Understanding Economics: Concepts and Calculations

Be able to identify the resources: labor, capital, natural resources, entrepreneurs

Know the difference between supply and demand and quantity supplied and quantity demanded. Remember that a change in quantity demanded and quantity supplied is only caused by a change in the price of the product sold, while a change in demand and supply are caused by the factors listed above.

Know the income and the substitution effects and how they affect demand.

Know what shifts the supply and the demand curves.

Demand Curve:

• Change in consumer income.
• Change in the price of other goods/services.
• Change in consumer expectations.
• Change in consumer tastes.
• Change in number of consumers.

Supply Curve:

• Changes in technology.
• Changes in the prices of inputs.
• Changes in the prices of alternative goods.
• Changes in producer expectations.
• Changes in the number of producers

Know how a change in supply or demand will impact equilibrium price and quantity. Know that equilibrium price and quantity are set at the price where supply and demand are equal on a table and where the supply and demand curves intersect on a graph.

Know what factors are included in the process of calculating GDP through the income and expenditures approaches.

• The income of U.S. citizens abroad must be subtracted and the income of foreigners in the U.S. must be added.
• Subsidies and indirect taxes (sales taxes etc.) must be added.
• Depreciation must be added.

Know how to adjust nominal to real GDP.

Real GDP = Nominal GDP X 100 / Price Index

Know the different types of unemployment as discussed in class and know how to calculate the unemployment rate. Frictional, structural, seasonal, cyclical.

Know and be able to list the non-income factors that affect consumption.

• Net Wealth.
• Price level.
• Interest Rate.
• Expectations

Know the non-interest-rate factors that affect investment.

• Business Expectations.
• Level of Economic Activity.
• Stock of Capital in use (machines, tools, materials etc.)
• The cost of capital goods.
• Technology

Be able to calculate consumption, savings, APC, APS, MPC, and MPS.

• Average Propensity to Consume (APC): the percentage of a person’s income that is spent. APC= Consumption/ Income
• Average Propensity to Save (APS): the percentage of a person’s income that is saved. APS = Savings/Income
• Marginal propensity to consume: the percentage of a change in income that is spent. MPC = Change in consumption/ Change in Income
• Marginal propensity to save: the percentage of a change in income that is saved. MPS = Change in Savings/ Change in Income

Be able to determine if a firm will make an investment or not.

• Calculate the projected revenues from the investment.
• Calculate the rate of return of the investment: Revenues/Price=RR
• Compare the rate of return to the interest rate.
• If the RR is greater or equal to the interest rate, the company will invest.

Know the factors that cause the aggregate demand curve to be downward sloping.

• The Interest Rate Effect is caused by the impact of a price change on the interest rate.
• The Real Balance Effect is caused by the impact of a price change on the value of wealth and savings.
• Foreign Purchase Effect is caused by the effect of a price change on foreign purchases of U.S. products.

Know how to calculate the multiplier and be able to use it to determine by how much total spending will increase if we increase consumption, government spending, investment, or exports.

Multiplier = 1 / (1-mpc) or 1/MPS

Know when the Federal Reserve was created; how many banks it comprises; the number of individuals on the Federal Reserve board and how long they are in office; the number of years the chairman of the Federal Reserve is in office; and the Federal Reserve’s main functions as listed in the textbox.

• Created in 1913
• Board consists of 7 members, each one is in office for 14 years
• The chair of the Fed is in office for four years
• There are 12 Federal Reserve banks.

• High level of employment.
• Economic growth
• Price Stability
• Interest rate stability
• Financial market stability
• Exchange rate stability

Be able to calculate and graph asset demand, transaction demand, and total money demand.

• Transaction Demand = GDP ÷ Multiplier
• Asset Demand is based on the interest rate
• Total Money Demand = Transaction Demand + Asset Demand

Show what will happen to price and quantity when supply and/or demand changes by placing one of the following signs in the spaces provided (+) (-) (?).