econ midterm Flashcards
basic econ problem: scarcity
bc of limited resources n unlimited want
econ questions
what/how/for whom to product
opportunity cost
exist bc of scarcity
giving up something good to do something else
opportunity cost of college is debt
consumer sovereignty
consumers have power, not gov
factors of production
land, labor, capital, entrepreneurship
physical capital: machine/computer/tools
human capital: skills/edu of workers n anything that takes care of them
traditional economies
decisions made based on whats done in the past. little change/innovation. basic econ. have same job as your parent. amish
command economy
decisions made by gov
centralized planning
bureaucracy
lack of worker incentive to meet gov quotas
inefficient
short supply of consumer good, low quality. EQUITY
north korea, cuba
market econ
consumers/producers make decision has private property. Efficient profit motive high standard of living NO SOCIAL SAFETY NET. when employee have no more skills, theres nothing for them. business could hurt consumers
mixed econ
some decision made by gov n other by consumers/producers.
USA: gov does not own business but regulates them for consumers.
OSHA: shut down factory
FAA
FDA
PPC
production posssibility curve
quantity of 2 goods that a society can currently produce
full employ: on the line
unempl: below curve
unattainable: above curve
ppl concave
increasing opportunity cost
ppc straight
constant opportunity cost
ppc illustrate econ growth.
move curve to the right/outward
do it when theres an increase in production
absolute advantage
produce a product when you can make more than someone else.
actual value
comparative advantage
make a product when you can do it at a lower opportunity cost
output questions
over, in direction of source not product
look at product row n c which is less.
law of supply
direct relationship btw price and QS
supply curve
movement along it: change in quantity of supply
things that shift the supply curve
PINTS producer expectation input prices technology number of producers subsidies tazes
Supply curve
producer expectation
if they think price decrease, product will b dumped before it happens
input prices
higher price of input (wages)= lower supply
technology
increase tech= increase supply
subsidides
pay someone to do something
increase supply
tax
decrease supply
wage
increase= increase in productivity
law of demand
inverse relationship btw price n quantity demand. relationship btw price of good n how much consumer is willing to purchase
movement along demand curve
change in quantity demanded
demand curve shift, change in demand
CCCPS
consumer income consumer tastes consumer expectation population/ # of buyers substitutes complements
demand curve
consumer income
normal goods: as income increases, demand increases
inferior good: as income decreases, demand increases
demand curve
consumer expectations
demand decreases when consumer think that price is going to b lower in the future
demand curve subsitutes
one being used in place of another
demand curve
complesments
2 goods used that are used together (pancake/syrup)
wage
increase wage= increase productivity
supply and demand graph
price vs quantity
equilibrity: ppl r willing to pay at the price n consumers r willing to make at that price
binding price floor
above= surplus
legal min price (ex. min wage)
producers want to produce more but consumers don’t want to buy that much
equity
fairness, if price isn’t fair to ppl, gov will alter it
price floor
price ceiling
binding price ceiling
below, shortage
legal max price
producers don’t want to produce much. high demand, low supply.
ex. rent control, landlord can’t rent higher than __, so they make cutbacks on services
nonbinding ceiling
does not nothing to market
elasticity of demand
how much quantity stretch when price is changed
relatively inelastic demand
vertical
quantity doesn’t that much when you change the price. buy at whatever price
a necessity can't delay the purchase few substitutes broad market structure (food) small % of budget
relatively elastic demand
horizontal. buy it when its on sale. buy at a certain price
luxury can delay purchase many substitutes narrow market (chicken) large % of budget
total revenue test
to c if good is elastic or not
price x quantity= TR
inelastic: increase price, increase TR
elastic: increase price, decrease TR
factor payment
resources
land-rent
labor-wage
capital-interest
entrepreneurship- profit
GDP
decrease: decrease disposable income measure anything (goods/services) made in the country in a year. doesn't count intermediate goods: double counting
recession
GDP goes down for 2 quarters
not in GDP
work you do for yourself barter housework cash transfer payment (from gov) stock/bond crime/pollution
income method to calculate gdp
wage
interest
rent
profit
expenditure method to calculate gdp
Cigx consumer spending investment (volitole, sensitive, first indicator) gov spending net export
unplanned investment
whats made but not sold at the end of the year
business cycle
expansion/recovery: increase GDP
peak: GDP highest, danger of inflation
contraction/recession: falling GDP
trough/depression: lowest GDP
GDP-depreciation
NDP
net domestic product
depreciation: new thing replaces old
Personal income- personal taxes
disposable income
disposable income- expenses
discretionary income
unemployed
able/willing/looking for a job
frictional unemploy
btw transition in life
cyclical unemploy
during contraction of business cycle, econ slowdown
structural unemploy
skills obselete
discouraged worker
unemployed person stops looking for a job
unemployed for 2 yrs
not counted in unemployment states
increase in discouraged workers will lower labor force participation
unemployment rate
unemployed/ labor force
labor force
unemployed + employed
labor force participation rate
labor force/ population
misery index
inflation + unemployment
demand-pull
occurs when products are bought faster than they can b produced. top of business cycle graph, decreased unemploy
cost-push
increase price of production= increase price
BAD
increase unemployment
hyperinflation
higher than 50% inlfation. no control over printing money
deflation
overall price fall
unemployed rate
unemploy / # in labor force
quantity theory of money
increase of money supply = increase price level
ways inflation creates distortions in the economy n impact business/consumers
menu costs
shoe leather costs
menu costs
how much it costs for business spend time, effort to make new cost. bad inflation
shoe leather costs
cost of ppl trying to counteract inflation, customers buy stuff before price rise up,
losers from inflation
consumers (prices rise faster than income)
fixed income
savers
banks with fixed rate loans
winners from inflation
investors in gold/silver
real estate
gov in debt
ppl paying others on fixed dollar contract
leading indicators of change in econ
avg work weak
building permit increase= good
stock market increase=good
inventory
measure of inflation
cpi
ppi
gdp deflator
cpi
uses a fixed weighted market basket of goods that coonsumer purchases regularly. list f what ppl buy regularly. most weighted: mortage
weakness of cpi
substitution bias
uses only retail prices
quality changes=changes in price
new stuff
gdp deflator
nominal GDP/ real GDP
___ - 100= inflation %
meausres goods produced . doesn’t included imported good
PPi
measures price change of goods purchased by business. increase means later increase in cpi n other stuff
fiscal policy automoaic
already in place to smooth out econ during recession.
