Econ cheatsheet FINAL Accumulative - .:1.Resourcesarescarce.2.T herealcostof somethingiso pportunitycost

Econ cheatsheet FINAL Accumulative -...

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Unformatted text preview: Economics is the study of scarcity and choice.Basic principles behind the individual choices include: 1. Resources are scarce. 2. T he real cost of something is o pportunity cost ( what you must give up to get it) Scarce Resources: petroleum, lumber, intelligence, resource: Land, labor, physical capital, human capital. Monetary policy uses the quantity of money to alter interest rates, which affect overall spending. F iscal policy uses changes in taxes and government spending to affect overall spending. Positive economics is the branch of economic analysis that describes the way the economy actually works NO SUGGESTIONS Normative economics makes prescriptions about the way the economy should work. WHAT IT SHOULD BE, SUGGESTIVE P roduction possibility frontier (PPF) – Efficiency – a situation where no one can be made better off without anyone else being worse off. Slope of PPFoutward bowed – Opportunity Cost. . Economic growth is shown as an outward shift of the PPF . Two general sources of economic growth. 1.increase in an economy’s resources. 2.Progressive t echnology .Straight line = constant opportuniy cost Gains from trade = specialization in their best assets. Individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people. Sources of comparative advantage ­ difference in technology, factor endowments, or climate. An individual has an absolute advantage in an activity if he or she can do it better than other people. HECKSCHER OHLIN MODEL SAYS International trade tends to: increase the demand for factors that are abundant in our country compared with other countries, and decrease the demand for factors that are scarce in our country compared with other countries. As a result, the p rices of abundant factors tend to rise , and the p rices of scarce factors tend to fall as international trade grows.law of increasing opportunity cost ­ as prouction of 1 good rises, opportunity cost of good goes ^ anything inside the curve is attainable. ^price of good, quantity of demand falls DEMAND CURVE: how much a good or service consumer wants to buy at any given price. Shifts of the Demand curve: An increase in the population and other factors generates an increase in demand—a rise in the quantity demanded at any given price. Demand is NOT the same as quantity demanded. 1. T he d emand schedule shows the q uantity demanded at each price and is represented graphically by a d emand curve. 2. T he law of demand says that demand curves slope downward. 3. A movement along the demand curve occurs when a price change leads to a change in the quantity demanded. When economists talk of increasing or decreasing demand, they mean shifts of the demand curve — a change in the quantity demanded at any given price. Quantity Demanded: movement the demand curve. (Change in quantity demanded caused by PRICE change only) Change in Demand – SHIFT of the demand curve. Change in demand is caused by changes in factors other than price such as income, tastes, expectations, population •Changes in the prices of related goods – Substitutes: Two goods are substitutes if a fall in the price of one good makes consumers less willing to buy the other good . (rice & pasta) – Complements : Two goods are complements if a fall in the price of one good makes people more willing to buy the other good . (pb & jelly) (Changes in income) Normal goods: When a rise in income increases the demand for a good—the normal case—we say that the good is a n ormal g ood. Inferior goods: When a rise in income decreases the demand for a good, it is an inferior good ● ● ● ● ● ● ● ● ● Price of a substitute ↑ demand for the good ↑ (right shift) Price of a complement ↑ demand for the good ↓ (left shift) Income ↑ ­ demand for normal good ↑ (right shift) ­ demand for inferior good ↓ (left shift) Tastes change in favor of the good (it becomes popular) demand ↑ (right shift) Price is expected to ↑ in the future demand ↑ (right shift) Number of consumers ↑ demand ↑ (right shift) Tax on consumers demand ↓ (left shift) Subsidy for consumers demand ↑ (right shift) The market demand curve for a good or service is the horizontal sum of the individual demand curves of all consumers in the market. The law of supply says that other things being equal, the price and quantity supplied of a good are positively related. (Supply is not the same as quantity supplied) Movement along supply curve = a change in the quantity supplied of the good as a result of change in that good’s price (1000 less hershey kisses because the $2 price raised up to $5) ● ● ● ● price of a substitute ↑, supply ↓ price of a complement ↑, supply ↑ Producers