Economics Review Flashcards

Government Interference

  • Price Ceilings:
    • The maximum amount one can charge for a product.
    • Intentional disruption to market equilibrium.
    • Can result in a shortage.
    • Depicted graphically (graph on the left).
  • Price Floors:
    • The minimum amount one can charge for a product.
    • The government will not allow prices to go below the floor.
    • Intentional disruption to market equilibrium.
    • Can result in a surplus.
    • Example: Minimum wage.
    • Depicted graphically (graph on the right).
  • Rationale:
    • Price ceilings and floors are implemented for equity reasons (to ensure fairness).

Demand Curve Changes

  • Change in Quantity Demanded:
    • Results from a change in the price of the product ONLY.
    • Movement along the demand curve.
  • Change in Demand:
    • A shift of the entire demand curve (AD).
    • Results from a change in any factor other than price.
    • Reflects a change in the quantity that people plan to buy.
    • Example: Stanley becoming popular shifts demand (Lead & Lead).

Factors Impacting Demand

  • Prices of related goods:
    • Complements: Goods often consumed together.
    • Substitutes: Goods that can be used in place of each other.
  • Expected future prices.
  • Income:
    • Normal goods: Demand increases with income.
    • Inferior goods: Demand decreases with income (e.g., off-brand products).
  • Number of buyers:
    • Example: Snowmobiles, college students.
  • Preferences:
    • Example: Fidget spinners.

Supply

  • Represented by supply schedules and supply curves.
  • Positive slope.
  • Reflects the entire market.

Supply Curve Changes

  • Change in Quantity Supplied:
    • Results from a change in the price of the product ONLY.
    • Movement along the supply curve.
  • Change in Supply:
    • A shift of the entire supply curve.
    • Results from a change in any factor other than price.
    • Reflects a change in the quantity that people plan to sell.

Trade and GDP

  • Trade Deficit:
    • Occurs when a country imports more than it exports.
  • Gross Domestic Product (GDP):
    • The market value of all final goods and services produced within a country's borders during a specific period of time.
    • Best single indicator of economic health.
  • Gross National Product (GNP):
    • GDP + Income earned from goods & services produced from the nation’s resources - Income earned by foreign companies.

GDP Components (Vocab)

  • Must be a final product.
  • Must be produced within the nation’s borders.
  • Must be produced within a specific period of time.

GDP Calculation

  • Consumption (C): Spending by households on durable goods, non-durable goods, and services.
  • Investment (I): Spending by businesses or private investors.
  • Government Spending (G): Expenditures by federal, state, and local governments on goods and services.
  • Net Exports (X-M): Foreign trade (exports - imports); often negative.
  • Formula: GDP=C+I+G+(X−M)GDP = C + I + G + (X - M)
    *In 2024, GDP was negative.

Factors Impacting Supply

  • Prices of related goods (substitutes and complements).
  • Prices of factors of production and other inputs.
  • Subsidies: Grants/gifts given to a production company.
  • Expected future prices.
  • Number of sellers.
  • Productivity (technology and natural events).

Market Equilibrium

  • Price as a Regulator:
    • Equilibrium occurs where quantity demanded equals quantity supplied (market-clearing price).
  • Shortage:
    • Quantity demanded exceeds quantity supplied.
  • Surplus:
    • Quantity supplied exceeds quantity demanded.
  • Law of Market Forces:
    • When there is a surplus, the price falls.
    • When there is a shortage, the price rises.

Price Controls (Revisited)

  • Price Ceiling:
    • Illustrated graphically.
  • Price Floor:
    • Illustrated graphically.

Tariffs + GDP

  • Moving factories to a country (potentially influenced by tariffs).
  • Tariffs vs. revenue generation within a country.
  • Historical context: What happened in the 90s.
  • Trade balance and equilibrium.

Determining Tariffs

  • Based on the trade deficit the U.S. has with a country.
  • Consideration of imports from that country.

Law of Demand

  • Definition: Other things remaining the same, if the price of a good rises, the quantity demanded of that good falls, and vice versa.
  • Inverse relationship between price and quantity demanded.
  • Quantity Demanded: The amount people are able and willing to purchase at a specific price during a specific period of time.

Law of Supply

  • Definition: Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases, and vice versa.
  • Direct relationship between price and quantity supplied.
  • Quantity Supplied: The amount that people are willing and able to sell during a specified period of time at a specified price.

Influences on Demand

  • Represented by demand schedules (tables) and demand curves (plotted values from schedules).
  • Price influences demand.

Price Elasticity of Demand

  • How much does a change in Price affect Quantity Demanded.
  • Determined by:
    • Number of Substitutes.
    • Proportion of price and quantity.
    • Price P Quantity a. Elastic.
    • Price P Def Demand Defd.

Macroeconomics

  • Household consumption largest part of pie (68.5%).
  • Per capita GDP ~$80,000.

GDP Types

  • Nominal GDP: Uses individual values of each year’s dollar.
  • Real GDP: Adjusted for inflation.

What GDP Does Not Record

  • Non-market activities (e.g., volunteering).
  • Second-hand goods.
  • Underground economy (e.g., babysitting).
  • Quality of life.

National Debt

  • 2641 Billion goes to ss Old Age & Survivors Insurance Trust Fund.
  • Government borrows from itself (~1/5 of the debt).
  • Deficits are used to increase Productive Capacity.
  • Last 90 years:
    • 76 deficits & 14 surpluses.
  • Payment options to reduce the debt:
    • Raise taxes.
    • Cut spending.
    • Increase production (GDP).
    • Shift spending.

Debt

  • Debt to GDP ratio: Healthy debt to GDP ratio: 77%.
  • impacts:
    • interest rates leading to businesses borrowing & hiring less.
    • Inflation T
    • Standard of living

Components of GDP (Review)

  • Must be a final product.
  • Must be produced during a given time period.
  • Must be produced within a nation's borders.

Calculating GDP

  • Consumption: Spending by households on durable goods + non-durable goods + services.
  • Investment: Spending by businesses/private investors.
  • Govt spending: Expenditures by federal, state, & local gov'ts on goods & services.
  • Net exports: foreign trade (must subtract imports).
    • C+I+G+(X−M)=GDPC+I+G+(X-M)=GDP (X-M is usually negative).
  • 2024 US GDP: 29.7Trillion29.7 Trillion
    *Two types of GDP

GDP

*Real vs Nominal:
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  • Deb accumulation of deficits over time
    *we overspend on programs & services.
    *Shift from discretionary to mandatory spending
    *More people qualify for mandatory spending programs