the relationship between?
Tax rate and tax revenue
If the government increases taxes, what will also increase?
Tax revenue
What does a shift mean?
That more people are willing and able to purchase that good
notes that "private property [shall not] be taken for public use, without just compensation.": private property is the #1 aspect of free enterprise
The Bill of Rights
What is the governing body of the Federal Reserve System?
The Board of Governors of the Federal Reserve System
Who sets the U.S. money supply?
The Board of Governors of the Federal Reserve System (FED)
Where are Federal Reserve Notes printed?
The Bureau of Engraving and Printing in Washington D.C.
complained to the king because he prevented the 13 colonies from "trading with all parts of the world.": cannot hinder competition
The Declaration of Independence
What is the central bank of the U.S. called?
The Fed
How is more money made?
The Fed asks the Bureau of Engraving and Printing in Washington D.C. to print money
What is the major policy-making group within the FED called?
The Federal Open Market Committee (FOMC)
FOMC
The Federal Open Market Committee, a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation's open market operations. It is the monetary policymaking body of the Fed.
What did Congress pass in 1913?
The Federal Reserve Act
Who issues paper money?
The Federal Reserve System
If the price goes down for a product, the purchasing power increases for consumers, allowing them to purchase more
The Income effect
This law states that as you consume anything, the additional satisfaction that you will receive will eventually start to decrease. In other words, the more you buy of ANY GOOD, the less satisfaction you get from each new unit consumed.
The Law of Diminishing Marginal Utility (DMU)
How does the government measure the distribution of income?
The Lorenz Curve ("Banana curve")
Federal Income Tax Debate
The Progressive tax system is used as an automatic stabilizer
If the price goes up for a product, consumers will buy less of that product and more of another substitute product (and vice versa).
The Substitution effect
Who issues coins?
The U.S. Treasury
What is the butterfly effect?
The butterfly effect shows that doing something small can lead to something big. A small change in the government can lead to something complex.
Growth Domestic Product (GDP)
The dollar value of all final goods and services produced within a country's borders in one year
Economic growth can come from a position on the PPF
The economy can experience economic growth by shifting its PPF to the right.
What is fiscal used to correct?
The economy's stability
Wage rate
The price of labor
What is corporate income tax and who pays it?
The tax corporations pay an income tax on their profits.
Identify which people are helped and which are hurt by unanticipated inflation: A tenant who is charged $850 rent each year.
The tenant is helped.
Money supply
The total supply of money in circulation
What happens if everyone has access to money?
The value of money would decrease significantly
Rule of 72
The way to find out the time required for any variable to double is to divide its percentage growth rate into 72
Ideas intended to explain something (how something works) that doesn't have an obvious answer
Theory
What happens if a country exports more than it imports?
There is a positive balance of trade- trade surplus
Sherman Antitrust Act
This act declared that anyone trying to create a monopoly or restrain trade is illegal
In a free enterprise economy, products are produced for people who are both willing and able to buy them
This answers "For whom to produce?"
In a free enterprise economy, the individuals who own and manage the business firms decide how to produce the products
This answers "How goods will be produced"
In a free enterprise economy, businesses firms will produce the products that consumers want to buy
This answers "What will be produced?"
What are resources needed for?
To produce the goods and services that satisfy our wants
Why have laws as it relates to our economic system been developed? (purpose)
To protect people, their businesses, and their jobs; to give people freedom
Why is the government involved in the U.S. economy?
To regulate the economy
If you decrease the money supply, which way does aggregate demand shift?
To the left
If you increase the money supply, which way does aggregate demand shift?
To the right
An alternative
Trade-off
Technological unemployment
Type of structural unemployment where automation and machinery replace workers causing unemployment -Created technology to enhance what you're doing- the robot has your skills -Examples: auto assemblers fired as robots take over production, producers of capital goods (ie: tractors)
Cyclical Unemployment
Unemployment that results from economic downturns (recessions) or economic booms -As demand for goods and services falls, demand for labor falls and workers are fired- derived demand
Consequences of an action that you didn't intend to receive; unforeseen outcomes that were not intended
Unintended effects
There are always ? with every decision
Unintended effects
Based on the law of supply, a supply curve will slope in which direction? Why?
Upward from left to right because price and quantity demanded have direct relationship
Total Revenue Test
Uses elasticity to show how changes in price will affect total revenue (TR) Price x quantity demanded
Brings satisfaction or happiness, is useful
Utility
What is the economic term for the amount of satisfaction a consumer receives from consuming a product?
Utility
Nonrecourse loan
a type of loan secured by collateral, which is usually property
Which variables are constant in the Quantity Theory of Money?
Velocity & quantity of output
Graph?
Vertical line: LRAS Curved line: SRAS Line sloping down: demand
If the engine (technology) or the gas mileage (productivity) increases, then the car can drive at even higher speeds (increase LRAS). Graph?
Vertical line: LRAS- Moves right Curved line: SRAS Line sloping down: demand
a sense of looking at, understanding, and explaining how the world works
Vision
Offshoring
When a company outsources certain work to individuals in another country
What is equilibrium?
When quantity demanded = quantity supplied
Why do those in labor unions make more money than those not in labor unions?
