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92 Cards in this Set
- Front
- Back
- 3rd side (hint)
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resources
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land, labor, capital, entreprenural ability
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LLCE
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circular flow model
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business - resource market - households - products (currenty travels clockwise, objects travel CCW)
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opportunity cost
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the value of the good, service, or time forgone to obtain something else
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NPDs of demand
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consumer tastes and income up
- normal goods D - demand up - inferior goods I - demand down prices of other goods up - substitutes D - demand for our product up - complementary I - demand for our product down expected levels of prices D # of buyers D |
TastE our PriceS, EXPECT BUYERS
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NPDs of supply
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- # of sellers up D -> supply of our product up
- price of imput resources up I -> we supply less of our product - expectation of future price levels up I -> we supply less of our product - taxes I and subsidies D |
SMELL our prices, expect subsidies
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price ceiling/price floor
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price ceiling induces shortage (does not help customer); price floor makes gov't commit to buying the remainder of product
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results of different demand elasticities
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elastic: price up -> rev down
inelastic: price up -> rev up |
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Ed, Es
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%change quantity/%change price (x/y); flat is elastic
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determinants of demand elasticity
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elsaticity up if:
- availability of subs up - portion of income spent on item up - longer time to react to price changes up - luxury of product up |
because there aren't enough sub officers, you get more income, they want you to spend longer time, and you get more luxury
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market period
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a period in which producers of a product are unable to change the quantity produced in response to a change in price.
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elasticity of supply in different market periods
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market period: perfectly inelastic, as you go over a longer period of time, it gets more elastic.
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income elasticity
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%cquantity demanded/%cincome
>1 = normal good income = normal good import demand = inferior good |
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profit, explicit vs. implicit costs
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TR-TC
explicit: $ changes hands implicit: opp costs change hands |
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accounting profit v. economic profit
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R-EC = accounting profit
R-EC-IC = economic profit |
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short term variable resources v. long term ones
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short term: labor only
long term: capital, plant size, equip. as well |
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law of diminishing marginal returns, total product curve, what is slope of TP curve, what does MPL curve look like?
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illustrate toal product curve with total product output v. quantity of labor employed. slope is MPL. MPL curve looks like upside down parabola that crosses x-axis.
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illustrate ATC, AVC, AFC, MC, TC, TVC, TFC, TP, MPL. How do TC and TP curves compare?
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see notes
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how does LRATC compare to short term?
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collection of short term scenarios
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cost y axis vs. change in output x axis graph
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economies of scale, constant returns to scale, diseconomies of scale (upside down parabola)
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two questions for market structure
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How much do I product to maximize profit?
What should I set the price at? |
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characteristics of perfect competition
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- many sellers
- standardized product - price taker - no barriers to entry/exit |
#SPB
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illustrate perfect commpetition graph
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include price axis (cost/revenue), quantity axis, P=D=MR, MC, ATC, AVC, AFC, where MR=MC (that is the quantity that you produce)
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don't forget to label axes correctly
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economic loss v. shutdown
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difference of ATC and AVC and price's relationship to it
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perfect competition in long run
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no economic profit, only "normal" or accounting profit
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what is called when P=ATC? P=MC?
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productive efficiency, allocative efficiency
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Why do cost curves look they way they do?
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AFC falls as a given amount of fixed costs is apportioned over a larger and larger output. AVC initally falls because of increasing marginal returns but then rises because of diminishing marginal returns. the marginal cost curve eventually rises because of diminishing marginal returns and cuts through the average total cost curve and the avc curve at their minimum points.
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characteristics of pure monopoly
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- one seller
- price maker - no substitutes - many barriers to entry |
#SPB
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what does pure monopoly graph look like?
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price (rev/costs) vs. quantity produced, P=D > MR, ATC, AVC, AFC, MC, produce where MR=MC, price where convenient
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why is MR less than P=D for monopoly?
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still make more money, but make less with increased output. bring in positive revenue, but it is less than the last unit.
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characteristics of monopolistic competition
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- ELASTIC DEMAND
- many sellers - substitutability - no barriers to entry (NO EP in the long run) |
Why is it all about product loyalty?, #SPB
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where do you extrapolate to in order to determine price for a price maker?
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the top of the demand curve; hope it is above the ATC curve.
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characteristics of oligopoly?
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- few major sellers
- standardized or differentiated product - barriers to entry - strategic behavior - interdependence |
#SPB
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what graph indicates the productivity of labor?
