Macro Exam #1 Combined
Efficiency
Marginal cost = Marginal benefit *Production is efficient if total surplus is maximized*
Markets Maximize the difference between benefits and costs (economic surplus):
Market outcomes are the best provided that: -The market is in equilibrium AND -No costs or benefits are shared with the public
Congress sets the national minimum wage in nominal terms
Publicized debate results in periodic increases: -Indexing would be simpler and less controversial. -Politicians appear to benefit from the debate.
Imports
Purchases in the US of goods and services produced abroad. -Imports can be consumption, investment, or government spending. *Imports increase the amount available to the domestic economy*
The annual percentage increase in the purchasing power of a financial asset is the__________.
Real Interest Rate
Nominal Wage=
Real wage * the Price Index
If total output increases from $1 trillion to $2 trillion as population increases from 100 million to 200 million, then output per person:
Remains Constant
A Normative Economic Principle is one that...
Says how people SHOULD behave.
Normative Economic Principle
Says how people SHOULD behave.
Outsourcing
Service work performed overseas by low wage workers. -Medical transcription -Medical tourism -Customer call centers -Technical writing
Consumer Non-Durables
Shorter-lived goods: -Clothing -Food -Bedding
Economic Investment
The increase in the capital goods used to produce other goods. -This value is based on the purchase price of the capital goods, NOT on stock value.
Services
The largest component of consumer spending: -Education -Taxi rides -Haircuts
Buyer's Reservation Price
The largest dollar amount the buyer would be willing to pay for a good.
Duration of Unemployment
The length of an unemployment spell.
Gross Domestic Product (GDP)
The market value of the final goods and services produced in a country during a given period.
Unemployment Rate
The number of unemployed people divided by the labor force. *= unemployed / labor force*
During times of high unemployment, colleges often observe an increase in enrollment even if tuition remains unchanged. Why?
The opportunity cost of attending college is lower when unemployment is high.
Participation Rate
The percentage of the working-age population in the labor force (that is, the percentage that is either employed or looking for work). *= labor force / population 16+*
Equilibrium Price and Equilibrium Quantity
The price and quantity at the intersection of the supply and demand curves for the good.
Relative Price
The price of a specific good or service IN COMPARISON to the prices of other goods and services. *Calculated as a ratio*
A person has a Comparative Advantage...
At a particular task if their Opportunity Cost of performing the task is lower than the other person's opportunity cost.
A person has an Absolute Advantage...
At a particular task if they can perform the task in fewer hours than the other person.
Produced in a country in a period of time:
"Domestic" in GDP means that activity is measured within a country's borders. -Nationality of owners or company is NOT relevant. Value must be produced in the year considered:
Suppose that Tom bought a bike from Helen for $195. If Helen's reservation price was $185, and Tom's reservation price was $215, the total economic surplus from this transaction was:
$30
The slope of a production possibilities curve is ______ because ______.
-Negative -Producing more of one good requires producing less of the other.
Suppose that the total production of an economy consists of 10 oranges and 5 candy bars, each orange sells for $0.20, and each candy bar sells for $1.00. What is the market value of production in this economy?
$7.00
GDP can be measured in 2 ways:
(1) Market Value: (2) Total spending for final goods less value of imports.
The Market:
*Buyers and sellers signal wants and costs* -Resources and goods are allocated accordingly. Interaction of supply and demand answer the three basic questions.
The Duration of Unemployment
*Costs of unemployment are DIRECTLY related to the length of time a person has been unemployed*
Central Planning:
*Decisions by individuals or small groups* -Agrarian societies -Government programs Set prices and goals for the group: -Individual influence is limited.
Incentive Principle
*Incentives are central to people's choices* *Benefits-* Actions are more likely to be taken if their benefits rise. *Costs-* Actions are less likely to be taken if their costs rise.
Underground Economy
*Is all unreported transactions, legal and illegal* Casual labor is often paid in cash: -Failure to report transaction reduces taxes. (Includes baby sitters, lawn care, home repair, etc.) Some underground activity is illegal: -A service of value is provided. (Drug dealers, bookies, fences, prostitution, etc.) *Estimates suggest the underground economy is large REGARDLESS of national income level*
Real GDP is a flawed measure of well-being
*It values ONLY market transactions* -Omits illegal transactions, volunteer work, and household production.
