Notes

ECONOMICS
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law of demand (falling marginal utility)
substitution effect
income effect
output effect

total cost = total fixed cost + total variable cost
monopolistic competition = product differentiation
if price is above ATC, the positive economic profits ensue
if price is on ATC, the normal economic profits ensue
in order to regulate a natural monopoly, set P = MC
profit-maximizing monopolist set output where MR = MC
a price floor causes deadweight loss to increase
total revenue = P x Q

Factors of Production:
land (natural resources)
labor (human effort)
capital (manmade equipment like machines, buildings, roads, computers)
entrepreneurial ability (the effort and know-how to put the other resources together in a productive way)

law of increasing costs (the more of a good that is produced, the greater its opportunity cost -> concave/bowed outward PPC)
specialization
comparative advantage
productive efficiency (all points on PPC)
allocative efficiency (producing optimal mix of goods and services that provide the most net benefit to society) (MB = MC)
economic growth (shifts PPC outward) is a result of
increase in quantity of resources
increase in quality of current resources
technological advancements

Market Economy (capitalism):
private property (individuals, not government, own most economic resources)
freedom (individuals are free to acquire resources to produce goods and services)
self-interest and incentives (individuals are motivated by self-interest in their use of resources)
competition
prices

law of demand (when the price of a good rises, consumers decrease their quantity demanded for that good)
substitution effect (the change in quantity demanded resulting from a change in the price of one good relative to the price of other goods)
law of demand predicts a downward sloping demand curve
income effect (the change in quantity demanded resulting from a change in the consumer's purchasing power / real income)

Shifters of Demand (MERIT)
Market size (number of buyers in the market)
Expectations (consumer expectations about future prices of good)
Related goods prices (price of substitute/complementary goods)
Income (consumer income)
Tastes (consumer tastes and preferences for good)

increase in number of buyers increases the demand for a good
normal goods (demand increases as income increases)
inferior goods (demand decreases as income increases)

law of supply (when the prices of a good rises, suppliers increase their quantity supplied for that good)
increasing marginal costs (as suppliers increase the quantity supplied of a good, they face increasing marginal costs. as a result, they only increase the quantity supplied of that good if the price received is high enough to at least cover the higher marginal cost)
law of supply predicts an upward sloping supply curve

Shifters of Supply (DCTIGER):
Disasters
Cost of an input to the production of the good
Technology (productivity used to produce good)
Inputs
Government qctions
Expections (producer expectations about future prices)
Related goods prices (price of other goods that could be produced)
more producers = more supply

shortage (when the quantity demanded exceeds the quantity supplied) (AKA excess demand)
surplus (when the quantity supplied exceeds the quantity demanded) (AKA excess supply)

total welfare = consumer surplus + producer surplus
consumer surplus = area under the demand curve and above the market price
producer surplus = area above the supply curve and below the market price

Elasticity = when we observe a consumer's purchase decision change in response to a change in some external variable, elsaticity measures the sensitivity of a person's consumption to that external change
elasticity of demand = (%change in quantity demanded of good) / (%change in price of good)
the greater this ratio, the more sensitive (responsive) consumers are to a change in the price of the good
E(d) > 1, price elastic (the responsiveness of the consumer exceeded, in %, the initial change in the price)
E(d) < 1, price inelastic (the initial change in price exceeded, in %, the responsiveness of the consumer)
E(d) = 1, unit elastic (the initial change in the price is exactly equal to, in %, the responsiveness of the consumer)
consumers are more price sensitive at higher prices than they are at lower prices
(if the price is already low, a 10% increase might be almost negligible to consumers; however, if the price is already high, a 10% increase could be pretty drastic)

Midpoint Formula:
use to calculate the percentage change between two prices or quantities on a demand curve
(change in quantity demanded / change in price) x (average price / average quantity)

perfectly inelastic = any increase in price results in no decrease in quantity demanded (ex. life saving drug)
("my demand curve is inelastic" -> straight, vertical line)
perfectly elastic = a decrease in price causes the quantity demanded to increase without limits
(straight, horizontal line)

the more vertical a good's demand curve, the more inelastic the demand for that good is
the more horizontal a good's demand curve, the more elastic the demand for that good is

the more narrow a product (minute maid instead of orange juice), the more elastic it becomes. this is because the number of substitutes for the product grows

The market cure for a surplus is a lower prices
The market cure for a shortage is higher prices
Increase in the money supply decreases interest rates, which shifts aggregate demand to the right
Second hand sales or underground economy transactions are not counted towards GDP
C+I+G+X measures aggregate spending (GDP) (aggregate income)
Investment spending is current spending in order to increase output or productivity later
Net exports: add any domestically produced goods purchased by foreign consumers (exports) and subtract any spending by our citizens on purchases of goods made in other nations (imports)

Labor (income = wages)
Land (income = rent)
Capital (income = interest)
Entrepreneurial talent (income = profits)

