Econ Test 1

What are the factors of production?

Land, Labor, Capital, Management

PPF stands for

Production Possibilities Frontier

PPF graph

Opportunity Cost

give up something to gain something else (a PPF movement)

Law of Demand

P↑ Q_D↓ (inverse relationship)

Demand Line

Normal goods

Y↑D↑ or Y↓D↓ (direct relationship)

Inferior goods

Y↑D↓ or Y↓D↑ (indirect relationship)

Substitute Products

indirect relationship:

P↑A D↑B or P↓A D↓B

think “if something happens to product A how will buyers either move away from or to product B”

Complementary Products

direct relationship

P↑A D↓B or P↓A D↑B

think “whatever happens to one will happen to the other”

Law of Supply

P↑ Q_S↑ (direct relationship)

With supply always think…

“the time to make money”

Supply line

Tax changes effect

Cost↑ then Profit↓ so S↓ OR Cost↓ then Profit↑ so S↑

What is a subsidy?

A subsidy is a financial assistance provided by the government to support a specific economic sector, business, or individual

Surplus and Shortage graph

shortage impact on price

P↑

surplus impact on price

P↓

market price < equilibrium price

shortage

market price > equilibrium price

surplus

market price=equilibrium price

equilibrium

price ceiling

maximum legal price

price floor

minimum legal price

price ceiling and floor graph

price ceiling causes…

black markets

to calculate surplus or shortage

Qs-Qd

price floor

eliminates monopolies

price ceiling and floor are ______ to real life

opposite: price ceiling is always below the equilibrium and price floor is above

NI and NP stand for

National Income and National Product

NP is

the total value of all goods and services produced in econ

Investments

add something new to the econ

Fixed investments

things that have been sold

Inventory investments

unsold and/or raw materials

Aggregate Supply (AS)

the total value of all g+s produced in econ

Aggregate Demand (AD)

the total value of all g+s that we plan to buy

AS doesn’t = AD because

we (as consumers) change our minds

AD>AS

shortage → inflation

AS>AD

surplus → recession

NI = (formula)

C + I + G + Ex + Im

Imports

outflow of money (we buy)

Exports

inflow of money (we sell)

Ex>Im

trade surplus

Ex<Im

trade deficit

Ex=Im

balanced trade

st $1

Ex↓(they buy less bc its more expensive) Im↑(we buy more bc it is cheaper)

wk $1

Ex↑ (they buy more bc cheaper) Im↓(we buy less bc its more expensive)

leakage/injection table

Leakage	Injection
S(avings)	I(nvestments)
NT	G(ov spending)
Im	Ex

AD>AS reactions:

P↑ (nom flow ↑ + real flow*) or

prodn↑ (nom flow↑ + real flow↑)

AS>AD reactions:

P↓ (nom flow↓ + real flow*) or

prodn↓ (nom flow↓ + real flow↓)

nominal flow is

the flow of money

real flow is

the flow of production

uii

unplanned inventory investment

AS=

AD±uii

uii>0

AS>AD = surplus

uii<0

AD>AS = shortage

uii=0

AD=AS = equilibrium

link b/t gov and RoW

Net Taxes, Gov. Purchases, Gov. borrowing

Transfer Payment (TP)

ss, welfare, unemployment, subsidies

eqn for national income

NI= C + I + G + net exports