PubPol 330 Final Exam

market demand

the demand by all the consumers of a given good or service -add the quantity demanded by each individual at each price

indirect effects of government intervention

the effects of government intervention that arise only because individuals change their behavior in response to the interventions

type and number of sellers and market supply curve

-if new businesses enter the market, the supply curve shifts right

what does GDP miss

-quality of life -doesn't show inequality -black markets/off the books work

expectations and supply curve

-supply curve shifts left when expected future prices are higher (want to wait and sell when you get more money) -supply curve shifts right when expected future price is lower

how the government can intervene in markets

-tax or subsidize private sale or purchase -restrict or mandate private sale or purchase -public provision

expansion

economic activity will keep growing until some shock, then the economy hits another peak

perfect competition

1. all firms in the market are selling an identical good 2. there are many sellers and many buyers, each of whom is small relative to the size of the market -perfectly competitive firms are price takers, following the market price

why supply curve is upward sloping

1. diminishing marginal product 2. rising input costs -rising input costs also lead to rising marginal costs

price elasticity of supply is larger when (5)

1. for firms that store inventories 2. when inputs are easily available 3. for firms with extra capacity 4. when firms can easily enter and exit the market 5. when there's more time to adjust

what shifts demand curve (6)

1. income 2. preferences 3. prices of related goods 4. expectations 5. congestion and network effects 6. number and type of buyers

market failure causes (4)

1. information 2. externalities 3. market power 4. lack of property rights

what shifts supply curves

1. input prices 2. productivity and technology 3. prices of related outputs 4. expectations 5. the type and number of sellers

common characteristics of business cycles (3)

1. recessions are short and sharp, expansions are long and gradual 2. business cycle is persistent 3. business cycle impacts many parts of the economy

price elasticity of demand is larger when (5)

1. there are more competing products 2. for specific brands rather than broad categories 3. for things that aren't necessities 4. when consumers search more 5. when there's more time to adjust

marginal principle

decisions about quantities are best made incrementally; you should break "how many" questions into a series of smaller, or marginal decisions, weighing marginal benefits and marginal costs.

cost-benefit principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

marginal product

extra output you get from an additional unit of that input

substitutes-in-production

Alternative uses of your resources. Your supply of a good will decrease if the price of a substitute-in-production rises.

crowding out

decline in private investment that follows from government borrowing -fiscal policy leads to a higher real interest rate -loanable funds market

normal good

demand for good increases when your income is higher

marginal cost

the cost of producing one more unit of a good

inelastic

describes demand that is not very sensitive to price changes -absolute value less than 1 -relatively steep curve

elastic

describes demand that is very sensitive to a change in price -absolute value greater than 1 -relatively flat curve

multiplier effect

describes the possibility that initial boost in spending will set off rippe effects that ultimately leads to a larger rise in GDP

complements-in-production

Goods that are made together. Your supply of a good will increase if the price of a complement-in-production rises.

complementary goods

Goods that go together. Your demand for a good will decrease if the price of a complementary good rises.

substitute goods

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises.

government purchases

directly spending money on goods and services like schools/highways

scarcity

Limited quantities of resources to meet unlimited wants

diminishing marginal benefit

each additional item yields a smaller marginal benefit than the previous item

seasonally adjusted data

Observations over time modified to eliminate the effect of season variations

fixed costs

Those costs that don't vary when you change the quantity of output you produce. -irrelevant to your marginal cost

variable costs

Those costs—like labor and raw materials—that vary with the quantity of output you produce.

congestion effect

When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease.

network effect

When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase.

movement along the supply curve

a change in prices causes a change in the quantity supplied

movement along the demand curve

a change in the quantity demanded of a good that is the result of a change in that good's price

market supply curve

a graph of the quantity supplied of a good by all suppliers at different prices

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good -the percentage change in quantity supplied/percentage change in price -about flexibility

income elasticity of demand

a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income -positive for normal goods -negative for inferior goods

market failure

a problem that causes the market economy to deliver an outcome that does not maximize efficiency

when was the economy invented

after the Great Depression, national income was sensational to hear about

real GDP

broadest measure of economic activity -measures total production, total spending, and total income across the whole economy -may not understand GDP until 5 years in the future -Y = C+I+G+NX

rational rule for buyers

buy more of an item if its marginal benefit is greater than (or equal to) the price

how the price of related goods shift market demand

complementary goods vs substitute goods

law of demand

consumers buy more of a good when its price decreases and less when its price increases

annualized data

converted to the rate that would occur if the same growth rate had occurred throughout the year -when data is collected over time period less than a year

sunk costs

costs that have already been incurred and cannot be recovered -exists no matter which choice you make, ignore these