Net Exports =
*Net Exports=Exports - Imports*
Unexpected Inflation:
*Redistributes Wealth* -Unexpectedly high inflation benefits borrowers at the expense of lenders. *Confuses Incentives*
Expenditure approach to measuring GDP
*Y=C+I+G+NX* Y=GDP or Output C=Consumption Expenditure I=Investment G=Government Purchases NX=Net Exports
Peg's Manicure Manor did 4,000 sets of nails in 2015 and 4,500 sets of nails in 2016. The price of a set of nails was $20 in 2015 and $22 in 2016. If 2015 is the base year, Peg's contribution to nominal GDP in 2015 was ______ and to real GDP in 2015 was _____.
-- $80,000 -- $80,000
On January 1, 2008, Edward invested $10,000 at 5 percent interest for one year. The CPI on January 1, 2008 stood at 1.60. On January 1, 2009, the CPI was 1.76. The real rate of interest earned by Edward was ______ percent.
-5
Fiscal policy influences the balance between government spending and taxes:
-A Deficit: -A Surplus:
Causes of Shifts in Supply:
-A change in the price of an input: -A change in technology: -Weather (agricultural commodities and outdoor entertainment): -Number of sellers in the market: -Expectations of future price changes: *Price changes NEVER cause a shift in supply*
Buyers and sellers have different motivations:
-Buyers want to benefit from the good. -Sellers want to make a profit.
U.S. production worker wages:
-CPI uses 1982-1984 as base year. -Real wages stayed roughly the same between 1970 and 2016 despite the fact that the nominal wage in 2016 was more than 6 times the nominal wage in 1970.
Decisions to cut taxes are made by _____ and are an example of _____ policy.
-Congress -Fiscal
Demand curves have a Negative slope
-Consumers buy less at higher prices. -Consumers buy more at lower prices.
Microeconomics considers topics such as:
-Cost of production -Demand for a product -Exchange rates
GDP does NOT account for intangibles people value:
-Crime rates -Traffic congestion -Civic organizations -Open space -Sense of community
Costs of Unemployment
-Economic Costs: -Psychological Costs: -Social Costs:
To work efficiently, unemployment benefits should be:
-For a limited time. -Less than the income received when working.
Types of Unemployment
-Frictional Unemployment: -Cyclical Unemployment: -Structural Unemployment:
Unexpectedly high inflation_________ borrowers and __________ lenders.
-Helps -Hurts
Unemployment Insurance is a government transfer to unemployed workers:
-Helps to reduce the costs of unemployment. -May give the unemployed an incentive to search longer and less intensely.
GDP omits services that are not traded in markets:
-Household production -Volunteer services *Valuing these services would be difficult*
Indexing automatically adjusts certain values, such as Social Security payments, by the amount of inflation:
-If prices increase 3% in a given year, the Social Security recipients receive 3% more. (No action by Congress required). -Indexing is sometimes included in labor contracts.
Psychological Costs:
-Individual self-esteem -Family stress of decreased income and increased uncertainty
Labor Union Costs
-Introduces inefficiency into competitive markets. -May keep companies from competing globally. -Increase labor supply in non-union sector. -Decreases wages for non-union workers.
The Real Wage:
-Is calculated by dividing the nominal wage by the CPI. -Is the wage paid to workers in terms of purchasing power.
Measuring Unemployment:
-Labor Force -Unemployment Rate -Participation Rate
Economic Costs:
-Lost wages and production -Decreased taxes and increased transfers
Demand reflects the entire market, NOT one consumer:
-Lower prices bring more buyers into the market. -Lower prices cause existing buyers to buy more.
Buyers may create benefits for others:
-Marginal Benefit is less than the full social benefit. -Vaccinations, my neighbor's landscaping. *The demand for these goods is less than socially optimal*
GDP per capita is positively associated with several measures of well-being:
-Material standard of living: more goods and services. -Health and life expectancy. -Education.
Minimum wage has...
-Minimum wage has increased 15 times between 1970 and 2008. -Real minimum wage has decreased by about 1/3 in that period.
Macroeconomics considers topics such as:
-Monetary Policy -Deficits -Tax
The value of output was $1,000 billion in Northland and $2,000 billion in Southland. The population of Northland was 50 million and the population of Southland was 120 million. There were 30 million employed workers in Northland and 75 million employed workers in Southland. Average labor productivity was higher in _________ and the standard of living was _______.
