Exam 1 Flashcards
What does market economy mean?
People can do whatever they want
What is opportunity cost?
The best alternative you give up when you make a choice
What does a country’s standard of living depend on?
Its ability to produce goods and services
What is inflation?
A general increase in prices
Circular flow diagram
Product markets
(Outputs)
Firms Households
Factor markets
(Inputs)
Production possibilities frontier
Shows various combinations of output that an economy can & cannot produce (graph)
What does the slope of a ppf tell us?
Opportunity cost of what’s on the x-axis
What are positive and normative statements?
Positive - descriptive
Normative - what should be done
Demand
Quantity of some good that buyers want to buy
Law of demand
As the price of something goes up, quantity demanded goes down
Normal goods
Quantity demanded goes up as income goes up
Inferior goods
Quantity demanded goes down as income goes up
Supply
Amount of a good or service that sellers want to sell
Law of supply
As the price of a good goes up, so will the quantity supplied
What happens when input prices go up?
Quantity supplied goes down
Equilibrium
When quantity supplied = quantity demanded
Surplus
When the quantity supplied is greater than the quantity demanded (P> P*)
Shortage
Quantity demanded is greater than quantity supplied (P<P*)
Law of supply and demand
Prices adjust to reach equilibrium
GDP
Dollar value of all final goods and services produced within a country in a given period of time
Y=C+I+G+NX
Expenditure = consumption + investment + govt spending + net exports
What does inflation change?
Value of dollars
Nominal GDP
GDP expressed in “current” dollars
Real GDP
Expressed in constant dollars
Calculate nominal GDP in economy that produces 2 goods
(Price item1 x quantity item1) + (price item2 x quantity item2)
Calculate real GDP in economy that produces 2 goods
(New quantity item1 x base year price item1) + (new quantity item2 x base year price item2)
Growth rate
(Y(2)/Y(1) - 1) x100%
CPI
(Consumer price index)
Choose base year
Cost of basket in year of interest/cob in base year
Inflation
CPI(year of interest)-CPI(previous year)/CPI(previous)
Cost of basket
Old quantity x new price
Real interest rate
Nominal rate - inflation rate
