Macroeconomics:

Allocation made to:

-Encourage economic growth

-Achieve price stability

-Accomplish low unemployment (or high employment)

Expand the economy/improve standard of living

Optimize distribution of resources

Maximize Utility ACROSS all economic units --> Allocative Efficiency

Concept of lifting up all other boats

Utility Definition:

The ability to satisfy.

Syn. = Useful/usefulness

Product Efficiency Definition:

No better way to rearrange resources to increase value.

Ceteris Paribus Definition:

Assumption that variables are constant

Efficiency Definition:

How well resources are used/allocated

Positive Questions Definition:

Can be answered with available information/typically is what is true.

Normative Questions Definition:

Questions you really have to think about

Markets promote?

Efficiency through the invisible hand (Adam Smith)

C

E

L

L

Capital - Interest

Entrepreneurship - Profit

Land - Rent

Labor - Wages

Production & Forms of Utility:

Adding or creating value:

Form - taking parts and making something new

Possession - feeling good about a purchase/owning the item

Time - Valentine's flower example

Place - Amazon delivery example (don't have to be in store to get it)

Allocative Efficiency Definition:

Mix of goods and services produced is the most desired by society.

Production Efficiency:

Mix of goods is produced at the lowest possible resource/opportunity cost by society.

PPFs

Left of PPF = attainable + inefficient

Right of PPF = unattainable + not possible

On PPF = possible + efficient

What can make PPF grow?

-Increase in labor

-Different policies

-More RnD

-Less inflation

-Less taxes

-More international trade

Positive-Sum Game

Trade between countries, benefits all

Comparative Advantage Definition:

When the opportunity cost to produce a good is lower than another country's.

Profit Formula:

Total Revenue - Total Cost

OR

$ Remaining = $ in - $ out

Value Formula:

First thing * Cost to produce + Second thing * Cost to produce

Diminishing Marginal Return Definition:

When resources start bending away from being productive.

Comparative Advantage Formula:

Give/Get

Comparative Advantage Example:

India Brazil

5000 Cotton 3000 Cotton

20000 Rice 11000 Rice

1 Cotton for India = 4 Rice

1 Rice for India = .25 Cotton --> Lowest (out of the two options for cotton)

1 Cotton for Brazil = 3.75 Rice --> Lowest (out of the 2 options for rice)

1 Rice for Brazil = 3/11 Cotton

Demand Curve:

Downward slope to the right

QD is usually dependent on the price

Law of Demand:

Holding all else equal, as price goes up, quantity demanded goes down, and as price goes down, quantity demanded goes up.

Supply Curve:

Upward slope to the right

Positive relationship

As price goes up, QS goes up | as price goes down, QS goes down

Equilibrium:

Where QS = QD

Market Definition:

Institution that allows buyers and sellers to interact.

Demand Definition:

Max amount of a product that buyers are willing and able to purchase over time at various prices

Determinants of Demand

P
R
I
C
E

Preferences/taste

Related Goods (substitutes/complements)

Income of buyers

Count/# of buyers

Expectations of future prices, supply, or events (natural disasters, etc.)

Demand Curve Shifts

Shift to the left = decrease in demand

shift to the right = increase in demand

Reduce in price = increases QD, DOES NOT shift | movement along

QD changes when?

Price changes

Decrease in Demand:

Tastes & preferences go down

Income goes down

Price of substitutes goes down

Price of complements goes up

# of buyers goes down

Price expectations go down

OPPOSITE FOR INCREASE IN DEMAND

Decrease in Supply:

Tech goes down

Resource costs go up

Price of production substitutes go up

Price expectations for future go up

# of sellers goes down

Taxes/Subsidies go down

OPPOSITE FOR INCREASE IN SUPPLY

Surplus:

Price above market equilibrium, QS is higher than QD

Shortage:

Price lower than market equilibrium, QD higher than QS

Minimum Wage is an example of:

A price floor

Total Revenue formula:

P * Q

First set equations to QD = QS

Set QD = 0 to find?

Set QS = 0 to find?

QD - QS = ?

