ECO2013 hammock FSU final

Scarcity

lack of something

choice

Scarcity implies ________

Opportunity cost

the value of the best thing we give up to get something

Rational self interest

assume people are rationally self interested; false but useful

Positive economics

describes the way the world actually is

Normative economics

describes the way the world should be

Production possibilities frontier

graph that shows the combination of output that the economy can possibly reduce given the available factors of production and the available production technology; demonstrate that tradeoffs exist and resources can be used efficiently or wastefully

Simple trade

voluntary exchange creates value

The law of demand

- As price increases, the quantity demand decreases

- As price decreases, the quantity demand increases

Marginal value (your willingness to pay for an additional good)

What does the height of the demand curve represent?

Diminishing marginal utility

decreasing satisfaction / usefulness as additional units of a product are acquired

Consumer surplus

the difference between the highest price a consumer is willing to pay for a good/service and the actual price the consumer pays (related to demand curve)

Changes in:

- the time of year

- quality of product

- income

- prices of subsidies

- complements, expectations, or tastes/preferences

What shifts the demand curve?

to the right

How does the demand curve shift when theres an increase in demand

to the left

How does the demand curve shift when theres a decrease in demand?

Law of supply

- As price increases, the quantity supplied increases

- As price decreases, the quantity supplied decreases

the marginal cost of producing an additional unit of output

What does the height of the supply curve represent

Producer surplus

difference between how much a producer is paid to produce one unit of output (the price) and the marginal cost of producing that unit of output

- input costs

- changes in technology

- expectations

- taxes/regulations

- firms enter/exit the market

- natural disasters

What shifts the supply curve?

Total surplus

consumer surplus + producer surplus

Equilibrium

where supply and demand meet

Efficiency

there is no reallocation of goods/resources that has benefits greater than costs; theres no way to make total surplus bigger

- total surplus is maximized

- marginal benefits = marginal costs

- every unit produced has a benefit to consumers that is greater than or equal to the cost of production

If equilibrium is efficient:

either price OR quantity will be indeterminate (but not both)

If supply and demand both shift, then:

supply/demand is inelastic (steep curve)

If the quantity demanded does not change much when the price changes, then:

supply/demand is elastic (more flat curve)

If quantity demanded does not change a lot when price changes, then:

Price controls

legal restrictions on what prices can be charged; generally inefficient

Price ceiling

legal maximum price

Non binding price ceiling

Price ceiling above equilibrium

Price floor

legal minimum price

Nonbinding price floor

price floor below equilibrium

shortage

Binding price ceiling causes a:

surplus

Binding price floor causes a:

Deadweight loss

the burden of a tax

the relative elasticities of supply and demand, NOT its legal assignment

What determines the burden of a tax

Monopoly

lack of competition; one seller

Public goods

a good that is non rivalrous and non excludable (ex: light from a lighthouse)

Negative externalities

the costs of an action of a third party (ex: pollution)

Tragedy of the commons

the overuse of common, publicly owned resources (ex: fisheries in international waters)

Tragedy of the anticommons

there are too many people with property rights to stop people from using a resource (ex: Russian shopping malls)

Public interest view of government

democratic governments effectively combine the preferences of the people and implement beneficial policy

Public choice view of government

democratic governments are made up of people who make decisions based on their self interest and incentives created by the political system

Rational ignorance

voters tend to be poorly informed; information is costly and benefits are low

Rational abstention

voters rationally abstain from voting

The special interest effect

when a concentrated group gets the policy it wants at the cost of a larger group (ex: NRA vs. gun control advocates)

A _____ is an amount.

A _____ is a change in an amount.

stock; flow

Gross domestic product (GDP)

- the market value of all final goods and services produced within a country (or other geographic area) within a year (or other time period)

- a measure of total production

Market value (GDP)

price X quantity of final goods

Final goods

goods that have reached the last buyers as a new good

Intermediate goods

goods in the production process, have not reached the consumer yet

Circular flow diagram

The expenditure approach

Y=C+I+G+NX

- y= GDP

- c= consumption spending

- i= investment spending

- g= government spending

- nx= exports - imports

The income approach

add up all spending

Per capita GDP

GDP divided by the total population

Problems with GDP

- non market production

- black/grey market production

- leisure/job quality are not counted

- product quality and new goods not reflected in GDP

- GDP can rise after bad events

- does not illustrate income inequality, poverty, etc

Price level

the overall level of prices of goods and services in an economy; measured with GDP deflator and consumer price index (CPI)

Inflation

an increase in the price level

Deflation

decrease in the price level

Disinflation

decrease in the rate of inflation

Nominal GDP

GDP calculated using prices and quantities from the current year

Real GDP

GDP calculated using prices from a base year and quantity from some other year of interest

GDP deflator

(Nominal GDP/Real GDP)x100

Consumer price index (CPI)

tracks the cost of an ordinary consumers typical prices over time

Inflation rate

[(New CPI-Old CPI)/(Old CPI)] x 100%

New price using CPI/GDP deflator

Old price X (new CPI/old CPI)

Old price using CPI/GDP deflator

New price X (old CPI/new CPI)

The business cycle

Categories for thinking about labor/employment

Total US population > adult non-institutionalized civilian population (16+) > labor force > employed and unemployed

Labor force participation rate

(Labor force/ adult non-institutionalized civilian population) X 100%

Unemployment rate

(unemployed/labor force) X 100%

Employed

- worked for pay

worked without pay in a family business

- have a job but are temporarily laid off

Unemployed

- don't have a job and are available for work

- have looked for a job in the last 4 weeks

Problems with the unemployment rate

- discouraged workers (wants jobs but have given up on looking)

- underemployment (people working part time but don't want to work full time)

Frictional unemployment

ordinary, temporary, caused by equal quitting or firing

Structural unemployment

- caused by mismatch between worker skills and employer needs

- there is some market structure that prevents hiring

Seasonal unemployment

caused by regular seasonal events

Cyclical unemployment

caused by recessions

Natural rate of unemployment

- when the economy is growing normally

- frictional + structural

Full employment

The rate of employment when employment is at its natural rate

Potential GDP

the value of outputs when we are at full employment

Menu costs

cost of changing prices (associated with anticipated inflation)

Shoe leather costs

people living with high inflation suffer the inconvenience of frequent bank trips (associated with anticipated inflation)

Unanticipated inflation causes

- people use resources to shield themselves from inflation

- relative prices to shift unpredictably bc higher inflation is more variable

Fancy circular flow model

- only includes money

- only leaking out (taxes, saving, imports)

- money coming in (government spending, business borrowing, exports)

Loanable funds market

Fishers equation definition

determines the relationship between nominal and real interest rates under the effect of inflation

Fishers equation

i=r+pi

I= nominal interest rate

r= real interest rate

pi= inflation premium

Foreign exchange market

market in which people trade currencies

2 ways money leaves the US

- imports

- capital outflowing (buying foreign assets)

2 ways money enters the US

- exports

- capital inflow (foreigners buy our assets)

Appreciation

when the dollar can buy more foreign currency

Depreciation

when the dollar buys less foreign currency

Exports - imports =

Capital Outflow - Capital Inflow

Trade deficit

- amount by which the cost of a countries imports exceeds the value of its exports

- imports > exports

- 0 > net exports

Trade surplus

- amount by which the value of a countries exports exceeds the cost of its imports

- exports > imports

- net exports > 0

3 uses of money

- medium of exchange

- unit of account

- store of value

Liquidity

how close something is to spendable money

Fiat money

paper money, usually issued by governments

Commodity money

money based on a traded commodity with intrinsic value (ex: gold, silver)

Money supply

how much money is there