Macro Review

Profit formula

total revenue(PxQ)-total costs(fixed costs + variable costs)

Fixed cost

costs of running a business that DOESNT change as a function of quantity sold

Variable costs

cost of running a business that DOES change as a function of quantity sold.

Discount rate

interest rate the central bank charges borrowers like commercial banks which then affect the i.r banks then charge borrowers.

Reserve requirements

amount of $ the central bank requires banks to hold onto (in reserve)

Open market operations to decrease MS

Sell securities

open market operations to increase MS

Buy securities

Discount rate: to decrease MS

increase the discount rate

Discount rate: to increase MS

decrease discount rate

RR: to decrease MS

increase the RR

RR: to increase MS

Decrease the RR

Fiscal policy

Gov.

Monetary policy

Nations central bank

What happens when the central bank reduces the i.r

It’ll make borrowing $ cheaper, in turn stimulating growth when in a contractionary phase. They reduced the i.r using an expansionary monetary policy.

What happens when the central bank increases the i.r

It’ll make borrowing $ more expensive and therefore spending $ less attractive to people. They increased the i.r using a contractionary monetary policy.

Cost benefit principle

Evaluate benefits and costs of any choice and and only pursuing the choice that yields benefits at least as large as the cost.

Opportunity cost principle

True cost of something is the most valuable alternative you must give up to get it.

Marginal principle

Break “how many” decisions down into a series of smaller, marginal decisions. Ask yourself “one more?” as if questioning if you should hire one more worker.

Interdependence principle

To understand the consequences of your decisions of your decisions, you must take account of how decisions depend on the choices of other people, how a decision in one market depends on other markets, and how todays decisions depend on past and future decisions.

Economic Surplus

Total benefits minus total costs flowing from a decision

Sunk costs

costs you’ve already incurred that can’t be reversed. Since you already made the choices and they can’t be reversed you’ve incurred them regardless of what future decisions you’ve made.

Equi-marginal rule

if something is worth doing, keep doing it until your marginal benefits=your marginal costs. Your economic surplus is maximized when marginal benefit=marginal cost.