Macro unit 1-3

Factors of production

1. Land
   2. Labor
   3. Physical Capital
   4. Entrepreneurship

PPC

production probabilities curve; max combos of 2 different goods that can be produced with fixed resources

what does a straight ppc instead of a curved one mean?

the products adapt to each other

absolute advantage

the ability of an individual or group to carry out a particular economic activity more efficiently than another individual or group.
produce more or using fewer resources

comparative advantage

produce at lower opportunity cost

input opportunity cost

the amount of one good that must be forgone to produce an additional unit of another good.
“it over”

output opportunity cost

the amount of output lost from producing an additional unit of a different good.
“other over”

Demand shifters

1. Tastes & preferences

2. Market size

3. Prices of related goods

4. Changes in income

5. expectation

price changes…

quantity, not demand

Prices of related goods types

substitudes and complements

changes in income

normal goods - people income rise, demand rise

inferior goods - income rise, so demand dec (ex: instant noodles)

product market

• businesses r providing households with goods and resources

• households are providing money to those businesses in the form of sales

factor market

• resources (land labor capital entrepren) r going from households to the businesses

• businesses provide households with wages, rent, internet, and profit

GDP + ways to calculate

Gross Domestic Product

Total value of all final goods and services produced within a country in a calendar year

-value added approach (adds contrib a countrys firms make to the final goods… ex. get for $8 sell for $15)

-income approach (rent, wages, interest, and profit with some adjustments)

-OUTPUT EXPENDITURE MODEL

Output Expenditure Model

look at sales that are in the product market —money that goes from households to businesses

C+I+G+Xn

C= Consumption ; I= Gross Investment (bus); G=Gov purchases; Xn = Net Exports (Exports - imports)

Per capita GDP

GDP divided by the pop of a country

used to determine a country’s standard of living

Unemployment rate formula

(Unemployed/Labor Force) x 100

Labor force formula

unemployed +employed

labor force participation rate formula

(Labor Force/Working age civilian pop) x 100

types of unemployment

• frictional - in btwn jobs or looking for first

• structural - changes in econ led to skills mismatch

• cyclical - caused by overall economic downturn

NRU

natural rate of unemployment = frictional + structural

zero cyclical unemployment

CPI

tracks price changes in a market basket of products

(calc inflation)

GDP Deflator

tracks price changes in all products

first calculate nominal gdp (value of current year’s goods using current year’s prices so q x p )

(nominal/real) x 100

spending multiplier

formula to find out how much money the initial change in consumption can impact GDP

1/MPS or 1/(1-MPC)

ex: initial cost = $800

MPS = 0.2 so 1/0.2 =5 so

there is up to $4000 inc in GDP

tax multiplier

when the gov inc or dec taxes, and it changes the amount of disposable income consumers have

-MPC/MPS or -MPC/(1-MPC)

-0.8/0.2 = -4

10 million tax dec in taxes —> $40 million GDP inc

aggregate demand

the demand for all goods and services in the economy

reasons for downward sloping aggregate demand

1. Wealth Effect (as prices fall, real wealth is inc —> cons inc consuming)

2. interest rate effect (as price levels fall interest rates also fall—> gross investment inc)

3. Net Exports Effect (lower price levels exports are cheaper for foregin countries—>exports will inc)

AGGREGATE DEMAND SHIFTERS

1. Consumer Spending

2. Gross Investment

3. Government Purchases

4. Net Exports

C + I + G + Xn

AGGREGATE SUPPLY SHIFTERS

1. Resource Prices (wages)

2. Productivity

3. Inflation Expectations

4. Business Taxes

5. Business Regulations

LRAS

long run aggregate supply

in the long run wages are flexible

LRAS SHIFTERS

1. Quantity of resources

2. Quality of resources

3. Productivity

4. Technology

Anything that shifts the PPC will shift the LRAS

Expansionary fiscal policy

fight unemployment by: inc gov spending and/or dec taxes

inc budget deficit or dec surplus

Contractionary Fiscal Policy

Fight Inflation By: Dec gov spending and/or inc taxes

dec budget deficit or inc surplus