Ch 3 Demand Law of demand Demand schedule to demand curve Law of demand and diminishing marginal utility Law of demand

and the income effect Law of demand and substitution effect Individual vs. market demand Determinants of Demand Tastes Number of buyers Income Normal vs. inferior goods Prices of related goods Complimentary vs. substitute goods Expectations Supply Law of supply Determinants of Supply Factor prices Technology Taxes and subsidies Prices of other goods Price expectations Number of sellers Supply, Demand, Equilibrium Surpluses Shortages Changes in supply and demand Price ceilings vs. price floors Black markets, rationing (who should get the few goods remaining?), Rent Controls Ch 4 Characteristics of the market system Private property Freedom of enterprise and choice Self-interest Competition Markets and prices Reliance upon technology and capital goods Specialization Division of labor Geographic specialization

Use of money Active but limited government Market System at work What will be produced? Economic costs and profits (normal vs. economic profits) Profits and expanding industries Loses and declining industries Consumer sovereignty and dollar votes Market restraints on freedom Derived demand for resources: Demand for resources are reliant upon the markets need for the goods that they help produce How will the goods and services be produced? Full employment of resources Production of what people want Who will get the goods and services? Distributed to consumers based upon their willingness and ability to pay How will the system accommodate change? Guiding function of prices Technological advance Capital accumulation Competition and the Invisible Hand Efficiency Incentives Freedom Ch 5 Households as Income Receivers Functional distribution of income How income is distributed by rents, interest, wages, profits Personal distribution of income How nations money income is divided among individual households 2001: lowest 20%: 3.6%; highest 20%: 50.2% Households as spenders Personal taxes: 13% Personal saving: 3% Personal Consumption: 86% Durable goods, non-durable goods, services Business Population Plant, firm, industry Legal forms of businesses Sole proprietorship Partnership Corporation

Hybrid Structures LLC, S-Corp The Principal Agent Problem Self-interest of agents that shareholders hire dont always coincide with the self-interest of the shareholders The governments role Providing a legal structure Maintaining competition Redistributing Income Transfer payments Market intervention Taxation Reallocating resources Spillovers and externalities Spillover costs Correction of spillover costs Legislation Specific Taxes Spillover benefits Subsidize consumers Subsidize suppliers Provide goods via government Public Goods and services Public goods: Non-rivalrous/non-excludable Free-rider problem Tragedy of the commons Quasi-public goods Education, streets, police, fire, etc. Promoting stability Unemployment Inflation New circular flow Include government Federal Finance Federal Tax Revenues Personal income tax: 46% Payroll Taxes: 38% Corporate income taxes: 8% Excise Taxes: 4% State tax Revenues Income, sales, property Ch 6 International Linkages Goods and services flows

Capital and Labor flows Information and technology flows US and world trade Volume and pattern Those nations that are not self-sufficient will participate more in international trade Volume US participation has been growing as % of GDP: 11% right now With whom do we trade, and for what? Specialization and Comparative Advantage Comparative costs Terms of trade The Foreign Exchange Market Government and Trade Trade impediments and subsidies Protective Tariff Import quotas Nontariff barriers Export subsidies Why government trade intervention Misunderstanding gains from trade Not always imports bad due to loss of jobs and exports good due to gains of jobs Political considerations Costs to society Multilateral Trade Agreements and Free Trade Zones Reciprocal trade agreements act (1934) Negotiating authority Generalized reductions Most favored nation clause GATT Equal, nondiscriminatory trade treatment for all members Reduction of tariffs by negotiation Elimination of import quotas WTO EU The Euro Zone NAFTA Ch 7 Income Method National Income Compensation of employees Rents