-Northland -Higher in Northland
Distortions Caused by Taxes:
-Not all taxes are indexed. -Capital depreciation allowance encourages purchase of capital goods. -In times of high inflation, investment in plant and equipment decreases. -US tax system is complex: -Taxes that are not indexed distort the tax incentives for people to work, save, and invest.
Government production is valued at cost:
-Overstates GDP if there is waste and inefficiency.
The Great Depression
-Period of falling output and prices. *-When inflation rates are negative, there is Deflation*
Producers sometimes shift costs to others:
-Pollution is like getting free waste disposal services. -Total Marginal Cost = Seller's Marginal Cost + Marginal cost of pollution. *When costs are shifted, supply is greater than socially optimal*
Specialization is Easier when:
-Population density passes a threshold. -Markets are connected. -Transportation for goods -Communications for services -Legal framework supports business. -Financial markets enable start-ups.
Social Costs:
-Potential increases in crimes and social problems. *-Social resources spent to address these*
Causes of Shifts in Demand:
-Price of complementary goods: -Price of substitute goods: -Income: Normal or Inferior goods? -Preferences: -Number of buyers in the market: -Expectations about the future: *Price changes NEVER cause a shift in demand*
GDP changes over time because:
-Prices change AND -Quantity of output changes.
Capital income pays for physical capital and intangibles:
-Profits for business owners. -Interest for bond holders. -Rent for land. -Royalties. *Measured before taxes*
Financial Investment
-Purchases of stocks, bonds, and other financial assets. -Purchase generally transfers ownership of a portion of the firm's EXISTING capital stock *Does NOT correspond to any increase in physical capital or production capacity, in most cases*
Limits to Outsourcing:
-Quality control -Physical presence (haircuts) -Complex communications -Understand nuance
Labor Union Benefits
-Reduced worker exploitation. -Support progressive labor legislation. -Increase productivity. -Promote democracy in the workplace.
Observations on Unemployment Rate:
-Rises during recessions. -Always greater than zero.
U.S. Tax System is Complex:
-Taxes are collected at the federal, state, and city levels. -Conflicting incentives.
Opportunity cost differs among sellers due to:
-Technology -Skills -Different costs such as rent -Expectations
Some of the issues macroeconomists study:
-The sources of long-run economic growth and development. -The causes of high unemployment. -The factors that determine the rate of inflation.
Government goods and services are not sold in the market:
-These goods have value. -Increase overall output. -Quantities are known. -Prices cannot be established.
Rank the amounts from largest to smallest:
-Total Output -Average Labor Productivity -Output per Person
Inflation may be overstated:
-Unnecessarily increases government spending. -Underestimates increase in the standard of living.
Market price balances two forces:
-Value buyers derive from the good. -Cost to produce the good.
Markets communicate information effectively:
-Value buyers place on the product. -Opportunity cost of producing the product.
Movement along the Demand Curve:
-When price goes up, quantity demanded goes down. -When price goes down, buyers move to a new, higher quantity demanded.
Movement along the Supply Curve:
-When price goes up, quantity supplied goes up. -When price goes up, sellers move to a new, higher quantity supplied.
Factors that are likely to affect a country's comparative advantage:
-the country's natural resources -the country's climate -the country's culture -the country's institutions
4 Rules of Supply and Demand Shifts:
1. An increase in demand will lead to an increase in BOTH equilibrium price and quantity. 2. A decrease in demand will lead to a decrease in BOTH equilibrium price and quantity. 3. An increase in supply will lead to a decrease in the equilibrium Price and an increase in the equilibrium Quantity. 4. A decrease in supply will lead to an increase in the equilibrium Price and a decrease in the equilibrium Quantity.
Suppose wildfires in California destroy a number of major wineries. At the same time, suppose consumers' incomes fall. If wine is a normal good, then how will both of these factors (the destruction of the wineries and the decrease in consumers' incomes) affect the equilibrium price and quantity of wine? 1. The equilibrium price of wine: 2. And the equilibrium quantity of wine:
1. Could either increase or decrease. 2. Will decrease
The Three Decision Pitfalls:
1. Measuring costs and benefits as proportions instead of absolute amounts: 2. Ignoring implicit costs: 3. Failure to think at the margin: -Sunk costs cannot be recovered.
