Economics: Units Covered Final Exam Review

1. HAVE FUN! FINAL EXAM Test Review

2. Units Covered • 1)Intro to Econ • 2) Supply & Demand • 3) Business & Market Structures • 4) Government: Fiscal/Monetary Policy • 5) Labor & Income Distribution & Globalization

3. Introduction to Econ Review

4. Why do we need Economics? • Resources are SCARCE • People have Unlimited Wants and Needs FORCES: 3) Society to allocate resources • The social science of how society allocates scarce resources.

5. Branches of Economics • Microeconomicslooks at individualparts of economy: • How households & firms make decisions and interact in specific markets • Macroeconomics looks at the entire economy: • Economy-wide phenomena including: inflation, unemployment, interest rates & GDP (economic growth)

6. 3 Types of EconomicSystems • MARKET • COMMAND • TRADITIONAL Understand the difference between each one! They have different goals: GEES

7. Adam Smith (1723-90) • Founder of Free Market Economics • Argued: Free markets best promote the social welfare • Government should not interfere with the free market (invisible hand regulates the market)

8. What is an Economy? • The way goods, services & moneyflow through an economic system The Circular Flow describes how goods, services & money flow through a market economy

9. CIRCULAR FLOW of a Market Economy Products Demand Supply CONSUMERS Circular Flow PRODUCERS Supply Demand Factors (Land, Labor & Capital)

10. Gross Domestic Product: - measures the % rate of economic growth - released quarterly in USA - speed limit for USA is 4.0% GDP = G + C + I + (X-M)

11. Business Cycle

12. PPF Summary • Line represents all efficient production points • Assumes a country uses all of its scarce resources • Points below are inefficient • wastes scarce resources • Points above are not attainable in short run • With existingtechnology & resources • Long Run goal is to shift the line outward

13. Supply & Demand Review

14. Utility:means satisfaction Law of Diminishing Marginal Utility • As more units are consumed =>additional satisfaction declines Marginal Utility: The amount of satisfaction a person gets from one additional unit of a product

15. S1 -------------- P1 ------------- D1 Q1 Equilibrium occurs whenDemand = Supply T-Shirts Price E1 Qty

16. Changing Demand • Know the difference between a: • 1) Change in Demand (TIPSE) • A new demand curve is required when a determinant of demand changes • Causes a shift in Demand curve • 2) Change in Quantity demanded • Movement along existing curve

17. Changing Supply • Know the difference between a: • 1) Change in Supply (TIN) • A new demand curve is needed when a determinant of supply changes • Causes a shift in Supply curve • 2) Change in Quantity Supplied • Movement along existing curve

18. Change inQuantity Demanded • ONLY price changes => Qty Demanded Changes Movement along an existing Demand Curve Only Price Changes D1

19. Determinants of Demand Determinants of Supply This is what determines if you should shift the Supply or Demand Curve TIPSE TIN [Tastes, income, population, price-complements Price substitutes, expectations] Technology, input prices number-sellers NEW Demand Curve NEW Supply Curve

20. Sample Problem Event: Economy starts to boom, jobs are easy to find Automobiles TIPSE ↓ Expectations ↑ ↓ Demand ↑ (shifts right) Price S1 P2 ------------------- E2 -------------- P1 E1 ------------------ ------------- D2 D1 Q1 Q2 Qty

21. Px D1 Qty Elastic Goods • Elastic demand curves are flat • Sensitive to price changes • A ↑ Price leads to a greater↓ in Qty Demanded

22. Qty D falls more than price Elastic Demand Curve .

23. Px D1 Qty Inelastic Goods • Inelastic demand curves are steep • Not Sensitive to price changes • A ↑ Price leads to a smaller↓ in Qty Demanded

24. What you need to know! • More elastic demand curves are flat • Elastic means Qty D is sensitive to Px Changes • Total Revenue=> Prices elastic goods • Total Revenue=> Prices inelastic goods

25. Market Structure Review

26. Perfect Competition Monopolistic Competition Monopoly Oligopoly # Sellers Ease of entry Price Control Importance: Know the 4 market structures and their characteristics

27. Many firms Type of Products? One Few Differentiated Identical firm firms products products Monopolistic Perfect Monopoly Oligopoly Competition Competition • Tap water • Soft Drinks • Shoes • Wheat • Electricity • Automobiles • Restaurants • Milk Number of Firms

28. Perfect Competition Characteristics • Many Firms • Homogenous products • Complete freedom to enter or leave industry • Perfect information • No price control—sell at Market Price • Price Takers

