Download Exam 2 Study Guide Outline

ECON 2100 Economics and Society
Exam 2 Study Guide Outline
(PS 5 – 10)
Chapter 4: Choice, Markets, and Government
 Analysis of Economic Decisions (3 concepts)
o Objectives (Goals)
o Constraints
o Choices
 Rationality
o Full and bounded rationality
 Preferences
o Self-regarding and Other-regarding
 Market performance (degree to which markets work efficiently in providing arrangements for mutually
beneficial trade)
 MARKET FAILURES (market is allocatively inefficient)
o Externalities
 Positive Externality
 External Benefit
 Negative Externality
 External Costs
 Government “Solutions”
 Subsidy
 Tax
o Public Goods
 Characteristics:
 Nonrival
 Non-excludable
 Free-rider Problem and Assurance Problem
 Government Provision
o Insufficient Competition (i.e. Monopoly)
 Market Q will be lower than efficient Q
 Anti-trust Law
 Regulation
o Government Policies
 Sometimes policies can be the cause of economic inefficiency
Chapter 5: Understanding the Choices Consumers Make
 Goal of consumer  Maximize Utility
o Law of Diminishing MU
 Consumer equilibrium
o Finding it using MU approach
 MUx/Px = MUy/Py
o Changes in Price
 Consumer Demand Curve
 Income and Substitution effects of Price change
o Normal Good
o Inferior Good
o Giffen Good (theoretical)
 Individual to market demand
 Gains from exchange
o Consumer and Producer Surplus
o Excise taxes and Deadweight Loss (Excess Burden of Tax)
o Tax Revenue & elasticity
o Tax Incidence (distribution of economic burden of tax)
Chapter 8: In Search of Prosperity and Stability
 Three Main Macro Goals
o Economic Growth
o Full Employment
o Stable Prices
1. Economic Growth
 Gross Domestic Product (GDP)
o Real GDP vs. Nominal GDP
 Sources of Economic Growth
o Growth of total labor inputs (population, labor force participation rate, average hours worked)
o Growth of labor productivity (productivity = output per worker, or output per labor hour)
 Benefits of Economic Growth
o Higher average standard of living (More goods and services)
 Costs of Economic Growth
o Budgetary Costs
o Consumption Costs
o Opportunity cost of workers’ time
o Other Social Goals
 Business cycle
o Expansions
o Contractions
o Recessions/Depressions
o Relationship with employment
2. Full Employment
 Unemployment
o Bureau of Labor Statistics (BLS)
o Types of Unemployment
 Frictional
 Seasonal
 Structural
 Cyclical
o UE rate
o Main economic cost of UE: opp cost of lost output
o Problems with measurement of UE
 Involuntary part-time workers
 Discouraged workers
 Full Employment
o Potential GDP
o Natural rate of unemployment
 Alternate measures of employment situation
o Payroll Survey
o Employment-Population Ratio
3. Stable Prices
 Price level
 Inflation
 Consumer Price Index (CPI)
o Calculate inflation rate (from period X to period Y)
𝐶𝑃𝐼𝑌 − 𝐶𝑃𝐼𝑋
 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 =
× 100
o
o

𝐶𝑃𝐼𝑋
Index payments
Translate from nominal to real variables
 i.e. wages
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑊𝑎𝑔𝑒𝑡
 𝑅𝑒𝑎𝑙 𝑤𝑎𝑔𝑒𝑡 =
× 100
𝐶𝑃𝐼𝑡
Costs of Inflation
o Redistributive costs
 Real Interest rate = nominal interest rate – inflation rate
o Resource costs