Types of Macroeconomic Policy:
1. Monetary Policy: 2. Fiscal Policy: 3. Structural Policy:
Sources of Comparative Advantage:
1. Talent 2. Natural Resources 3. Cultures and Societal Norms -Languages -Institutions
Every society answers 3 basic questions:
1. WHAT: -Which goods will be produced? -How much of each? 2. HOW: -Which technology? -Which resources are used? 3. FOR WHOM: -How are outputs distributed? (need? income?)
If the CPI was 2.15 in 2009 and 2.18 in 2010, then the annual rate of inflation between those years is:
1.4% *(2.18-2.15)/2.15=0.014*
In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted jobs. What is the unemployment rate in this town?
13.7%
Base Year for CPI
2010 -Changes periodically
If the inflation rate is 3%, and the real interest rate is 5%, then the nominal interest rate is:
8% *The real interest rate = the nominal interest rate - the rate of inflation*
In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted them. What is the participation rate in this town?
81.1%
Equilibrium
A balanced or unchanging situation in which all forces at work within a system are cancelled by others. *A system is in equilibrium when there is NO tendency for it to change*
Efficiency (or Economic Efficiency)
A condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels.
Sunk Cost
A cost that is beyond recovery at the moment a decision must be made.
Economists believe that scarcity is...
A fundamental fact of life for everyone.
Inferior Good
A good whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease.
Normal Good
A good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease.
Supply Curve
A graph or schedule showing the quantity of a good that sellers wish to sell at each price. *If the price is less than opportunity cost, offer more*
Production Possibilities Curve
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.
All else equal, relative to a person who earns minimum wage, a person who earns $30 per hour has:
A higher opportunity cost of taking the day off work.
Capital Good
A long-lived good that is used in the production of other goods and services. -Houses, apartments, and motels. -Stoves in restaurants, cooking schools. -Delivery vehicles and taxis. *Money is NOT a capital good*
Equilibrium Principle
A market in equilibrium leaves no unexploited opportunities for individuals. -BUT it may not exploit all gains achievable through collective action. -Only when the seller pays the full cost of production and the buyer captures the full benefit of the good is the market outcome socially optimal. *Regulation, taxes and fines, or subsides can move the market to optimal level*
Price Ceiling
A maximum allowable price, specified by law. *-Rent controls set a maximum price that can be charged for a given apartment.* If the controlled price is below equilibrium, then: -Quantity demanded increases -Quantity supplied decreases -A shortage results
Intermediate Goods or Services
Are used up in the production of final goods. *Not included in GDP to avoid double counting*
Consumer Price Index (CPI)
A measure of the cost of living during a particular period. Measures: -The cost of a standard basket of goods and services in a given year. -Relative to the cost of the same basket of goods and services in the base year.
Price Level
A measure of the overall level of prices at a particular point in time. *Measured by a price index such as the CPI*
Change in the Quantity Demanded
A movement along the demand curve that occurs in response to a change in price.
Change in the Quantity Supplied
A movement along the supply curve that occurs in response to a change in price.
Unemployment Spell
A period during which an individual is continuously unemployed.
Economic Growth
A process of steady increase in the quantity and quality of the goods and services the economy can produce. *The more we can produce, the more we can consume*
Variable
A quantity that is free to take on different values.
Real Quantity
A quantity that is measured in physical terms. *To compare values over time, use Real Quantities*
Nominal Quantity
A quantity that is measured in terms of its current dollar value.
Demand Curve
A schedule or graph showing the quantity of a good that buyers wish to buy at each price. *It is downward-sloping with respect to price*
Change in Demand
A shift of the entire demand curve. -If buyers are willing to buy less at each price, then demand has decreased.
Change in Supply
A shift of the entire supply curve.
Hyperinflation
A situation in which the inflation rate is extremely high.
Deflation
A situation in which the price of most goods and services are falling over time so that inflation is negative.
If it takes a person less time to perform a task than anyone else, then that person has a(n) ________________ advantage in performing that task.
Absolute Advantage
Positive Analysis
Addresses the economic consequences of a particular event or policy, NOT whether those consequences are desirable.
Normative Analysis
Addresses the question of whether a policy should be used; normative analysis inevitably involves the values of the person doing the analysis.
GDP does NOT value Leisure:
Amount of leisure has increased in the past 100 years: -Work weeks are shorter. -People enter the labor force at an older age. -People retire earlier. Leisure produces no goods for market: -GDP places a value of zero on all leisure time. -Opportunity cost of an hour of leisure is your hourly wage. -Omission of the value of leisure time makes GDP seem smaller.