expect higher price in the future: supply ↓ today expect lower price in the future: supply ↑ today ● ● ● ● ● ● ● ● Price of an input ↑ supply of the final good ↓ (left shift) Price of a substitute in production ↑ supply of the original good ↓ (left shift) Price of a complement in production ↑ supply of the original good ↑ (right shift) Technology improves: supply of the good ↑ (right shift) Price is expected to ↑ in the future: supply ↓ today (left shift) Number of producers↑ supply of the good ↑ (right shift) Tax on each unit: supply ↓ by tax amount (left shift) Subsidy: supply ↓ by subsidy amounts (left shift) Equilibrium price ­ every buyer has a seller, market clearing price Surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level. S hortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level. Changes in Equilibrium ● ● ● ● Where Demand goes: price and equilibrium follow Demand ^ – equilibrium price and quantity ^ Where supply goes, quantity follows, price goes in opposite direction supply ^ ­ equilibrium price decreases, equilibrium quantity increases ● When both curves shift ­ magnitude of shifts? If yes, bigger shift dominates Price Controls legal restrictions on how high or low prices go Price Ceiling a max price sellers are allowed to charge, pushes price DOWN, ( binding =set below equilibrium price) Benefits successful buyers BUT persistent shortages, “missed opportunities”/ Price Floor is a government­ or group­imposed price control or limit on how low a price can be charged for a product . A price floor must be higher than the equilibrium price in order to be effective. pushes price UP, (binding=effective above equilibrium) Benefits successful sellers BUT persistent surplus going to waste.. Usually for labor market. Quantity Control ( Quota ) upper limit on the quantity of some good bought or sold / License gives owners rights to supply Inefficient Allocation to Consumer ( price ceilings lead to this ) people who want the good badly & willing to pay high, & those who care little & willing to pay low do get it / Wasted Resources people expend money, effort, & time to cope with shortages / Inefficiency Low Quality sellers offer low quality goods at low prices / Black Market goods bought & sold illegally / Inefficient Allocation of Sales among Sellers those willing to sell the good at lowest price are not always who manage to sell it / Inefficiency High Quality ( due to floor price) offer high quality goods at high price Demand Price at which consumers will demand that quantity / Supply Price at which producers will supply that quantity Quota Rent (Wedge) the earnings that accrue to the license­holder from ownership of the right to sell the good, on graph drives between demand/supply price. Quota Limit max quantity allowed to trade / Deadweight Loss lost gains / Imports goods purchased from abroad Exports goods & services sold abroad / Globalization phenomenon of growing economic linkages among countries Domestic home country / Non Domestic foreign / Domestic Demand Curve quantity of a good demanded by domestic consumers depends on the price of that good / Domestic Supply Curve quantity of a good supplied by domestic producers depends on price of that good / Trade Protection policies that limit imports / Tariff tax levied on imports (It raises the domestic price above the world price, leading to a fall in imports. Domestic producers and the government gain, but consumer losses more than offset this gain, leading to deadweight loss in total surplus. Tariff revenues go to the government) Import Quota legal limit on the quantity of a good that can be imported / Offshore Outsourcing businesses hire people from abroad MOD 8: The Ricardian model of international trade analyzes international trade under the assumption that opportunity costs are constant (i .e. PPF is a straight lin e)/ Shows that trade between two countries makes both countries better off than they would be in autarky—that is, there are gains from trade. When a market is opened to trade, if the world price is lower than the autarky price, trade leads to imports and a fall in the domestic price compared with the world price. There are overall gains from trade because consumer gains exceed the producer losses. Consumer surplus – economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service relative to its market price. Graphically – area under the demand curve above the price Producer surplus ­ economic measure of the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good Graphically – area above the supply curve below the price. If the world price is higher than the autarky price → exports and a rise in the domestic price compared with the world price.There are overall gains from trade because producer gains exceed the consumer losses. Arguments for Trade Protection. national security, job creation, and the infant industry argument. * If the world price is below the autarky price, a good is imported. If the world price is above the autarky price, a good is exported. Most economists advocate free trade, but in practice many governments engage in trade protection. The two most common forms of protection are tariffs and quotas.