Konan exam 1 notes

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Chap -8 Definitions

Business cycle: Ups and Downs of economic activity. Consists of expansions and recessions.

Economic expansion: Period of rising real GDP. Economic Activity and employment are higher.

Contraction or recession: Period of falling real GDP. Econ. Activity & employment - lower.

economic

growth: refers to the ability of the economy to produce increasing quantities of goods and services.

Inflation : Increase in overall/average price level.

GDP is a measure of income, output and expenditure and also total value added.

we measure total production by gross domestic product (GDP), which is the total market value of all final goods and services produced dosmestically in an economy during a period of time.

Real GDP increased 2.4 percent in 2014 (that is, from the 2013 annual level to the 2014 annual

level), compared with an increase of 2.2 percent in 2013.

GDP does not include household production, which refers to goods and services people produce for themselves, nor does it include production in the

underground economy, which consists of concealed buying and selling. The underground economy in

some developing countries may be more than half of measured GDP. GDP is not a perfect measure of

well-being because it does not include the value of leisure, it is not adjusted for pollution or other

negative effects of production, and it is not adjusted for changes in crime and other social problems. doesn't measure distribution of income. has high correlation with quality of life.

. Nominal GDP is the value of final goods

and services evaluated at current-year prices. Real GDP is the value of final goods and services evaluated

at base-year prices. The GDP deflator is a measure of

the price level and is calculated by dividing nominal GDP by real GDP and multiplying by 100.

Real GDP per capita is a measure of standard of living

GDPD = NGDP/RGDP x 100

INF= change in P(t) ie GDPD(t)/p(t-1)

Other concepts:

1. GNP - Value of all final goods and services produced by a nation's factors of production (no matter where)

2. NI = GDP - current capital consumption ie depreciation

3. Personal income = NI + Transfer payments

4. Disposable income = PI - taxes

PPF- The production

possibilities frontier (PPF) is a curve that shows the maximum attainable combinations of two products

that may be produced with available resources. The PPF is used to illustrate the trade-offs that arise from

scarcity. Points on the frontier are technically efficient. Points inside the frontier are inefficient, and

points outside the frontier are unattainable. The opportunity cost of any activity is the highest-valued

alternative that must be given up to engage in that activity. Because of increasing marginal opportunity

costs, PPFs are usually bowed out rather than straight lines. This illustrates the important economic

concept that the more resources that are already devoted to any activity, the smaller the payoff from

devoting additional resources to that activity is likely to be. Economic growth is illustrated by shifting a

PPF outward.

Fundamentally, markets

are about trade, which is the act of buying or selling. People trade on the basis of comparative advantage.

An individual, a firm, or a country has a comparative advantage in producing a good or service if it can

produce the good or service at the lowest opportunity cost. People are usually better off specializing in the

activity for which they have a comparative advantage and trading for the other goods and services they

need. It is important not to confuse comparative advantage with absolute advantage. An individual, a

firm, or a country has an absolute advantage in producing a good or service if it can produce more of

that good or service from the same amount of resources. It is possible to have an absolute advantage in

producing a good or service without having a comparative advantage.

. A market is a group of buyers and sellers of a

good or service and the institution or arrangement by which they come together to trade. Product

markets are markets for goods and services, such as computers and medical treatment. Factor markets

are markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial

ability. A circular-flow diagram shows how participants in product markets and factor markets are

linked. Adam Smith argued in his 1776 book The Wealth of Nations that in a free market, where the

government does not control the production of goods and services, changes in prices lead firms to

produce the goods and services most desired by consumers. If consumers demand more of a good, its

price will rise. Firms respond to rising prices by increasing production. If consumers demand less of a

good, its price will fall. Firms respond to falling prices by producing less of a good. An entrepreneur is

someone who operates a business. In the market system, entrepreneurs are responsible for organizing the

production of goods and services. The market system will work well only if there is protection for

property rights, which are the rights of individuals and firms to use their property.

Scarcity exists because we have unlimited wants but only limited resources available to fulfill those

wants. This scarcity requires that we make decisions about how to use our resources. In other words, we

face trade-offs. A production possibilities frontier (PPF) is a curve showing the maximum alternative

combinations of two products that may be produced with available resources. A PPF is a graphical

representation of the trade-offs and opportunity costs a producer faces. As shown in Figure 2.1, points on

a PPF are efficient, while points under the PPF are inefficient. Points beyond the PPF are unattainable

with current resources. A PPF will always have a negative slope because increasing production requires

shifting resources away from one activity toward the second activity.

