Macro Test 1

Economy

area of the production, distribution, or trade and consumption of goods and services by different agents

incentive theory

people and organizations are responsive to to incentives

free market

free market systems can lead to a more efficient allocation of resources than a planned system

assumptions of the production possibility curve

one economy producing two goods, resources are scarce, all resources are being used

what does a linear ppf mean

opportunity cost is constant

How does an increase in the number of buyers affect the demand curve

demand increases - curve shifts right

How does an increase in income affect the demand curve for a normal good

demand increases - curve shifts right

How does an increase in income affect the demand curve for an inferior good

demand decreases - curve shifts left

How does an increase in the price of a related good affect the demand curve for a substitute good

demand increases - curve shifts right

How does an increase in the price of a related good affect the demand curve for a complimentary good

demand decreases - curve shifts left

How does an increase in preference of a good affect the demand curve

demand increases - curve shifts right

How does an expectation of a goods price to increase affect the demand curve

demand increases - curve shifts right

what is the difference between demand and quantity demand

quantity demanded is dependent on price and demand depends on all other factors

how does an increase in the number of sellers affect the supply curve

supply increases - curve shifts right

how does an increase in the cost of production affect the supply curve

supply decreases - curve shifts left

how does an improvement of technology affect the supply curve

supply increases - curve shifts right

how does an increase in the price of alternative goods affect the supply curve

supply decreases - curve shifts left

how does an expectation of prices to increase affect the supply curve

supply decreases - curve shifts left

what does it mean when Qs = Qd

market is at equilibrium

what does it mean when Qs < Qd

there is a surplus

what does it mean when Qd > Qs

there is a shortage

When does government create a price floor

when people are consuming too many demerit goods

what happens to supply and demand when there is a price floor

supply increases and demand decreases

when is a black market created

when there is disequilibrium caused by artificial forces (like government price floors and ceilings)

when is a price ceiling created

when government thinks consumers are under consuming a certain good

In the circular flow model, what are the factors of production

land, labor, capitol, entrepreneurial ability

In the circular flow model, what are the factors of payment

rent, wages, profit

what are the two key elements in the circular flow model

firms and households

GDP

gross domestic product - shows how an economy values goods

what is excluded from GDP calculations

illegal goods, goods not traded via market, intermediate goods (raw materials), second hand goods, foreign produced goods

What are the different ways to calculate GDP

income approach (value of payments to factors of production), value added approach (value of goods and services produced), expenditure approach (value of household expenditure on goods and services)

What is the formula for calculating GDP with the expenditure approach

GDP = (consumer expenditure) + (investment expenditure) + (gov expenditure) + (exports) - (imports)

what are the components of consumption

non-durables, durables, services

what are the components of investment

structures (residential and non-residential), equipment, and inventory

what are the component of government expenditures

federal, state, local purchases

Difference Between Nominal and real GDP

Nominal is calculated using price and quantity from the same year while real is calculated using quantity from current year and prices from base year

how to calculate GDP deflator

(current price)/(base year price)

what does it mean if GDP deflator is greater than 1

inflation

what does it mean if GDP deflator is less than one

deflation

what does it mean if GDP deflator = 1

no price change

limitations of GDP

does not calculate freedom, income distribution, environmental impacts, product quality, market bias (hard to compare between countries) non-marketable items, and social factors (like crime)

demands labor

firms

supplies labor

labor force

who makes up the labor force

individuals 16 years + who have the capacity and desire to work

Employed

individuals 16 years + who work at least 1 hr of the week, work at their own business during any time of the week, have a job but may not have worked during survey week

Unemployed

individuals 16 years + who do not have a job, have looked for a job in the past 4 weeks

Law of Demand in Labor Market

as real wage increases, demand from firms decreases

real wage

national average nominal wage rate/GDP deflator

Labor demand function shifters

technological changes, gov policies (like taxes), economic expectations

Law of supply in labor markets

as real wage increases, supply from labor force increases

labor supply curve shifters

number of potential workers and willingness to work

unemployment that exists at full employment

seasonal and frictional

Seasonal unemployment

seasonal workers (temporary unemployment)

frictional unemployment

people in between jobs (temporary unemployment)

Natural Unemployment

unemployment levels at full employment

Cyclical unemployment

victims of economic cycles (like closed businesses)

Structural unemployment

long term unemployment (when labor market is NOT at equilibrium)

reasons for labor market disequilibrium

minimum wage rates, labor unions and efficiency wages

labor force

unemployed and employed people

people not in the labor force

marginally attached, discouraged workers, institutionalized people, students, retirees

marginally attached

people who want jobs, are available for work, did not search for work in the past month but have in the past year

discouraged worker

marginally attached people who are not currently looking for work because they are frustrated with their inability to find work

Labor force participation rate

labor force/noninstitutionalized working age population

unemployment rate

unemployed/labor force

limitations of unemployment rate

does not factor in quality of work/people who want to work more, excludes discouraged workers