Econ Exam Studying

The Cost Benefit Principle

Costs and benefits are the incentives that shape decisions. You should evaluate the full set of costs and benefits of any choice, and pursue only those whose benefits are at least as large as their costs.

The Opportunity Cost Principle

The true cost of something is the next best alternative you must give up to get it. Your decisions should reflect this opportunity cost, rather than just the out-of-pocket financial costs.

The Marginal Principle

Decisions about quantities are best made incrementally. You should break “how many” decisions down into a series of smaller, or marginal, decisions.

The Interdependence Principle

Your best choice depends on your other choices, the choices others make, developments in other markets, and expectations about the future. When any of these factors change, your best choice might change.

framing effect

small differences in how alternatives are described, or framed, can lead people to make different choices

sunk costs

when the time, effort, an other costs you put into the project cannot be reversed (good decision makers ignore sunk costs)

production possibility frontier

maps out different sets of outputs that are attainable with scarce resources. moving along prouction possibility frontier highlights opportunity cost.

the rational rule

if something is worth doing, keep doing it until your marginal benefits equal your marginal costs

order of principles when making decision

mmarginal principle, cost-benefit, opportunity cost, interdependence

law of demand

tendency for the quantity demanded to be higher when the price is lower

rational rule for buyers

buy more of an item if the marginal benefit of one more is greater than or equal to the price. to maximize your economic surplus, keep applying the rational rule for buyers until price = marginal benefit. your demand curve is also your marginal benefit curve

the market demand curve

plots the total quantity of a good demanded by the market (across all potential buyers at each price).

market demand

the sum of the quantity demanded by each person

4 steps for market demand curves

1) survey customers

2) add up total quantity demanded in survey

3) scale up quantities to represent the whole market

4) plot total quantity demanded at each price point

who do prices change the quantity demanded for? explain

for both new and old customers. changes in price can change who your customers are.

what shifts the demand curve

happens when factors other than price change. rightward shift of the demand curve = increase in demand, bc at each and every price, the quantity demanded is higher

6 factors that shift demand curve

1. income

2. preferences

3. prices of related goods

4. expectations

5. congestion and network effects

6. the type and number of buyers

normal good

goods for which your demand increases when your income is higher

inferior goods

goods for which demand decreases as income increases

complementary goods

when the higher price of one good decreases demand for another, etc (hot dogs and hot dog buns)

substitute goods

Goods that can be used in place of each other. When the price of one good increases, demand for its substitute increases. If the price of coffee increases, consumers may switch to tea, increasing demand for tea.

distinction between movements along demand curve and shift of the curve itself

when the price changes, you are analyzing a movement along the demand curve. when other factors change, the demand curve may shift.

variable costs

costs of production that change depending on how much a firm produces.

• When production increases → total variable costs increase.

• When production decreases → total variable costs decrease.

• example: Raw materials: A bakery needs more flour and sugar to make more cakes.

fixed costs

costs that dont vary when you change the quantity of output you produce. example: Rent: A bakery pays $2,000 per month for its storefront, regardless of how many cakes it sells.

rational rule for sellers in competitive markets

sell one more unit if the price is greater than (or equal to) the marginal cost

market supply

the sum of the quantity supplied by each seller. illustrates the total quantity supplied by the market.

how to find total quantity supplied at a given price

add up the quantity supplied by each individual supplier

which way oes supply curve vs demand curve slope?

demand curve is downwards sloping, and supply curve is upwards sloping

which principle of economics relates to the shift of actual curves?

interdependence principle

why is the market curve upward sloping (2 reasons)

1) a higher price leads individual sellers to increase supply

2) a higher price means it’s more profitable to be a supplier —> a lower price means it’s less profitable

5 factors that shift supply curve

1) input prices

2) productivity and technology

3) prices of related outputs

4) expectations

5) the type and number of sellers

goal of demand

to maximize economic surplus: the difference between the benefit you get and the price you pay

the goal of supply

to maximize profits: the difference between your revenues and your costs

equilibirum

the point at which every seller who wants to sell an item at the current price can find a buyer, and every buyer who wants to buy at the current price can find a willing seller (where the curves cross)

how do shortage and surplus affect the price

shortage causes the price to rise, surplus causes the price to fall

GDP

stands for gross domestic product. the market value of all final goods and services produced within a country in a year.

how to calculate GDP

GDP = C + I + G + NX. (consumption + investment + gov purchases + net exports (imports-exports).

investment

spending on goods that will be used to produce other goods and services in the future. Business equipment:

examples:

• A bakery purchases a new oven to make more cakes.

• Factories and buildings: A company builds a new factory or warehouse.

• Machinery: A car manufacturer purchases new robots for its assembly line.

what does gdp miss

1) prices dont equate to values

2) leaves out nonmarket activities

3) shadow economy is missing

4) environmental degradation isn’t counted

5) leisure doesnt count

nominal GDP (and downside of it)

The total value of all final goods and services produced within a country, calculated using prices from the current year. Nominal GDP does not adjust for inflation.

Current Prices × Current Quantities

Real GDP

The total value of all final goods and services produced within a country, calculated using prices from a fixed base year.

Real GDP adjusts for inflation, allowing us to measure changes in actual production.

Base-Year Prices × Current Quantities

how to calculate growth rate

(new value - old value)/(old value) x 100

how to calculate the percent change in real gdp

percent change in nominal gdp - percent change in prices

working age population

The civilian noninstitutional population ages 16 and older, used for standard U.S. labor statistics

unemployed

A person who does not have a job, is available to work, and has actively looked for work in the past four weeks (or is on temporary layoff).

not in the labor force

People who are neither employed nor officially unemployed, such as retirees, full-time students who aren't working or seeking work, and people who have stopped looking for work.

labor force

empoyed + unemployed

unemployment rate

unemployed/labor force x 100

Labor Force Participation Rate

Employment-Population Ratio

frictional unemployment

Unemployment caused by the time it takes workers and employers to find a suitable match.

A college graduate searching for their first job.

structural unemployment

Unemployment caused by structural barriers or mismatches in the labor market that prevent available workers from obtaining jobs.

Workers unable to find jobs because their skills no longer match employers' needs, or because wages are held above equilibrium.

cyclical unemployment

Unemployment caused by a temporary downturn in economic activity.

A restaurant lays off employees because customers spend less during a recession.

equilibrium unemployment rate

The long-run unemployment rate toward which the economy tends to return. Your notes describe it as approximately 4–5%. It is not necessarily zero because workers are continually entering, leaving, and changing jobs.

inflation

A sustained increase in the overall price level of goods and services in an economy.

inflation rate

The percentage change in the overall price level over a period of time.

Consumer Price Index (CPI)

A measure of the cost of a fixed basket of goods and services purchased by a typical consumer, relative to its cost in a base year.

market basket

A collection of goods and services used to measure changes in consumer prices, such as food, housing, transportation, and clothing.

base year

The reference year used to compare prices over time. The CPI is set to 100 in the base year.

CPI calculations

(cost of basket in current year/cost of basket in base year) x 100

inflation rate calculation

adjusting prices for inflation calculation

real wage calculation

real interest rate calculation

nominal interest rate - inflation rate