ECON 2A Chapters 8-21

how to find %change in real value

%change in nominal value - % change in price

inflation rate

(price level this year - price level last year)/price level last year * 100

Ways to measure GDP

-Add up every dollar of spending -Adding up every dollars worth of output produced -Adding every dollar of income earned GDP = Consumption + Investment + Government Purchases + Net exports GDP = C + I + G + NX

Monopolistic Competition

-Many businesses, each selling slightly differentiated product

Sources of Comparative Advantage for Countries

1) Abundant Inputs 2) Develop a specialized skill 3) Exploit Benefits of Mass Production

Why is redistribution costy?

1) Administrative costs 2) Reduction of incentives to work 3) Tax avoidance, evasion, and fraud

Policies that encourage competition

1) Anti-collusion laws 2) Merger laws 3) Illegal to attempt to monopolize 4) Encourage international trade

What does market power lead to

1) Charge a higher price 2) Sell a smaller quantity 3) Earn larger profit

Setting prices when you have market power

1) Choose quantity to produce (Where Marginal Revenue and Marginal Cost are equal) 2) Choose price by looking at demand curve

3 step formula to evaluate exports effect on market

1) Determine new price 2) Determine Supply + Demand at new price 3) Assess quantity demanded that will be traded *Exports make up the gap between the quantity supplied by domestic sellers and the quantity demanded by domestic buyers.

Creating consumer price index and measuring inflation

1) Find out what people typically buy 2) Collect prices from stores where people do their shopping 3) Tally up price of basket of goods and services 4) Calculate inflation rate

Other things to keep in mind about market power

1) Having more competitors decreases market power 2) Allows for independent pricing strategies 3) Product differentiation increases market power 4) Imperfect competition among buyers gives them market power 5) Your best choice depends on choices of other businesses

How to allocate tasks

1) Measure cost of producing each good 2) Calculate opportunity cost of producing each good 3) Evaluate who has comparative advantage by assessing who has the lowest opportunity cost for each task

Limits of GDP

1) Prices are not values 2) Nonmarket activities-including household production not included 3)Shadow economy missing 4) Environmental degradation not counted 5) Leisure does not count (omits costs of output - less leisure)

Solutions to Externalities

1) Private Bargaining (Coase Theorem) 2) Corrective Taxes + Subsides 3) Cap and Trade 4) Laws, Rules, Regulations 5) Gov't support for public goods 6) Assign ownership rights to solve tragedy of the commons

Challenges of measuring true cost of living

1) Quality improvements 2) New products can make you better off, decreasing cost of living 3) People save money by changing what they buy

Negative effects of inequality

1) less trust, tolerance, community involvement, more crime 2) concentration of political power

Costs of inflation

1. menu costs 2. shoe leather costs (forces people to take costly measures to keep wealth in assets that'll maintain their value) 3. distort signals 4. inflation redistributes (borrowers gain more, because they pack back less then the real value they borrowed)

Market Power

Ability to increase price w/o losing sales to competing businesses

Permanent Income

Average Lifetime income, less inequality in permanent income due to temporary ups and downs, better measure of living standards

Marginal Revenue

Change in total revenue

Relative Poverty

Compares Resources relative to material living standards in contemporary society

Rule of 70

Doubling time (in years) = 70/(percentage annual growth rate).

Club goods

Excludable and Nonrival -Internet -Cable TV -Satellite

Private Goods

Excludable and Rival -cars -cupcakes -can of coke

free rider problem

For a group, the problem of people not joining because they can benefit from the group's activities without joining. (not paying the cost)

PCE deflator

Includes items consumed you don't pay for directly, ie. medical care paid by employer used for monetary policy

Oligopoly

Market dominated by handful of large sellers

Nominal GDP

Measured in today's prices, useful for RIGHT NOW

Perfectly competitive market

No market power, be a price taker -take market price

Public Goods

Non excludable and Nonribal -National Defnese -Public Edu

Common Resources

Nonexcludable and Rival -Fish in ocean Highways (to extent)

Non rival

One person's enjoyment doesn't subtract from another

Monopoly

Only one seller in market, lots of power, can increase price w/o losing customers

Externality

Side effect on bystanders whose interests aren't fully taken into account, (both positive and negative externatilities) -Price change is not an externality

Higher market power demand curve

Steeper (less elastic)

Tariffs

Tax on imported goods

World Demand

Total Quantity demanded in world

World Supply

Total Quantity supploed by all sellers in world

Real GDP

Using constant prices

Chained CPI

a measure of the CPI in which the typical consumer's "basket" of goods considered is updated monthly, reduces bias

Indexation clauses

adjusts wages in line w/ CPI

marginal utlity

boost in overall wellbeing from extra dollar, (remember diminishing returns)

Perfect Competition firm demand curve

completely flat (it's completely elastic so this makes sense)

Intergenerational mobility

extent to which economic cirumstances independent from parents

Output effect

higher output raises revenue

Opportunity cost of a task

hours task takes/ hours required to produce alternative output

Absolute poverty

measure of adequacy of resources relative to absolute/unchanging standard

Consumer Price Index (CPI)

measure of average prices people pay over time for goods and services

Utility

measure of wellbeing *Remember: person with low income receives higher utility from same amount of $ than someone with high income*

How to find real interest rate

nominal interest rate - inflation rate

Non-excludable

other people aren't easily excluded from using it

Consumption spending

private spending on final goods and services -living standards largely determined by what you buy -Less inequality in spending than income -top quintile spends 4x as bottom quintile

Money illusion

tendency to focus on nominal dollar amounts instead of inflation-adjusted amounts

Comparative Advantage

the ability of an individual, a firm, or a country to produce a good or service at a lower opportunity cost than competitors *What you are least bad at*

Absolute Advantage

the ability to produce a good using fewer inputs than another producer

World Price

the price at which a good can be bought or sold abroad

Progressive taxes

those with higher income tend to pay higher share of income

Discount effect

to sell one more unit, you have to lower the price on all units sold.

GDP

total of all goods and service produced

When do people import?

when foreign products are a better deal than their U.S.-made equivalents. lead to lower prices, less domestic production, and more domestic consumption.

When do people export?

when they can make more money than they would if they just sold them in the United States