Unit 7

Balance of Payments

• Balance of Payments Defined
• The sum of all the transactions that have taken place between a nation's residents and the residents of all foreign nations.
• Transactions Include:
• Exports and imports of goods
• Exports and imports of services
• Tourist expenditures
• Interest and dividends received or paid abroad
• Purchases and sales of financial or real assets abroad

3 Components

• Current Account
• U.S. trade in currently produced goods and services
• Balance of Current Account is found when all transactions in current account are added.
• Capital Account
• Summarizes the purchase or sale of real or financial assets and the corresponding flows of monetary payments accompanying them.
• Official Reserves Account
• Quantities that central banks of nations hold of foreign currencies
• All three components must equal zero.

Balance of Payments Deficits and Surpluses

• Imbalances between current and capital accounts that cause a drawing down or up a building up of foreign currencies.

Foreign Exchange Market

• Foreign Exchange Market Defined
• A market in which various national currencies are exchanged for one another.
• Exchange Rates
• Equilibrium prices in the markets
• Two Points of Foreign Exchange Markets
• Competitive Market:
• Characterized by large numbers of buyers and sellers dealing in standardized products such as the euro, yen, and the dollar.
• Linkage to All Domestic and Foreign Prices:
• The market price or exchange rate of a nation's currency is an unusual price that links all the domestic prices with all the foreign prices.
• Changes in Foreign Exchange Rates
• Increase in the supply of currency will decrease the exchange rate of a currency.
• Decrease in supply will increase exchange rate.
• Increase in demand, increase in exchange rate.
• Decrease in demand, increase in exchange rate.
• Exchange Rate Determinants / Appreciate & Depreciation
• Buyer's Taste
• Relative Income
• Relative Price Level
• Appreciation: currency increases in value
• Depreciation: exchange rate decreases

Comparative and Absolute Advantage

• Principle of Absolute Advantage
• One country would have an absolute advantage over the other if it is able to produce the same amount of goods with fewer resources.
• Principle of Comparative Advantage
• A nation has the comparative advantage in the production of a product when it can produce the product a lower domestic opportunity cost than it can with a trading partner.
• Terms of Trade
• The rate of exchange of two products that can be determined through negotiation, thus the outcome is the terms of trade.
• Gains from trade are based on comparative advantage.
• Video

Specialization and Trade

• Specialization based on comparative advantage improves global resource allocation.
• Specialization and trade also increase the productivity and the standard of living within a nation.
• There will be a larger global output of goods and services due to specialization and trade.

Unit 5 & 6

Long Run and Short Run Curves

• AS curves doesn’t shift in response to changes in the AD curve in the short run.
• Nominal wages do not respond to price-level changes
• Workers may not realize impact of the changes or may be under contract.
• Long Run – period in which nominal wages are fully responsive to previous changes  in price level
• When changes occur in the short run they result in either increased or decreased
• producer profits – not changes in wages paid.
• Nominal wages – money getting paid, Real wages – actual value of money, actual gross pay
• In the long run, increases in AD result in a higher price level, as in the short run, but as workers demand more money the AS curve shifts left to equate production  at the original output level, but now at a higher price.
• In the long run, the AS curve is vertical at the natural rate of unemployment (NRU), or full employment (FE) level of output. Everyone who wants a job has one & no one is enticed (tempt) into or out of the market.
• Demand-pull inflation will result when an increase in demand shifts the AD  curve to the right, temporarily increasing output while raising prices.
• Cost-push inflation results when an increase in input costs that shifts the AS curve to the left. In this case, the price level increase is not in response to the 
• increase in AD, but instead the cause of price level increasing.

The Philips Curve

• represents the relationship between unemployment and inflation
• The trade-off between the inflation and the unemployment occurs in the short run
• Each point on the Philips curve corresponds to a different level of output

Long Run Philips Curve

• It occurs at the Natural Rate of Unemployment (NRU)
• It is represented by a vertical line
• There is no trade-off between unemployment and inflation in the long run
• The economy produces at the full-employment output level
• The nominal wages of workers fully incorporate any changes in price level as wages
• adjust to inflation over the long run.

