ECON 201 (Lindahl) Final Exam Study Guide
Terms in this set (117)
Refers to the way in which the individual pursuit of self-interest can lead to good results for society as a whole
Shape of demand curve
Price change leads to a change in the quantity demanded
Explain reasons for movement along a demand curve
Shifts of the Demand Curve
A change in the quantity demanded at any given price; an increase in demand causes a rightward shift of the demand curve
A change in the prices of related goods or services, a change in income, a change in tastes, a change in expectations, a change in the number of consumers
Explain reasons for shifts in the demand curve
Shape of supply curve
Price change leads to a change in the quantity supplied
Explain reasons for movement along a supply curve
Shifts of the Supply Curve
A change in the quantity supplied at any given price
A change in input prices, a change in the prices of related goods and services, a change in technology, a change in expectations, a change in the number of producers
Explain the reasons for the supply curve to shift
If the price of a good is above the producer's cost, a sale generates a net gain to the producer
Price Elasticity of Demand
A measure of the responsiveness of the quantity demanded to changes in the price
Income Elasticity of Demand
Indicates how intensely the demand for a good responds to changes in income; negative corresponds to an inferior good, positive corresponds to normal goods; greater than one corresponds to income-elastic good, less than one corresponds to income-inelastic good
Cross-Price Elasticity of Demand
Measures the effect of a change in one good's price on the quantity demanded of another good; positive corresponds to substitute goods, negative corresponds to complement goods
Elasticity of Supply
The percent change in the quantity of a good supplied divided by the percent change in the price
The demand for a good is more elastic when there is a unique price at which consumers will buy as much or as little as they are offered; the price elasticity of demand depends on whethere there are close substitutes for the good in question, whether the good is a necessity or a luxury, the share of income spent on the good, and the length of time that has elapsed since the price change
Explain what makes the demand for a good more or less price elastic
Consumer surplus exists when the difference between willingness to pay and price is the net gain to the consumer; producer surplus exists when the price of a good is above the producer's cost and a sale generates a net gain to the producer
Explain the concept of consumer and producer surplus
In the short run, the quantity of a fixed input cannot be varied but the quantity of a variable input can; in the long run, the quantities of all inputs can be varied
What is the difference between the short run and the long run?
This due to an effect called diminishing returns to an input; this effect leads to a decline in the marginal product of that input
Why is it, in the short run, that adding more of a variable input yields less and less additional outputs (marginal product)? How does this impact the marginal cost curve?
A cost that depends on the quantity of output produced; the cost of a variable input
A cost that does not depend on the quantity of output produced; the cost of a fixed input
The additional cost incurred by producing one more unit of a good or service
The total cost divided by the quantity of output produced
Because average total cost consists of two parts: average fixed cost, which falls when output increases, and average variable cost, which rises with output
Explain why the ATC is U-shaped
Perfect competition, monopoly, oligopoly, monopolistic competition
What are the four basic market structures? Give examples of each
An industry controlled by a producer who is the sole supplier of a good without close substitutes
A market structure in which there are many competing producers, each producing a differentiated product, and there is free entry and exit in the long run
Optimal Output Rule
Produce the quantity at which marginal revenue equals marginal cost
The marginal revenue of a monopolist is composed of a quantity effect and a price effect. Because of the price effect, a monopolist's marginal revenue is always less than the market price, and the marginal revenue curve lies below the demand curve.
Explain why a monopoly's demand and marginal revenue curves are different
Barriers to Entry
Protects monopolies; can take the form of control of a natural resource or input, increasing returns to scale that give rise to natural monopoly, technological superiority, a network externality, or government rules that prevent entry by other firms, such as patents or copyrights
Various techniques used to differentiate consumers based on their sensitivity to price and charging those with less elastic demand higher prices
Perfect Price Discrimination
Charges each consumer a price equal to his or her willingness to pay and captures the total surplus in the market
An industry with only a small number of producers
The study of behavior in situatiosn of interdependence
A game based on two premises: each player has an incentive to choose an action that benefits itself at the other player's expense; when both players act in this way, both are worse off than if they had acted cooperatively
Cooperation among producers to limit production and raise prices so as to raise another's profits
An agreement among several producers to obey output restrictions in order to increase their joint profits
A player's best action regardless of the action taken by the other player
Efforts undertaken by the government to prevent oligopolistic industries from becoming or behaving like monopolies
External costs and benefits
Talking/texting while driving, technology spillover
What are causes of externalities?
