Review sheet for first midterm -- key points from early chapters.

Chapter 1:

Definitions -- economics as study of choice, as caused by scarcity, unlimited wants but limited resources to satisfy them;

Questions: What? How? When? Where? Who?

Ideas: Choice as tradeoff;

Marginal benefit and marginal cost -- if MB>MC, better off it you do it;

Voluntary exchange benefits both parties

Markets are efficient because they move things to those who value them most

Market failure can happen

Expenditure on final goods equals value of output of final goods equals income generated

Growth allows higher living standards

Inflation occurs if money grows faster than output

Some unemployment is normal and necessary because of job and employee search

Micro -- small, studies individual agents, markets, goods, etc

Macro -- large, studies things at level of whole economy, e.g. inflation, employment/unemployment, output, growth, money, interest rates, etc.

Efficiency -- how much, how maximize value of all output, versus Equity -- who gets it, who pays for it

Positive -- what is, refutable by facts; versus Normative, an opinion, value judgement, what ought to be, cannot be refuted by facts.

"Ceteris Paribus" -- other things equal

Fallacy of Composition -- what works for one may not work for all

"Post Hoc ergo Propter Hoc" -- after this, therefore because of this -- fallacy, correlation is not causation
 
 

Chapter Three:

The PPF -- Production Possibilities Frontier. Feasible output combinations on or inside, not feasible outside. Inside is inefficient, because you could produce more of both outputs, implies waste or unused resources.

Opportunity cost comes from movement around the curve -- how much you have to give up of one good to get a unit of the other (the one whose opportunity cost you are calculating)

PPF and growth -- moving the PPF out; from more inputs (e.g. capital accumulation), technical change, human capital accumulation, more natural resources, better organization.

Comparative Advantage: You have comparative advantage in the production of the thing for which you are the low opportunity cost producer. Specialization in that, and exchanging (trading) for things you are a high opportunity cost producer of, allows both you and your trading partner to become better off [voluntary exchange], i.e. consume outside your PPF.

Absolute advantage -- you are more productive than others absolutely. BUT you cannot have comparative advantage in everything, you can always benefit from specialization [in what you are low opportunity cost producer of] and exchange.

Chapter Four:

Demand and Supply.

The demand schedule slopes down, because it shows the amount buyers want to buy at different prices for a fixed set of other conditions; if something becomes more expensive, at least some buyers will substitute something else for some of this so overall buyers will want to buy less.

Change in quantity demanded arises from change in the good's own-price, everything else constant; change in demand means how much buyers want to buy at a fixed price has changed, because something other than own-price [which affects how much people want to buy] has changed.

Things that change demand -- PYNTE -- see notes.

Supply is similar, shows quantities that sellers want to sell at different prices for fixed set of other conditions, for a market with many small sellers. If the own-price changes, you get a change in quantity supplied, i.e. amount sellers want to sell; if something else changes that affects how much sellers want to sell at a fixed price, then you get a change in supply [the whole curve]. The things that change supply -- PEST -- see notes.

Shifting curves -- practice!

Complements [go together] and substitutes [one instead of the other] in consumption and production, and how that affects demand, supply, and the market.

Normal goods [demand increases if income does] and inferior goods [demand decreases if income increases, like ramen noodles].

Equilibrium:

Where the curves cross, at that price [the equilibrium price] the amount buyers want to buy equals the amount the sellers want to sell [the equilibrium quantity], the market clears, and there is no tendency for price to change. If price were higher, sellers would want to sell more than buyers want to buy, there would be a surplus or excess supply, and price would tend to fall. If price were lower, sellers would want to sell less than buyers want to buy, there would be a shortage, or excess demand, and price would tend to increase.

Changes -- what will happen? Practice -- see notes.
 
 

Chapter 5:

Intro to macro

Main issue is the idea of a business cycle, definitions of recession, expansion, peak, and trough, and definitions of inflation and unemployment. See recent notes. Most everything is repeated in more detail in chapter 6.

Chapter 6:

GDP/National income accounting:

Two ways to measure: Expenditure on final output, C + I + G + (X - M).  [Expenditure on final goods must equal value of output of final goods, because inventory change is defined as investment]

Consumption [HH spending]; Investment, gross [purchases of capital goods plus additions to inventories]; Government expenditure [all]; net exports [exports minus imports]. NOT intermediate goods -- things used up in the production of other things.

Income: Payments to factor inputs [resources, i.e. labor, capital, natural resources, entrepreneurship; i.e. labor compensation, net interest, rent, profits -- "value added"], plus indirect business taxes and depreciation. [Total income + indirect business taxes + depreciation equals total value added, for the whole economy is the cost of producing all final goods so is equal to the value of output of final goods].

Price Indices: A price index measures the average level of prices; its rate of change is the rate of inflation.  Deflation is the price level falling, negative inflation.

CPI: Consumer Price Index.  Fixed 'basket' of goods and services based on an expenditure survey of households is costed [priced] now, and that cost divided by the same fixed basket's cost in the base period, multiplied by 100, to give the index.

GDP deflator.  A broader price index, for the whole of GDP.  It is derived from the estimate of 'real GDP,' i.e. GDP adjusted for inflation, and nominal or 'money' GDP, which is GDP in current prices.  The GDP deflator equals money GDP divided by real GDP, times 100 to give an index number.  'Money' equals 'real' times 'price index,' divided by 100.  Real GDP is estimated by a 'chain index' method, do not worry about the details; what you need to know is that real GDP has been adjusted for inflation, so that it is an estimate of the quantity of GDP; the GDP deflator is the estimate of the price level of GDP, so money GDP is quantity x prices, i.e. real GDP times the GDP deflator.