ECON 104 (Exam 1)

Perfectly competitive market

A market in which there are many buyers and sellers, all the products are identical, and there are no barriers to new sellers entering the market.

Demand Schedule

A table showing the relationship between the price of a product and the quantity of the product demanded.

Quantity Demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Demand Curve

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Market Demand

The demand by all the consumers of a given good or service.

Law of Demand

The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Substitution Effect

The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.

Income Effect

The change in the quantity demanded of a good that results from the effect of a change in the good's price on consumers' purchasing power.

Ceteris paribus ("all else equal")

The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.

Normal Good

A good for which the demand increases as income rises and decreases as income falls.

Inferior Good

A good for which the demand increases as income falls and decreases as income rises.

Substitutes

Goods and services that can be used for the same purpose.

Complements

Goods and services that are used together.

Income, Price of Related Goods, Tastes, Population and Demographics, Expected Future Prices

5 things that shift market demand

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Supply Schedule

A table that shows the relationship between the price of a product and the quantity of the product supplied.

Supply Curve

A curve that shows the relationship between the price of a product and the quantity of the product supplied.

Law of supply

The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Price of Inputs, Technological Change, Price of Substitutes in production, Number of Firms, Expected Future Prices

5 things that shift supply

Market equilibrium

A situation in which quantity demanded equals quantity supplied.

Competitive market equilibrium

A market equilibrium with many buyers and many sellers.

Surplus

A situation in which the quantity supplied is greater than the quantity demanded.

Shortage

A situation in which the quantity demanded is greater than the quantity supplied.

Price ceiling

A legally determined maximum price that sellers may charge.

Price floor

A legally determined minimum price that sellers may receive.

Consumer surplus

The difference between the highest price a consumer is willing to pay and the price the consumer actually pays.

Marginal benefit

The additional benefit to a consumer from consuming one more unit of a good or service.

Marginal cost

The additional cost to a firm of producing one more unit of a good or service.

Producer surplus

The difference between the lowest price a firm would have been willing to accept and the price it actually receives.

Economic efficiency

A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production, and in which the sum of consumer surplus and producer surplus is at a maximum.

Black markets

A market in which buying and selling take place at prices that violate government price regulations.

Microeconomics

The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Business cycle

Alternating periods of economic expansion and economic recession.

Expansion

The period of a business cycle during which total production and total employment are increasing.

Recession

The period of a business cycle during which total production and total employment are decreasing.

Economic growth

The ability of an economy to produce increasing quantities of goods and services.

Inflation rate

The percentage increase in the price level from one year to the next.

Gross domestic product (GDP)

The market value of all final goods and services produced in a country during a period of time, typically one year.

Final good or service

A good or service purchased by a final user.

Intermediate good or service

A good or service that is an input into another good or service, such as a tire on a truck.

Transfer payments

Payments by the government to individuals for which the government does not receive a new good or service in return.

Consumption

Spending by households on goods and services, not including spending on new houses.

Investment

Spending by firms on new factories, office buildings, machinery, and additions to inventories, and spending by households on new houses.

Government purchases

Spending by federal, state, and local governments on goods and services.

Net exports

Exports minus imports.

Y = C + I + G + NX

Equation for GDP

Value added

The market value a firm adds to a product.

Household production

Refers to goods and services people produce for themselves.

Underground economy

Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.

Real GDP

The value of final goods and services evaluated at base-year prices.

Nominal GDP

The value of final goods and services evaluated at current-year prices.

Price level

A measure of the average prices of goods and services in the economy.

GDP deflator

A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100.

( Nominal GDP / Real GDP ) x 100

GDP Deflator Equation

P (current year) x Q (current year) =

Nominal GDP Equation

P (base year) x Q (current year)

Real GDP Equation

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

How to find % change in economic variables

Labor force

The sum of employed and unemployed workers in the economy.

Unemployment rate

The percentage of the labor force that is unemployed.

Discouraged workers

People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.

(Unemployed / # in Labor Force) x 100

Unemployment Rate Equation (u)

(Labor Force / Working Age Population)

Labor Force Participation Rate Equation

Working Age Population

Those 20 years and older

Frictional unemployment

Short-term unemployment that arises from the process of matching workers with jobs.

Structural unemployment

Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs.

Cyclical unemployment

Unemployment caused by a business cycle recession.

Natural rate of unemployment

The normal rate of unemployment, consisting of frictional unemployment plus structural unemployment.

Efficiency wage

A higher-than-market wage that a firm pays to increase worker productivity.

Inflation rate

The percentage increase in the price level from one year to the next.

Consumer price index (CPI)

An average of the prices of the goods and services purchased by the typical urban family of four.

Producer price index (PPI)

An average of the prices received by producers of goods and services at all stages of the production process.

Nominal interest rate

The stated interest rate on a loan.

Real interest rate

The nominal interest rate minus the inflation rate.

Deflation

A decline in the price level.

Nominal interest rate − Inflation rate

Real interest rate formula