Environmental standards, emissions tax
What are some solutions to pollution?
A payment designed to encourage activities that yield external benefits
Taxes designed to reduce external costs
Even in the presence of externalities an economy can always reach an efficient solution as long as transaction costs are sufficiently low
Tradable Emissions Permits (Cap-and-Trade)
Licenses to emit limited quantities of pollutants that can be bought and sold by polluters
If the supplier of a good can prevent people who do not pay from consuming it
If the same unit of a good cannot be consumed by more than one person at the same time
The supplier of a good cannot prevent consumption by people who do not pay for it
More than one person can consume the same unit of a good at the same time
Many undividuals are unwilling to pay for their own consumption and instead will take a "free ride" on anyone who does pay
Because of the free-rider problem; ex: group projects
Why do markets have a hard time providing efficient levels of nonrival and/or nonexcludable goods?
The total value of all fnal goods and services produced in the economy during a given year
Survey firms and add up the total value of their production of final goods and services; add aggregate spending on domestically produced final goods and services in the economy; sum the total factor income earned by households from firms in the economy
How do we measure GDP?
Real GDP uses prices of a selected base year in its calculations while nominal GDP uses the prices current in the year in which the output is produced in its calculations
What is the difference between nominal and real GDP?
Nominal Interest Rates
The interest rate expressed in dollar terms
Real Interest Rates
The nominal interest rate minus the rate of inflation
The unemployment rate that arises from the effects of frictional plus structural unemployment
Nonworking people who are capable of working but have given up looking for a job given the state of the job market
Marginally Attached Workers
Would like to be employed and have looked for a job in the recent past but are not currently looking for work
The number of people who work part time because they cannot find full-time jobes
Unemployment due to the time workers spend in job search
More people are seeking jobs in a particular labor market than there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle
The deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle
Discouraged workers, marginally attached workers, underemployment, frictional unemployment, structural unemployment, natural unemployment, cyclical unemployment
What are the different types of unemployment?
4.9% overall; 8.8% african-american; 13.9% white teenager; 23.3% african-american teenager
What are the approximate current rates of unemployment and inflation?
Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world
Shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
A change in wealth independent of a change in the aggregate price level; ex: rise in the stock market or in real estate values; changes in expectations, changes in wealth, and the size of hte existing stock of physical capitla; fiscal and monetary policies; changes in commodity prices, changes in nominal wages, changes in productivity
What factors cause shifts in aggregate demand and aggregate supply?
Nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages
Explain the shape of the short-run aggregate supply curve, focusing on "sticky wages"
The LRAS shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible; vertical
How is the LRAS shown and estimated?
What shifts the LRAS?
Economic slumps are caused by inadequate spending, and they can be mitigated by government intervention
Because of the Great Depression; developed by British economist John Maynard Keynes in 1936 to understand economic slumps and find ways to prevent them
How and why did Keynesian economics develop?
The main goal is to establish the idea that managing the economy is a government responsibility
What are Keynesian economics main goals and techniques/tools?
Uses changes in the quantity of money to alter interest rates and affect overall spending
Uses changes in government spending and taxes to affet overall spending
A government that tries too hard to stabilize the economy can end up making the economy less stable; time lags between when policy is decided upon and when it is implemented
What are some critiques of fiscal policy?
Government debt held by individuals and institutions outside the government
Medium of exchange, store of value, unit of account
List and explain three functions of money
Medium of Exchange
An asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption
Store of Value
A means of holding purchasing power over time
Unit of Account
A measure used to set prices and make economic calculations
The total value of financial assets in the economy that are considered money
Currency in circulation, traveler's checks, and checkable bank deposits
What is included in the M1?
Fight recessions and try to ensure price stability: low inflation; taylor rule for monetary policy
Identify the goals and tools of monetary policy
Expands money supply, increase in AD
Explain how specifically the Fed lowers interest rates and why, and explain the effect on AD
Mortgage-Backed Security (MBS)
a type of asset-backed security that is secured by a mortgage or collection of mortgages. The mortgages are sold to a group of individuals (a government agency or investment bank) that securitizes, or packages, the loans together into a security that investors can buy.
