Basic Economic Concepts
What is the Basic Economic Problem
What is Scarcity
Price rises, quantity demanded falls. What law is this?
Law of Demand.
A farmer sells the same product as other farmers and cannot choose the market price. What is the firm?
Price taker.
A country’s output is below potential RGDP.
Recessionary gap.
What type of policy is used during a recession?
Expansionary fiscal policy.
What is Scarcity
Unlimited wants, but limited resources
Input costs for smartphones rise. What happens to supply?
Supply decreases/shifts left.
Name 3 key characteristics of perfect competition (besides price takers)
Many competitors
Identical Products
East Entry Exit
Low Barrier to entry
A country has high inflation and output above potential.
Inflationary gap.
The government fights inflation. What tools will it use to do this?
Lower taxes
Increase Gov't spending
Land and Labor are examples of what?
The 4 factors of production
Chicken and beef are substitutes. If chicken price rises, what happens to demand for beef?
Demand for beef increases.
A perfectly competitive firm has MC greater than MR. What should it do?
Decrease output until MC = MR.
Oil prices rise, making production more expensive. What happens to SRAS?
SRAS decreases/shifts left.
The central bank buys bonds.
1: What economy are we in?
2: What happens to money supply and interest rates?
1: Recession
2: Money supply increases; nominal interest rates decrease.
the value of the next best alternative you give up when a choice is made
Opportunity Cost
The government gives solar panel producers a subsidy. What happens to price and quantity?
Price decreases; quantity increases.
Firms in perfect competition are earning losses. What happens in the long run?
Firms exit, supply decreases, and profits return to zero.
In a recessionary gap with no government action, what happens to wages and SRAS?
Wages fall; SRAS increases/shifts right.
A country starts with a balanced budget. The government increases taxes to fight inflation. What happens to the budget?
Budget surplus.
The two shifters of the PPC curve
1: Change in resource quantity or quality
2: Change in Technology
A price ceiling is set below equilibrium. What happens?
Shortage
A perfectly competitive firm is producing where P = MC, but not at minimum ATC. Is it allocatively or productively efficient?
Allocatively efficient, not productively efficient.
What happens to wages and SRAS to correct inflation if there is no help from the government?
Wages rise; SRAS decreases/shifts left.
The economy has high inflation. What OMO action should the central bank use?
Sell bonds to decrease the money supply and raise interest rates.