29. Smith’s two primary laws • 1) Self-Interest: • People act in their own self-interest • Profits or greed motivate individuals • 2) Competition: • Lots of producers—you “fear” competition • Assures goods are produced at the lowest possible price: economic efficiency

30. PRICE DISCRIMINATION • Price discriminationis the business practice of selling the same good at different prices to different customers • For a Firm to price discriminate it must: • have some market power (some price control) • be able to identify & separate groups of consumers • be able to prevent resale between consumers

31. Unit Wrap Up: 3 Market Failures • Predatory Pricing • Is Wal-Mart guilty? • Negative Externalities • Pollution • Price Fixing • Collusion- do you trust corporations?

32. Government Review Gov’t Budget & Fiscal & Monetary Policy

33. Deficit & Debt relative to GDP • Current Deficit = 425 Billion • Current Debt = 9.4 Trillion • Current GDP = 13.5 Trillion • Deficit as % of GDP = 3.1% of GDP • Highest ever (1983) was 6% of GDP • Debtas % of GDP = 70% of GDP • Highest ever (1946) was 120% of GDP

34. 2 Types of Fiscal Policy • Expansionary Goal: Increase AD (*) • Restrictive Goal: Decrease AD Increase Gov’t Spending Decrease Taxes Decrease Gov’t Spending Increase Taxes (*) AD = Aggregate Demand which is demand for the entire economy from Individuals, businesses & Government

35. FISCAL POLICY Expansionary fiscal policy needed AS1 Lower Taxes & ↑ Gov’t spending AD1 AD2 AD shifts right End result: higher GDP, more Jobs & slightly higher inflation Fiscal Policy will shift AD curve Economy in recession Price Level Real GDP

36. 2 Types of Monetary Policy • LOOSE Monetary Policy Goal: AD • 1) Lower Discount Rate & Use Open Market Operations: • TIGHT Monetary policyGoal: AD Buy Securities => Increase MS => lower interest rates 1) Raise Discount Rate & Use Open Market Operations Sell Securities => Decrease MS => raises interest rates

37. Price Level MS1 MS2 AS1 Affects AD AD1 i1 --------- i2 --------------- Real GDP Recession: GDP growth at -2.0%, Unemployment 7% Loose Monetary Policy in action Interest Rate AD2 MD Qty of $ Lower interest rates will shift AD to the right

38. Labor & Income Distribution

39. Lorenz Curve Line of Income equality Gini Coefficient between 0 and 1

40. Wealth vs. Income Numbers YOU should know • Top 20% has 84% of Wealth • Top 20% has 47% of Income • Top 1% has 39% of Wealth • Top 1% has 15% of Income

41. Trend in U.S. Immigration • 1910 15% (of population) • 1950 7% “ “ • 1970 5.0% “ “ • 2004 11.0% “ “ • 24 million people • 11 million illegal (estimate)

42. Trends in Labor Unions • Union membership has declined significantly • 1953 peak of 36% of labor force • 2004 dropped to 12% of labor force

43. Trade & Globalization

44. Trade Theory • Understand the theory of Free Trade • Why trade, in theory, is mutually beneficial • Understand why Globalization is occurring today

45. Here is my great theory! Ricardo’s Theory • Countries should produce (specialize) in goods where they have a comparative advantage • Trade benefits both parties (each country gets “more”) • Free Trade promotes a more “efficient” world economy • Absolute Advantage is not relevant in trade analysis

46. Determining Comparative Advantage BRAZIL MEXICO 1 Coffee = ____Wheat 1 Coffee = _____ Wheat 1 Wheat = ____ Coffee 1 Wheat = ____Coffee coffee 1 1/2 1 wheat 2 Wheat : BRAZIL has comparative advantage---produce only WHEAT Coffee : MEXICO has comparative advantage---produce only COFFEE Coffee BRAZIL 1000 1000 MEXICO 1000 500 Wheat Wheat

47. Globalization: Why Now? 1) Fall of Soviet Union 2) Rise of Technology • This combination has made it possible for the world to become one global • Economy: • The Fall of the Soviet Union meant the end to a purely communist • Economic system. • The rise of Technology meant it was now possible for information to be shared • around the globe. This has allowed jobs to move more freely between countries

48. P2 ------------------- E2 ------------------ D2 Event: Globalization Increases Skilled Workers TIPSE ↓ Tastes ↑ ↓ Demand ↑ (shifts right) Price S1 -------------- P1 E1 ------------- D1 Q1 Q2 Qty