unemployment benfits, wellfare, food stamp, progressive income tax
discretionary fiscal policy
new laws needes to b made to fix recession/inflation
MPC
consume
percentage of additional income that is spend
MPS
saving
percentage of additional income that is saved
MPC+MPS
1
spending multiplier
how increase/decrease in spending will affect GDP
1/MPS
tax multiplier
how increase/decrease in tax affact gdp
one less than spending multiplier
inflationary expectaiton
phillips curve, increase shift in SRPC
inside lag
long
recognize problem to time policy becomes law n enacted
outside lag
short
from when policy enacted to the time it makes and impact
Federal reserve
7 board of governors, appointed by pres, confirmed by senate. banks keep money here.
decrease suppy money= increase interest rate
demand pull inflation
increase shift in AD, bought faster than produced, too fast
cost push inflation
decrease shift in SRAS
stagflation, little supply
classical econ
econ is flexible, stay out of it
keynesian
econ is rigid, needs intervention
real balances wealth effect
increase in price, less value of money, ppl can’t buy alot, business make less, lowers GDP
interest rate effect
increase prices, ppl save less
banks less money to lend = higher interest rate on loans. business don’t spend much
foreign purchase effect
when price increase, foreign buy less n GDP down
shift in lras
more/less workers
tech
edu of workers
new energy source
balance budget effect
always one (spending - taxing) when spending is expansionary.
if expansionary with contractionary fiscal at the same time
AD moves right a little bit
phillips curve
inflation vs unemployment
natural rate of unemployment
movement along; AD
shift: up-bad, SRAS
medium of exchange
What this means is that you can give people money and they will give you goods or services in exchange. This is very important because it makes economic activity easy.
store of value
remains valuable for a long time
unit of account
Knowing the value or price of a good, in terms of money, enables both the supplier and the purchaser of the good to make decisions about how much of the good to supply and how much of the good to purchase.
monetary policy tools
discount rate: weakest
reserve requirement : powerful
open market operation : important
discount rate
interest rate that red charge bank for borrowing money
recession: kower
reserve requirement
% of bank deposits that must hold n not lend to customers
recession: lower
open market operation
buying/selling gov bonds
recession: buy
increase supply money=
increase demand.
if demand is higher than supply: inflation
if supply is too low= recession
fed fund rate
interest rate that bank pays another bank for a loan
if lowered: prime rates lowered (rate that bank charge their best business
money multiplier
1 / reserve requirement
multiply answer by deposit then subtract by deposite
for FED: multiply answer by deposite
creating money out of thin air
money market
NIR vs quantity of money
Expansionary: Right MS, Right AD
loanable fund
money available for borrowing
supply: saving, savors, fed
demand: investment, borrowers
real interest rate vs quantiy of loans
increase demand: expansionary fiscal
S: ppl save more if real interest rate high
commodity money
intrinsic value salt
representation money
backed by gold/silver
fiat money
not backed by anything, need central bank
M0
cash/coin
M1
demand deposit/checks
M2`
small saving account
MV=PQ
monetarism: monetors beleive in monetary policy. increase MS just enough to keep up with GDP. shouldn’t raise more than 3%-5%
M: money supply
V: velocity
P: pice level
Q: real GDP
crowding out effect
expansionary fiscal policy= budget deficit
business wont b spending much bc high interest rates. therefor AD doesn’t move as high bc low investment spending while gov increase spending
keynesian support (its okay) Classical: powerful/importnat thing
FED, increase MS
transaction deman
amt of money to buy daily things
asset demand
money saved wieh niterest rate is high, not spending money.
capital stock
factories, machines
supply shock
drastic movement of supply
progressive tax
based on income
regressove tax
less money you make, the highest income of your tax is affect (the more it effects you)
sales
poprtional tax
to income
interest rate n price of bonds
inverserly related
reational expectation theory
ppl who knows econ make choice based on that, take anti fiscal actions making the policies usless
