Econ 1 Test 2 Terms

Price Ceilings

Represent a government imposed legal maximum price. Imposed below equilibrium price. Cause sustainable shortages.

Shortage

When the quantity demanded is greater than the quantity supplied at a given price.

Price Floors

Represent government imposed legal minimum price. Imposed above equilibrium price. Cause sustainable surpluses.

Surplus

When the quantity supplied is greater than the quantity demanded at a given price.

Inventory

The raw materials to produce goods or the stock of finished goods that are ready to be sold

Elasticity

Measures the responsiveness to some change

Price Elasticity

Calculates the percentage by which the quantity changes when there is a percentage change in price.

Elastic Goods

Goods with many substitutes. Decrease in supply with a relatively elastic (gradual sloped) demanded curve. Change in price and quantity are similar.

Inelastic Goods

Goods with few substitutes. Decrease in supply with a relatively inelastic (steeper sloped) demanded curve. Change in price is greater than change in the quantity demanded.

Price Elasticity of Demand

Absolute value of the percentage change in the quantity demanded divided by the percentage change in price.

Price Elasticity of Demand Equation

|change in quantity demanded % / change in price %|

Direct Tax

Tax paid directly to government. Ex) income tax

Indirect Tax

Tax that is not paid directly to government. Ex) sales tax

Tax Incidence

Indicates how the burden of an indirect tax is paid. How the tax is divided between buyer and seller.

Deadweight Loss

Mutally advantageous activity foregone by consumers and producers, because of tax. Occurs any time the government moves the price away from the amrket equilibrium price.

Public Goods

Non-excludable and non-rival goods or services. You cannot be denied these goods.

Transfer Payments

Redistribution of income by the government from the private sector to the public sector. Ex) Pell grants

Circular Flow Model

Tool used to show all the parts of an economy and their connections together in one diagram.

Goods and Services Market (O)

Intermediary between households who buy outputs and firms that supply these goods and services. Also known as Products Market, and Output Market.

Consumption (C)

The purchase of consumer goods and services by households.

The Resource Market (R)

Intermediary between firms who demand the usage of resources, and households who supply productive inputs. Also known as Factor Markets, Inputs market

The Financial Market (LF)

Intermediary between households that save and firms that borrow to invest. Also known as Loanable Funds Market, Banking Market

Saving (S)

Deferred consumption

Investment (I)

The addition to capital. Investments are firms purchases of capital goods in the outputs market.

Fiscal Policy

How a government collects and spends tax revenues. Three primary expenditures: transfer payments, purchases on the goods and services market, and financing of government debt.

Government (G)

Government purchases are the expenditures on private sector goods and services in the economy.

Trade Policy

Any law or rule affecting tariffs, barriers, or quotas.

Foreign Exchange Market (FE)

Intermediary between importers and exporters who wish to buy and sell goods and services.

General Equilibrium

GE states that in an economy with multiple markets, demand and supply from each market is related to another, thereby arriving at corresponding equilibrium prices.

Stock

Amount of money that circulates within an economy at a specific time.

Flow

Velocity of the money stock. Average number of times a unit of funds is passed between parties in an economy at a specific time.

Leakage

Any part of income that is not used for domestic consumption. Savings, taxes, and imports by households all represent leakages to the circular flow.

Injection

Purchases in the outputs market that do not come directly from household consumption. Investment, government purchases, and exports are all injections into the economy.

Net Exports (NX)

Exports minus imports

Capital Inflows

Funds that travel from financial markets abroad through the foreign exchange market and go directly to the domestic loanable funds market

Capital Outflows

Funds that move from the domestic loanable funds market and travel through the foreign exchange market and go directly to financial markets abroad.

Inflation

Increase in general level of price or a decrease in the purchasing power of money. Result of too much demand or not enough supply.

Consumer Price Index

Average price of a market basket of goods and services purchased by the average household.

Inflation Rate Equation

[(CPI2 - CPI1)/CPI1] x 100

Consumer Price Index Equation

(Price of the Market Basket for a given year/ Price of Market Basket for the base year) x 100

Business Cycle Model

Scatter plot model that depicts fluctuations of GDP after it has been adjusted for inflation

Real

Any statistic which has been adjusted for inflation

Expansion

Period in which RGDP is rising

Expansion Cycle

Increase in output, resource demand, incomes, consumption, demand pull inflation, investments, interest and decrease in transfer payments.

Peak

Temporary maximum of RGDP

Contraction

Period in which RGDP is falling

Contraction Cycle

Decrease in output, resource demand, incomes, consumption, demand pull inflation, investments, interest, increase in transfer payments

Trough

Temporary minimum of RGDP

Natural Rate of Output

Potential long run GDP of an economy

Labor Market

Intermediary between firms who demand labor services and households who supply this factor of production

Labor Force Equation

Unemployed Workers + Employed Workers

Unemployment Rate Equation

(Unemployed Workers/Labor Force) x 100

Frictional Unemployment (Fu)

Occurs because of the information required and time it takes for capable workers seeking employment.

Structural Unemployment (Su)

Occurs when the qualifications of the available workers do not match the requirements needed for unemployment.

Natural rate of Unemployment (u_N)

Sum of frictional and structural unemployment in an economy. Also known as full employment.

Cyclical Unemployment (Cu)

Any difference between the actual unemployment rate (as calculated by the BLS) and the natural unemployment rate (as determined by the economics community)

Cyclical Unemployment Equation

u - u_N = Cu

Demand Pull Inflation

Cause and result of anticipated inflation

Cost Pull Inflation

Cause and result of unanticipated inflation