When union workers bargain for higher wages, the company can no longer support a full staff because the union workers now cost more to keep employed As a result, the company will fire a few union workers because of the cost and lower the wages or amount of nonunion workers in order to support a full staff again
Car analogy: 70 mph is sustainable.
Where the economy needs to be Full employment
Profit is a signal in a perfectly competitive market
Will never make a big profit because once others see you making profit, they will sell the same product
What are the two key aspects of the definition of demand?
Willingness and ability
People in office know that their chances of reelection are greater if the economy is in good shape on election day. Because of this, people in office hope to increase aggregate demand in the economy.
With greater aggregate demand, firms will sell more goods and services and hire more workers. People will have jobs and income. In this scenario, voters will be more likely to reward those in office.
Are all inventors entrepreneurs?
Yes
Included in GDP?: $10.00 for movie tickets
Yes
Included in GDP?: $10K tuition to attend college
Yes
Included in GDP?: $15K car made in U.S., sold in Canada
Yes
Included in GDP?: $20K Toyota made in Mexico
Yes
Included in GDP?: $5M increase in defense expenditures
Yes
Included in GDP?: Bread produced at the Hillshire plant in Rome, GA
Yes
Included in GDP?: Construction & completion of office building in downtown Roswell
Yes
Included in GDP?: Farmer purchases new $100K tractor
Yes
Included in GDP?: Ford makes new $2M factory
Yes
Included in GDP?: GDOT resurfacing of Route 92 by local excavating company
Yes
Included in GDP?: Oil change done at NTB
Yes
Included in GDP?: Toyota Camry produced in Tennessee factory
Yes
Can price takers sell for less than the equilibrium price?
Yes, but why would they? -Yes, there could be the possibility of more buyers, but more buyers for a product with a decreased price can lead to a shortage. -This would also cause the market to temporarily be out of equilibrium
Do the expenditures approach and income approach generate the same amount?
Yes, since every dollar spent is a dollar of income
At any given time, people demand
a certain amount of liquid assets (money) for everyday purposes
Derived demand
a demand that is the result of some other demand
Subsidy
a government payment that supports a business or market; they cause the supply of a good to increase
Elastic
a price change has a significant impact on the quantity demanded; greater than 1
Target price
a price target is an individual analyst's expectation on the future price of a security
Public franchise
a right granted to a firm by government that permits the firm to provide a particular good or service but excludes others from doing so
Wage floor
a set value that wages cannot fall below
Many believe that globalization is making the world move towards...
a single worldwide economy
Economic model
a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them
AD=
aggregate demand
Cartel agreement
an agreement that specifies that they will act in a coordinated way to reduce the competition among them and hopefully raise their profits
How can you determine a nation's economic system?
based on their economy's characteristics and how they answer the 3 economic questions
Why is free enterprise considered an ethical system?
because individuals are allowed to choose their own occupations or professions. We get to choose what is good and moral.
When GDP is up, there is more tax burden on consumers,
discouraging consumption, decreasing AD
The government's job is to...
brake or speed up when needed as well as promote things that will improve the engine.
Total Revenue - Total Cost = 0
breakeven point
This theory states that change in the money supply will...
bring about strictly proportional changes in the price level
To increase the money supply, the Fed should
buy government securities
When reading a demand curve, assume all outside factors, such as income, are held constant
ceteris paribus
Elasticity equation
change in quantity demanded/original quantity demanded x original price/change in price
Marginal cost equation
change in total cost /change in quantity
Marginal revenue equation
change in total revenue / change in quantity
An increase in the price of paint causes a decrease in the demand for paint brushes. The two products are...
complements
When there is high unemployment, unemployment benefits to citizens increase...
consumer spending
Much of what characterizes a free enterprise economy has to do with how the key economic sectors...
deal with each other.
To increase the money supply, the Fed should...
decrease the discount rate. Expansionary or Easy Money Policy
If aggregate demand decreases, then prices will
decrease, and deflation will occur
For most products and services, an increase in price results in...
demand for fewer products; doesn't shift the curve
A demand curve is a graphical representation of a
demand schedule
Demand for labor is known as...
derived demand
Circular flow diagrams show the relationship between
different economic groups
The demand for labor on a graph has a
downward slope, which means that as wage rates fall, companies can hire more employees
When a customer's need for a product is not urgent, demand tends to be...
elastic
Employment rate =
employed persons / noninstitutional adult civilian population
Sellers that do not respond to public preferences...
end up taking losses and going out of business.
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
As banks keep some of the money in reserve and loan out their excess reserves, the loan...
eventually becomes deposits for the current bank or another bank that will loan out their excess reserves
Resources are limited, but
everyone's needs and wants are unlimited
A public good can be
excludable or non-excludable
What do antitrust laws protect consumers from?
exploitation by monopolies and ensure that competition exists
Minimum wage law
federal law that sets the lowest hourly wage rate that can be paid to workers
When prices do not fall at the same time, deflation can lead to firms...
going out of business and workers being laid off
Higher demand for you =
higher wage rate
Changes in business investment (firms cur back on buying factories and machinery), residential construction (contractors stop building so many homes), or government spending (cut substantially) can be a cause of a business cycle because...
if contraction occurs, then less goods and services are sold, so more workers are fired. This means that these workers don't have the income they once had and don't buy the same things they once did, so overall income decreases.
