Economics Cram Kit 2024 Edition PDF

2024 30 YEARS D 2025 SSO ODIO OY NI YOO GN...

2024 30 YEARS D 2025 SSO ODIO OY NI YOO GN UU G O CRAM KIT CCA UORU EDITION ANN BR DDO EBS OY ETS YOO T UUR RSS economics ECONOMICS ALPACA-IN-CHIEF Daniel Berdichevsky ▪ ▪ ▪ ▪ ▪ ▪ ▪ Type Definition Example  ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪  Price Quantity [[ 1. QD decreases; 2. shift of the demand curve  Normal goods Inferior goods Price → → Substitutes Complements Quantity Quantity ▪ ▪ → → ↑ ↓ Factor Impact Supply ↑ ↓ ↑ ↑ ↑ ↓ ↑ ↓ ↓ ↓ ↑ ↑ ↑ ↑ ↑ ↓ ↓ ↓ ↓ ↓ ↑ ↑ ↑ ↑ ↑ ↑ ↓ ↓ ↓ ↓ ↓ ↓ ↑ ↓ ↓ ↓ ↑ ↑  ≈ → → → ▪ ▪ ▪ ▪ A price ceiling below equilibrium or a price floor above ▪ equilibrium is inefficient and leads to deadweight loss. ▪ ▪ ▪ Price Price Ceiling Quantity ▪ ▪ ▪ ▪ ▪ Price Floor Price Quantity  Price Importing Economy Consume ▪ r price Tax ▪ Price Producer A C price World Price ▪ B D Quantity Quantity ▪ Exporting Economy ▪ A World C Price ▪ Price B D ▪ ▪ Quantity ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ✓ ✓ ✓ ✓ ▪ ✓ ▪ ✓ ▪ ▪ ▪ ▪ ▪  ▪ ▪ ▪ ▪ ▪ ▪ ▪ 1. 2. 3. 4. ▪ ▪. Peak Expansion Real output Downturn Trough Time ▪ ▪ ▪  ↑ ↓ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪. ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Real Interest Rate Savings Supply Investment Demand Quantity of Money ⇒ ⇒  Land, capital Factors of labor production Transfers Goods and services Goods and Goods and services services Value of S ▪ money (1/P) ▪ ▪ ▪ ▪ D Quantity of Money MV = PQ ▪ ▪ ▪ ⇒ ▪ ▪ ▪ ▪ ▪ ▪  ▪ ▪ ▪ ▪ SRAS2 SRAS1 Price ▪ Level New equilibrium AD2 ▪ LRAS AD1 Real Output ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ LRAS SRAS P ▪ AD ▪ Real Output Y = Y* ▪ ▪ ✓ ✓ ✓ ▪ ▪ ▪ ▪  ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Human wants are unlimited, but goods are scarce ▪ The good being sold must be highly standardized ▪ Nothing is ever truly free ▪ Large number of buyers and sellers ▪ To get one thing, we must give up another ▪ Everyone is well informed about the market price ▪ Humans behave rationally in economics ▪ No barriers to entry exist; firms enter and exit easily ▪ Economic cost includes opportunity and accounting costs ▪ Everyone is a price taker ▪ Accounting cost: tangible cost ▪ Price represents opportunity cost of good’s production ▪ Opportunity cost: value of the next-best alternative ▪ Law of demand: the quantity demanded of a good ▪ Marginal cost: cost of producing/consuming “one more” decreases when the price increases and vice versa ▪ Marginal benefit: gain from producing/consuming “one ▪ Demand: this relationship between prices and quantities more” for a particular market ▪ Diminishing returns: marginal benefit decreases as quantity ▪ Quantity demanded: amount demanded at each price increases ▪ Demand shifts: income, substitutes, complements, the ▪ Rational agents will produce or consume a good until number of consumers, consumer tastes, expectations marginal cost = marginal benefit/revenue (MC = MR) ▪ Rational consumers maximize their utility, or satisfaction; ▪ Law of supply: quantity supplied of a good increases rational firms maximize their profits when the price increases and vice versa ▪ Supply: relationship between prices and quantities for a ▪ Positive: “What is” (taxes are 20%) particular market ▪ Normative: “What should be” (taxes should be lower) ▪ Quantity supplied: the amount supplied at a given price ▪ Microeconomics: focuses on individual decision making; ▪ Supply shifts: factor costs, technology, expectations of individuals to markets future prices, number of producers, and regulations ▪ Macroeconomics: focuses on the economy as a whole; ▪ Changes in demand or supply cause a shift of the curve; tracks economy wide variables quantity changes at every price ▪ Change in quantity demanded or supplied causes a movement along the curve ▪ Comparative advantage: being able to produce a good at a lower opportunity cost than anyone else ▪ Absolute advantage: being able to produce a good more ▪ Equilibrium: intersection of supply and demand efficiently than everyone else ▪ Consumer surplus: difference between how much ▪ An individual can have an absolute advantage in everything, consumers are willing to pay and the market price but not a comparative advantage in everything ▪ Producer surplus: difference between the price at which ▪ Agents should specialize in what they have a comparative firms are willing to sell and