* MOD 9: Policy efforts undertaken to reduce the severity of recessions are called stabilization policies = monetary + fiscal. Long­run economic growth is the sustained upward trend in the economy’s output over time. Part of the long­run increase in output is accounted for by the fact that we have a growing population and workforce, but overall production has grown faster than the workforce. A rising aggregate price level is inflation. A falling aggregate price level is d eflation. The economy has p rice stability when the aggregate price level is changing only slowly. Expansion à recession = b usiness cy c le peak , recession à expansion = business cycle trough , e xpansion = recovery, r ecession = output and employment falling (at least 6 months assigned to NBER ) Depression =prolonged recession (both recession and depression are contractions on graph) A country runs a trade deficit when the value of goods and services bought from foreigners is more than the value of goods and services it sells to them.A country runs a trade surplus when the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them. When the prices of most goods and services are rising, so that the overall level of prices is going up, the economy experiences inflation. When the overall level of prices is going down, the economy is experiencing deflation. Aggregate Output is the total amount of output produced and supplied in the economy in a given period (another term is gross domestic product (GDP) Equilibrium advice (mod 4 and 5 sum up to Mod 6): Where demand goes, price and quantity follow! Where supply goes, quantity follows while price decreases The bigger shift dominates: large increase in demand dominates small decrease in supply/ the large decrease in supply dominates the small increase in demand Circular Flow Diagram • Product markets are where goods and services are bought and sold. • F actor markets are where resources, especially capital and labor, are bought and sold. Households sell factors of production (land, labor, capital) in factor markets and purchase goods and services in product markets. Firms sell goods and services in product markets and purchase factors of production (land, labor, capital) in factor markets. •A stock is a share in the ownership of a company held by a shareholder. •A b ond is a loan in the form of an IOU that pays interest. Disposable income = total household income ­ taxes Private savings = disposable income ­ consumer spending Economists keep track of the flows of money between sectors with the n ational income and product accounts, or n ational accounts. Imports = outflow Exports = inflow • Intermediate goods and services are goods and services—bought from one firm by another firm—that are inputs for production of final goods and services. –E.g. Milk bought by Ferdinand’s creamery as an input 3 approaches calculating GDP ● Value added = Sales – Cost of intermediate goods from other firms ● Expenditure Approach : Add up all spending on domestically produced final goods and services. GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports – Imports) GDP = C + I + G + X – IM, Net Exports = Exports – Imports = X – IM Income Approach: Add up all income paid to factors of production § GDP = Wages + Interest + Rent + Profit NOT INCLUDED IN GDP: Second Hand sales, stocks and bonds, transfer payments such as social security, welfare, unemployment, corporations overseas The aggregate output is the total quantity of final goods and services the economy produces. Price Index Level = nominal/ real * 100 (measure of change in price level) • Nominal GDP – output calculated using current ­year prices and current­year output –Nominal GDP = price current year * quantity current year • Real GDP – output calculated using base­year prices and current­year output. –Real GDP = price base year * quantity current year • GDP per capita is a measure of average GDP per person. –GDP per capita = GDP / (number of people in the economy) Growth rate of GDP shows the percentage by which GDP has changed from one year to the next. •The main formula for calculating growth rate of variable X is: •Where X can be: nominal GDP, real GDP or GDP per capita Chained dollar s is a method of adjusting real dollar amounts for inflation over time, so as to allow comparison of figures from different years. Its the method of calculating changes in real GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year. Real GDP per capita is a measure of average aggregate output per