Contents

1. 1 Industrial organization
2. 2 Macroeconomics
   1. 2.1 Unemployment
      1. 2.1.1 Fiscal policy
      2. 2.1.2 Monetary policy

• Elasticity: %change in quantity / %change in price
  • also affected by substitutes, proportion of income spent, time passed since last price change
  • If income elasticity > 1, price increase -> total expenditure increase
  • labor demand elasticity // product price, labor intensiveness, substitute capital, lower wage rate
  • demand/supply elasticity detemines proportion of producer/consumer supply loss from higher tax

• Law of diminishing returns: more resources in production -> increases output at a decreasing rate

• Price discrimination: two or more identifiable customer groups that have different price elasticities of demand; more gains from the group with inelastic demand(pays higher price)

• Crowding out effect: reduction in private borrowing and spending as a result of higher interest rates

• Accounting profit usually overstated because lack of opportunity cost consideration

• Production decision
  • short-run fixed costs fixed, based on AVC
  • long-run variable costs for different size plants

• economically efficient = lowest production cost
• which must be technologically efficient = least input
• demand of final goods/services ↑ -> price ↑ -> demand for resources(labor) ↑

Industrial organization

• Natural monopoly - when economies of scale are great

Unemployment

• Unemployed = actively seeking employment

• minimum wage > equilibrium wage -> excess supply of workers
  • substitutes for labor -> unemployment rises, economic efficiency

• aggregate hours: total number of hours worked in a year by all employed people

Fiscal policy

• Laffer curve: higher tax rates can reduce tax revenue
• unannounced policy: in effect in short-run, no in long-run
  • unannounced decrease in growth rate of money supply -> decrease in output in short-run, lower inflation, but no change in output in the long run

Monetary policy

• open market operations: most often used, sale/purchase of treasury bonds
• Automatic stabilizers: built-in features that tend to automatically promote a budget deficit during a recession and a budget surplus during an inflationary boom, without a change in policy

• Available money supply = bank reserve / reserve requirement
  • Potential deposit expansion multiplier = 1 / reserve ratio
  • required reserves = demand deposits * reserve requirement
  • excess reserves = actual reserves - required reserves

• money supply ↑ -> aggregate demand ↑ in short term -> new equilibrium at higher price & GDP
• Quantity theory of money
  • money supply * velocity = price * employment level
  • money supply proportional to price