Determinants of the Philips Curve

• Increase in AD = Up/left movement along SRPC
• Determinants (increase): AD to the right, GDPR up & PL down: u% down & π% up: up/left along the curve
• Decrease in AD = Down/right movement along SRPC
• Determinants (decrease): AD to the left, GDPR up & PL down: u% up & π% down: down/right along the curve
• SRAS down = SRPC to the left
• Determinants (Inflationary Expectations, Input Prices, Productivity, Business Taxes, and/or
• Deregulation) (decrease): SRAS to the right, GDPR up & PL up: u% down & π% down: SRPC to the left
• Supply shock - a rapid and significant increase in resource cost which causes the SRAS curve to shift
• Natural Rate of Unemployment (NRU) = frictional + structural + seasonal
• The natural rate at fewer worker benefits creates a lower NRU
• Misery Index – the combination of inflation and unemployment in any given year
• Single digit misery is good
• If the inflation rate persists and the expected rate of inflation rises, then the entire SRPC moves
• upward. If inflation expectations drop (new technology, efficiencies), then the SRPC moves downward. 
• Stagflation occurs when you have high unemployment and high inflation at the same time.
• Disinflation – when inflation decreases over time:

Nominal

• Business profits fall
• Firms reduce employment, thus unemployment increases
• Laffer Curve – trade-off between tax rates and government revenue; As tax rates increase from 0,tax revenues increase from 0 to some maximum level and then decline.
• The higher the tax rate you set, the less money you will collect. Laffer Curve is controversial anddebatable.

Criticisms on the Laffer Curve

1. Where the economy is located on the curve is difficult to determine.
2. Tax cuts also increase demand which can fuel inflation
3. Empirical evidence suggests that the impact of tax rates on incentives to work, save,
and invest are small
Supply-side economics or Reaganomics

• They support policies that support GDP growth by arguing that high marginal tax rates along with the current system of transfer payments (unemployment compensation and social security) provide disincentives to work, invest, innovative, and undertake entrepreneurial ventures. They believe that the AS curve will determine levels of inflation, unemployment, and economic growth.
• Marginal Tax-Rate: The amount paid on the last dollar earned or on each additional dollar earned.
• Supply-side economists believe that if you reduce the marginal tax rate then more people will be able to work longer thus forgoing leisure time.

Unit 4

Uses of Money

• medium of exchange (barter or trade)
• unit of account, hives money its economic worth
• store of value

Types of Money

1. Representative Money- paper money backed by a tangible product
2. Commodity Money- gold and silver coins, gets its value form materials made
3. Fiat Money- it is money b/c the government says so (US)

Characteristics of Money 

1. Durability - how long is money good for 
2. Portability - can carry it anywhere
3. Divisibility - can be broken into smaller units
4. Scarcity
5. Acceptability

M1 Money

• consists of currency in circulation (paper and coins) (travelers check)
• Checkable deposits- checking accounts, demand deposits (DD)
• Account for 75% of $ in circulation

M2 Money 

• Includes
• savings accounts
• money- market accounts
• accounts held by banks outside the U.S
• adding M1 money as well
• money market account- accounts interests; large money account

ASSETS = LIABILITIES + NET WORTH 

RESERVE RATIO = (commercial banks required reserves/ commercial banks checkable deposit liabilities)

3 Important Issues

1. Excess Reserves = actual reserves - required reserves
2. control of lending ability
3. asset or liability to which bank

- Banks create money by lending excess reserves and destroy it by loan repayment. Purchasing bonds from the public also creates money

-Monetary Multiplier = 1 / (required reserve ratio)

- Maximum checkable deposit creation = excess reserves x monetary multiplier

Reserve Requirement

• the Fed. requires banks to always have some money readily available to meet condumers demand for cash
• the amount, set by the Fed., is the Required Reserve Ratio 
• The required reserve ratio is the % of demand deposits (checking account balances) that must not be loaned out 
• Typical Reserve Ratio = 10%

The Monetary Policy

• shows us the impact of a change in demand deposits on loans and eventually the money supply

Monetary Policy

• ·         Controlled by the FED(Federal Reserve Bank)
• ·         Influencing the economy through changes in reserves, which influences the money supply and available credit

4 Options of Monetary Policy

1. 1.       Reserve Requirement- the % that is set by the FED of the minimum reserves that a bank must keep; decrease -> expansionary monetary policy; increase -> contractionary monetary policy
2. 2.       Discount Rate- the rate of interest that the FED charges for overnight loans to banks; decrease    -> expansionary monetary policy; increase -> contractionary monetary policy
3. 3.       Federal Fund Rate- the rate that FDIC members charge each other for overnight loans; decrease    -> expansionary monetary policy; increase -> contractionary monetary policy
4. 4.       OMO (Open Market Operation):

a.       Buy or sell securities (bonds) – “FED”

b.      FED buys bonds -> expand money supply (expansionary)

c.       FED sells bonds -> decreases money supply (contractionary)

