FINAL EXAM- WHOLE SEMESTER Flashcards
the law of demand:
the tendency for the quantity demanded to be higher when the price is lower
market demand:
all the quantities in the market added together (sum)
the Law of Supply
hold everything else equal, when the price rises, the quantity supplied also rises; when the price decreases, the quantity supplied will fall.
unmeasured changes in quality–>
leads the CPI to overestimate inflation
club goods
exludible & non-rival
opportunity cost of work:
the value of the next best use of your time
marginal social cost
the extra external costs imposed on bystanders from one extra unit
Rational Rule:
If something is worth doing, keep doing it until your marginal benefits equal your marginal costs.
common resources
ex) fish in the ocean
non-excludible & rival
marginal benefit:
the extra benefit you get from 1 more worker or one more whatever
what is not measured/included in GDP? (3)
1) household production
2) consumption of leisure
3) natural disaster, environmental degradation
cyclical unemployment
results from a business cycle, inflation or a recession!
Tragedy of the Commons
ex) central grassed area called the “commons”. Shepherds who brought their sheep to graze on the commons benefited from this grass but didn’t pay for the privilege. The problem is that when it costs nothing to graze sheep on the town commons, each shepherd does a lot of it. –> tragedy: The commons will be overgrazed and the grass will never grow back. *People overconsuming resources is the problem. (like a negative externality)
introduction of new goods–>
revise the basket!
marginal propensity to consume (MPC)
the fraction of an additional dollar of income that households spend on consumption ex) MPC=.4 & save, 60 cents. –> higher for low-income families. (*for every additional dollar that you get you spend 40 cents and save 60 cents.)
cost-benefit principle
We pursue the decision if benefits>costs. Costs and benefits are the incentives that shape decisions.
Coase Theorem:
based on the Tragedy of the Commons story, that all you need to do is impose a property right and allow negotiation, and that you will get an EFFICIENT OUTCOME. (pros and cons- many people don’t negotiate.)
-theorem doesn’t work when negotiation is costly.
-Coase Theorem needs free negotiation.
output:
supply curve @ world price!!!
if %change Qd is greater than %change Price, is it inelastic or elastic?
elastic
A demand curve is graphed holding other things…
constant.
more competition: more or less elastic?
more elastic
multiplier effect < 1: crowding out–>
government (investment) spending is crowding out investment by firms.
Why does AS slope upwards?
overheating economy, weak economy
marginal external costs
the extra external costs imposed on bystanders from one extra unit
scale effect:
when capital gets cheaper, it substitues for labor –> LESS DEMAND (&vice-versa)
MS graph
quantity of money, interest rate.
decreasing the money supply—> interest rate goes up!
MRPL= (equation)
P times MPL
price ceiling:
line under equilibrium.
tool for affordable housing
leads to shortage
marginal principle
that decisions about quantities are best made incrementally (You break down decisions into smaller decisions, into increments.) You ask: “Should I supply 1 more?”
When GDP falls–>
unemployment rises.
Ed (price elasticity of demand):
%change in Qd/$change in Price (take absolute value)
structural unemployment
unemployment bc the # of jobs available in some labor markets is insufficient to provide a job for everyone who wants one, markets changing!
frictional unemployment
unemployment because it takes time for workers to search for jobs that best suit their tastes and skills, caused by turnover or job search
corrective tax:
can induce people to take account of the negative externalities they create
Is a price change an externality?
No
midpoint formula for elasticity
Ed= Q2-Q1/(Q2+Q1)/2 / P2-P1/(P2+P1/2)
total value of production:
Pgood (times) How many of good
exporting country:
sellers gain from trade; buyers lose from trade
opportunity cost principle
the value of the next best use of your time (weighing your opportunities) You ask: “Or what?”
