econ exam 1

Ten Principes

Principle 1: People face tradeoffs

Principle 2: The cost of something what you give up getting it

Principle 3: Rational people think at the margin

Principle 4: People respond to incentives

Principle 5: Trade can make everyone better off

Principle 6: Markets are usually a good way to organize economic

Principle 7: Government can sometimes improve market outcomes

Principle 8: A country's standard of living depends on its ability to produce goods and services

Principle 9: Prices rise when government prints too much money

Principle 10: Society faces a short-run trade off between inflation and unemployment

First 4 principles have to do with what?

How people make descisions

What do the last 4 principles have to do with?

Productivity are the ultimate source of living

Scarcity

The limited nature of society's resources

Economics

The study of how society manages its scarce resources

The economist plays 2 roles

Scientist: Trying to explain the world

Policy Advisers: Trying to improve the world

Circular-flow diagram is what?

A visual model of the economy, slows how dollars and goods and services flow through markets among households and firms

Factors of production are defined as? and what are some examples?

the resources the economy uses to produce goods and services including

1. Labor

2. Land

3. Capital (buildings and machines used in production)

Households in the circular-flow diagram do what?

1. Own the factors of production, sell/rent them to firms for income

2. Buy and consume goods and services

Firms in the circular-flow diagram do what?

1. Buy/hire factors of production, use them to produce goods and services

2. Sell goods and services for wages, rent, and profit

PPF is a graph that...

shows the combinations of two goods the economy can possibly produce given the available resources and the available technology

When a PPF has a lower slope it has a...

lower opportunity cost

Market is a.

group of buyers and sellers

Buyer behavior: Demand

1. Quantity demanded of any good is the amount of the good that buyers are willing and able to purchase

2. Law of demand: claim that the quantity demanded of a good falls when the price of the good rises, other things equal

3. Pay attention to the difference between a change in quantity demanded and a change in demand

Demand schedule

Table that shows the relationship between the price of a good and the quantity demanded

Economy

okimonos "one who manages a household"

Efficiency

That society is getting the maximum benefits from its scarce resources

Equality

Those benefits referenced in efficiency are distributed uniformly among society's members

Rational People when thinking at the margin...

systematically and purposefully do the best they can to achieve their objectives, given the available opportunities

Marginal change

to describe a small incremental adjustment to an existing plan of action

Sam Peltzman is...

an economist that concluded the net result is little change in number of driver deaths and an increase in the number of pedestrian deaths.

Demand curve

a graph of the relationship between the price of a good and the quantity demanded

i) Increase in demand: demand curve shifts to the right

ii) Decrease in demand: demand curve shifts to the left

Normal good:

increase in income leads to an increase in demand

Inferior good:

increase in income leads to a decrease in demand

Substitutes:

Increase in price of one good leads to an increase in demand for the other

Complements

Increase in price of one good leads to decrease in demand for the other

Quantity Supplied

amount of a good that sellers are willing and able to sell

Law of supply

claim that the quantity supplied of a good rises when the price of the good rises

Supply curve

graph of the relationship between price of a good and the quantity supplied

i) Increase in supply: shifts the supply curve to the right

ii) Decrease in supply: shifts the supply curve to the left

Equilibrium

situation when market price has reached level at which quantity supplied = quantity demanded

Equilibrium price

price at this intersection between supply and demand

Law of supply and demand

claim price of a good adjusts to bring the quantity supplied and demanded for that good into balance

Price ceiling

A legal maximum on the price at which a good can be sold

Price floor

A legal minimum on the price at which a good can be sold

Tax incidence

The manner in which the burden of a tax is shared among participants in a market

GDP

measures the total income of everyone in the economy & the total expenditure on the economy's output of goods and services.

i. Definition: market value of all final goods and services produced within a country in a given period of time

Substitution bias

consumers substitute toward goods that have become relatively less expensive

Introduction of New Goods

B/c CPI is based on a fixed basket of goods and services, does not reflect the increase in the value of the dollar that arises from the introduction of new goods.

GDP deflator

the ratio of nominal GDP to real GDP

Indexation

the automatic correction by law or contract of a dollar amount for the effects of inflation

Nominal interest rate

change in dollar amound

Real interest rate

interest rate corrected for inflation

Consumer Price Index

measure of overall cost of the goods and services bought by a typical customer

How to calculate Inflation Rate:

CPI in yr 2 - CPI in yr 1 / CPI in yr 1 * 100

How to calculate CPI:

Price of basket of goods and services in current year / price of basket in base year * 100

GDP measures value of production within country limits. True/False

True

A Canadian citizen working in the US does not contribute to the US GDP. True/False

False

How to calculate GDP deflator

Nominal/Real Multiplied by 100

Private saving formula

Private saving = Income(Y) - Taxes(T) - Consumption(C)

Public saving formula

Public saving = Taxes(T) - Government spending(G)

National saving formula

National saving = Private saving + public saving

Real interest rate formula

Real interest rate = Nominal interest rate - inflation

Nominal interest rate formula

Nominal interest rate = Real interest rate + inflation rate

After tax nominal interest rate formula

After tax nominal interest rate = Nominal interest rate * (1- tax rate)

After tax real interest rate formula

After tax real interest rate = After tax nominal interest rate - Inflation

Velocity

M * V = P * Y or V = P * Y/M

Utility

Pleasure or satisfaction obtained from consuming a good or service

Economizing Problem

Wants exceed means

Economizing Problem

Limited resources vs. unlimited wants

Individuals Economizing Problem

Budget Line

Society's Economizing Problem

Production Possibilities Frontier (PPF):

Factors of production

the resources the economy uses to produce goods & services, including labor, land, capital

Inverse Relationship (negative)

Variables move in opposite directions (negative)

Direct Relationship (positive)

Both variables move in the same direction (positive)

Equation of a Line

y = a + bx

y

Equation of a Line:

the variable on the vertical axis

a

Equation of a Line:

the vertical intercept

b

Equation of a Line:

the slope of the line

x

Equation of a Line:

the variable on the horizontal axis

Infinite Slop

Straight Up

Slope

rise/run (△x/△y)

Vertical Intercept

when x=0, point where line crosses/touches vertical axis

Centeris Paribus

Assumption that all other variables are constant

Opportunity Cost

whatever must be given up to obtain it