EC202 Exam 2

Market

group of buyers and sellers of a particular good or service

Competitive market

market with many buyers and sellers where each has negligible impact on price

Monopoly

one-seller market

Perfect competition

market with many buyers and many sellers

Quantity demanded

amount of a good buyers are willing and able to purchase

Law of demand

quantity demanded increases when price falls and decreases when price rises

Demand schedule

table showing relationship between price and quantity demanded

Demand curve

graph showing relationship between price and quantity demanded

Demand shifters

number of buyers, income, price of related goods, tastes, expectations

Quantity supplied

amount of a good sellers are willing to sell

Law of supply

quantity supplied increases when price rises and decreases when price falls

Supply schedule

table showing relationship between price and quantity supplied

Supply curve

graph showing relationship between price and quantity supplied

Supply shifters

input prices, technology, number of sellers, expectations

Surplus

quantity supplied greater than quantity demanded

Shortage

quantity demanded greater than quantity supplied

GDP

market value of all final goods and services produced in an economy in a given period

Final goods

goods sold to end users, not used for further production

Intermediate goods

goods used to produce other goods

Expenditure GDP

C + I + G + NX

Consumption (C)

spending by households on goods and services

Investment (I)

spending on capital goods, residential structures, inventory

Government spending (G)

spending by government on goods and services

Net exports (NX)

exports minus imports

Transfer payments

government payments not for goods/services (not in GDP)

Income GDP

wages + interest + rent + profit

Economic growth

increase in GDP

Recession

decline in GDP

Nominal GDP

GDP measured using current prices

Real GDP

GDP adjusted for inflation using base year prices

GDP deflator

(Nominal GDP / Real GDP) × 100

Inflation

general increase in prices

Deflation

general decrease in prices

Inflation rate

percentage change in price level

GDP per capita

GDP divided by population (standard of living measure)

CPI

measures cost of goods/services for a typical consumer

CPI formula

(current basket price / base year basket price) × 100

Core CPI

CPI excluding food and energy

PPI

measures cost of goods/services for producers

Substitution bias

CPI doesn’t account for consumers switching goods

New product bias

CPI doesn’t account for new goods

Quality bias

CPI doesn’t fully reflect quality improvements

Real interest rate

nominal interest rate minus inflation rate

Indexation

adjusting values for inflation automatically

Cost of living allowance (COLA)

income adjustment based on CPI

Labor force

employed + unemployed

Unemployed

people actively seeking work but not employed

Unemployment rate

(U / labor force) × 100

Labor force participation rate

(labor force / adult population) × 100

Structural unemployment

job loss due to economic changes

Frictional unemployment

short-term unemployment while searching for jobs

Cyclical unemployment

unemployment due to business cycle

Natural rate of unemployment

structural + frictional unemployment

Business cycle

economic expansions and contractions over time

Consumer surplus

willingness to pay minus actual price paid

Producer surplus

price received minus cost

Deadweight loss

loss of economic efficiency due to market distortion

Efficiency

maximizing total surplus

Fiscal policy

government taxing, spending, and borrowing

Budget deficit

annual shortfall of government spending vs revenue

National debt

accumulation of past deficits

Tax incidence

burden of a tax shared by buyers and sellers

Externality

uncompensated benefit or cost affecting a third party

Positive externality

benefit to others (e.g. education)

Coase theorem

private parties can solve externalities if rights are defined and costs are low

Public goods

non-rival and non-excludable goods

Non-rival

one person’s use doesn’t reduce another’s

Non-excludable

cannot prevent non-payers from using

Free rider

someone who benefits without paying

Tragedy of the commons

overuse of shared resources

Financial intermediation

linking borrowers and lenders

Commercial banks

take deposits and make loans

Investment banks

engage in trading and underwriting

Bond

promise to repay borrowed money with interest

Face value

value of bond at maturity

Coupon payment

periodic interest payment

Yield

coupon payment divided by price

Bond price-yield relationship

inverse (when price rises, yield falls

Crowding out

government borrowing reduces private investment

Risk-return tradeoff

higher risk leads to higher expected return

Efficient market hypothesis

prices reflect all available information

Compounding

growing money over time ((1+r)^N × amount)

Discounting

finding present value (amount / (1+r)^t)