Fed raises interest rates–>
movement along AD to left and vice-versa
for how many? choices:
use the marginal principle
marginal social cost= (equation)
marginal private cost + marginal external cost
REAL GDP (equation)
(Price good1 base year times Quantity good1 current year) + (Price good2 base year times Quantity good2 current year)
nominal GDP
production of goods + services valued at *current prices
NOMINAL GDP (equation)
(Price good1 times Quantity good1) + (Price good2 times Quantity good2)
labor force:
employed + unemployed
ad and as graph
quantit of output, price level
GDP deflator (equation)
nominal GDP/real GDP, times 100. no units
inflation rate= (CPI)
(CPI2-CPI1)/CPI1 times 100=
buyer value
amount of buyer’s willingness to pay, money you are able/willing to pay
subsidy:
a payment made by the government to those who make a specific choice ex) Pell Grant
tax incidence
the division of the economic burden between buyers and sellers
sunk costs
When the time, effort, and other costs you put into the project cannot be reversed. (You should ignore them.)
infant industry argument:
new industries should be protected from foreign competition until they become established
free-rider problem:
when someone can enjoy the benefits of something without bearing the costs ex) ENJOYING CLEAN AIR
time- decreases or increases elasticity?
increases elasticity
from society’s perspective…
ex) the relevant marginal cost of an extra gallon of gas is the *marginal social cost, the SUM of the marginal private costs paid by the seller and the marginal external costs borne by bystanders
marginal product of labor (MPL)
additional production from hiring one more worker
stagflation:
a combination of inflation and falling aggregate output. caused by supply shocks, sudden contractions of aggregate supply, usually from increases in input prices. HIGH INFLATION and HIGH UNEMPLOYMENT at the same time. changing aggregate demand inevitably makes one worse.
perfectly inelastic:
VERTICAL GRAPH
interdependence principle:
recognizes that your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. *Your best choice depends on the choices of others.
external cost:
the harm that negative externalities such as pollution impose on bystanders
consumer price index
a measure of the overall cost of good + services bought by a typical consumer
Convert costs & benefits into dollars by evaluating your…
willingness to pay
multiplier effect
change GDP= change spending times multiplier
private good
excludible & rival
tariff (gov.) revenue=
tariff times Q
U-3
unemployed (current: 4.1%)
unemployed:
the number of people who are not working & actively looking for work
responsive to a change in price:
elastic
order of principles:
MCOI (marginal, cost-benefit, opportunity cost, interdependence)
economic surplus
the difference between the benefits you enjoy & the costs you incur, and a measure of how much your decision has improved your well-being
central bank
US federal reserve
CPI= (equation)
cost of basket current period/cost of basket in base period (times 100) =
tax on sellers: NOT INCOME TAX
1) tends to reduce the quantity sold
2) tends to increase the price paid by buyers + decrease the price received by the sellers
3) both buyers + sellers bear the economic burden of the tax.
4) *Incidence of the tax describes the division of the economic burden of the tax.
Why is the labor supply curve upward sloping?
1) New people could be induced into the workforce.
2) Existing workers to work more
3) Some people switch occupations
reservation wage:
the wage at which you choose to cater to the labor market
price mechanisms:
both taxes and subsidies, and price ceiling and floor, QUOTAS!
employed:
the number of people who are working
negative externality:
an activity whose side effects harm bystanders ex) smoking. Impose costs on others. S curve shifts
someone else’s shoes technique:
allow yourself to understand someone else & how they view the world
–empathy
–What decision would I make in their shoes? (if I faced their incentives)
income effect
higher income makes leisure more attractive. For most people leisure is a normal good. A higher wage increases the marginal benefit of leisure and people want to consume more.
discouraged workers:
people who don’t have a job, but not looking (they think they can’t get one)
perfect competition
Markets in which all firms in the industry sell identical goods and there are many buyers and sellers, each of whom is small relative to market size.
terms of trade:
how many other good < 1 good < how many other good
public good(s)
non-excludible & non-rival
choke point:
when the Demand line reaches y-axis
open market operations
buying + selling government bonds
MS increase–> buy bonds
MS decrease–> sell bonds
unit elastic:
if Ed = 1. total revenue is constant at this elasticity.
Federal Funds Rate-
the interest rate that the Fed charges banks
importing country:
demanders gain; seller profit falls
real GDP
the production of goods + services valued at *constant prices
fiscal policy
government
for either/or choice:
use cost-benefit principle
compensating differentials:
differences in wages that arise from non-monetary characteristics of a job
An employer would institute an efficiency wage because
paying a higher wage than the market prevailing wage can encourage greater worker productivity.
internalizing the externality:
Impose a tax (ex) Pigovian tax) equal to the marginal external cost or a subsidy! –> positive or negative externality
elasticity of supply:
1) inventories- may supply more elastic
2) easily available inputs- ramp up and down production
3) extra capacity
4) easy entry + exit- yes, elastic; no, inelastic
5) time- over time, things become more elastic.