Cash on the Table
An economic metaphor for unexploited gains from exchange.
An increase in the demand for GM automobiles results in:
An increase in the quantity supplied of GM automobiles.
If Ana devotes all her time to making fudge, she can make 3 pounds of fudge an hour, and if she devotes all her time to making toffee, she can make 2 pounds of toffee an hour. If Leo devotes all his time to making fudge, he can make 4 pounds of fudge an hour, and if he devotes all his time to making toffee, he can make 5 pounds of toffee an hour. According to The Principle of Comparative Advantage, Ana and Leo will be able to produce more overall if:
Ana Specializes in fudge and Leo specializes in toffee
Efficient Point
Any combination of goods for which currently available resources DO NOT ALLOW an increase in the production of 1 good without a reduction in the production of the other.
Inefficient Point
Any combination of goods for which currently available resources ENABLE an increase in the production of 1 good without a reduction in the production of the other.
Unattainable Point
Any combination of goods that CANNOT be produced using currently available resources.
Attainable Point
Any combination of goods that can be produced using currently available resources.
Final Goods or Services
Are consumed by the ultimate user. -End products of production. *Included in GDP*
Government Purchases
Are final goods and services bought by federal, state, and local governments. -Fighter jets -Teaching -Office supplies *Excludes Transfer Payments* *Excludes interest paid on government debt*
Transfer Payments
Are made by government but the government receives no current goods or services. -Social Security -Food Stamps -No purchases of final goods and services involved in transfer payments. *Spending by recipients IS included in GDP*
Opportunity cost includes:
BOTH -Explicit costs -Implicit costs
Mixed Economies use...
BOTH the market and central planning
Long-term Unemployment
Been out of work for 6 months or longer.
Inflation-Protected Bonds
Bonds that pay a nominal interest rate each year equal to a fixed real rate plus the actual rate of inflation during that year.
What will happen to the equilibrium price and quantity of beef, if the price of chicken feed increases? (Assume that chicken and beef are substitutes.)
Both will increase
Income taxes have been indexed to avoid...
Bracket Creep *Indexing income taxes matches tax rates to the real income level*
Calculating CPI
CPI is the ratio of the cost of the basket of goods in the current year to the cost of the base year. -CPI for the base year is always 1. -CPI for a given period is the cost of living in that period relative to what it was in the base year. -BEA uses CPI as a percentage-- the ratio times 100
Learning more about economic models..
Can help us make better decisions even if most people don't consciously use economic models to make decisions.
If there is no inflation...
Cash holds its value over time.
When inflation is high...
Cash loses value over time.
A PPC represents current choices:
Changes in choices occur over time due to: -More Resources -Investment in capital -Population growth -Improvements in Technology -More specialization (Start-up and switching costs) -Increases in Knowledge
Everyone can be made better off if each person specializes in performing the task at which they has a(n) ______________.
Comparative Advantage
Adjusting for Price Changes
Compare GDP for different years to see how much output has changed.
If the demand for gadgets increases as a result of a decrease in the price of widgets, the widgets and gadgets are:
Complementary goods
Deflating [a nominal quantity]
Converts it to a real quantity. *Divide a nominal quantity by its price index to express the quantity in real terms*
Goods can be Final AND Intermediate...
Count ONLY the final goods.
Consumer Durables
Long-lived consumer goods: -Cars -Furniture: -Appliances:
Fiscal Policy
Decisions that determine the government's budget, including the amount and composition of government expenditures and government revenues. -How much should the government spend, and on what?
The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2016, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2017, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same. Between 2016 and 2017, a typical family's cost of living:
Decreased by 4.5 percent
If the CPI falls from 2.33 to 2.25, then there has been ________________.
Deflation *If the price level is falling, then there is Deflation*
Monetary Policy
Determination of the nation's money supply. -Controlled by the central bank or, in the US, the Federal Reserve System (FeD). *The central bank has the power to inject more money into the economy, or remove it*
Benefits increase when...
Differences in opportunity cost increase.
To aggregate 300 tons of steel, 5,000 bushels of wheat, and 1 million barrels of crude oil, economists add together the _____ of the three products.
Dollar Value
Suppose that the extra cost to Tim of a third glass of soda is zero because he's at a restaurant that gives free refills. According to the Cost-Benefit Principle Tim should:
Drink a third glass of soda if the extra benefit of doing so is positive.