Prime Rate- the interest rate that banks charge their most credit worthy borrowers

	Expansionary Or Easy Money (Recession) (Increase MS)	Contractionary or Tight Money (Inflation) (Decrease MS)
OMO	Buy Bonds	Sell Bonds
Discount Rate	Decrease	Increase
Federal Fund Rate	Decrease	Increase
Required Reserve Ration	Decrease	Increase

·         Tight money has a higher interest rate

·         Easy money is depreciating

Single Bank:

•  amount of money single bank cant create (loan out) = ER
• AR-RR=ER

Banking System

• Can create money by a multiple of its initial ER
• Deposit Multiplier = 1/RR

System New $

• Deposit Multiplier x Initial ER
• Total change in the money supply as a result of the deposit

Money Market

Loanable Funds or Bond Market

Crowding Out 

Video Notes

Video 1: Types and Functions of Money

3 types of money

• ·         Commodity – goods that act as money
• ·         Representative – coins and dollars
• ·         Flat money – government’s word

3 main functions

• ·         Medium of exchange
• ·         Storage of value
• ·         Unit of account

Video 2: Money Market Graphs

Money supply

• ·         Constant, controlled by the interest rates and government.
• ·         Vertical, not based off of interest rates
• ·         Increase demand = increase interest rates

The law of demand – if the price is high quantity demanded is low, if price is low quantity demanded is high

Video 3: The Fed’s tools of monetary policy

The gov’t uses two options regarding changes in the money supply

• ·         Contractionary (tight money)
• ·         Expansionary (easy money)

Contractionary fiscal policy

• ·         Reserve rate will ↑
• ·         Discount rate will ↑
• ·         Gov’t will sell bonds and securities

Expansionary fiscal policy

• ·         Reserve rate will ↓
• ·         Discount rate will ↓
• ·         Gov’t will buy bonds and securities

Video 4: The Loanable funds Market

Loadable funds graph

• ·         Supply curve is completely dependent on saving
• ·         If more people save, then more loans are available
• ·         If gov’t is in a deficit then demand for loans will increase, which leads to a decrease in supply of loans
•  

Video 5: Money creation and multiple deposit expansion

Money is created when banks make loans

To find how much money a loan creates you must:

• ·         Find the multiplier – (1/RR)
• ·         Multiply by the loan amount = multiple deposit expansion

Example

·         RR = 20%

·         (1/.2)=5

·         5(500) = 2500

Video 6: Relating Money market, loanable funds market, AD/AS model

Exchange – MV = PQ

·         Increase in demand for money increases price level

·         Increase in demand for money increases interest rate, which causes the demand curve to increase resulting in the price levels to increase as well as GDP_r  in AD/AS graphs 

Unit 3

Aggregate Demand

• shows the amount of RGDP that the private, public and foreign sector collectively desire to purchase at each positive price
• relationship between price and RGDP is inverse
• price on Y
• Quantity of X

Three Reasons why AD is Downward Sloping

• Real Balancing Effect
• price is high; businesses and households cannot afford to buy as much output 
• vise versa
• Interest-Rate Effect
• high price level increases interest rate, discouraging investment
• vise versa
• Foreign Purchases Effect
• higher price level increases the demand for relatively cheaper imports
• vise versa

Shifts in AD

• a change in C, Ig, G and Xn
• a multiplier effect that produces a greater change that the original change in the 4 compenents

Consumption

• Household is affected by:
• consumer wealth
• more wealth, AD increases
• vise versa 
• Consumer Expectations
• positive, AD increases
• vise versa
• Household indebtedness
• less debt, AD increases
• vise versa
• Taxes
• Less Taxes, AD increases
• vise versa

Gross Private Investment

• Sensitive to:
• The real interest rate
• low interest rate, AD increases
• vise versa
• Expected Returns
• Higher Expected Returns, AD increases
• vise versa
• Influenced by
• expectations of future profitability
• technology
• degree of excess capability
• business taxes

Government Spending

• More, AD increases
• vise versa

Net Exports

• Sensitive to:
• Exchange Rate
• strong $= more imports fewer exports, AD decreases
• weak $= fewer imports and more exports AD increases
• Relative Income
• Strong Foreign Economy = increase in exports, AD increases
• Weak Foreign Economy = decrease in exports, AD decreases

Aggregate Supply

• Long Run 
• input prices are completely flexible and adjust to changes in the price level
• level of RGDP supplied is independent of the Price Level
• Short Run
• input prices are sticky and do not adjust to changes in the PL
• level of RGDP supplied is directly related to the PL