Double Shift Rule
if two curves shift at the same time, EITHER price or quantity will be indeterminate (ambiguous)
Decreasing money supply=
increase interest rate = decrease investment
If a modest price increase has little or no effect, the demand for the product has what type of elasticity?
inelastic
The Simple Quantity Theory of Money uses the exchange equation to explain...
inflation & deflation
When stock is sold for the first time it is called...
initial public offering (IPO)
In the early 1900s...
injunctions were used to prevent strikes
National Labor Relations Board (NLRB)
investigated labor practices
If the bank pays out less in withdrawals than it accepts in deposits during the day, the bank will have excess reserves at the end of the day. These excess reserves can be
lent out in the form of loans.
Taft-Hartley Act
made it impossible for labor workers to require employers to make labor union employment a requirement
What is a price ceiling?
maximum legal price a seller can charge for a product
Money wage
measuring a person's wage in terms of money (sometimes called "normal wage")
Real wage
measuring wage in terms of what it buys
What is a price floor?
minimum legal price a seller can sell a product for
What is meant by indeterminant?
not exactly known, established, or defined; having no definite or definable value
Quantity demanded is a
number; demand is not
closed shop
organization that hires only union workers
union shop
organization that required people to join a union after a certain time period after getting hired
Cash, and any other good considered money, has value because of its general acceptability. You can use it to get what you want because
other people will accept it in exchange for what they have.
Unlike bonds, stocks make the holder a(n)...
owner in the corporation
When there is a shift in demand, the new demand curve will be ? to the original
parallel
The entire business cycle is measured from...
peak to peak
Monopolistic competitor's products can be different in any way that is
perceived as different by the consumers
What is the coefficient formula for elasticity of demand or supply?
percentage change in quantity demanded/supplied / percentage change in price
Just as we can use supply and demand to determine the price of goods, we can also use it to determine the
price of labor
Nominal GDP =
price x quantity demanded
Total revenue equation
price x quantity demanded
In a market economy, a high price is a signal for
producers to supply more and consumers to buy less
Real GDP =
production x base year's prices
When GDP is down, the tax burden on consumers is low,
promoting consumption, increasing AD
If real GDP declines for two consecutive quarters, the economy is said to be in a...
recession
Total revenue
refers to the total receipts from sales of a given quantity of goods or services
Wagner Act
required employers to bargain with employees and made it illegal for employers to interfere with their employees' rights to form a union; formed NLRB
Wage rate =
salary/hours
Oligopolies are price...
searchers -They have some control over the price they charge -They can raise the price of their good and still sell some of the goods they produce
Monopolistic competitive firms are price...
searchers -We call firms in a monopolistic competitive market price searchers, because the products that they sell are slightly different from any other product in the market -Therefore if they raise their prices, they will still sell some of its product because the consumers cannot find an identical product in the market
To decrease the money supply, the Fed should
sell government securities
Externality
side effect
Each bank that is a member of the Federal Reserve System is required to keep a reserve account with its district bank. Reserve accounts are...
similar to checking accounts
Short run
some factors are variable and others are fixed, constraining entry or exit from an industry
What is the difference between the total value of production and wages paid to a worker?
surplus value
A perfectly competitive market is a price...
taker
Entrepreneurs play an important role in society by...
taking risks to new products or new ways of doing things that benefit the public
In a perfectly competitive market, profit may be...
taxed away
When they give someone a loan, the bank deposits it into their checking account. So, they keep
the RRR of that deposit and loan out the excess (this money doesn't exist).
The more progressive the tax system...
the greater the economy's built-in stability
Unit-elastic
the impact of a price change is neutral-that is, neither major nor minor; equal to 1
The demand on a demand curve is downward sloping showing
the inverse relationship between price (on the y-axis) and quantity demanded (on the x-axis)
Free enterprise also allows for the production of the goods and services preferred by both...
the minority and the majority.
An ethical economic system will reward producers for responding to...
the preferences of the buying public.
Consumers' willingness to replace a costly item with a less costly item is an example of...
the substitution effect
What does scarcity force people or society to do?
to make choices
Civilian labor force =
unemployed persons + employment persons
Unemployment rate =
unemployed persons / civilian labor force
in 1842, courts decided that
unions were not illegal, but some union practices were
When a manufacturer of pain medication reduced the price of the medication by 30%, the quantity demanded increased by almost exactly 30%. Demand for the product is...
unit-elastic
The supply for labor on a graph is
upward sloping, which means that as wage rates increase, the supply of employees willing and able to work increases
One objective of this book is to get you to understand and use the economist's _______ ___ ______________.
way of thinking
If we only have the natural rate of unemployment...
we are at full employment
If aggregate demand increases more than aggregate supply does...
we have inflation
What is meant by "Making a decision at the margin"?
when you decide how much more or less to do; individuals will choose the option that yields the greatest net marginal benefit; by deciding something by choosing the one with the more benefits