Without Trade....
Each person can consume ALONG their PPC. -What you produce determines what you consume.
With Trade....
Each person's consumption can be greater than production. -Produce according to comparative advantage. -Trade to get what you want.
Efficiency Principle
Equilibrium price and quantity are efficient if: -Sellers pay all the costs of production. -Buyers receive all the benefits of their purchase.
Suppose the current issue of The New York Times reports an outbreak of mad cow disease in Nebraska, as well as the discovery of a new breed of chicken that gains more weight than existing breeds that consume the same amount of food. How will these developments affect the equilibrium price and quantity of chickens sold in the United States?
Equilibrium quantity will increase, but the effect on equilibrium price is unknown.
The Principle of Comparative Advantage
Everyone does best when each person (or each country) concentrates on the activities for which their opportunity cost is lowest. *Total value of output increases with Specialization and Trade*
The Low-Hanging Fruit Principle
Explains the upward-sloping supply curve.
Trade Deficit
Exports < Imports
Trade Surplus
Exports > Imports
Value Added
For any firm, the market value of its product or service minus the cost of inputs purchased from other firms. *Count value added in the year it is produced*
The Market
For any good consists of all the buyers and sellers of the good.
Which of the following activities is most likely to be counted in GDP?
Gail buys paper and crayons to donate to poor children in need of school supplies.
Exports
Goods and services produced domestically and sold abroad. *Exports reduce the amount available to the domestic economy*
Macroeconomic Policies
Government actions designed to affect the performance of the economy as a whole.
Structural Policy
Government policies aimed at changing the underlying structure, or institutions, of the nation's economy.
A Rational Person
Has well-defined goals and tries to fulfill those goals as best they can.
Short-term Unemployment
Have several possible outcomes: (1) Find permanent job after searching a few weeks. -Economic costs are low. (2) Leave the labor force. (3) Short-term or temporary job that leads to unemployment again. -These chronically unemployed have costs similar to the long-term unemployed.
The fact that the production possibility curve is Downward sloping illustrates the idea that...
Having more of one thing generally means having less of something else.
Other Government Regulations:
Health and safety regulations can reduce the demand for labor by: -Increasing employer costs. -Reducing productivity. *The reduction in demand will increase unemployment and lower wages*
Given the costs of inflation, most economists agree that low and stable inflation promotes a...
Healthy economy.
Which of the following would NOT be studied in macroeconomics?
How a sharp increase in gasoline prices is likely to affect SUV sales.
Shift in Demand
If buyers are willing to buy more AT EACH PRICE, then demand has increased. *Move the ENTIRE demand curve to the right*
Production Possibilities Curve
Illustrates the combinations of 2 goods that can be produced with given resources.
The Principle of Increasing Opportunity Cost (AKA "The Low-Hanging Fruit Principle")
In expanding production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs.
If the price of motel rooms increases by 10 percent while the prices of other goods and services increase by 5 percent on average, the relative price of motel rooms has:
Increased
Indexing
Increases a nominal quantity each period by the percentage increase in a specified price index. *Indexing prevents the purchasing power of the nominal quantity from being eroded by inflation*
Microeconomics is the study of...
Individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets.
If the demand curve for bologna shifts to the right as income falls then bologna is a(n):
Inferior good *An Inferior good is a good for which an increase in income leads to a decrease in demand and a decrease in income leads to an increase in demand*
____________ reduces the purchasing power of money.
Inflation
Structural Unemployment
Is long-term, chronic unemployment in a well-functioning economy. -Lack of skills, language barriers, or discrimination. -Structural shifts in production create a long-term mismatch between workers and market needs. -Barriers of employment such as: -Minimum wages -Unions -Unemployment Insurance -High economic, psychological, and social costs: (example: US steel, telecommunications, manufacturing).
Economic Surplus
Is the benefit of taking an action MINUS its cost.
Cyclical Unemployment
Is the increase in unemployment during economic slow-downs. -Usually short duration. -Economic cost is the decline in Real GDP.
Equilibrium Price
Is the price at which the supply and demand curves intersect.
Equilibrium Quantity
Is the quantity at which the supply and demand curves intersect.
Labor Income
Is wages, salaries, benefits, and incomes of the self-employed. -About 2/3 of GDP.
Assume that Joe is willing to produce a hamburger for $1, and Mary is willing to pay $3 for a hamburger. Which of the following is true?