Long Run AS

• marks the level of full employment in the economy (analogous to PPC)
• Verticle

Changes in SRAS

• Increase in SRAS seen as shift to right: SRAS →
• Decreases in SRAS shift to left: SRAS ←
• Key to understanding shifts in SRAS in per unit of production:
• (Per Unit Production Cost = Total Input Cost / Total Output)

Determinants of SRAS

• Input Prices
• Domestic Resource Prices
• Wages (75% of all business costs)
• Cost of capital
• Raw materials (commodity prices)
• Foreign Resource Prices
• Strong $ = Lower Foreign Resource Prices
• Weak $ = Higher Foreign Resource Prices
• Productivity
• (Productivity = Total Output / Total Input)
• More Productivity = Lower Unit Production Costs = SRAS →
• Lower Productivity = Higher Unit Production Costs = SRAS ←
• Legal-Institutional Environment
• Taxes and Subsidies
• Taxes ($ to government) on businesses increase per unit production costs = SRAS ←
• Subsidies ($ from government) on businesses reduce per unit production cost = SRAS →
• Government Regulation
• Government regulation creates a cost of compliance = SRAS ←
• Deregulation reduces compliance costs = SRAS →

The AS/AD Model

• the equilibrium of AS & AD determined where AD intersects SRAS & LRAS at the same point

Recessionary Gap

• exists when equilibrium occurs below Full Employment output

Inflationary Gap

• exists when equilibrium occurs beyond full employment output

3 Ranges

• Horizontal or Keynesian Range
• It includes only levels of real output that are less than the FE output.
• It implies that the economy is in recession.
• Vertical or Classical Range
• The economy reaches its full capacity real output.
• Increase in PL = constant production
• Intermediate
• Expansion of real output and price level

Consumption and Saving 

• Disposable Income (▵DI)
• income after taxes, net income
• DI= gross income - taxes
• households cane either consume or save
• Consumption - household spending
• the ability to consume is constrained by:
• the amount of DI
• the propensity to save
• Do household consume if DI=0?
• Yes; autonomous consumption 
• Average Propensity to Consume (APC) = C/DI = % of DI that is spent
• Saving - household NOT spending
• the ability to save is constrained by:
• the amount of DI
• the propensity to consume
• Do household save if DI=0?
• No
• Average Propensity to Save (APS) = S/DI = % of DI that is saved
• Equations
• APC+APS=1
• 1-APC=APS
• 1-APS=APC
• APC>1, dissaving
• -APS, dissavings
• Marginal Propensity to Consume (MPC) = ▵C/▵DI = % of every extra dollar earned that is spent
• Marginal Propensity to Save (MPS) = ▵S/▵DI = % of every extra dollar earned that is saved
• MPC+MPS=1
• 1-MPC=MPS
• 1-MPS=MPC

Determinants of C & S

• wealth, expectations, household debt, taxes

Spending Multiplier Effect

• an initial change in spending (C, Ig, G, Xn) causes a larger change in AS or AD
• ▵AD/(▵ in C, Ig, G, Xn)
• Why does this happen?
• expectations and income flow continuously which sets off a spending increase in the economy
• = 1/(1-MPC) or 1/MPS
• (+) when increase in spending
• (-) when decrease in spending

Tax Multiplier

• when the government taxes, the multiplier works in reverse because money is leaving circular flow
• = -MPC/(1-MPC) or -MPC/MPS
• if tax is cut, then multiplier is positive because there is more money in the circular flow

Interest Rates and Investment Demands

Investment

• Money spent on expenditures on:
• New plants or factories
• Capital equipment (machinery)
• Technology (hardware and software)
• New homes
• Inventories (Goods sold by producers)

Expected Rates of Return

• investment decisions
• Cost/Benefit analysis
• determine the benefits
• Expected rate of return
• count the cost
• Interest cost
• determine the amount of investment they undertake
• Compared expected rate of return to interest cost
• If expected return > interest cost, then invest.
• If expected return > interest cost, then do not cost.

Real (r%) v. Nominal (i%)

• Nominal is the observable rate of interest. Real subtracts out inflation (π%), and is only known ex post facto.
• Computing r%: (r% = i% - π%)
• determining the cost of an investment decision
• Real interest rate (r%)

Investment Demand (ID)

• Downward sloping
• When interest rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable.