Max selling price

Max supply

Opportunity

QD = QS Example Problem

Demand: 75 - 4P

Supply = -24 + 6P

P = 9.9 --> Plug back in

QD & QS = 35.4

When QD = 0 --> 18.75

When QS = 0 --> 4

Elasticity Definition:

Measure of responsiveness/indication of resistance to some force

Force = Price

Response = QD

Elastic

Abs. Value (Large% change in QD/small% change in P)

If > 1, elastic

Typically not steep curves

Luxury Cars

Inelastic

Abs. Value (small% change in QD/Large% change in P)

If < 1, inelastic

Usually steep curves

Gasoline is an example

E

L

A

S

T

I

C

Luxuries

Absolute Value > 1

Substitutes

Time, a lot

Income % - large

Coupons

Inelastic

N

A
F
N
S
P

Necessities

Absolute Value < 1

Few Substitutes

Not a lot of time

Small % of income

Price and TR in same direction

Quantifying Midpoints formula:

Abs. Value ((Q2 - Q1/(Q2+Q1)/2)/

(P2-P1/(P2+P1)/2))

Cross Price Elasticity Formula:

QD change with change of related good price

% change of Qa / % change of Pb

Same as midpoint formula, no need to divide by 2 in either

if +, then substitute

if -, then complement

Income Elasticity Formula

% change in Q / % change in Income

if +, then normal good

if -, then inferior good

Price Elasticity Formula:

Abs. Value (% change in Qd / % change in P)

Fixed Costs:

Variable Costs:

Not going to change

Will change

Implicit Costs:

Explicit Costs:

Constant Costs

Actual out of pocket costs

Average Fixed Cost:

Average Variable Cost:

Average Total Cost:

Marginal Cost:

Marginal Revenue:

Total Fixed Cost / Q

Total Variable Cost / Q

Total Cost / Q

Change in total cost / change in Q

Change in total revenue / Q

When is profit maximized?

When MR = MC

Perfect Competition:

-we get to set the price

-duplication of resources

# of sellers - very many

Product Type - undifferentiated/common

Control over price - None/price taker

Barriers to entry/exit - easy

Monopolistic Competition:

-we like choices

-lose control of price

# of sellers - many sellers

Product type - differentiated/seem unique

Control over price - limited/price maker

Barriers to entry/exit - few barriers

Oligopoly:

-price stability

-have fewer choices

# of sellers - few

Product Type - unique in function/differentiated in industry

Control over price - substantial price maker

Barriers to entry/exit - high

Monopoly:

(Market curves gradually get steeper)

-less wasted resources

-no price/substitute options

# of sellers - one

Product Type - unique

Control over price -price maker

Barriers to entry/exit - high

5 Market Failures

P

A

U

S

E

Public Goods (Excludable (toll road) vs. rivalrous (apple))

Asymmetric Information (insider trading)

Unequal Distribution of income among equals

Structural Failure (profit is favored over consumer)

Externalities - external costs/benefits

GDP Formula:

Consumption Spending + Investment Spending + Government Spending + (Exports -Imports)

Recession:

6 months of real GDP decline

Inflation:

increase in the general level of prices

Deflation:

Reduction in the general level of prices

Unemployment:

Out of work, looking for work, and able to work

Underemployment:

Work that seems below your skill-set

GDP:

Real GDP:

All goods & services produced

Same thing just adjusted for inflation

GNP:

Goods and services produced by American-owned all over the world

Unemployment Formula:

Unemployed/labor force + unemployed

3 Key Indicators:

Leading - predict where we're headed

Roughly Coincident - validate where we are

Lagging - verify where we've been

Cost Push Inflation:

Demand Pull Inflation:

Prices up, output down

Prices up, output up

3 Types of Unemployment

Structural - mismatch in skillsets/geography

Cyclical - nearly 0/ caused by recession

Frictional - temporary

Economic Growth:

Basically just GDP increases

Who provides GDP information?

Bureau of Economic Analysis

Who provides CPI information?

Bureau of Labor Statistics

Core Rate CPI:

Measurement of inflation that looks at all sectors except for food and energy

PPI:

Measures average selling price over time with domestic producers

GDP Deflator Formula:

GDP/Real GDP, then *100