Joe and Mary can make a mutually beneficial exchange.
Price Index
Measures the average price of a given class of goods and services relative to the price of the same goods and services in a base year.
The provision of additional cash to the banking system is an example of _______ policy.
Monetary
USUALLY, Nominal and Real GDP increase each year:
Nominal GDP can go up and Real GDP go down: -Fewer goods and services produced AND -Prices increase faster than output decreased Nominal GDP will be smaller than Real GDP if the prices in the current year are less than in the base year: -Usually true for years before the base year Real GDP could rise and Nominal GDP fall, *But this is rare*: -Prices are falling faster than output is increasing.
The annual percentage increase in the nominal value of a financial asset is the ____________.
Nominal Interest Rate
Trade Imbalances
Occur when the quantity of goods and services that a country sells abroad (its exports) differs significantly from the quantity of goods and services its citizens buy from abroad (its imports). -Trade Deficit: -Trade Surplus
Market Equilibrium
Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price. *At the equilibrium price, quantity supplied = quantity demanded*
Bracket Creep
Occurs when a household is moved into a higher tax bracket due to increases in nominal BUT NOT real income. -Higher tax brackets have a higher tax rate.
A Deficit
Occurs when government spending is greater than tax revenue.
A Surplus
Occurs when government spending is less than tax revenue.
Frictional Unemployment
Occurs when workers are between jobs. -Short duration, low economic cost. -May increase economic efficiency.
Production possibilities curves for large economies are generally bow-shaped because:
Opportunity costs tend to increase with increases in production.
Average Labor Productivity
Output per employed worker. *Output per Employed Worker = (Total Output) / (Number of People Employed)*
Suppose the market demand curve is given by Qd = 80 - 10P, and the market supply curve is given by Qs = 10 + 15P. What is the equilibrium price and quantity?
P* = $2.80 and Q* = 52
Suppose quantity demanded is given by Qd = 100 - P, and quantity supplied is given by Qs = 20 + 3P. In this case, equilibrium price, P*, and equilibrium quantity, Q*, are as follows:
P*= 20, Q*= 80
Involuntary Part-Time Workers
People who say they would like to work full-time but cannot find a full-time job. *Counted as employed*
A Positive Economic Principle is one that...
Predicts how people WILL behave.
Positive Economic Principle
Predicts how people WILL behave.
Investment
Spending by firms on final goods and services, primarily capital goods and housing.
Consumption Expenditure (or Consumption)
Spending by households on goods and services.
A broad government initiative to reduce a country's reliance on agriculture and promote high-technology industries is an example of ______ policy.
Structural
Microeconomics
Studies choice and its implications for price and quantity in individual markets. -Sugar -Carpets -House Cleaning Services
Macroeconomics
Studies the performance of national economies and the policies that governments use to try to improve that performance. -Inflation -Unemployment -Growth
Economics
Study of how people make choices under conditions of scarcity and of the results of those choices for society.
Shift in Supply
Supply increases when sellers are willing to offer more for sale AT EACH POSSIBLE PRICE. *-Moves the ENTIRE supply curve to the right* Supply decreases when sellers are willing to offer less for sale AT EACH POSSIBLE PRICE. *-Moves the ENTIRE supply curve to the left*
An Arizona student claims to have spotted a UFO over the desert outside of Tucson. How will this claim affect the supply (not the quantity supplied) of binoculars in Tucson stores?
Supply will not change. The demand for binoculars is likely to increase, leading to an increase in price and quantity supplied (BUT NO CHANGE IN SUPPLY).
The Cost-Benefit Principle
Take an action if and ONLY if the EXTRA benefits are at least as great as the EXTRA costs.
The Scarcity Principle states...
That although we have boundless needs and wants, the resources available to us are limited, so having more of one good thing usually means having less of another.
The Cost-Benefit Principle states...
That an individual (or a firm or a society) should only take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.
Suppose the Nepal invests less in new factories and equipment than does the US. This will likely cause:
The US's production possibilities curve to shift outward faster than Nepal's.
The Greatest security for workers is....
The ability to adapt quickly to changing circumstances.
Aggregation
The adding up of individual economic variables to obtain economy-wide totals. -Aggregate measurements in dollar values allow economists to compare broad categories of goods and services, such as exports and imports. -Aggregation often obscures the fine detail of an economic situation.
Excess Demand (Shortage)
The amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.