Shifts in ID

• Cost of production
• Business taxes
• Technological change
• Stock of capital
• Expectations

Fiscal Policy

• Fiscal policy is the changes in the expenditures or tax revenues of the federal government
• 2 tools of fiscal policy:
• Taxes: Government can increase or decrease taxes
• Spending: Government can increase or decrease spending
• it is enacted to promote our nation's economic goals: full employment, price stability, economic growth

Deficits, Surpluses, and Debt

• Balanced budget: Revenues = Budget
• Budget Deficit: Revenues < Budget
• Budget Surplus: Revenues > Budget
• Government Debt: sum go all deficits - sum of all surpluses
• Government must borrow money when it runs a budget deficit from:
• individuals, corporations, financial institutions, and foreign entities/governments

Fiscal Policy (FP): Two Options

• Discretionary FP (actions)
• Expansionary FP - think deficit
• to increase RGDP, combat recession, and reducing unemployment
• Government Spending -->, Taxes <--
• creates inflation
• Contractionary FP - think surplus
• strategy for controlling inflation
• Government Spending <--, Taxes -->
• Non-Discretionary FP (no action) - AUTOMATIC
• Discretionary increases or decreases taxes
• Automatic - takes in unemployment compensation, social security, etc, that help eases the effects of recession and inflation

Tax Systems

• Progressive Tax System
• Average tax rate that rises with GDP
• Proportional Tax System
• Average tax rate remains constant as GDp changes
• Regressive Tax System
• Average tax rate falls with GDP

Graphs:

Unit 2

Circular Flow Model

• It represents the flow of money, goods, and services in an economy.
• Factor Market (Resource)- (FOP), we sell our resources to businesses
• Product Market (Goods)- where goods and services ore bought and sold
• Household- person or group that shares an income
• Firm- organization that produces goods or services for sale

GDP

• Gross Domestic Product; the total value of all final goods and services produces within a countries borders within a given year
• Included:
• final goods and services
• income earned
• interest payments on corporate bonds
• current production of final goods and services
• unsold output (business inventories)
• Excluded:
• intermediate goods
• transfer payments (public/private)
• Ex: scholarship, SS
• purchases of stocks and bonds (financial transactions)
• used or secondhand sales
• non-market transactions
• ex: 
• illegal drugs, prostitution
• baby sitting
• own housework or repairs
• growing own products for person consumption

GNP

• Gross National Product; total value of all final goods and services produces be Americans within a given year

Calculations

• GDP:
• Expenditure Approach: C + Ig + G + Xn
• C- personal consumption
• Ig- Gross private domestic investment
• G- government spending
• Xn- Net Exports
• Income Approach: W + R + I + P + Statistical Adjustments
• F.O.P
• W- wages, i.e salaries, compensation of employees
• R- rent, rental income
• I- interest income
• P- payments. Proprietors income
• Budget Deficit
• Total amount that the gov. borrows within a year (total gov. spending exceed tax and fee revenue)
• transfer payments + gov. purchases of goods and services - Gov. tax and fee collection
• Trade
• Exports - imports
• National Income
• Approach #1:
• Compensation of employees + proprietors income + interests income + rental income + corporate income
• Approach # 2:
• GDP - Indirect business taxes - depreciation - net foreign factor
• Disposable Personal Income
• national income - Household taxes + Gov. Transfer Payments
• Net Domestic Product 
• GDP - depreciation (consumption of fixed income)
• Net National Product 
• GNP - depreciation 
• GNP
• GDP + Net Foreign Factor Payment

Nominal GDP

• The value of output produces in current prices (can increase year to year if either output or price increase
• Inflation
• P * Q 

Real GDP

• Value of output produced in constant or base year prices
• can only increase if output increases
• Economic Growth
• Original Price * Q

Consumer Price Index

• measures the cost of the market basket of goods of a typical urban American family
• (Cost of market basket in a given year)/(cost of market basket in a base year) * 100
• Real GDP is adjusted for inflation 

Inflation - general rise of the price level

Deflation - fall of the price level

Rate of Inflation

• (CPI2 - CPI1)/CPI1 * 100

Deflator- NGDP/RGDP * 100

Types of Inflation

• Cost-push inflation - higher production costs which increase prices, usually result of a supply shock (push cost on you)
• Demand-pull inflation - too many dollars chasing too few goods; shortage driving up prices, overheated economy w/ excessive spending w/ same amount of goods
• Political Politics - depression/ recession

How Inflation Hurts/Helps

• Hurts
• lenders- b/c they loan $ at a fixed rate
• people with a fixed income (SS or transfer payments)(elderly)
• people who work for a fixed wage
• Helps
• debtors
• business where price of the product increases faster than the price of resources

