econ final

PED

percentage change in quantity / percentage change in price

midpoint PED

q2-q1/(q2+q1/2)/p2-p1/(p2+p1/2)

categories PED

inelastic = value between 0 and 1 change is unresponsive p to d
elastic = value of more than 1 percentage change q > percentage change p
unit elastic = value of 1 percentage change q = percentage change p
perfectly elastic = infinity
perfectly inelastic = 0

elastic

increase P decrease Q and TR
decrease P increase Q and TR

inelastic

increase P increase Q and TR
decrease P decrease Q and TR

factors influencing PED

availability substitutes
adjustment period
share of customer's budget spent on good

PES

percentage change in quantity supplied/percentage change in price

PES midpoint

Qs2 - Qs1/ (Qs2+Qs1/2)/ P2-P1/(P2+P1/2)

constant elasticity supply curve

price elasticity remains same along the supply curve

perfectly elastic supply curve

any change in p will result in infinite changes of q

perfectly inelastic supply curve

percentage change in P = percentage change in Qs

unit elastic supply curve

q changes proportionally to p

determinants PES

adjustment period

IED

how responsive demand is to change in customer income

normal good

IED +

IED > 1

luxury

IED < 1

necessity

CPED

responsiveness of demand in demand for one good in price of other good

CPED formula

%△d one good/ %△ p other good

substitutes

increase in P of one good leads to increase in Q of other good

complements

increase in P of one good leads to decrease in Q of other good

accounting profit formula

TR - explicit costs

economic profit formula

total revenue - explicit costs - implicit costs

explicit cost

actual cash payments for resources

implicit cost

opportunity costs of using resources owned by firms or provided by firms owners

fixed cost

does not vary with change in output rate

variable cost

vary with change in output rate

law of diminishing marginal returns

adding an additional factor of production results in smaller increases in output

marginal output increase

increase marginal returns

marginal product rise

total product increase

marginal product falls but still is positive

increase by decreasing amounts

marginal product = 0

total product is at max

marginal product is negative

total product is falling

cost formulas

TC = FC + VC
MC = △TC/ △q
AVC = VC/ q
ATC = TC/ q

Relationship Between Marginal Cost and Average Cost

If the AC falls due to increase in the output, the MC is less than the AC
If the AC rises due to increase in the output, the MC is more than the AC

why are cost curves u-shaped

because of law of variable proportion (when quantity of one factor of production increased while keeping all other factors constant, result in decline of marginal product of factor)

golden rule profit max

to produce at a level where marginal revenue = marginal cost to be most profitable

economies scale

cost advantage experienced by firm when it increases unit of output

diseconomies of scale

company grows so large that unit cost increase

long run cost curve

shows lowest possible cost of prod

minimum efficient scale

when unit cost is at its lowest possible point while company is producing good effectively

GDP

measure total value of all goods and services produced in a country's border usually within a year

nominal GDP

does not take into account inflation so does not show true growth of econ

real GDP

takes into consideration changes in prices of goods and services over time so shows true growth econ

why do we use real GDP to calculate econ growth

gives accurate picture of how econ is growing

limitations of national income accounting

Ignore underground econ, quality of life indicators and exclude informal sector

CPI

(cost of market basket in given year/ cost of market basket in base year) x 100

why is PPI considered early indicator of inflation

measures price changes before it reaches consumers

what is GDP deflator

Measures changes in price of goods and services produced in USA including those exported to other countries

GDPPI

GDP = consumption + investment + gov spending + net exports

demand pull inflation

happens when demand for goods and service exceed supply in econ

cost-push inflation

happens when overall prices rises due to increase in prod costs

effects on unanticipated inflation

Redistribution of income and wealth
Uncertainty and risk
Menu costs
Distortion of relative price
Financial market volatility

limitations of using CPI to measure inflation

Does not measure price changes in regional, remote or rural areas and does not take into account the difference of spending patterns

adult population

individuals part of the labour force as well as individuals not part of the labour force these individuals need to be civilian, non-institutional, and 16 years or older

labour force formulas

labour force = employed +unemployed
LBFR = labour force / adult pop x 100
Unemployment rate = unemployed / labour force x 100

different sources unemployment

Frictional, structural, seasonal, cyclical, natural

natural rate unemployment

Unemployment rate when econ produce full employment real output

full employment

No cyclical unemployment and GDP is at potential

problems with official unemployment rate

does not consider the quality of job workers have

types of workers

Marginally attached workers - unemployed not working or looking for job but want one and have looked for one in past 12 months
Discouraged Workers - given up looking for job and left labour market
Underemployed workers - not working full time

unemployment benefits

financial assistance, job search supports

over employment

demand for labour in country exceeds supply

shadow econ

illegal economy

u-6 measure unemployment

U-3 rate of unemployment + Marginally attached workers

spending is higher than real GDP

Firms increase output GDP rise

spending is lower than real GDP

firm reduce output GDP falls

why is AD curve slopping downward

Because of wealth effect - price level falls the real value of money increase,
interest rate effect - price levels falls people so prices are lower and international
trade effect - domestic price level falls relative to foreign price level increase ag demand

what cause shift in AD curve

Consumption spending gov spending and exports - imports

why does SRAS slope upward

Because wages and resource prices are not flexible (sticky)

How does an economy close an expansionary gap?

Increase gov spending or decrease tax

How does an economy close a recessionary gap?

When real wages return to equilibrium and quantity labour = quantity supplied

What is an Automatic Stabiliser?

Feature of econ system that will adjust gov spending and taxation in response to changes in economic activity

What are the discretionary fiscal policy tools?

Changing tax or gov spending

What are the three functions of money?

Store of value, unit of account, medium of exchange

What are the ideal properties of money?

Divisibility, durability, portability

Narrow definition of Money [M1]

category money supply that includes all real money held by central bank

Broader definition of Money [M2]

category money that includes cash, checking deposits

What are the Fed's Tools of Monetary control?

Open market operations, discount rate and reserve equipments

How does the Fed close an expansionary gap?

By decreasing supply money

how does the Fed close a recessionary gap?

Reducing interest rates