Interest Proprietors income Corporate profits From NI to GDP Indirect business taxes (general sales taxes, excise taxes, business property taxes, license fees, customs duties) Consumption of fixed capital (depreciation) MINUS Net foreign factor income (take off income earned in other nations) Disposable Income = (C + S) Personal Income = (DI + Personal Taxes) National Income = (PI + Undistributed corporate profits + Corporate income taxes + Social security contributions) Net Domestic Product = (NI + Net foreign factor income + indirect business taxes) Gross Domestic Product = (NDP + Depreciation) Nominal vs. Real GDP GDP Price index Shortcomings of GDP Nonmarket activities Homemakers, people who repair own stuff Leisure Improved product quality Black market GDP and environment Composition and Distribution Noneconomic sources of well-being Less crime, better education, world peace, etc. Ch 8 Economic Growth Increase in real GDP Increase in real GDP per capita Growth as a goal Arithmetic of growth Rule of 70 FV = PV * (1+r)^t OR FV = PV * e^rt Main sources of growth Increasing inputs of resources Increasing productivity of resources Most economic growth comes from productivity increases

Growth in US Improved products and services Added leisure Other impacts Better jobs, Less stress in the workplace, etc. Relative Growth rates The Business Cycle Phases Peak Recession Trough Recovery Causation Irregular innovation Productivity changes Monetary phenomenon Animal Spirits Durable vs. non-durable goods Durables hit harder than non-durables Unemployment Measurement of unemployment # unemployed / Labor force Part time employment Discouraged workers Types of unemployment Frictional Search unemployment Wait unemployment Structural Unemployment Cyclical Unemployment Full Employment Economic Costs of unemployment Okuns Law GDP Gap = Actual GDP Potential GDP For every 1% of unemployment above natural rate, GDP Gap increases by 2% Unequal Burdens Occupation: Lower-skilled occupations suffer more from unemployment than do higher-skilled ones Age: Younger gets hit harder Race/Ethnicity: Minorities get hit harder Gender: Differs Education: More = better Duration: Longer = very bad Noneconomic costs Not having a job is stressful; stress is bad

International comparisons US relatively low for developed world Inflation Price indices Laspeyres: Uses current level quantity; overstates inflation Paasche: Uses base year quantity; understates inflation Fischer Index: Takes geometric mean of Laspeyres and Paasche sqrt(PL * PP) Measurement of inflation CPI GDP Deflator PPI Types of Inflation Demand-Pull Caused by increases in demand for goods/services Cost-Push Caused by increases in price of production Complexities When demand-pull looks like cost-push Demand increases, prices go up Prices that go up include input prices such as labor, land, capital This might look like cost-push, but its demand-pull Demand pull will last as long as whatever is causing it stays around Cost-push is self-destroying Eventually people will find alternatives Ch 9 Consumption vs. savings 45 degree line Consumption schedule Savings schedule DI = C + S At low levels of income, dissavings occurs Average and Marginal propensities to save/consume APC = consumption / income APS = savings / income APC + APS = 1 MPC = dC / dI MPS = dS / dI MPC + MPS = 1 MPC and MPS are the slopes of the Consumption and savings curves Non-income determinants of consumption/saving Wealth

When value of accumulated savings increases, people will spend more and save less Expectations If we expect rising prices soon, we will spend more now Real interest rates Higher = more savings Lower rates = more purchases and more credit Household debt More debt, less C Taxation Taxes go up, C and S go down Interest-rate-investment relationship Expected rate of return Purchase price = $1000 Expected return = $1100 Expected rate of return = $100/1000 Real interest rate If r = 7% Cost of $1000 investment is $70 Expected return = $100, cost = $70 = profit of $30; this is a good investment Invest up to where interest = rate of return Investment demand curve Shifts of investment demand curve Acquisition, maintenance, operating costs Business taxes Tech change Stock of capital goods on hand Expectations Instability of investment Durability Irregularity of innovation Variability of profits Variability of expectations Multiplier Effect Multiplier = change in GDP / Initial change in spending Change in GDP = Multiplier * initial change in spending Rationale Infinite geometric summation 1/(1-r) r = MPC 1-r = MPS 1/(1-MPC) 1/MPS Less in reality People might pay extra in taxes such as sales/excise