person = real gdp / population size Labor force participation rate = labor force / population ^ 16 = _% Unemployment rate (Qs ­ Qd) = unemployed / labor force * 100 = _% Rule of 70 = #of years for real gdp to double = 70/ annual growth rate of real gdp per capita KEY to long run economic growth = labor productivity, output per worker ^PRODUCTIVITY = ^physical capital per worker & human capital per worker & technology advances Convergence Hypothesis = fits the data only when factors that affect growth, such as education, infrastructure, and favorable policies/institutions are held EQUAL across all countries. GDP deflator = nom gdp/real gdp * 100 CPI = nominal cost value of basket market ($ with #) / real cost value of market basket ($ with #) x 100 PPI = early warning signs Inflation rate = new ­ old / old * 100 (inflation = if real gdp rises & nominal gdp falls) ● ● ● 1. The large differences in countries’ growth rates are largely due to differences in their rates of accumulation of physical and human capital as well as differences in technological progress. 2. A prime factor is differences in savings and investment rates. 3. Technological progress is largely a result of research and development, or R&D. Cyclical unemployment relates to business cycles troughs and peaks = actual ­ natural Natural Unemployment = frictional (job search) + structural (more ppl than jobs)→ rates that exist when economy’s at full employment Actual = natural + cyclical The aggregate production function is a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology . –Y­axis: real GDP per worker; X­axis: Physical capital per worker –Slope of production function – “returns to physical capital” –An aggregate production function exhibits diminishing returns to physical capital : each successive increase in the amount of physical capital leads to a smaller increase in productivity (holding the amount of human capital and the state of technology fixed) Savings, Investment Spending, and the Financial System Mod 20 – (1) Total Income = Total Spending – (2) Total income = Consumption spending + Savings – (3) Total spending = Consumption spending + Investment spending •Putting these together, we get: – (4) Consumption spending + Savings = Consumption spending + Investment spending •Subtract consumption spending from both sides, and we get: – (5) Savings = Investment spending •Government can earn and spend money: –The budget balance (= government savings) is the difference between tax revenue and government spending. It is how much a government “saves”. –Budget balance > 0 → budget surplus (when tax revenue exceeds government spending) –Budget balance < 0 → budget deficit (when government spending exceeds tax revenue). National savings = private savings + budget balance (government “savings”), is the total amount of savings generated within the economy. Net capital inflow is equal to the total inflow of foreign funds minus the total outflow of domestic funds to other countries. Investment spending = National savings + Net capital inflow The loanable funds market examines the demand for funds generated by borrowers and the supply of funds provided by lenders (savers). ● ● ● The rate of return on a project is the profit earned on the project expressed as a percentage of its cost. Businesses will ONLY take up projects if RATE OF RETURN is greater or equal to INTEREST RATE. The project with highest rate of return is the most likely to be chosen. Anything that shifts either the supply of loanable funds curve or the demand for loanable funds curve changes the interest rate. Driving Factors include: changes in gov’t policy and technology innovations that = new investment opportunities Real interest rate = nominal interest rate ­ inflation rate Fisher effect = an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged. Understanding the Financial System ● ● ● ● A household’s wealth is the value of its accumulated savings. A financial asset is a paper claim that entitles the buyer to future income from the seller. A physical asset is a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes Transaction costs are the expenses of negotiating and executing a deal. Loans A loan is a lending agreement between an individual lender and an individual borrower. Loans are tailored towards the individual borrower Bonds IOU issued by the borrower. Seller of the bond promises to pay a fixed sum of interest each year and to repay the principal—the value stated on the face of the bond—to the owner of the bond on a parꛕcular date. A bond is a financial asset from its owner’s point of view and a liability from its issuer’s point of view. Bonds are more standardized than loans, hence – easier to resell. Riskier bonds have higher interest rate. Stocks a share in the ownership of a...
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