Find inflation rate = (CPI of year 2 - CPI of year 1) / (CPI of year 1)
Price index of 100 = no inflation (100 = base year)
Expansion is real GDP growing
Contraction is real GDP falling
CPI = (market basket in the year you're looking for) / (market basket in the base year) x 100

recessionary gap = high unemployment is greatest concern
inflationary gap = rising price level is greatest concern
demand-pull inflation is inflation that is the result of stronger consumption from all sectors of AD as it continues to increase in the upward-sloping range of SRAS. The price level begins to rise, and inflation is felt in the economy.

spending multiplier
the multiplier effect of an increase in AD is greater if there is no increase in the price level
the multiplier effect of an increase in AD is smaller if there is a larger increase in the price level
supply-side boom = when the SRAS curve shifts outward and the AD curve stays the same, the price level falls, real GDP increases and the unemployment rate falls

supply shock is something that affects the costs of firms, positively or negatively
positive supply shock = result of higher productivity or lower energy prices
negative supply shock = result of increase in input prices

AD increases causing Real GDP to increase, unemployment decreases and the price level increases
AD decreases causing Real GDP to decrease, unemployment rises and the price level decreases
SRAS increases causing Real GDP to increase, unemployment decreases and the price level decreases
SRAS decreases causing Real GDP to decrease, unemployment increases and the price level increases

if GDP goes up, price level goes up, unemployment goes down (for a shift in demand)
if GDP goes down, price level goes down, unemployment goes up (for a shift in demand)
so an increase in consumption spending (C+I+G+X) shifts the aggregate demand curve
stagflation is when AS shifts left and AD stays the same

rising real GDP creates jobs and lowers unemployment
a decrease in SRAS creates inflation, lowers real GDP, and increases the unemployment rate
stagflation most likely results from decreasing SRAS with AD that stays the same

Phillips Curve = inflation rate and unemployment rate
If AD rises, movement up the Phillips Curve (inflation rises)
If AD falls, movement down the Phillips Curve (inflation decreases)

the full effect of the spending multiplier is felt when there is no rise in price
the more you raise the price, the less effect the spending multiplier has
if people spend less (MPC is less) then the less effect the spending multiplier has
if you raise the price, people spend less

Aggregate supply is vertical in the long run because in the long run all resources are employed at full employment

interest rate effect: as the average price level rises, consumers and firms borrow more money for spending and capital investment which increases the interest rate

fiscal policy = government spending and tax collection (affects economic output, unemployment, and price level)
expansionary fiscal policy fixes a recession (government spending increases, or lower taxes)
contractionary fiscal policy fixes inflation (government spending decreases, or increase taxes)

budget deficit = government spending is more than revenue collected from taxes
budget surplus = goverment spending is less than revenue collected from taxes

a deficit increases the demand for loanable funds but, by raising the real interest rate, reduces the quantity of loanable funds available to the private borrowers and investors
crowding out
automatic stabilizers anything that increases a budget deficit during a recessionary period and increases a budget surplus during an inflationary period
automatic stabilizers examples are corporate and personal taxes and transfer payments like unemployment insurance and welfare

stuff to look up:
CPI measure the change in the prices paid by consumers for a market basket of goods and services
demand-pull inflation
spending multiplier (1/mps)
supply side boom
cost-push inflation
how to fix inflationary/recessionary gaps
autonomous spending

If interest rate is high, the more expensive the loan, so less people will take out loans
because they don't want to be crushed by the interest rate consumer spending on items will fall, causing real gdp to fall as well


Federal Reserve controls money supply and regulates banks
2 types of monetary policies
Expansionary Monetary Policy
When Fed puts in and increases the money supply in the system which makes it easier for banks to loan out money, lowering the interest rate which increases consumer spending which increases GDP
In money market graph, Supply Market shifts up a
Contractionary Monetary Policy
When fed decreases money supply causing interest rates to go up decreases investment and consumer spending, slowing down the economy
goal is to flight inflation
Goal of the Expansionary monetary policy:
Speed up the economy and increase employment
How?
The FED buys govt. bonds causing money supply to increase. Interest Rates fall and consumption and investment increase
Goal of the Contractionary Monetary Policy:
Slow down the economy and decrease inflation
How?
FED sells govt. bonds causing money supply to decrease. Interest Rates rise and consumption and investment decrease

3 functions of money
1. Medium of Exchange - Real money has value because we accept it
2. Unit of Account - money helps measure the relative value of different goods and services
3. Store of Value - money allows you to store and buy something in the future

Commodity Money - Many different value, you can do other things with it (used less than fiat money)
Fiat Money - only one purpose

Time Value of Money - Value of money changes over time
Money today is worth more than money in the future

What makes money effective?
1. Generally Accepted - Buyers and sellers have confidence that it is a legal tender
2. Scarce - Money must not be easily reproduced
3. Portable and Dividable - Money must be easily transported and divided

The Money Market
Shifters of Money Demand
1. Price Level
2. Incomes
3. Technology

Shifters of Money Supply
1. Reserve Requirement % of deposits banks must hold in reserve
2. Discount Rate - The interest rate the Fed charges banks
3. Open Market Operations - MOST IMPORTANT
Fed does this the most
The Fed buys or sells bonds (securities) to private commercial banks
Buy bonds -> Money Supply gets bigger
Sell bonds -> Money Supply gets smaller

When interest rate goes up, you don't want to hold on to money