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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