Along a production possibilities frontier, resources and technology are fixed. If there is an increase in the

available resources or an improvement in the technology used to produce goods and services, then the

PPF will shift outward. The economy will be able to produce more goods and services, which means the

economy has experienced economic growth. Economic growth is the ability of the economy to increase

the production of goods and services. Growth may lead to greater increases in production of one good

than another.

A market is a group of buyers and sellers of a good or service and the institution or arrangement by

which they come together to trade. Product markets are markets for goods, such as computers, and

services, such as medical treatment. Factor markets are markets for the factors of production, such as

labor, capital, natural resources, and entrepreneurial ability. A circular-flow diagram is a model that

illustrates how participants in markets are linked. The diagram demonstrates the interaction between

firms and households in both product and factor markets. Households buy goods and services in the

product market and provide resources for sale in the factor market, while firms provide goods and

services in the product market and buy resources in the factor market. A free market is a market with

few government restrictions on how a good or service can be produced or sold, or on how a factor of

production can be employed.

Entrepreneurs are an essential part of a market economy. An entrepreneur is someone who operates a

business, bringing together the factors of production—labor, capital, and natural resources—to produce

goods and services. Entrepreneurs often risk their own funds to start businesses and organize factors of

production to produce those goods and services consumers want.

Elasticities:

Measure of responsiveness of quantity to a change in factors affecting eg: demand or suppy

price elasticity, income elasticity

1. percentage change = (Q2-Q1)/(0.5(Q1+Q2)

(P2-P1)/0.5(P1+P2)

IF e> 1, ELASTIC. e=1, unit elastic, e

total revenue approach: TR= P x Q

%change TR= %changeP + %changeQ

TR changes in the direction of the dominant effect.s

If TR change in direction of P, it is because P dominants =>D is inelastic

determinants- 1. expensive or not 2. necessity or luxury 3. Availability of substitutes 4. definition of market (broadly defined eg. food is inelastic, narrowly defined is elastic)

Income elasticity = measure of responsiveness of demand to a change in income. same formula.

sign is important = if e0, normal good

necessities and luxuries are normal goods

if E1, luxury if you spend the same fraction in a good then income elasticity is 1.

cross price elasticity = measure of responsivess of demand to a change in others price.

Ec= change in Qa/change in Pb (use same formular)

if e > 0, substitutes. e

demand ; amount of good that one individual is willing and able to buy. law -inverse relationship between p and q, holding OF constant.

3 explanations - 1. substitution effect of price change 2. income effect of price change

3. Diminishing marginal utility - as Q up, MU down

Market demand curve - sum of all individual demand curves

supply - quantity of good a firm is willing and able to sell over a time period.

determinants of individual supply = price, production technology, input prices, expectations.

upward sloping because - producer would like to sell more at higher prices

1. diminishing marginal returns

factors - pOwn, pOther, tech, E, number of sellers

if D up and S up, then Q up. If D up S down, P up

GDP -

Only items with Market value are a part

only final good to the final user, not intermediate good.

only goods that are tangible

produced domestically

has a time dimension - it is about new production over that period. If it is not produced over that period it cannot be part of GDP. It's about production, not financial assets.

circular flow : output market ---g/s-->Households---Fa.of.prod

-->input market--fop-->Firms... money goes backways

illustrates the flow of spending and money in the economy. GDP - total income received by households.

Value added method = sum of value added throughout all stages of investment (sale price- cost of intermediate good)

Expenditure method = C + I + Government INvestment + (EX-IM)

GDP is divided into four

major categories of expenditures: consumption, investment, government purchases, and net exports.

Government transfer payments are not included in GDP because they are payments to individuals for

which the government does not receive a good or service in return. We can also calculate GDP by adding

up the value added of every firm involved in producing final goods and services.

investment - business, residential and inventory

Chap 1;

Economics is the study of the choices consumers,

business managers, and government officials make to attain their goals, given their scarce resources. We

must make choices because of scarcity, which means that although our wants are unlimited, the resources

available to fulfill those wants are limited.

What goods and services will be produced? How

will the goods and services be produced? Who will receive the goods and services produced?

Economists assume that people are rational in the sense that

consumers and firms use all available information as they take actions intended to achieve their goals.

