Economics Study Guide

Cram Kit Overview

• Designed to provide a quick review of the most testable and easily forgotten facts
• Complements the more detailed Power Guide
• The main component uses charts and diagrams for efficient studying

Cram Kit Structure

• Concludes with a Crunch Kit for last-minute review
• Includes glossary-like lists to organize key information
• The Power Guide offers more extensive lists with an emphasis on thoroughness

Economics Curriculum Breakdown

• Section I covers the basics of economics
• Contains an expectated 5 test questions in that section
• Section II covers microeconomics topics
• Contains an espectated 20 test questions in that section
• Section III covers macroeconomics topics
• Contains an expected 15 test questions in that section
• Section IV examines the intersection of economics and ecology
• Contains an expected 10 test questions in that section

Rationaility and Efficienty

• Economic agents maximize utility where marginal utility equals marginal cost
• Economists assume marginal benefit decreases as quantity increases

Fundamental Economic Concepts

• Resources are limited with scarcity and unlimited wants
• Choices require giving something else up, known as trade-offs
• The full cost of a decision is its economic cost
• In 1776, Adam Smith described the "invisible hand," where the market regulates itself
• Engage in exchange because gains can be achieved through trade
• Absolute advantage: Producing a good more efficiently than others with the same inputs
• Comparative advantage: Producing a good at a lower opportunity cost, not necessarily absolute

Microeconomics: Specialization, Trade, and Markets

• Markets occur when producers and consumers voluntarily exchange goods or services
• Trade requires voluntary transactions and an agreed-upon price for buyers and sellers
• Prices convey the value of goods to producers and consumers

Production Possibilities Frontier (PPF)

• Represents all combinations of output that are feasible
• Producing more of one good necessitates a tradeoff with less production of another
• Points on the curve are efficient while points inside the curve are possible but inefficient

Demand and Supply

• Law of Demand: Quantity demanded increases as price decreases
• Quantity demanded defined as amount of a good consumers will demand at a given price
• Law of Supply: Quantity supplied increases as price increases
• Quantity supplied defined as how much of a good firms supply at a given price
• Demand and supply meet at the market equilibrium

Consumer Surplus

• Consumer surplus represents the difference between what consumers will pay and the market price
• Producer surplus represents the difference between the price at which firms will sell and the market price
• The market equilibrium maximizes the sum of both consumer and producer surplus

Elasticity

• Measures how the quantity demanded or supplied changes in response to changes in the good's price
• E = 0: Perfectly inelastic, vertical line
• E = ∞: Perfectly elastic, horizontal line

Factors that Affect Price Elasticity

• Demand: Close substitutes, luxuries, short run
• Supply: Scarce inputs, short run

Taxation

• Marginal taxes make consumers pay more with producers recieving less
• Taxes distort the market, creating inefficiency

Trade

• World price is fixed, the world market either buys surplus or supplies the shortage
• A tariff is a tax on imports, increasing producer surplus

Market Failures and Imperfect Competition

• Imperfectly competitive markets lead to inefficiency and deadweight loss
• Firms have market power with a downward sloping demand curve and the ability to influence price
• Only one firm supplies, full power to set prices, and barriers prevent entry
• Few firms face non-price competition; collusion is illegal
• Price discrimination involves charging different prices to different consumers

Institutions

• Institutional Economics recognizes that transactions occur within a complex institutional framework
• Not all decisions are about profit maximization
• Governance Structures involve hierarchy, markets, and networks

Key Market Factors

• Property rights dictate who can and cannot use a good
• Government may improve economic efficiency in a market through laws and other methods of control

Imperfect Competition

• Oligopolies: Market with a few firms facing non-price competition
• Collusion: Firms cooperate to raise market prices artificially, leading to cartels
• Monopolistic Competition: Lower barriers to entry, many firms compete through product differentiation

Macroeconomics Main Concerns

• Macroeconomics is concerned with factors affecting the long run, such as the standard of living, and the short run
• The causes and consequences of short-run economic fluctuations (especially unemployment and inflation)

Gross Domestic Product (GDP)

• GDP defined as the market value of all final goods and services produced within a country in a given period
• Average labor productivity = GDP/number of workers
• Labor productivity depends on physical capital, human capital, natural resources, technological knowledge and political/legal environment.

Macroeconomics Important Factors

• Not Included in GDP: Intermediate goods, goods not sold on the open market, used goods, and transfer payments
• Missing Economic Activity: Excludes activities not exchanged in 'official' markets and ignores natural resource depletion
• Included in GDP: new homes are personal investment, NON consumption
• Nominal GDP: Valued at today's prices
• Influenced by inflation rate
• Real GDP: Valued at base year prices
• GDP Deflator: Tool used to correct for the effects of inflation on GDP figures
• Consumer Price Index: Index number used to measure changes in the prices of consumer goods

Money Supply and Market

• Exists as a medium of exchange, a unit of account and store of value
• It is valuable because a authority believes it is
• Money supply involves M0, M1 and M2 from most to least liquid
• Can trade by investing in bonds and stocks

Federal Open Market Committee (FOMC)

• Part of the regional Federal Reserve System
• Manages money supply and open market operations