Credit Default Swap (CDS)
a financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. This is achieved by the issuer of the bonds insuring the buyer's potential losses as part of the agreement.
Credit Rating Agency (CRA)
A credit rating agency (CRA, also called a ratings service) is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely interest payments and the likelihood of default.
A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Gramm-Leach-Bliley Act (GLBA) and Glass-Steagall Act
The Gramm-Leach-Bliley Act requires financial institutions - companies that offer consumers financial products or services like loans, financial or investment advice, or insurance - to explain their information-sharing practices to their customers and to safeguard sensitive data. The Glass-Steagall Act effectively separated commercial banking from investment banking and created the Federal Deposit Insurance Corporation, among other things. It was one of the most widely debated legislative initiatives before being signed into law by President Franklin D. Roosevelt in June 1933.
a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains.
a bank that purchases large holdings of newly issued shares and resells them to investors.
Securitization Food Chain
The primary object of "Inside Job" - and mostsecuritization food chain references since - are the mortgage-backed securities (MBS) created by investment banks.
Subprime is a classification of loans offered at rates greater than the prime rate to individuals who are unable qualify for prime rate loans. This usually occurs when borrowers have poor credit and, as a result, the lender views them as higher risk.
Arguments The Inside Job makes about the main cause(s) of the financial crisis
Exposes the corruption in US banking that led to the 2008 crash; the film tries to find out the route causes of this financial crises, the corruption in the financial and political system of US, impact of this corruption on global economies; The main cause of this Financial crisis was deregulation in 1980s of Financial Institutions which include Banks, Insurance Companies, Credit Rating Agencies etc.; The financial bubble was created from 2001-2007, everyone could get house mortgage loan, even if they can not afford to pay it back, as a result the house price skyrocketed; In 2008, mortgage loan holders failed to payback their loan to lenders, as a result the Securitization Food Chain imploded. The default on the part of mortgage borrowers were already clear, because loans were issued even to those house holders who could not afford to pay the loan back; The main cause of financial crisis was deregulation and to give financial industry a full freedom, as a result, they acted in their own interest and made millions of dollars at the cost of taxpayers and general public investment. So It is recommended that strong actions are need to be taken against those who are responsible for this crisis, but it is unfortunate to see that those people and institutions are still in power. The Government need to bring reforms in financial industry.
18th century philosopher known as the father of modern economics and major proponent of Laissez-Faire economic policy, propsed the idea of the invisible hand and compensating wage differentials.
Production Possibility Frontier
illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other.
occurs when a person/company/region focuses their production efforts on a smaller subset of tastes or products to gain a competitive advantage. These groups become better at the task or production than other companies by raising the level of expertise of a the labor force and quality and quantity of the products produced.
Becoming better at one item will allow better rates of production and increased demand. Along with working with other countries it will open trade with their specialized item (ie Hawaii and pineapples vs. Japan and manga)
How is specialization tied to growth and trade?
opportunity cost of producing the good or service is lower than other countries'
if the country can produce more output per worker than other countries
Does comparative advantage or absolute advantage matter more?
Shoes, payless to Nike
Amazon basics vs. "trendy"
Costs and benefits to society of monopoly
Producing more of a good drives down its market price. Firms realize that profits would be higher if it and its rival limited their production, aka entering into collusion
Why does collusion create higher profits?
less concentration, complex products and pricing schemes, differences in interests, bargaining power of buyers
Why don't all oligopoly firms collude?
A firm attempts to influence the future behavior of other firms
Through strategic behavior
How can game theory help us predict cheating?
was popularized by the renowned economist John Maynard Keynes. It states that individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth.
What is the paradox of thrift and why does it matter?
annually balanced budget; cyclically balanced budget; functional finance
What are the budget philosophies?
The deficit is the difference between what the U.S. Government takes in from taxes and other revenues, called receipts, and the amount of money it spends, called outlays. ... You can think of the total debt as accumulated deficits plus accumulated off-budget surpluses.
What is the difference between a deficit and the debt?
the money supply goes up
Describe what happens to the money supply when a commercial bank makes a loan
Monetary hawk and dove. A monetary hawk, or hawk for short, is a term used to describe someone who places keeping inflation low as the top priority in monetary policy. ... Doves generally are more in favor of expansionary monetary policy, including low interest rates, while hawks tend to favor "tight" monetary policy.
Hawk and Dove
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