1. Topics in Demand and Supply Analysis
Price Elasticity
Price~elasticity = \frac {\%\Delta~Quantity~demanded~(Qx)}{\%\Delta~Price~(Px)} P r i ce e l a s t i c i t y = %Δ P r i ce ( P x ) %Δ Q u an t i t y d e man d e d ( Q x ) 0 > e > -1 \rightarrow 0 > e > − 1 → -1 > e > -∞ \rightarrow − 1 > e > − ∞ → e = -1 \rightarrow e = − 1 → e = 0 \rightarrow e = 0 → e = -∞ \rightarrow e = − ∞ →
Income Elasticity
Income~elasticity = \frac {\%\Delta~Quantity~demanded~(Qx)}{\%\Delta~Income~(Ix)} I n co m e e l a s t i c i t y = %Δ I n co m e ( I x ) %Δ Q u an t i t y d e man d e d ( Q x ) e > 0 \rightarrow e > 0 → e < 0 \rightarrow e < 0 → ε{_Y} ε Y
Cross-price Elasticity
Cross-price~elasticity = \frac {\%\Delta~Quantity~demanded~(Qx)}{\%\Delta~Price~of~a~related~good~(Py)} C ross − p r i ce e l a s t i c i t y = %Δ P r i ce o f a re l a t e d g oo d ( P y ) %Δ Q u an t i t y d e man d e d ( Q x ) e > 0 \rightarrow e > 0 → e < 0 \rightarrow e < 0 → y y ε{_{py}} ε p y
2. The Firm and Market Structures
For all market structures, Max Profit \longrightarrow ⟶ when MC = MR MC = MR
MC MC MR MR
Breakeven points :AR = ATC A R = A TC TR = TC TR = TC
ATC = A TC = AR = A R = TR = TR = TC = TC = AR = ATC A R = A TC
Short-run shutdown points: AR < AVC A R < A V C TR < TVC TR < T V C
Market structures: Perfect Competition
3. Aggregate Output, Prices, and Economic Growth
Total GDP = final value of goods and services produced (market value)
GDP~Deflator = \frac{Nominal~GDP}{Real~GDP} \times 100 G D P De f l a t or = R e a l G D P N o mina l G D P × 100 Nominal~GDP{_t} = P{_t} \times Q{_t} N o mina l G D P t = P t × Q t Real~GDP{_t} = P{_{b}} \times Q{_t} R e a l G D P t = P b × Q t t t b b P{_t} P t P{_b} P b Q{_t} Q t
Expenditure Approach
Real~GDP = Consumption~spending~(C) + Investment~(I) + Government~spending~(G) + Net~exports~(X-M) R e a l G D P = C o n s u m pt i o n s p e n d in g ( C ) + I n v es t m e n t ( I ) + G o v er nm e n t s p e n d in g ( G ) + N e t e x p or t s ( X − M ) X X M M
Income Approach
Real~GDP = National~income + Capital~consumption~allowance + Statistical~discrepancy R e a l G D P = N a t i o na l in co m e + C a p i t a l co n s u m pt i o n a ll o w an ce + St a t i s t i c a l d i scre p an cy Real~GDP = Consumption~spending~(C) + Savings~(S) + Taxes~(T) R e a l G D P = C o n s u m pt i o n s p e n d in g ( C ) + S a v in g s ( S ) + T a x es ( T ) Savings~(S) = Investments~(I) + Fiscal~Balance~(G-T) + Trade~Balance~(X-M) S a v in g s ( S ) = I n v es t m e n t s ( I ) + F i sc a l B a l an ce ( G − T ) + T r a d e B a l an ce ( X − M ) S – I = Fiscal~Balance~(G-T) + Trade~Balance~(X-M) S – I = F i sc a l B a l an ce ( G − T ) + T r a d e B a l an ce ( X − M ) National Income = Employees’ compensation
Personal Income = National income
Personal Disposable Income = Personal income – Personal taxes
Potential GDP = Aggregate hours worked × Labor productivity\longrightarrow ⟶ Aggregate hours worked = Labor force × Average hours worked per week\longrightarrow ⟶ Growth in Potential GDP = Growth in labor force + Growth in labor productivity
The Production Function
Y = A \times f (K, L) Y = A × f ( K , L ) Y Y A A K K L L
Growth in Potential GDP = Growth in technology + WL × (growth in labor) + WC × (growth in capital)WL = Labor’s percentage share of national incomeWC = Capital’s percentage share of national income