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MPL
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NPDs of labor demand
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- productivity D
- price of the output it produces D - substitution effect and price of capital up D - demand for labor up (opposite is output effect) - price of complementary resources up I - demand for labor down |
PRODUCE the PRICES, SUBTITUTE the complements
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what is MRP equal to?
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MPL*Price of product
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what does labor demand curve and MPL curve look like?
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1.) wage rate y vs. amt labor x, downward sloping, D=MRP.
2.) MPL y vs. amt labor x, looks like MP curve. |
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if firm is wage taker, what does MRP=MRC curve look like?
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MRC is horizontal, and MRP=D is downward sloping.
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inclusive unionism, exclusive unionism, occupational licensing. what does exclusive unionism graph look like?
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graph: wage rate v. labor, decrease supply to increase wage rate.
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reasons for wage differentials
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education, ability, compensating differences
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NPDs of wage elasticity of demand for labor
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price of the output it produces D
- substitution effect and price of capital up D - demand for labor up (opposite is output effect) THESE ARE THE TWO MIDDLE ONES OF NPDs of LABOR DEMAND A third one is the ratio of labor costs to total costs. |
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what is monopsony, what does it say about mobility of labor resources, what does the supply of labor graph do as a result of it?
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pay lower wage rate on supply graph (therefore higher less labor due to law of supply) -> now you can pay higher wages to attract more workers.
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what is MRC of monopsony?
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cost of not only additional resources but also additional costs of upping everyone else's wages who are performing similar jobs and are already hired.
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problems with lorenz curve
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low income groups get
transfer payments non-cash transfer payments. middle class shoulders the burden. |
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what each quintile makes on the lorenz curve
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difference between y values of upper and lower bounds of that quintile
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does lorenz curve take inflation into account?
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NO. NOMINAL, NOT REAL.
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law of diminishing marginal utility, what it looks like on graph
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lower class have much larger x-axis gain in marginal utility as a representation of percentage change in income than the upper class have in a losing sense.
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social insurance v. public assistance, entitlements
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SS, MC, UE
medicaid, TANF, SSI, tax credits for low income entitlements: offer payments or non cash benefits to all who fit program's requirements. need law to change them. |
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three factors to evaluate the economy
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economic growth, unemployment rate, price stability.
for inflation, if prices change more than income, you have a negative chang ein real income) |
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nominal GDP
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total monetary value of all final goods and services produced within the bounds of a country in a single year, whether by US or foreign resources
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NOT included in GDP:
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-financial transactions
-transfer of gov't money -second hand transactions -underground E |
three transactions and prostitutes
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GDP equation
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C = personal consumption expedentures
Ig = gross private domestic investment G = gov't purchases NE = net exports |
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what does real GDP do?
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it isolates impact of prices. compare today's output at today's price t otomorrow's output at the same price. ADJUSTED FOR INFLATION.
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definition of recession
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two quarters of decline in real GDP
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frictional, structural, cyclical umemployment
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people waiting for jobs or searching for jobs, mismatch between jobs and workers, associated with business cycle
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CPI
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= price of current market basket/price of market basket '82-'84 or some other base year. annual increase of about 4.5%
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core inflation
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excludes food and energy
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solution to inflation
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change interest rates
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NPDs of AD
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C
-wealth effect D increase AD -consumer expectations D good expectations increase AD -household indebtedness I -personal taxes I Ig -marginal cost (the interest rate) I -marginal benefit (expected return) D G more gov't purchases -> AD up D more money into economy to purchase more good products NE - income abroad D - exchange rates |
has to go with GDP equation
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what are the axes for AD and AS curves?
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price level y vs. real GDP x
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LRAS
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perfectly vertical with price level v. real GDP as axes.
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NPDs of AS
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- changes in imput prices I -> imput prices up AS down
- productivity D -> more productive more supply - legal environment --taxes I supply less --regulations questionable |
get imput resources, be productive, see what gov't thinks
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demand pull and cost push inflation graphs
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price level vs. real GDP, AD up or AS down, price rises. GDP is always measured from equilibrium
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illustrate expansionary policy vs. contractionary policy. what do you need to do to accomplish either? when does each occur?
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price level v. real GDP as axes. AD up or AD down. increase GE or decrease taxes to achieve expansion. expansionary occurs when there is not enough inflation.
