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84 Cards in this Set
- Front
- Back
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scarcity
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desire is unlimited and resources are limited
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ceteris parabus
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while certain variables can change all other things remain constant
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positive economic statements
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how things are
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normative economic statements
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how things should be
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production possibilites curve (PPC)
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curve that shows the maximum combination of two outputs an economy can produce given its available resources and technology
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opportunity cost
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the value of the best alternative forgone when an item or activity is chosen
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implications of upward movement along demand curve
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-increased price and decreased quantity demanded
-eventual return to equilibrium price |
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implications of downward movement along demand curve
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-decreased price and increased quantity demanded
-eventual return to equilibrium price |
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left shift of demand curve
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-decreased price and quantity demanded
-change in equilibrium |
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right shift of demand curve
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-increased price and quantity demanded
-change in equilibrium |
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price elasticity of demand
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-the responsiveness or sensitivity to a change in price
-% change in Q demand/% change in price |
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mid point formula
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Ed= ((Q2-Q1)/(Q2+Q1))/((P2-P1)/(P2+P1))
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explicit costs
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payments to non-owners of a firm for their goods and services
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difference between accounting and economic profit
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accounting profit is economic profit minus explicit costs
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variable cost
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costs that our zero when output is zero and varies as output changes
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perfectly competitive firm
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-buyers and sellers are price takers
-maximize profit and minimize cost -no barrier to entry -where TR-TC is greatest -price = demand |
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profit maximization
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where total revenue minus total cost is greatest
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marginal revenue (MR)
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change in total revenue from the sale of one additional output
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monopoly
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-single seller
-unique product -impossible entry -ownership of a vital resource in producing the good -legal barriers to entry -economies of scale -price maker |
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different market structures
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-monopolistic competition
-monopoly -perfect competition |
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monopolistic competition
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-many small sellers
-differentiated product -ease of entry and exit -price maker, to an extent |
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economic profit
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total revenue - (explicit costs + implicit costs)
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point outside of PPC
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unattainable
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point on the PPC
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efficient
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point inside of PPC
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inefficient
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total market demand
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this is calculated by horizontally summing two individual demand curves
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shortage on graph
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when quantity demanded is greater than quantity supplied
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surplus on graph
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when quantity supplied is greater than quantity demanded
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where on graph is profit maximized (pure competition)
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where MR=MC
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where on graph is profit maximized (monopoly)
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by producing the quantity of output at MR=MC and charging the corresponding price on its demand curve
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GDP
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market value of all final goods
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calculation of GDP
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use only new products, not resold products
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real GDP
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((nominal GDP)/(CPI)) x 100
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inflation rate
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((CPI(given)-CPI(previous))/(CPI(previous)) all times 100
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inflation
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an increase in the general price level of goods and services in an economy
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deflation
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a decrease in the general price level of goods and services in an economy
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disinflation
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a reduction in the rate of inflation
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consumer price index (CPI)
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an index that measure changes in average prices of consumer goods and services
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how to calculate CPI
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given year market basket cost divided by base year market basket cost, all multiplied by 100
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real income
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(nominal income)/(CPI/100)
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still fill in
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still fill in
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aggregate demand curve
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curve that shows level of real GDP purchased by the economy at different possible price levels
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why is aggregate demand curve down slopping?
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-because at a given aggregate income, people buy more goods and services at a lower price level
-real balances effect -net exports effect -interest rate effect |
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relationship between price level and aggregate demand curve
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decrease in price level equals a higher quantity of real GDP demanded and vice versa
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factors that cause aggregate demand curve to shift
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any of the components of GDP.
-Consumption (C) -Investment (I) -Government Spending (G) -Net Exports (X-M) |
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aggregate supply curve
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curve that shows the level of GDP produced at different possible price levels
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why aggregate supply curve shifts
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-resource prices (domestic and imported)
-taxes -technological change -subsidies -regulation |
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change in price level and effect on real GDP (Keynesian)
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real GDP increases, price level stays the same
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change in price level and effect on real GDP (Intermediate)
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both real GDP and price level increases
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change in price level and effect on real GDP (Classical)
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price level increases and GDP remains constant at full employment level
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MPC (marginal propensity to consume)
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change in consumption as a result of a change in income
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how does MPC affect real GDP
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MPC is used to calculate the spending multiplier (SM), the closer the MPC is to 1, the higher the spending multiplier, meaning consumers will spend more of their income
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taxing multiplier (TM)
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the change in aggregate demand (total spending) as a result from an initial change in taxes
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fiscal policy
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deliberate use of changes in government spending and taxes to alter aggregate demand
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how to calculate MPC
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change in income/change in consumption
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supply side policy
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fiscal policy that emphasizes government policies that increase aggregate supply
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progressive tax rate
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tax that charges a higher rate as income rises
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regressive tax rate
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tax that charges a lower rate as income rises
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flat tax rate
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tax that charges the same rate to all income levels
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national debt
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amount owed by the federal government to owners of government securities
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money
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anything that serves as a medium of exchange, unit of account and store of value
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M1
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currency + checkable deposits
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M2
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M1
+ savings deposits and small time deposits of less than 100,000 dollars |
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organizations of the Fed
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-board of governors
-FOMC (federal open market committee) -Federal Advisory Council -12 district banks (regional Federal Reserve Banks) -U.S. Banking System |
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Functions of the Federal Reserve
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-controls money supply
-clears checks -supervises and regulates banks -maintains and circulates currency -protects consumers -maintains federal government checking accounts and gold |
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ownership of the Federal Reserve
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derives authority from Congress
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fractional reserve banking
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system in which banks keep only a small percentage of their deposits on reserve with the Fed
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required reserve
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minimum balance that the Fed requires a banks to hold in vault cash or on deposit with the Fed
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banks balance sheet (assets)
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-required reserves
-excess reserves -loans |
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banks balance sheet (liabilities)
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checkable deposits
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money multiplier (MM)
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-maximum change in the money supply (checkable deposits) due to an initial change in the excess reserves banks hold
-1/require reserve ratio |
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money supply
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checkable deposits
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how the Fed changes money supply
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-monetary policy
-open market operations, change in discount rate, change in required reserve ratio |
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how the Fed combats inflation
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decrease money supply
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how the Fed combats a recession
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increases money supply
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discount rate
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interest rate the Fed charges on loans to other banks
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federal funds rate
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interest rate banks charge for overnight loans of reserves to other banks
-what commercial banks charge eachother |
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demand curve for money
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curve representing the quantity of money that people hold at different interest rates
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transactions demand for money
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money people hold to pay everyday predictable expenses
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speculative demand for money
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money people hold to take advantage of expected future changes in the price of bonds, stocks or other non-money assets
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precautionary demand for money
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money people hold to pay unpredictable expenses
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how fed influences interest rate
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-money supply changes
-increases in money supply = decrease in interest rate -decrease in money supply = increase in interest rate |
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equation of exchange
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-money supply times the velocity of money equals total spending
-MV = PQ |
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monetarists
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-velocity changes but is predictable
-fed should increase money supply at a constant percentage to combat inflation or recession -quantity theory of money -fixed money supply |