discretionary fiscal policy

fiscal policy that is the result of deliberate actions by policy makers rather than rules -policy that temporarily increases spending or cuts taxes to boost the economy

perfectly elastic

flat demand curve; consumers are perfectly price sensitive -any change in price leads to infinite change in quantity

lagging indicators

follow business cycles with delay -unemployment: wait to fire people

Okun's rule of thumb

for every percentage point that actual output falls below potential output, the unemployment rate is around half a percentage point higher -output gap 2%, unemployment increases 1%

transfer payments

given to individual households, doesn't add directly to GDP because nothing is purchased or produced (unless the HH spends the $)

inferior goods

goods that consumers demand less of when their incomes rise

opportunity cost principle: applied to government spending

government spending is best done during a slump; real wages are lower, so project is cheaper

peak

high point in economic activity

expansionary fiscal policy

higher government spending and lower taxes

employment cost index

how fast wages/benefits are rising -rising compensation is a sign of a healthy economy

rational rule

if something is worth doing, keep doing it until your marginal benefits equal your marginal costs

how expectations shift market demand

if you expect future price to be lower--> you demand less now

individual demand curve

illustrates the relationship between quantity demanded and price for an individual consumer -also your marginal benefit curve

individual supply curve

illustrates the relationship between quantity supplied and price for an individual producer

input prices and supply

increased input prices will shift supply to the left

unemployment rate

indicator of excess capacity; what share of labor force wants a job and doesn't have one - Unemployed/labor force x 100

productivity and technology and supply curve

less efficient production shifts supply curve to left -increases marginal costs

potential output

level of output that occurs when all resources are fully employed -lets us know how much more government can spend without sparking inflationary pressure

trough

low point in economic activity

contractionary fiscal policy

lower government spending and higher taxes

subsidies

lower the price for private sales or purchases of goods that are underproduced

diminishing marginal product

marginal product of an input declines as the quantity of the input increases

price elasticity of demand

measures how responsive buyers are to price changes. -what percent the quantity demanded will change in response to a 1% price change -Percent change in QD/Percent change in price -absolute value: larger elasticity means larger change in QD -more responsive=more elastic and flat the curve is -about substitutability

how income shifts market demand

normal good vs inferior good

government purchases (G)

not the same as government spending -does not include social security fund -doesn'tinclude transfer payments

total revenue

price x quantitiy

perfectly inelastic

quantity does not respond at all to changes in price (E=0) -vertical line

mandates

require private purchase of goods that are underproduced

quota

restrict private sale or purchase of goods that are overproduced

rational rule for sellers in competitive markets

sell one more item if the price is greater than or equal to the marginal cost -price=marginal cost

business cycle

short term fluctuations on economic activity -ups and downs are very disruptive

consumer confidence

spend more when they think the economy is going in a good direction -self-fulfilling prophecy

public finance

study of the role of the government in the economy

price of related outputs and supply curve

substitutes-in-production vs complements-in-production

stock market

tells you about future expected profits of businesses -forward looking: if report comes out and economy is not as good as expected, stock market goes down

nonfarm payroll

tells you if the labor market is improving; how many jobs are created each month

business confidence

tells you what managers are planning -when it falls, a recession might be on the horizon

rate of inflation

tells you what's happening with prices -rising inflation indicates economy is producing above potential because sales are booming so companies raise prices faster than usual

law of supply

tendency of the quantity supplied to be higher when the price is higher

direct effects of government intervention

the effects of government intervention that would be predicted if individuals did not change their behavior in response to their interventions

marginal benefit

the extra benefit of adding one unit

output gap

the percentage difference between actual aggregate output and potential output -when actual is less than potential, high unemployment -when actual is greater than potential, economy using resources with unsustainable intensity

opportunity cost

the true cost of something is the next best alternative you have to give up to get it -some out-of pocket costs are opportunity costs (not always) -ignore sunk costs

recession

time between the peak and trough, contraction because economy shrinks

initial unemployment claims

timely indicator of job market, tells you how many people lost their jobs and applied for unemployment the previous week

3 T's of fiscal policy

timely, targeted, temporary

GDP

total spending, total output, total income

tax

use the price mechanism to change the price of a good to encourage or discourage use -raise the price for private sales or purchases of goods that are overproduced

real GDI

useful cross check on GDP -Gross Domestic Income -flash warning sign of the economy before GDP

leading indicators

variables that tend to predict the future path of the economy -business and consumer confidence -stock market

interdependence principle

your best choice depends on - your other choices (you have a budget constraint, limited time, limited resources) - the choices others make (competition in the market) - developments in other markets (credit market, housing market) - expectations about the future. when any of these factors changes, your best choice might change.