Macro Exam #1

3 Things Needed for a Firm to Supply Good/Service

1. Has the resources/tech to produce 2. Can profit 3. Has definite plan to produce and sell

Issues with market value

1. Home production not accounted for 2. Under group economy goes unrecorded 3. Government provided services 4. Imputations like owners equivalent rent

Causes of shift in demand curve

1. Price of related goods 2. Expected future prices 3. Income Gain 4. Expected future income and credit 5. Population 6. Preferences

2 Economic Questions

1. What is produced? How? For whom? 2. When are private and social interest aligned?

Shortcomings of GDP/Capita

1. country depletes natural resources 2. Pollution decreases well being 3. Value of leisure (family time) not counted -median for income distribution might be a better stat due to highly skewed income variation

Investment in GDP

13-20% Investments Business and residential and includes depreciation

Government Purchases in GDP

15-20% government employee salaries, military equipment, roads, public buildings Does not include transfers like social security or unemployment

Average Income

GDP per Capita US 77,000

Land

Gifts of nature

Supply

Given a price, sellers will be interested in selling a given quantity of a good or service.

Inflation Rate Formula

(change in price index/initial price index) x100

Income Approach Rule of Thumb

2/3 GDP is labor income, 1/3 capital income Major debate for the last decade about rising capital shares and inequality.

Net Exports in GDP

3% (Exports - Imports)

Consumption in GDP

66% Durables (cars/houses), non-durable (food), services (university courses)

Choices

A choice is a trade off People make rational choices by comparison marginal benefits and costs Choices respond to incentives

The "How"

A production technology is used to combine factors of production, using the as inputs to obtain goods and services as outputs

Movement Along Supple Curve

A rise in price increases quantity supplied (reverse for decrease)

Paretos def of efficiency

A situation is efficient if it is impossible to make one person better off without making at least one other person worse off

PPF Steep

As the PPF gets steeper the cardinal costs is increasing (more variability between each move)

Source of GDP

Bureau of Economic Analysis and US Census

Conspicuous consumptions

Buying specific things to display wealth.

Momentum in finance

Buying stocks that have gone up already

Efficiency is necessary but not sufficient for desirability

Can be very unequal: if one person gets a fortune and everyone else subsistence income

Scarcity

Can't have everything we want, so we have to give something up.

Factors of the "How"

Capital, Labor, Land, Entrepreneurship

Increases in Inventories

Considered investments

Market Value

Contribution to GDP measured by price.

Gains from trade

Countries have different PPF due to different resources, the differences create comparative advantages and gains from trade.

Demand curve

Demand on graph

Positive

Describes how things are with no judgement (Econ Q 1)

Demand graph

Downward slope

Private and social interests

Efficiency

Price between 2 opportunity costs

Efficient

Change in Supply Curve Factors

Factors in production Price of related goods Expected future prices Number of suppliers Technological advances State of nature

Entrepreneurship

Find business opportunities, organize factors Human capital makes workers more skilled and productive through formal education, on job training, and health

Markets can promote efficient outcomes

Firms have incentives to produce high quality goods in cost effective way. Prices steer consumers to satisfy their wants by buying cheap (abundant) rather than expensive goods (scarce).

GNP Equation

GDP + NFP

The "What"

Goods and services are produced in the economy. The purpose of production is to satisfy human wants and needs.

Income = Expenditure

Goods and services are values at the price which they are sold.

Newly Produced

Goods made years ago but sold one do not count toward current GDP only earnings of intermediaries in the transactions if any count towards current GDP

Giffen Goods

Goods that are exceptions to the law of demand where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand.

Lorenz Curve

Graph showing how much the actual distribution of income differs from an equal distribution Lens bending off of 45* line (the bigger the lens the closer Gini is to 1)

GNP

Gross National Product - the sum of all goods and services produced in a nation in a year

Positioning in marketing

High price may be seem not consumers as quality

Constant Marginal Cost

Horizontal supply curve

Pareto Improvement

Improvement is a change that benefits at least one person and hurts none (only possible when situation is inefficient)

NFP

Income earned by Americans overseas minus income earned by foreigners in US

Change at the Same Time (Opposite Direction)

Increase demand and decrease supply = increase in price, quantity ambiguous Decrease demand and increase supply = decrease in price, quantity ambiguous