Unemployment

• % of people w/o jobs

Labor force- employed + unemployed

Not in the labor force- 16 or younger; military personel; mentally insane; jail mates; stay at home mom/dads; full time students; retires; discouraged 16+ years olds who have searched for a job for 2 weeks

How To Calculate Unemployment Rate 

• (# of unemployed)/(total labor force) * 100

4 Types of Unemployment 

• Seasonal- lifeguard/ Santa worker, etc.
• Frictional- between jobs, quit before you get the other jobs
• Structural- lack of skill/declining industry
• Cynical- bad for society and individuals (you have a recession)

Full Employment - occurs when there is no cynical unemployment present in the economy

Okun's Law - for every one % of unemployment above the NRU occurs a 2% decline in real GDP

Unit 1 Notes

Unit One

• Macroeconomics- study of major components of an economy
• Microeconomics- study of how households and firms make decisions and how the interact in markets
• Positive Economics- attempting to describe the world as it is 
• Normative Economics- describes the world how it should be 
• Wants-
• desires of citizens
• broader than or needs
• Needs- basic requirements for survival
• Scarcity- 
• most basic fundamental economic problem that all societies face 
• unlimited wants with limited supply
• Shortage-situation where quantity demanded is less than quantity supplied
• Goods- tangible commodities, can be bought and sold
• Consumer Goods- goods intended for final use by the consumer
• Capitol Goods- items used in the creation of other goods such as factory machinery and trucks
• Services- work performed for someone else

Factors of Production

1. Land (natural resources)
2. Labor
3. Capitol (Human & Physical)
1. Human- knowledge and skills a worker gains through education and practice
2. Physical- human made objects used to create other goods and services (tools, machinery, and buildings)
4. Entrepreneurship

Opportunity Cost- the most desirable alternative; giving up by making a decision

Production Possibilities Graph

• Point D- Inefficient
• Point A, B, C- efficient
• Point E- Unattainable
• In between- overstated
• "Full Employment"- not 100% employment, or 100% productive
• 4% unemployment
• 80-90% factory capacity
• Productive Efficiency-
• producing at lowest cost, allocating resources
• at any point
• Allocative efficiency-
• combination most desired by society
• where to produce on the curve
• Growth- in the labor force, indicated shift in the PPG outward
• Loss- indicates an inward shift

Law of Increasing Opportunity Cost

• when resources are shifted from making one good or service to another, the cost of producing the second item is increasing
• this occurs because not all resources are equally shared for the production of all goods and services

4 Key Assumptions of Production Possibilities

1. Only two goods can be produced
2. Full employment of resources
3.  There are 4 fixed labors (FOP) 
4. Fixed technology

Demand

• Demand is the quantities that people are wiling and able to by at various prices
• The Law of Demand: there is and inverse relationship between price and quantity demanded
• Change in price causes a change in quantity demand
• Causes that change demand:
• Change in buyer's taste
• Change in the # of buyers
• Change in income
• Change in price of related goods (substitute/complimentary)
• Change in expectations

Supply

• Supply is the quantities that producers or sellers are willing and able to produce/sell at various prices
• The Law of Supply: there is a direct relationship between price and quantity supplied
• Change in price causes a change in quantity supplied
• What causes a change in supply:
• change in the # of suppliers 
• change in taxes or subsidies
• change in weather
• change in technology
• change in cost of production/resource prices
• change in expectations
• change in anything except price

Elasticity of Demand

Elastic demand

• a product is elastic when demand will change greatly giving a small charge in price
• many substitutes
• includes luxury goods
• > 1

Inelastic Demand

• a product is said to be inelastic if the demand for it will not change, or it will change very little regardless of price 
• few substitutes
• necessary
• < 1

Unitary Elastic

• = 1

Change in quantity/change in price = Price Elasticity of Demand

Price Ceiling/Floor Graphs

• Price floor- minimum price for a good or a service, ex: minimum wage
• Price Ceiling- Maximum price that can be legally charged for a good service, ex: rent control

Business Cycle

• Expansion- real output in the economy is increasing and the unemployment rate is declining
• Peak- real output at highest point
• Contraction/Recession Phase- real output is decreasing, unemployment rate is increasing
• Trough- lowest point of real GDP
• Peak and trough are meaningless because we never know we are in one until it is over
• If a recession loses more than 10% of Real GDP then it is a depression
• Trough means the end of a recession