Transcript File

ECON 114
Important Notes
and Review
W2013-14 Term 2
MARKET OF CONSUMPTION
FIGURE 2.1:
The
Circular
Flow
MARKET OF PRODUCTION
Positive versus Normative Analysis
 Positive statements: claims that attempt to
describe the world as it is
 Normative statements: claims that attempt to
prescribe how the world should be
Nominal Income  Real Income
Nominal Income – (CPI * 100) = Real Income
GDP is…
GDP = C + I + G + NX
(Y) = Consumption + Investment + Govt Purchases + Net Export
Note 
Net Capital Outflow = Net Exports
NCO
=
NX
Shifts in the Demand Curve
 Factors that shift the demand curve (continued):
 Prices of related goods:
Meat VS
Mining
 Substitutes: two goods for which an
increase in the price of one leads to an
increase in the demand for the other
Coal Mining
VS
Oil Mining
 Complements: two goods for which an
increase in the price of one leads to a
decrease in the demand for the other
The Supply Curve: The Relationship
Between Price and Quantity Supplied
Quantity supplied: the amount of a good
that sellers are willing and able to sell
Law of supply: the claim that, other things
equal, the quantity supplied of a good
rises when the price of the good rises
Copyright © 2014 by Nelson Education Ltd.
4-7
The Supply Curve: The Relationship
Between Price and Quantity Supplied
Supply schedule: a table that shows the
relationship between the price of a good
and the quantity supplied
Supply curve: a graph of the relationship
between the price of a good and the
quantity supplied
Copyright © 2014 by Nelson Education Ltd.
4-8
Equilibrium
Equilibrium price: the price that balances
quantity supplied and quantity
demanded (people buy product at $$$)
Equilibrium quantity: the quantity supplied
and the quantity demanded at the
equilibrium price (people buying # of
products)
Copyright © 2014 by Nelson Education Ltd.
4-9
FIGURE 4.8:
The Equilibrium of Supply and Demand
This is an
example
Copyright © 2014 by Nelson Education Ltd.
4-10
Equilibrium
 Surplus: quantity supplied > quantity demanded
 Shortage: quantity supplied < quantity demanded
Copyright © 2014 by Nelson Education Ltd.
4-11
FIGURE 4.9:
Markets Not in Equilibrium
Copyright © 2014 by Nelson Education Ltd.
4-12
Elasticity:
• A measure of the responsiveness of quantity
demanded or quantity supplied to a change in on
of its determinants
% CHANGE IN QUANTITY DEMANDED
PRICE ELASTICITY =
% CHANGE IN PRICE
Copyright © 2014 by Nelson Education Ltd.
4-13
Income Elasticity of Demand:
It measures how the quantity demanded
chagnges as consumers’ income changes and
calculated as
Income Elasticity % Change in Quantity Demanded
=
of Demand
% Change in Income
Financial Markets: The Bond Market
Bond: a certificate of indebtedness that specifies
the obligation of the borrower to the holder of
the bond
Someone borrows some $$$$ (money)
Debt finance: the sale of a bond to raise
money
Characteristics:
bond’s term
bond’s credit risk
If Buying a Bond  lending money
If Selling a Bond  borrowing money
Bond is really small chunks of a loan
Ex: $1M loan = 10 000 of $100 bonds
Some Important Identities
National saving (S): the total income in the
economy that remains after paying for
consumption and government purchases
Some Important Identities
Let T denote the taxes collected by
government minus transfer payments.
National saving can then be expressed in
either of two ways:
or
Some Important Identities
Private saving: the income that households
have left after paying for taxes and
consumption
Public saving: the tax revenue that the
government has left after paying for its
spending
Some Important Identities
Budget surplus:
Budget deficit:
T=Taxes
G=Government Spending
Active Learning
A. Calculations
 Suppose GDP equals $10 million, consumption
equals $6.5 million, the government spends $2
million and has a budget deficit of $300 000.
 Find public saving, taxes, private saving,
national saving, and investment.
