1. What are the two roles an economists plays?
a. Scientists - try to explain the world
b. Policy advisors - try to improve the world
2. As scientists, economists employ the _
a. Scientific Method
3. As a scientist, economists also need to do two things:
1. What kinds of questions does economics address?
a. What are the principles of how people of how people make decisions?
b. What are the principles of how people interact? (interactively)
c. What are the principles of how the eco
a. And equality both refer to how much a society can produce with resources
b. And equality both refer to how fairly the benefits from using resources are
distributed between members of a society
c. Refers to how much a society can produce w
The Fed has two basic types of monetary policy.
Expansionary monetary policy increases the money
supply while contractionary monetary policy decreases
the money supply. Expansionary monetary policy
includes purchasing government bonds, decreasing the
Interest Rates and Fiscal Policy
Fiscal policy has a clear effect upon output. But there is
a secondary, less readily apparent scal policy effect on
the interest rate.
Basically, expansionary scal policy pushes interest
rates up, while contractionary scal
Money Supply and Monetary Policy
In the SparkNote on money and interest rates we learned about the money
supply. This is the starting point for understanding monetary policy.
Initially we dened the money supply as the total amount of currency held
Which of the following pairs best t with scal policy?
(A) Taxes and government spending
(B) Open market operations and reserve requirement
(C) Taxes and open market operations
(D) Open market operations and government spending
Who uses scal policy?
While expansionary and contractionary scal policy both directly affect the
national income, the ultimate change in output is not always equal to the
policy change. That is, there are factors that increase or decrease the
efcacy of scal policy. These facto
Contractionary Fiscal Policy - Policy enacted by the government that
reduces output. Examples include raising taxes and decreasing government
Contractionary Monetary Policy - Policy enacted by the Fed that reduces
the money supply and thus reduc
Taxes are an integral part of your life as an American.
Each April you spend countless hours pouring over
records and receipts, or paying an accountant to do this,
in preparation for income taxes. Similarly, in most states
whenever you purchase something,
Money Supply - The total amount of
money in an economy including both
demand deposits and currency.
Multipliers - Numbers that dictate
the overall effect of a policy change
on the output of an economy.
National Income - Output. (See the
denition of output
Taxes and Government Spending
Fiscal policy describes two governmental actions by the
government. The rst is taxation. By levying taxes the
government receives revenue from the populace. Taxes
come in many varieties and serve different specic
Problem : List the major vehicles of monetary policy.
There are three major vehicles of monetary policy. They
are open market operations, changing the reserve
requirement, and manipulating the federal funds interest
Problem : Dene expansionary monet
Assume a firm has the following cost and revenue
characteristics at its current level of output: price=
$8.00, average variable cost=$6.00 and average
fixed cost =$4.00. In the long run, the firm
Should shut-down as its making a loss of $2
Which of the fo
Increasing returns to scale
When the proportional increase in output is larger than an
underlying proportional increase in input.
Constant returns to scale
When a given percentage increase in all inputs leads to an
identical percentage increase in output.
Planning period with complete input flexibility
Long-run cost relationship
Short-run cost relationship
Short-run cost curve
Cost-output relation for a specific plant and
Long-run cost curve
Factors outside the control of the firm, such as consumer
incomes, competitor prices, and the weather.
It measures elasticity at a given point on a function.
Average elasticity over a given range of a fu
Discrete production function
Production function with distinct input patterns.
Continuous production function
production function where inputs can be varied in an
unbroken marginal fashion.
Returns to scale
Output effect of a proportional increase in all
Responsiveness of demand for one product to changes in
the price of another.
Equation for Cross-Price Elasticity
(Change in Qy / Change in Qp)(Px/Qy)
Falls within rising income, and rises with falling income
Theory of the Firm
Basic model of business
Expected Value Maximization
Optimization of profits in light of uncertainty and
the time value of money.
Value of the Firm
PV of the firm's expected future net cash flows.
Residual of sales reve
Change in total revenue associated with a 1-unit change in
Activity level that generates the highest revenue, MR=0
Relations between cost and output
Short-run cost functions
Cost relations when f
Demand for inputs used in production
Change in quantity demanded
movement along a given demand curve reflecting a change
Shift in demand
Switch from one demand curve to another following a
change in non-price determinant of demand
Products that serve the same purpose.
Products that are best consumed together.
Goods and services that satisfy the same need or desire.
Goods and services consumed together in the same
A market in which there are many buyers and many sellers
of an identical product so that each has a negligible impact
on the market price.
A market in which there is only one seller.
A market in which there are a few
shows the consumption bundles available to a consumer
who spends all of his or her income
optimal consumption bundle
the consumption bundle that maximizes the consumer's
total utility given his or her budget constraint
marginal utility per dol
the rate at which one good trades for another in the market
the marginal rate of substitution of one good in place of the
other good is constant, regardless of how much of each and
for all quantities sold, up to the market equilibrium,
marginal benefit-price consumers are WTP-exceeds
marginal cost (the price firms are willing to sell for.)
a maximum price sellers are allowed to charge for a good
elasticity helps us measure how a given percentage
change in price will affect
knowing elasticity can help a firm with its _,
and can also help a firm _.
pricing strategy ; predict how a given change in price will
comparative advantage is important in explaining why it
is in a person or country's best interest to
specialize in production and engage in exchange; explains
why supply curves are upward sloping.
we use our (highest/lowest) opportunity cost resources
Amount that consumers are willing to pay
law of demand
a negative or inverse relationship between price and
indicates that a lower price increases the purchasing power
of a buyers money income.
determinants of demand
assumed to be