Rational individuals weigh the benefits and costs of each action and choose an action only if the benefits

outweigh the costs. Although people act from a variety of motives, ample evidence indicates that they

respond to economic incentives. Economists use the word marginal to mean extra or additional. The

optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal

cost.

Society

faces trade-offs: Producing more of one good or service means producing less of another good or service.

The opportunity cost of any activity—such as producing a good or service—is the highest-valued

alternative that must be given up to engage in that activity. The choices of consumers, firms, and

governments determine what goods and services will be produced. Firms choose how to produce the

goods and services they sell. In the United States, who receives the goods and services produced depends

largely on how income is distributed in the marketplace. In a centrally planned economy, most

economic decisions are made by the government. In a market economy, most economic decisions are

made by consumers and firms. Most economies, including that of the United States, are mixed economies

in which most economic decisions are made by consumers and firms but in which the government also

plays a significant role. There are two types of efficiency: Productive efficiency occurs when a good or

service is produced at the lowest possible cost. Allocative efficiency occurs when production is in

accordance with consumer preferences. Voluntary exchange is a situation that occurs in markets when

both the buyer and seller of a product are made better off by the transaction. Equity is more difficult to

define than efficiency, but it usually involves a fair distribution of economic benefits. Government

policymakers often face a trade-off between equity and efficiency

Economists rely on economic models, which are

simplified versions of reality used to analyze real-world economic situations. Economists accept and use

an economic model if it leads to hypotheses that are confirmed by statistical analysis. In many cases, the

acceptance is tentative, however, pending the gathering of new data or further statistical analysis.

Economics is a social science because it applies the scientific method to the study of the interactions

among individuals. Economics is concerned with positive analysis—what is—rather than normative

analysis—what ought to be. As a social science, economics considers human behavior in every context of

decision making, not just in business.

Chap 3

The model of demand and supply is the most powerful in

economics. The model applies exactly only to perfectly competitive markets, where there are many

buyers and sellers, all the products sold are identical, and there are no barriers to new sellers entering the

market. But the model can also be useful in analyzing markets that don’t meet all these requirements. The

quantity demanded is the amount of a good or service that a consumer is willing and able to purchase at

a given price. A demand schedule is a table that shows the relationship between the price of a product

and the quantity of the product demanded. A demand curve is a graph that shows the relationship

between the price of a good and the quantity of the good consumers are willing and able to buy over a

period of time. Market demand is the demand by all consumers of a given good or service. The law of

demand states that ceteris paribus—holding everything else constant—the quantity of a product

demanded increases when the price falls and decreases when the price rises. Demand curves slope

downward because of the substitution effect, which is the change in quantity demanded that results from

a price change making one good more or less expensive relative to another good, and the income effect,

which is the change in quantity demanded of a good that results from the effect of a change in the good’s

price on consumer purchasing power. Changes in income, the prices of related goods, tastes, population

and demographics, and expected future prices all cause the demand curve to shift. Substitutes are goods

that can be used for the same purpose. Complements are goods that are used together. A normal good is

a good for which demand increases as income increases. An inferior good is a good for which demand

decreases as income increases. Demographics are the characteristics of a population with respect to age,

race, and gender. A change in demand refers to a shift of the demand curve. A change in quantity

demanded refers to a movement along the demand curve as a result of a change in the product’s price.

A normal

good is a good for which demand increases as income rises and decreases as income falls. An inferior

good is a good for which demand increases as income falls and decreases as income rises.

The purpose of markets is to bring buyers and sellers together. The interaction of buyers and sellers in

markets results in firms producing goods and services consumers both want and can afford. At market

equilibrium, the price of the product makes quantity demanded equal quantity supplied. A competitive

market equilibrium is a market equilibrium with many buyers and many sellers. The market price (the

actual price you would pay for the product) will not always be the equilibrium price. A surplus is a

situation in which the quantity supplied is greater than the quantity demanded, which occurs when the

market price is above the equilibrium price. Firms have an incentive to increase sales by lowering price.

As the market price is lowered, quantity demanded will rise, and quantity supplied will fall until the

market reaches equilibrium.

A shortage is a situation in which quantity demanded is greater than the quantity supplied, which occurs

when the market price is below the equilibrium price. Some consumers will want to buy the product at a

higher price to make sure they get what they want. As the market price rises, the quantity demanded will

fall—not everyone will want to buy at a higher price—and quantity supplied will rise until the market

reaches equilibrium. At the competitive market equilibrium, there is no reason for the price to change

unless either the demand curve or the supply curve shifts.