Active Learning
Answers: Part A
Given:
Y (is GDP) = 10.0, C = 6.5, G = 2.0, G – T = 0.3
Public saving = T – G = – 0.3
Taxes: T = G – 0.3 = 1.7
Private saving = Y – T – C = 10 – 1.7 – 6.5 = 1.8
National saving = Y – C – G = 10 – 6.5 = 2 = 1.5
Investment = national saving = 1.5
Active Learning
B. Calculations
 Use the numbers from the preceding exercise but
suppose now that the government cuts taxes
by $200 million.
 In each of the following two scenarios, determine
what happens to public saving, private saving,
national saving, and investment.
1. Consumers save the full proceeds of the tax
cut.
2. Consumers save 1/4 of the tax cut and spend
the other 3/4.
Active Learning
Answers: Part B
In both scenarios, public saving falls by $200
million, and the budget deficit rises from $300
million to $500 million.
1. If consumers save the full $200 million,
national saving is unchanged, so investment
is unchanged.
2. If consumers save $50 million and spend
$150 million, then national saving and
investment each fall by $150 million.
Net Export
= Total Exports – Total Imports
ECON 114
Macro-Economics
Definitions for
each chapter
Chapter 1
business cycle
fluctuations in economic activity, such as employment and production (p. 15)
economics
the study of how society manages its scarce resources (p. 4)
efficiency
the property of society getting the most it can from its scarce resources (p. 5)
equity
the property of distributing economic prosperity fairly among the members of society (p. 5)
externality
the impact of one person's actions on the well-being of a bystander (p. 12)
incentive
something that induces a person to act (p. 8)
inflation
an increase in the overall level of prices in the economy (p. 14)
marginal changes
small incremental adjustments to a plan of action (p. 7)
market economy
an economy that allocates resources through the decentralized decisions of many firms and households as
they interact in markets for goods and services (p. 10)
market failure
a situation in which a market left on its own fails to allocate resources efficiently (p. 12)
market power
the ability of a single economic actor (or small group of actors) to have a substantial influence on market
prices (p. 12)
opportunity cost
whatever must be given up to obtain some item (pp. 7, 55)
productivity
the quantity of goods and services produced from each hour of a worker 's time (pp. 13, 145)
property rights
the ability of an individual to own and exercise control over scarce resources (p. 12)
rational people
people who systematically and purposefully do the best they can to achieve their objectives (p. 7)
scarcity
the limited nature of society's resources (p. 4)
Chapter 2
circular-flow
diagram
a visual model of the economy that shows how dollars flow through markets
among households and firms (p. 24)
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and
economic growth (pp. 29, 100)
microeconomics
the study of how households and firms make decisions and how they interact in
markets (pp. 29, 100)
normative
statements
claims that attempt to prescribe how the world should be (p. 30)
positive statements
claims that attempt to describe the world as it is (p. 30)
a graph that shows the combinations of output that the economy can possibly
production
produce given the available factors of production and the available production
possibilities frontier
technology (p. 26)
Chapter 3
absolute advantage
the comparison among producers of a good according to their
productivity (p. 55)
comparative advantage
the comparison among producers of a good according to their
opportunity cost (p. 55)
exports
goods and services that are produced locally and sold abroad
(pp. 60, 274)
imports
goods and services that are produced abroad and sold locally
(pp. 60, 274)
opportunity cost
whatever must be given up to obtain some item (pp. 7, 55)
Chapter 4 Part 1
competitive market
a market in which there are many buyers and many sellers so that each has a negligible
impact on the market price (p. 68)
complements
two goods for which an increase in the price of one leads to a decrease in the demand for
the other (p. 73)
demand curve
a graph of the relationship between the price of a good and the quantity demanded (p. 70)
demand schedule
a table that shows the relationship between the price of a good and the quantity
demanded (p. 69)
Equilibrium
a situation in which the price has reached the level where quantity supplied equals
quantity demanded (p. 79)
equilibrium price
the price that balances quantity supplied and quantity demanded (p. 79)
equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price (p. 79)
inferior good
a good for which, other things equal, an increase in income leads to a decrease in demand
law of demand
the claim that, other things equal, the quantity demanded of a good falls when the price of
the good rises (p. 69)
law of supply
the claim that, other things equal, the quantity supplied of a good rises when the price of
the good rises (p. 75)
law of supply and
demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity
demanded for that good into balance (p. 81)
Chapter 4 Part 2
market
a group of buyers and sellers of a particular good or service (p. 68)
normal good
a good for which, other things equal, an increase in income leads to an increase in demand (p. 72)
quantity
demanded
the amount of a good that buyers are willing and able to purchase (p. 69)
quantity
supplied
the amount of a good that sellers are willing and able to sell (p. 75)
shortage
a situation in which quantity demanded is greater than quantity supplied (p. 80)
substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the
other (p. 72)
supply curve
a graph of the relationship between the price of a good and the quantity supplied (p. 76)
supply
schedule
a table that shows the relationship between the price of a good and the quantity supplied (p. 75)
surplus
a situation in which quantity supplied is greater than quantity demanded (p. 80)
Chapter 5
consumption
spending by households on goods and services, with the exception of purchases of new housing (p. 105)
GDP deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100 (p. 110)
government
purchases
spending on goods and services by local, territorial, provincial, and federal governments (p. 106)
gross domestic
product (GDP)
the market value of all final goods and services produced within a country in a given period of time (p.
