Exam 1 Study Guide
What are economic indicators?
1. GDP (measures of aggregate production 2. inflation (misery index) 3. unemployment (% change in Consumer Price Index)
What are the components of GDP?
1. consumption 2. investment (NOT stocks etc.) 3. gov't spending 4. net exports
What are the factors of production?
1. land 2. economic capital 3. labor 4. entrepreneurship
What policies can promote economic growth?
1. monetary policy (managing interest rates and availability of credit) 2. fiscal policy (use of gov't spending/taxes)
The main determinants of labor productivity are __________
1. physical capital 2. human capital 3. technological change
What are the factors that cause the supply curve to shift?
1. production cost 2. weather 3. technology 4. government policies (taxes, regulations, subsidies)
What are the factors that cause the demand curve to shift?
1. tastes/preferences 2. population 3. income 4. prices of relative goods 5. expectations about future prices
What factors are left out of the GDP calculation but are still necessary in determining and reflecting our standard of living?
1. value of leisure 2. quality of environment 3. improvements in products quality
How is economic growth measured?
GDP
How do you calculate GDP?
GDP = C + I + G + (NX) (consumption + investment + gov't spending + net exports)
How do you calculate GDP per capita?
GDP per capital = GDP ÷ population
What are business cycles?
a cycle of expansion & contraction that economies undergo over time
Ceteris paribus
all factors being equal
Change in quantity demanded/supplied moves __________
along the curve
What is excess supply?
amount that producers want to sell is GREATER than the amount that consumers want to buy (surplus)
What is excess demand?
amount that producers want to sell is LESS than the amount that consumers want to buy (shortage)
Economic indicators can help give us __________
an understanding of the state of the economy
What is the Law of Demand?
at a higher price↑ consumers will demand a lower quantity↓ (P & Q have inverse relationship)
When labor production increases over time, so does __________
average wages
How does specialization lead to gains in trade?
benefits of specialization include -larger quantity of goods and services that can be produced -improved productivity -production beyond a nation's production possibility curve -resources that can be used more efficiently
Over the course of human history, economic growth has __________
brought substantial gains in incomes & standards of living in many countries
Fluctuations in real GDP are called __________
business cycles
Self-interest is not necessarily selfish, some say. In fact, self-interest likely includes an individual's consideration for __________
close friends and family
Describe marginal analysis (marginal benefit and marginal cost)
compares the additional benefits derived from an activity and the extra cost incurred by the same activity
Describe the production possibilities frontier (curve)
curve that illustrates the quantities that can be produced of 2 products if both depend upon the same limited resource
Describe the circular flow diagram
diagram indicating that the economy consists of households and firms interacting in a G&S market and a labor market
What happens to equilibrium price and equilibrium quantity when there is a shift in supply?
downward shift (supply increase) = price falls↓ quantity increases↑ upward shift (supply decrease) = price rises↑ quantity decreases↓
An increase in education and training for the workforce would __________
increase the aggregate production function
If a government wanted to raise capital deepening, it should __________
invest in education & research
An economy is considered to be in a recession if __________
it moves from peak→trough
An economy is considered to be an expansion if __________
it moves from trough→ peak
Change in demand/supply moves __________
left & right
What are the 4 phases of a business cycle (in order)?
movement of economy from peak→trough & trough→peak 1. expansion 2. peak 3. recession 4. trough
What is scarcity?
never enough resources to meet all our needs and desires (time, money, labor, tools, land, and raw materials)
In order to satisfy as many wants as possible, it is necessary to achieve productive efficiency because __________
otherwise resources are idle
Why do economists assume people are rational?
people will make choices in their own self-interest
When certain assumptions are used to create a model of reality, its value can be tested and determined by its ability to __________
predict outcomes
A supply curve is a graphical illustration of the relationship between quantity supplied and __________
price
What is the Law of Supply?
price of G&S increases↑ quantity of G&S increases↑ (ceteris paribus)
Scarcity is imposed on individual households in the form of income and __________
prices of the goods that a person may purchase
What is capital deepening?
process of increasing amount of physical/human capital per worker
Labor productivity is __________
production OR output per worker per hour
The production possibilities model shows an inverse relationship between the amount of one thing and the amount of something else that can be produced because __________
production of different types will compete for limited resources
How does labor productivity impact economic growth?
productivity growth means an economy is able to produce more G&S for the same amount of work
What is the role of assumptions?
provides a way for economists to simplify economic processes and make them easier to study and understand
If demand decreases and supply remains constant, what happens to the market equilibrium?
quantity and price both fall
What is the difference between real GDP and nominal GDP?
real GDP includes the effects of inflation
What is the difference between real and nominal values?
real value is adjusted for inflation
If a country's GDP increases faster than its population, its GDP per capita would __________
rise↑
What is the difference between movements along a demand (or supply) curve versus a shift of an entire curve?
shift = caused by factors movement = caused by change in price
What is a recession?
significant decline in real GDP
The advantages that society gains through trade lie in the ability to __________
specialize resources to the uses where opportunity cost is minimized
What is a competitive market?
structure in which no single consumer or producer has the power to influence the market
Describe an effective economic model and relationship between cause and effect
supply and demand is an effective economic model that illustrates the relationship between the supply of a good and service sold at different prices and the quantity demanded by consumers. At higher prices, consumers demand lower quantities. A demand curve shows this relationship
Marginal benefit is __________
the benefit received from a unit increase
Marginal cost is __________
the cost of obtaining or producing 1 more unit of something
Equilibrium price
the intersection of the supply & demand curves markets reach equilibrium because prices that are above and below an equilibrium price lead to surpluses and shortages. A surplus usually means that vendors will lower prices to clear out inventory, while a shortage means they will raise prices to take advantage of the higher demand In both cases, price will converge toward an equilibrium price, which may be higher or lower than original equilibrium price.
Which assumption reflects a basic understanding economists have about the world?
the world has limited productive resources
What happens to equilibrium price and equilibrium quantity when there is a shift in demand?
upward shift (demand increase) = price rises↑ quantity increases↑ downward shift (demand decrease) = price falls↓ quantity decreases↓
What does gross domestic product measure?
value of final G&S produced within a county in 1 year
What is opportunity cost?
what must be given up to obtain something that's desired (value of next best alternative)