the market price advantage for, and then everyone will benefit from trade ▪ Equilibrium maximizes consumer and producer surplus ▪ A PPF shows all the ways an economy can produce goods ▪ % change in quantity over % change in price ▪ Each axis features a good; the PPF measure trade-offs ▪ Price elastic demand: has close substitutes, luxuries between these two goods ▪ Price inelastic demand: necessities ▪ All points outside the curve are impossible to produce at ▪ Price elastic supply: long run ▪ Points inside the curve are possible but inefficient and do ▪ Price inelastic supply: short run, scarce good not use all available resources ▪ Factors affecting demand elasticity: substitutes, necessities, scope of market, time horizon ▪ Impossible to improve well-being without hurting someone ▪ Factors affecting supply elasticity: scarcity of inputs, else presence of barriers to entry, time horizon ▪ No way to judge the superiority of one distribution or ▪ Elasticity= 0: perfectly inelastic another ▪ 0 < Elasticity < 1: price inelastic ▪ Elasticity = 1: unit elastic ▪ How much should be produced? ▪ Elasticity > 1: elastic ▪ Who should produce the good? ▪ Elasticity = : perfectly inelastic ▪ Who should receive the good? ▪ Total revenue: amount a firm receives from selling its goods ▪ Common resources are non-excludable and rival ▪ Total cost: costs of a firm supplying its goods ▪ The tragedy of the commons occurs when people ▪ Accounting cost: actual monetary cost overuse a resource because no one owns it ▪ Accounting profit: straight monetary profit earned ▪ Economic cost: both monetary (accounting) cost and the ▪ A firm with a downward sloping demand curve has opportunity cost of the resources used market power; they can choose their price ▪ Economic profit: monetary profit minus opportunity cost; ▪ The combinations of price and quantity available to always equal to zero in the long run choose from are determined by the market demand ▪ Fixed costs: costs that a firm must pay regardless of how ▪ Market with only one firm much it produces (rent, utilities); only fixed in short run ▪ Produce less than what consumers demand, and sell it ▪ Variable costs change with the amount produced at higher than the market price ▪ Average cost: the sum of fixed costs and total variable ▪ Arise due to the presence of barriers to entry costs, divided by the total number of units produced ▪ Price discrimination: charging different customers ▪ After a certain point, marginal costs stop decreasing and different prices; a monopoly can capture more of the begin increasing—diminishing returns to scale consumer surplus for the firm ▪ In the long run, all costs are variable ▪ Market with only a few firms ▪ Price ceilings set a maximum; price floors set a minimum ▪ Collusion: when firms cooperate to artificially raise market prices by restricting supply ▪ Deadweight loss: lost efficiency due the market not being in equilibrium ▪ Cartel: group of firms that collude ▪ Binding price controls ALWAYS have deadweight losses ▪ Cartels often break up due to an incentive to cheat ▪ Price controls transfer surplus ▪ Taxes distort the market, transferring surplus from the ▪ Firms compete through product differentiation, not market to the government at the expense of efficiency price competition ▪ The more inelastic party always bears more of the tax ▪ Few barriers to entry exist ▪ Revenue equals price times quantity ▪ Institutions: formal or informal rules that guide human interactions ▪ A market failure is when competitive markets fail to produce socially desirable outcomes ▪ Organizations are like institutions but more formal ▪ Two types are externalities and public goods ▪ Governments can tax their citizens and use force ▪ Pork barrel politics: elected officials tend to steer money to their constituents by introducing projects ▪ Externalities are costs or benefits that affect a third party uninvolved in the activity or transaction in question ▪ Logrolling: vote trading among elected officials ▪ Individuals do not factor externalities into their decisions ▪ Rent seeking: socially unproductive activities that simply direct economic benefits ▪ Negative externalities harm third parties; the tendency is to overproduce them ▪ Positive externalities benefit third parties; there are not ▪ Market value of all final goods and services produced enough of them within a country in a given period of time ▪ Coase Theorem: resolve externalities as long as property ▪ GDP = Y = C + I + G + NX rights are defined and parties can negotiate ▪ Consumption: consumer spending on final goods ▪ Investment: value of all money spent on capital or ▪ A rival good, when it is consumed, can no longer be technology consumed by anyone else ▪ Government expenditures ▪ People have limited access to excludable goods ▪ Net exports: exports minus imports ▪ Private goods are both rival and excludable ▪ Business cycle: fluctuations in GDP ▪ Public goods are neither ▪ Average labor productivity: GDP/ # workers employed ▪ Collective goods are non-rival and excludable ▪ Circular flow model: households own factors of production; ▪ Climate change impacts all citizens in the global climate firms rent factors and produce goods, which households commons buy; two markets: goods and factor ▪ Some climate issues and global consumption fuel ▪ Aggregate demand (AD): quantity of goods demanded by an negative externalities in the environment economy at different price levels, slopes downward ▪ Response time is crucial in formulating solutions to ▪ Aggregate supply (AS): potential supply of goods and climate issues services in an economy at different price levels ▪ Issues in space, authority, and jurisdiction make it ▪ SRAS slopes upwards; LRAS: fixed at full employment difficult to propose global climate solutions output; vertical line; independent of price level ▪ Norms, institutions, and expectations can be ▪ Short run equilibrium: intersection of SRAS and AD; long coordinated in collective action run equilibrium is at the intersection of all three curves ▪ Consumers’ time preference over-emphasizes the present at the expense of the past and future ▪ Labor force: all individuals 16 or over, not in prison or ▪ Sustainability encourages responsible consumption with armed forces, and actively looking for work or has a job future generations in mind ▪ Employment rate: percentage of labor force with a job ▪ Participation rate: % of population in the labor force ▪ Global climate change is causing more severe weather ▪ Structural unemployment: due to large shifts in economy; ▪ These climate issues disproportionately affect poor mismatch between skills demanded and skills supplied communities in Africa, Latin America, and Asia ▪ Cyclical unemployment: caused by the business cycle ▪ The social cost of carbon estimates the cost of climate- ▪ Frictional unemployment: due to time-lag between jobs related damages ▪ Unemployment rate calculated every month by the BLS ▪ Natural rate of unemployment: never 100%; structural + ▪ Renewable energies are becoming less expensive frictional unemployment ▪ The Biden administration is investing in climate-friendly ▪ Okun’s Law: 1% rise in unemployment = GDP drops 2% technologies ▪ Some responses to climate issues are to do nothing, the “no regrets” approach, and geoengineering ▪ A medium of exchange, unit of account, and store of value interventions ▪ Commodity money: money with intrinsic value ▪ Organizations like the UN Environment Program and the ▪ Fiat money: intrinsically worthless; state makes it valuable Conference of Parties promote global climate action ▪ Inflation: rise in price level; decrease in purchasing power ▪ Global climate agreements are difficult to enforce due of money; measured by the CPI and GDP deflator to overcommitment and a lack of transparency ▪ Liquidity: how easily an asset can be converted to currency ▪ Experimental governance efforts can cooperate on ▪ Savings: income that is not spent large-scale issues ▪ Investment: purchase of new capital equipment ▪ A Global Environment Organization could provide a ▪ Bond: a certificate of indebtedness unified front for environmental policy solutions ▪ Stock: ownership of a portion of a company ▪ Future agreements on climate solutions would have to keep the unequal distribution of climate harm in mind ▪ Net capital outflow: domestic purchase of foreign capital minus foreign purchase of domestic assets ▪ Fiscal policy: government spending or taxes influences AD ▪ Contractionary: increasing taxes, decreasing spending ▪ Expansionary: decreasing taxes, increasing spending ▪ Open market operations: FOMC buys or sells securities ▪ Reserve ratio: fraction of deposits banks must not loan out ▪ Discount rate: interest rate the Fed charges to banks ▪ Contractionary: sell securities, increase RR / discount rate ≠