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illustrate built in stabilizer
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gov't ex and taxes y vs. real gdp x. G is horizontal, taxes are upward sloping. Right side is surplus, left side is deficit.
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problem areas in fiscal policy
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recognition lag, admin lag, operational lag
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how do you finance a deficit?
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sell gov't securities. you compete with pricate demanders for $$.
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illustrate the crowding out effect
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investment demand curve: inverse relationship between interest rates and amount of investment. increasing interest rates reduces pricate investment accordign to amt. of investment decreaseing.
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issues with financing public debt
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- income redistribution issue
- foreign holders - crowding out effect? |
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what determines the value of money?
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based on price levels - what are expectations for inflation?
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M1 vs. M2
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M1 = cash in hand + checkable deposits
M2 = M1 + time deposits + MMAs CREDIT CARDS NOT INCLUDED. |
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illustrate the banking system in the US
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fed reserve with 7 member board of governors, 14-yr terms, 2-yr intervals; chair and vice chair serve 4 yr terms; 12 regional banks that are privately owned by local commercial banks (all of the above coorespond with Fed Open market committee that buys and sells gov't securities), regional banks interact with both commercial banks and credit unions, savings and loan associations, thrift institutions, etc. those two things interact with the public.
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fed's jobs
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- check clearing
- bank supervision - yearly audits - gov't's bank - bank's bank - establish RRR - manage money supply (RR, ER, all about managing the existence of excess reserves in banking system) |
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money multiplier M
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=1/RRR = 1/.1 = 10 today
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how do demand deposits increase with the iterative money creation process?
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see handout if not sure.
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monetary policy
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actions by fed to affect prices and monetary supply to control e growth, price stability, and unemployment.
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what is the money market?
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contains demand for money and supply for money
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medium of exchange in the money market
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transactions demand for money
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what does the demand for money transactions graph look like, what is the point of it?
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demand for money transactions is perfectly vertical, real interest rate on y, amt of money demanded on x, illustrates that changing interest rates does not affect amt of money demanded - DEPENDS SOLELY ON NOMINAL GDP, NOT INTEREST RATE
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two categories of $$
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medium of exchange, store of value (asset demand for money)
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what does money equilibrium curve look like, what happens when you increase or decrease money supply?
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real interest rate y, amount money demanded/supplied x, MS is perfectly vertical as demonstrated on another flash card, TDM is downward sloping, equilibrium is called money equilibrium and there is an equilibrium interest rate. decrease money supply and you drive prices up and visa versa
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tools of monetary supply
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- buy gov't securities, increase excess reserves, increase supply, move curve right.
- change RRR - raise discount rate, discourage comm banks from obtaining addl securities, move supply curve to left |
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easy money, tight money
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unemployment/recession -> lower IR -> increase MS according to money equilibrium demand and supply graph -> increase investments because I inversely prop to interst rate -> GDP up -> AD up
TIGHT MONEY IS OPPOSITE. |
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three graphs to portray easy money v. tight money
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TDM vs. TSM graph, lower y axis RIR, MS increases, next is Id graph with RIR vs. amt of investment, then AD2 vs. AD1 graph.
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economic growth
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change in real GDP per capita
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sources of economic growth
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supply side (labor, capital, resources, technology), demand side, efficiency
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what comprises supply side change and its impact on economic growth?
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size of work force
- pop growth - work week - labor force participation rate productivity of work force -tech change -increase in capital stock - edu and training -allocation of resources |
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what contributes greatest to economic growth on the supply side?
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tech change 40%, then inc in capital stock 30%, then increase in human capital, then allocation of resources.
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when is international trade good for the economy? are tariffs or specialization good?
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good for e under comparative advantage. tariffs are bad and specialization is good
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comparative advantage
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lower relative or comparative opportunity cost than another person or country
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mexico v. us trade scenario, how do you establish terms of trade?
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mexico: 1S=4A
US: 1S=3A. US should produce soybeans. If you inverse the equations, you will see that avocados work better for Mexico. terms of trade should be beneficial to both countries. |
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determinants of exchange rates - what causes demand for currency and value of currency to increase?
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tastes: if the british like our MP3 players better, then they will supply more pounds to us, making pounds less valuable.
other scenarios as well, but don't worry about them |
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foreign exchange rates graphs
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$ interms of pounds y, # of pounds in US economy x, demand and supply for pounds equilibrium
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