Change at Same Time (Same Direction)

Increase in both = increase in equilibrium quantity, price ambiguous Decrease in both = decrease in equilibrium quantity, price ambiguous

Equilibrium Effect of Changes in Demand

Increase in demand shifts demand curve to the right Shortage at original price

Equilibrium Effect of Changed in Supply

Increase in supply shifts curve to the right Surplus at original price (price falls and quantity increases)

Intermediate Goods

Inputs in production of other goods

Consumer Problem

Is choosing what to buy to best satisfy those wants within budget

Opportunity cost formula

Loss / gain

Capital Goods

Machinery help produce other goods but are final because they last for years

Nominal GDP Grows

May mean quantity or price increases (or both) Even in GDP rises if there is enough inflation real GDP may fall.

Nominal Variables

Measured in monetary units

Market forces can lead to inefficient outcomes

Monopolies: an only seller can restrict supply to make product artificially scarce and charge higher prices Externalities: pollution, global warming, etc. are a cost to those in society that are not paid by the polluter

Demand

Most customers have more wants than they can satisfy with their means

Autarky

No trade, closed economy

Real GDP formula

Nominal GDP/GDP Deflator (Price index) x 100

PPF Graph

On line is efficient, those below are inefficient, above is unofficial.

Efficient Allocation of Resources

On the PPF at where the marginal benefit = marginal cost Efficient production plan

Normative

Opinion or judgement base on positive (Econ Q 2)

Law of Demand

Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls

Law of Supply

Other things equal, the higher the price of the good, the greater the quantity supplied.

Market Equilibrium

Price that quantity demanded = quantity supplied Quantity is the quantity bought and sold at equilibrium price

Incomplete Information Effect on Demand

Prices are as signals

Substitution Effect

Relative price of good rises, people seek substitutes and demand goes down.

Not a part of supply

Resale Exemption: Durables (cars and houses)

Movement on Demand Curve

Rise in price decreases quantity demanded (movement up the curve) fall in price increases quantity demanded (movement down curve)

Demand Schedule

Shoes the relationship between the quantity demanded and the price

Price is too Low

Shortage: people want to buy more than is supplied Upward pressure on prices

Rawls: a theory of justice

Society x is more just than society y id a person would prefer to enter x from a veil of ignorance (not knowing what position they were born into)

Micro

Studies and choices by individuals and businesses and how choices interact in markets and influence governments. Can identify who the players are

Macro

Studies of performance of national and global economies. Don't know all of the players and how they are going to react, but still have to run the economy.

GDP Equations

Sum of added values (revenue from sales - cost of intermediate goods) Sum of final sales Salaries + profits (pre-tax)

Price is too High

Surplus: people want to buy less than is supplied Downward pressure on price

Production Possibilities Frontier

The boundary between those combinations of goods and services that can be produced and those that cannot.

Gross Domestic Product (GDP)

The total market value of all newly produced final goods and services made in one country one year. Measures total economic output.

Production = Income

The total value of production is the sum of everyone's income.

Labor

Time, effort, human capital makes labor more skilled (education and experience)

Capital

Tools, instruments machines, and buildings used in production

Econ Definition

Trying to satisfy unlimited wants with limited means

Supply on a graph

Upward sloping: -producers will supply a good if can cover marginal cost -marginal cost is increasing due to overtime/fixed factors

Fundamental Identity of National Accounting Equation

Value produced (Y) = spending consumption (C) + Investment (I) + Government purchases (G) + Net exports (NX) Y = C + I + G + NX NX = exports - imports

Real Variables

Variables measured by physical units

Unique Item

Vertical supply curve

Consumer Demand

What the consumer will buy given income, prices, and other relevant factors.

Opportunity Cost

What we could have instead

The "Who"

Whoever buys them 1. Land earns rent 2. Labor earns wages 3. Capital earns interest 4. Entrepreneurship earns profit

Marginal benefit

Willingness to pay

Gini Index

a mathematical formula that measures the amount of economic inequality in a society If all earn the same Gini = 0, the more inequality the closer Gini = 1

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

Demand

entire relationship between the price of good and quantity demanded demanded of good

Econ Origin

oikonomos "managing the household"

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Income effect

the change in consumption that results when a price increase causes real income to decline

Fundamental Identity of National Accounting

total production = total income = total expenditure