Flatter=more elastic(supply+demand) 18.

PERFECT COMPETITION Price takers:horizontal demand curves not earn economic profits for any significant period of time(others enter market ) P = MR = MC = ATC short-run supply curve for a firm is its MC line above the average variable cost curve, AVC short run,increase demand(demand curve shift right)P and Q up long run,increase supply(supply curve shift right)P and Q down technology shifts supply right,more supply-lower cost-more product 19. MONOPOLY 1 seller,specific good, no substitute,high entry barriers natural:1 firm can supply cheaper than 2(electricity) price searchers:must find on own max profit @ MR = MC price descrimination:sell@different prices(must have groups w/ different elastic ity,prevent reselling) efficient@S(MC)=D(MB),but monopoly produce less+charge more rent seeking:trying to buy/create a monopoly regulating(average cost pricing):ATC=D,output up/price down/efficiency up/still has normal profit regulating(marginal cost pricing:MC=D,loss b/c price<ATC, requires subsidy 20. MONOPOLISTIC COMPETITION many sellers,differentiated product,compete on quality,low barriers max profit @ MR = MC price>ATC=profit -> others enter -> no profit efficiency?cost of advertising:ATC up,but sales up -> sales up -> ATC down must innovate OLIGOPOLY few sellers,interdependence,barriers,similar or differentiated kinked demand curve:cut price-others follow,raise price-not dominant firm:price setter,others are takers prisoners dilemma:quantity down,price up agree,other cheat? 21. FACTOR MARKETS derived demand:from demand for goods(labor) marginal product:additional output from 1 more input unit marginal revenue:additional revenue from selling 1 more unit price taker: MR = P / down slope demand: MR < P marginal revenue product:additional revenue from 1 more input unit price up -> labor demand up -> MR up -> MRP up -> MRP shift up long run labor demand is more elastic than short run more labor intensive industries are more labor demand elastic if automatic substitute exists,labor demand is more elastic(manufacturing vs. pi lot) substitution effect:wage up -> workers give more hours income effect:max labor willing to work b/c of leisure value(causes to bend back ward) population up and home technology up -> labor supply up physical capital demand up -> financial capital demand up invest in physical capital if PV of MRP > financial cost capital supply is upward sloping curve of interest rates(interest rate up/income up/expected future income up -> supply shift up) ? non-renewable resource:elastic supply(oil) / renewable: inelastic(water/land) price=opportunity cost(below supply curve)+economic rent(above supply curve)

22. CYCLES, JOBS real GDP up -> expansion -> peak -> GDP down -> contraction/recession -> trough unemployeed:available/looking in past 4 weeks/laid off/starts in next 30 days labor force:working or looking expansion -> unemployment down working age pop:over 16/not in institution labor force participation:% of employed/looking working age pop discouraged workers:available/not employed or looking -> short term fluctuations employment to pop ratio:% of working age pop emplyed aggregate hours:tot hours worked by all -> long term growth (but avg work week d own) -> helps to measure productivity of labor real wage rates (using tot comp) are adjusted for change in price level frictional unemp:constant economy changes causing slow matching of workers structural unemp:economy changes that eliminate jobs but make others cyclical unemp:changes in economic output(when real GDP falls below potential GD P full employment:no cyclical unemp natural rate of unemp:frictional+structural unemp CPI basket weights 80,000 (from survey) item basket -> inflation CPI=(current basket price/base baset price)*100 inflation rate=[(CPIthis-CPIlast)/CPIlast]*100 CPI biases:new goods/quality change/commodity substitution/outlet substitution only estimate:not optimal for economic decisions inflation overstated by 1.1%/yr 23. AS/AD long run AS curve is vertical@full emp(real GDP is set@potential GDP) short run AS curve is increasing function of price AD=C+I+G+X-M (consumption+investment+govt expenditures+exports-imports) wealth effect:price up -> real wealth down -> spending down price up -> interest rates up -> invest down -> consumption down (delay purchase s:intertemporal substitution) AD shift up (right) <- expected inflation up/expected income up/expected profits up fiscal policy:tax changes (down) -> C up/govt expenditures up -> G up => AD up monetary policy:interest rate/quantity money up -> interests rate down -> C+I up -> AD up world economy:foreign income up -> X up/exchange rate down -> cheaper for foreig ners -> X up => AD up equilibrium:AD up -> prices/output up -> money wages up -> supply down -> price up more -> back to full employment Classical:self-regulating economy always at full employment/labor,capital,*techn ology increase output [policy:no taxes bc they stunt incentives/efficiency] Keynesian:*expectations shift AD -> cycles bc wages are downward sticky -> no au to-correction [need govt policy] Monetarist:cycles from inappropriate monetary policy,*quantity of money growth i f predictable stablize GDP [low taxes] 24. MONEY, BANKS, FEDERAL RESERVE money functions:medium of exchange,unit of account,store of value M1:money not in bank+travelers checks+checking account M2:M1+time deposits+savings+money market mutual fund balances check doesn't increase money supply/credit card is a loan depositories:create liquidity(combine deposits to make loans)/intermediaries/mon itor risk/pool default risk regulations relaxed (80/90s) -> competition,consolidation -> efficiency innovation -> loans,technology fractional reserve banking system/required reserve ratio:excess can be loaned -> multiplier effect (1/RRR)