102)
investment
spending on capital equipment, inventories, and structures, including house- hold purchases of new
housing (p. 106)
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth (pp.
29, 100)
microeconomics
the study of how house- holds and firms make decisions and how they interact in markets (pp. 29, 100)
net exports
the value of a nation's exports minus the value of its imports; also called the trade balance (pp. 106,
274)
nominal GDP
the production of goods and services valued at current prices (p. 109)
real GDP
the production of goods and services valued at constant prices (p. 109)
Chapter 6
consumer price
index (CPI)
a measure of the overall cost of the goods and services bought by a typical
consumer (p. 124)
core inflation
the measure of the underlying trend of inflation (p. 127)
indexation
the automatic correction of a dollar amount for the effects of inflation by
law or contract (p. 132)
inflation rate
the percentage change in the price index from the preceding period (p.
126)
nominal interest
rate
the interest rate as usually reported without a correction for the effects of
inflation (p. 133)
real interest rate
the interest rate corrected for the effects of inflation (p. 133)
Chapter 7
catch-up effect
the property whereby countries that start off poor tend to grow more rapidly than
countries that start off rich (p. 151)
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the
quantity of the input increases (p. 150)
human capital
the knowledge and skills that workers acquire through education, training, and
experience (p. 146)
natural resources
the inputs into the production of goods and services that are provided by nature,
such as land, rivers, and mineral deposits (p. 146)
physical capital
the stock of equipment and structures that are used to produce goods and services
(p. 145)
productivity
the quantity of goods and services produced from each hour of a worker 's time
(pp. 13, 145)
technological
knowledge
society's under- standing of the best ways to produce goods and services
(p. 146)
Chapter 8 Part 1
bond
a certificate of indebtedness (p. 169)
budget deficit
a shortfall of tax revenue from government spending (p. 177)
budget surplus
an excess of tax revenue over government spending (p. 177)
crowding out
a decrease in investment that results from government borrowing (p. 184)
financial
intermediaries
financial institutions through which savers can indirectly provide funds to borrowers
(p. 172)
financial markets
financial institutions through which savers can directly provide funds to borrowers (p.
169)
financial system
the group of institutions in the economy that help to match one person's saving with
another person's investment (p. 168)
Chapter 8 Part 2
government debt
the sum of all past budget deficits and surpluses (p. 183)
government net debt
the difference between the value of government financial liabilities and
financial assets (p. 186)
market for loanable funds
the market in which those who want to save supply funds and those who
want to borrow to invest demand funds (p. 178)
mutual fund
an institution that sells shares to the public and uses the proceeds to buy a
portfolio of stocks and bonds (p. 172)
national saving (saving)
the total income in the economy that remains after paying for consumption
and government purchases (p. 176)
private saving
the income that house- holds have left after paying for taxes and
consumption (p. 176)
public saving
the tax revenue that the government has left after paying for its spending
(p. 177)