Excess Supply (Surplus)
The amount by which quantity supplied exceeds quantity demanded when the price of the good exceeds the equilibrium price.
Nominal Interest Rate (or Market Interest Rate)
The annual percentage increase in the nominal value of a financial asset. -Nominal interest rates are the most commonly stated rates.
Real Interest Rate
The annual percentage increase in the purchasing power of a financial asset. *Real Interest Rate = Nominal Interest Rate - Inflation*
Rate of Inflation
The annual percentage rate of change in the price level.
Economic Surplus
The benefit of taking an action MINUS its cost. *Economic Surplus = Total Benefits - Total Costs*
Income Effect
The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power. *Buyers' overall purchasing power goes down*
Substitution Effect
The change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes. *Buyers switch to substitutes when price goes up*
If one fails to account for implicit costs in decision making, then applying the cost-benefit rule will be flawed because:
The costs will be UNDERstated
Standard of Living
The degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable.
Buyer's Surplus
The difference between the buyer's reservation price and the price they actually pay.
Total Surplus
The difference between the buyer's reservation price and the seller's reservation price.
Seller's Surplus
The difference between the price received by the seller and their reservation price.
Unemployment Rate
The fraction of people who would like to be employed but can't find work. *% of the labor force that is out of work*
Marginal Benefit
The increase in Total Benefit from 1 ADDITIONAL unit of an activity.
Marginal Cost
The increase in Total Cost from 1 ADDITIONAL unit of an activity.
Socially Optimal Quantity
The quantity of a good that results in the maximum possible economic surplus from producing and consuming the good. *The Socially Optimal Quantity maximizes total surplus for the economy from producing and selling a good*
Rate of Inflation
The rate at which prices in general are increasing over time.
If Country A and Country B have the same population size, then the standard of living in these 2 countries can still be different depending on:
The relative sizes of total output.
Market Value
The selling prices of goods and services in the open market. *Aggregate measure of quantities produced* -More expensive items receive a higher weighting. -Willingness to pay is an indication of benefit received from the good.
Seller's Reservation Price
The smallest dollar amount for which a seller would be willing to sell an additional unit. *Generally equal to Marginal Cost*
Macroeconomics
The study of the performance of national economies and the policies governments use to try to improve that performance.
Which of the following is NOT a determinant of the demand for gasoline?
The supply of gasoline. *A change in supply does NOT change demand* ARE Determinants: -Consumers' incomes -The price of diesel -The price of automobiles
Fisher Effect
The tendency for nominal interest rates to be high when inflation is high and low when inflation is low.
Labor Force
The total number of employed and unemployed people in the economy. *= employed + unemployed*
Opportunity Cost [of that activity]
The value of what must be foregone in order to undertake an activity.
Opportunity Cost
The value of what must be foregone in order to undertake an activity. -Explicit AND Implicit costs. -NOT the combined value of ALL possible activities! *Opportunity Cost = Explicit Costs + Implicit Costs* --Opportunity cost considers ONLY your best alternative!
Real Wage
The wage paid to workers measured in terms of purchasing power. *The real wage for any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period*
Average Benefit
Total benefit divided by the number of units.
Average Cost
Total cost divided by the number of units.
Complements
Two goods are complements in consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift).
Substitutes
Two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift).
To see how much output has grown...
Use ONLY the changes in quantities. *Hold prices constant*
Nominal GDP
Values output in the current year using prices from the current year. *Nominal GDP is the current dollar value of production*
Real GDP
Values output in the current year using the prices from the base year. *Real GDP measures the physical volume of production*
The Scarcity Principle (aka "No Free-Lunch Principle")
We have boundless wants, but resources are limited. *Having more of 1 good thing USUALLY means having less of another.*
Income Approach to GDP
When a good is sold, its proceeds are distributed to workers or business owners. *GDP=Labor income + Capital income*
Maximizing GDP will not necessarily maximize national well-being
Whether increases in output increase welfare is a case-by-case issue.
According to the Incentive Principle, when the benefit of an action falls, a person...
Will be less likely to take the action.
A price ceiling that is set above the equilibrium price:
Will have NO effect on the market.
A rational person is someone...
With well-defined goals who tries to fulfill those goals as best they can.
Discouraged Workers
Would like to have a job but they have not looked for work in the past 4 weeks [because they believe there are no jobs available]. *Counted as out of the labor force* -Could be counted as unemployed but they are not.