Fed up money supply <- buying T-securities/discount rate down/RRR down discount rate down -> banks pay to borrow up -> loans down monetary base:notes,coins,bank reserve deposits currency drain:people holding increased money supply as currency change in quantity of money = change in monetary base money multiplier quantity of money = [(1+currency to deposit ratio)/(RRR+currency to deposit rati o)]*monetary base 25. MONEY, INTEREST, REAL GDP, AND THE PRICE LEVEL demand for money determined by interest rate (opportunity cost of holding up as rate up) supply determined by Fed (perfectly inelastic-vertical) GDP up -> money demand curve shift up innovations (ATM) -> shift demand curve down interest rate:equilibrium of MS/MD Fed buys (avoid recession) -> quantity of money up -> interest rate down -> cons umption up -> AD up -> GDP growth/inflation up quantity theory of money:money supply up -> proportional price up (so Fed tighte ns to avoid inflation) P = MV/Y (price=money*velocity/real GDP) 26. INFLATION persistent increase in price level,not single price jump demand-pull:AD shift up -> price/quantity up (short term) -> slide back to LAS q uanity,but price is higher cost-push:AS shift down -> price up/quantity down (short term) -> AD shift up to meet LAS quantity,but price higher unanticipated inflation -> purchase power down(borrowers owe less) -> wages less (good for employer) => wealth transfer high anticipated inflation -> GDP down bc:less productive(uncertainty->short ter m focus),decrease investment/transactions,high transaction costs,distorts return s expected+actual inflation same => remain full employment GDP,but prices up if AD up more than expected -> unemployment decreases below natural rate short run Phillips curve:holds inflation/natural rate of unemployment constant(n egative relationship) long run Phillips curve:vertical natural rate of unemployment=frictional+structural when cyclical=0 natural rate up -> LRPC shift right nominal risk-free interest rate=real risk-free rate+expected inflation rate 27. FISCAL POLICY supply-side effects:(tax)policy on LR AS(potential real GDP) income tax/sales tax up -> income down -> work down -> supply down Laffer curve:increase tax past certain point,less work,less income,less tax reve nue investment comes from savings,foreigners,govt -> if down(bc of tax),less capital -> less GDP growth policy affects govt saving supply:large deficit -> saving down -> real interest rate up -> firm investment in capital down (crowding out effect) generational effects:postponing fiscal imbalances(medicare) -> must be paid for by future generations discretionary fiscal policy to stabilize economy govt purchase multiplier:$1 spending -> more than $1 change in AD tax multiplier:tax cut leads to spending(but not as much since some is saved) balanced budget multiplier:positive(simultaneous purchase/tax cut - different ef fects) policy not exact/delays prevent immediate results automatic stabilizers:induced taxes(laws determine rates,not $s)/needs-tested sp ending(govt pays qualified)

28. MONETARY POLICY Fed objective:maintain price level stability(0-3% inflation) -> reduces uncertai nty -> stable rates/wages -> invest up => increase in sustainable real GDP growt h fixed-rule policies:constant regardless of economy bc lags can cause problems(fe d doesn't stabilize AD) feedback-rule policy(strict) vs discretionary policy - needs good timing a size of adjustments feedback:recession triggers increase money supply growth+inflation decreases -> shift AD to full employment -> stabilize real GDP/inflation policy has lag so possible to make cycles more severe productivity shock decreases potential real GDP growth -> fixed rule(stagflation ) / feedback(stabilize GDP or price at detriment of the other) policy credibility:without it,individuals will not revise expectations correctly new monetarist feedback rule sets growth rate in money supply as function of tar get inflation rate/10yr avg GDP growth rate/4yr avg velocity new keynesian feedback rule sets federal funds target rate as function of inflat ion rate from target deviation/real from potential GDP rate new keynesian act quickly on business cycle, new monetarist responds slow