When does AD shift left?
uncertainty in market
natural rate of unemployment
4-5% in the US, always more than 0, *when economy is neither in a recession nor in a boom
tax on buyers: NOT INCOME TAX
1) tax leads to a reduction in quantity sold
2) PRICE buyers pay increases and PRICE sellers take home decreases.
3) profits of buyers + sellers decrease –> they share the burden of the tax.
4) the *incidence of the tax = the economic burden is born by whichever curve is MORE INELASTIC.
externality:
a side effect on bystanders whose interests aren’t fully taken into account (often leads to market failure). OR a cost of a benefit that accrues to somebody outside the market transaction. can be produced during 1) production 2) consumption or 3) disposal
Why restrict trade? (5)
1) national security
2) infant industry (Joseph Stiglitz)
3) Unfair competition
4) skirt regulations –> labor, environmental
5) jobs
absolute advantage
one person or nation can produce more of EVERYTHING
U-6
unemployed + marginally attached + involuntarily part-time (7.7%)
C.O.L.A.=
cost of living adjustment
quota:
sets a maximum quantity of a good that can be sold
ex) city zoning
cross-price elasticity:
Exy= %change Qdx/ %change Px. >0, substitutes; <0, complements
Okun’s Rule
when output goes down, unemployment goes up.
elasticity
measures how responsive the quantity demanded or supplied is to a change in price ex) medicine is a necessity (*necessity vs luxury)
maturity transformation occurs when banks…
use short-term loans to make long-term loans.
not responsive to a change in price:
inelastic
According to Ceteris Parabus, when the price of a product falls…
the quantity demanded of the product increases.
free-riding
non-rival & non-excludible
positive externalities:
activities whose side effects benefit bystanders ex) flu shot. Generate benefits for others. D curve shifts (Dprivate benefit–> Dsocial benefit)
GDP=
C+I+G+Nx (consumption (spending by households), investment (firms–> capital expenditures by firms + new housing by households), government spending, net exports (exports-imports))
price floor:
line above equilibrium
leads to surplus
perfectly elastic:
HORIZONTAL GRAPH. when any change in price leads to an infinitely large change in quantity
gains from trade:
an increase in total profit from trade
income elasticity:
Ei= %change Qd/ %change I. if greater than 0, normal good. less than 0, inferior good.
Bond or Stocks?
Bond- less risk, you know the interest rate and the date that you will be paid back
Stock- uncertain, high risk, depends how the company does, last in line
marginal cost:
the extra cost of one more
substitution effect:
that higher wages make work relatively more attractive. Increases the returns of work relative to leisure–> work more.
Production Possibility Frontier (graph)
Maps out the different sets of output that are attainable with your scarce resources and illustrates the trade-offs/opportunity costs you face when deciding how best to allocate scarce resources.
–Graph: curved down (x-axis: quantity of good first mentioned; y-axis: quantity of good second mentioned)
scarcity:
Your resources are limited. Scarcity=you always face a trade-off.
What shifts AS?
1) change in input prices
2) change in productivity (shifts AS to the right)
When does AD shift to the right?
consumption goes up
investment goes up
government spending goes up
net exports goes up
framing effect:
the phenomenon that small differences in how alternatives are described, or framed, can lead people to make different choices
market equilibrium
the price at which Qs and Qd are equal, the market clearing price
marginal revenue ($) product of labor
measures the additional revenue from hiring another worker
marginal private costs:
the extra costs that are paid for by the seller. ex) refinery: any extra oil, labor, electricity used
statutory burden of a tax:
the burden of being assigned by the government the responsibility of sending a tax payment
seller cost
how much it cost you to bring the good to the market
inflation rate (between 2 years)=
Deflator2-Deflator1/Deflator1 times 100= ____ %
individual demand curve
plots the quantity that he plans to buy at each price
economic burden:
the burden created by the change in after-tax prices faced by buyers and sellers as a result of the tax ex) the Philadelphia tax- a tax on sellers, but economic burden on both buyers and sellers
U-5
unemployed + marginally attached (current: 5.0%)
substitution bias:
prices change from year to year, but not proportionally. You can substitute between goods to reduce the impact of inflation on you. In this case, CPI overestimates the effect of inflation.
marginally attached (to the labor market)
want a job, but not looking (they don’t think they can get one)
monetary policy
Fed, actions taken by the central bank