Ch. 12

People might buy imports instead of domestic

Legislative mandates Employment Act of 1946 Council of Economic Advisors and Joint Economic Committee Fiscal Policy and AS/AD Expansionary Fiscal Policy Increase government spending Reduce taxes Mixture of both Expansionary policy will shift AD to right, then multiplier effect will shift it further Increased Government Spending Increased Govt spending will increase G component of CIGX AD will shift to rt Tax Reductions If MPC is .75 and taxes are decreased by $20B, then C will increase by $15B This will shift AD to rt This is not as efficient as govt spending since MPC for personal consumption is not 1 It is more economically efficient per dollar spent, though, since Govt spending cannot perfectly simulate what personal consumption would be Mixture of both will include both of these effects Contractionary Fiscal policy works the same way Financing of Deficits and Disposing of surpluses Borrowing vs. New Money Borrowing from public Bonds are issued, money collected, money spent Bond Illusion, if not true, would limit effectiveness Printing Money New money printed, govt spends it No worry about lack of bond illusion, but inflation is a problem Disposing of Surpluses Debt reduction Use the extra surplus to pay off excess debt Govt buys back bonds and retires them Problem with this is that adding more money to economy by buying bonds will offset some of the contractionary fiscal policy Impounding Just sit the funds on the sidelines, allowing them to do nothing Less inflationary, more contractionary, more controversial Automatic stabilizers

Systems that kick in to provide automatic stimulus or lack thereof when needed Tax System Tax system is an automatic stabilizer Govt spending per year is fixed Taxes are tax rates If economy is too weak, the govt will spend the money anyway, and any tax shortfall will be made up with deficit spending. This leads to an automatic stimulus The opposite is true if too much money comes in Tax Progressivity If everyone begins to make more money, people, on average, will pay higher rates of taxes, thus automatically increasing taxes and slowing economic growth Evaluating Fiscal policy Full Employment Budget Used to adjust the actual Federal budget deficits and surpluses to eliminate the automatic changes in tax revenues Measures wht the Federal budget deficit or surplus would be with existing tax rates and govt spending elvels if the economy had achieved its full-employment lvl of GDP This allows economists to see what the tax revenues and govt expenditures would have been if things had been ideal Then, we can see if things were above or below this level Use figure 12.4 as a graph Problems, Criticisms, Complications Problems of Timing Recognition lag It takes a long time to recognize that we are in a recession It also takes a long time to recognize when we are out of one Administrative lag It takes time to get the wheels of govt going to solve the problem or stop solving the problem Operational Lag It takes time for the solution to take effect or stop taking effect Political considerations Future policy reversals Offsetting state and local finances Much state and local financing is pro-cyclical Laws and constitutions require state and local govts to balance their budgets and thus they spend a lot in good times and spend very little in bad Crowding Out Effect Net Export Effect Problem: Recession

Expansionary fiscal policy higher domestic interest rates increased foreign demand for dollars higher value of dollar internationally Lower net exports Ch 17 Supply factors Increase in quality and quantity of natural resources Increases in quantity and quality of human resources Increase in supply of capital Improvements in technology Demand factors People must want the increased production Efficiency Factor Must use the increased factors in the most efficient way possible Production possibilities analysis Growth and production possibilities Labor and productivity Hours of work Labor productivity Growth in as/ad model Production possibilities and AS Extended AS/AD model Accounting for Growth Labor inputs vs productivity Generally the trend has been to have more increases in productivity than labor inputs Technological advance Quantity of Capital Education and training Economies of scale Economies of scale Resource allocation Ch 18 Debt definitions Public vs. total debt Budget philosophies Annually balanced budget Cyclically balanced budget Functional finance What causes debt Wars Recessions Lack of fiscal discipline

Quantitative Aspects Debt vs. GDP International comparisons Interest charges Ownership Effects on Social Security Not so big factors Bankruptcy Burdening of future generations Most is owed to US citizens, so just transfer from one American to another Substantive issues Income distribution Incentives Foreign-owned public debt Crowding Out effect