3. Understanding Business Cycles
Unemployment~Rate = \frac {Number~of~unemployed~people}{Total~labor~force} U n e m pl oy m e n t R a t e = T o t a l l ab or f orce N u mb er o f u n e m pl oye d p eo pl e Participation~Rate~(Activity~Ratio) = \frac {Total~labor~force}{Total~working–age~population} P a r t i c i p a t i o n R a t e ( A c t i v i t y R a t i o ) = T o t a l w or kin g – a g e p o p u l a t i o n T o t a l l ab or f orce Labor~Force = Unemployed~people + Employed~people L ab or F orce = U n e m pl oye d p eo pl e + E m pl oye d p eo pl e Unemployed = Looking for job
Consumer~Price~Index = \frac {Cost~of~basket~at~current–year~prices}{Cost~of~basket~at~base–year~prices} \times 100 C o n s u m er P r i ce I n d e x = C os t o f ba s k e t a t ba se – ye a r p r i ces C os t o f ba s k e t a t c u rre n t – ye a r p r i ces × 100 Laspeyres’ Index = \frac {\Sigma~(Current–year~price \times Base–year~quantity)}{\Sigma~(Base–year~price \times Base–year~quantity)} L a s p eyres ’ I n d e x = Σ ( B a se – ye a r p r i ce × B a se – ye a r q u an t i t y ) Σ ( C u rre n t – ye a r p r i ce × B a se – ye a r q u an t i t y ) Fisher’s~Index = \sqrt {(Laspeyres’~Index) \times (Paashe~Price~Index)} F i s h er ’ s I n d e x = ( L a s p eyres ’ I n d e x ) × ( P aa s h e P r i ce I n d e x ) Paashe~Price~Index = \frac {\Sigma~(Current–year~price \times Current–year~quantity)}{\Sigma~(Base–year~price \times Base–year~quantity)} P aa s h e P r i ce I n d e x = Σ ( B a se – ye a r p r i ce × B a se – ye a r q u an t i t y ) Σ ( C u rre n t – ye a r p r i ce × C u rre n t – ye a r q u an t i t y )
4. Monetary and Fiscal Policy
Money~Multiplier = \frac {1}{Reserve~requirement} M o n ey M u lt i pl i er = R eser v e re q u i re m e n t 1 Fiscal~Multiplier = \frac {1}{1- MPC \times (1- t)} F i sc a l M u lt i pl i er = 1 − MPC × ( 1 − t ) 1 MPC MPC t t
Equation of Exchange
MV = PY~(Money~supply \times Velocity = Price \times Real~output) M V = P Y ( M o n ey s u ppl y × V e l oc i t y = P r i ce × R e a l o u tp u t ) Fisher Effect
Nominal~Interest~Rate = Real~interest~rate + Expected~inflation~rate N o mina l I n t eres t R a t e = R e a l in t eres t r a t e + E x p ec t e d in f l a t i o n r a t e Neutral Interest Rate
Neutral~interest~rate = Real~trend~rate~of~economic~growth + inflation~target N e u t r a l in t eres t r a t e = R e a l t re n d r a t e o f eco n o mi c g ro wt h + in f l a t i o n t a r g e t
5. International Trade and Capital Flows
GDP
GDP = C + I + G + X - M G D P = C + I + G + X − M C C I I G G X X M M
Balance of Payments
Current~Account + Capital~Account + Financial~ Account = 0 C u rre n t A cco u n t + C a p i t a l A cco u n t + F inan c ia l A cco u n t = 0 Trade Balance
X - M = Private~Savings + Government~Savings - Investments~in~domestic~capital X − M = P r i v a t e S a v in g s + G o v er nm e n t S a v in g s − I n v es t m e n t s in d o m es t i c c a p i t a l
6. Currency Exchange Rates
Real~Exchange~Rate = Nominal~exchange~rate \times \frac {CPI~base~currency}{CPI~price~currency} R e a l E x c han g e R a t e = N o mina l e x c han g e r a t e × CP I p r i ce c u rre n cy CP I ba se c u rre n cy
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