1.

Circular Flow diagram

● Flow of inputs and outputs

■ Markets for Goods and Services: Firms sell, households buy
○ Goods and services bought by:
■ Households: Buy and consume goods and services, own and sell
factors of production
○ Provide labor, land, and capital for:
■ Markets for Factors of production: Households sell, Firms buy
○ Factors of production used by:
■ Firms: Produce and sell goods and services, hire and use factors
of production
○ Goods and services sold by Markets
● Flow of cash
■ Markets for Goods and Services: Firms sell, households buy
○ Revenue for firms
■ Firms: Produce and sell goods and services, hire and use factors
of production
○ Wages, rent, and profit goes to
■ Markets for Factors of production: Households sell, Firms buy
○ Income for
■ Households: Buy and consume goods and services, own and sell
factors of production
2. Monetary tools of the central bank? How does eache inc/dec monetary supply? How
does central bank affect national reserves
● Central Banks: a national bank that provides financial and banking services for
its country's government and commercial banking system, as well as
implementing the government's monetary policy and issuing currency
● Open Market Operations
○ When a bank buys or sells securities (investments)
■ Buying securities
● adds cash to banks’ reserves
● more money to lend
■ Selling securities
● decreases cash to banks’ reserves
● reduce cash holdings and now has less to lend
● Fed lending to banks
○ Increase reserves by lending reserves to banks - more reserves allow
banking system to make more money
● Reserve Requirement
○ Regulations on the minimum amount of reserves that banks hold against
depositors
■ More reserves - lowers monetary supply
● Paying Interest on Reserves
○ Commercial banks holds reserves on deposit at the fed
○ Higher interest - more reserves, increase reserve ratio, lower monetary
supply

3. Why Aggregate demand curve down? Explain each theory and give examples
● The aggregate demand curve - quantity of goods and services households,
firms, government and consumers want to buy at each price level
● The Wealth Effect - Consumers are wealthier
○ Stimulate the demand for consumption goods
○ Increases real wealth and ability to buy
● The Interest-rate Effect - Interest rates fall
○ Stimulates the demand for investment goods and services demanded
● The Exchange-rate Effect - currency depreciates
○ Stimulates the demand for net exports
○ Imported goods are expensive
○ Local goods are cheaper = increase export

4. Why does Short run aggregate supply curve upwards? Explain each theory and give
examples
● The aggregate supply curve - quantity of goods and services firms produce and
sell at each price level
 ○ Is the market value
● Sticky-wage theory
○ workers' earnings don't adjust quickly to changes in labor market
conditions
○ Wages are sticky because of contracts between workers and firms
■ If price is high: renegotiate contracts with workers
■ If price is low: can higher more workers and increase output
● Sticky-price theory
○ Low prices level could cause firms to have higher than desired prices
■ Depresses sales and cuts back production
○ Basically higher prices, lower sales, reduce production
● Misperceptions theory
○ Unexpected low price makes some suppliers think that their relative
prices have also fallen
○ Low price level causes misperceptions about relative prices
○ Induces suppliers to the lower price level by decreasing production

5. 4 types of cost curve? Explain nature of shapes and give examples

● Marginal Cost - increasing
○ Increase in total cost that arises from an extra unit of production (previous
total cost - current total cost)
■ Marginal cost rises with the quantity outputted
● Average Fixed Cost - decreasing
○ Average of costs that do not vary (rent, water, electricity)
■ Decreases as output increases because cost is spread over more
units
■ Distributes costs among units produced
● Average variable Cost - increasing
○Average of costs that vary based on quantity ( cost of coffee beans, milk,
sugar, etc)
■ Rises due to DMP
● Diminishing Marginal Productivity - increase only one input
may increase output, but will eventually stagnate or
decrease
● Average Total Cost - decreases then increases
○ typical cost of unit of output if cost is divided evenly among units
produced (total cost / no. of units produced)
■ Declines up to a certain point then increases after said point
 ● Variable costs starts to get higher and therefore increases
total costs

6. Cost curves in short run and long run. Differentiate economies of scale and constant
returns to scale and diseconomies of scale

● Short run cost curve

○ Three Average Total Cost curve for small, medium, and large factories
○As the firms move along the long run cost curve, it is adjusting the size of
the factory to the quantity of production
● Long run cost curve
○ Firms have greater FLEXIBILITY in the long run
● Economies of scale - the property whereby ATC falls as the quantity of output
increases
● Diseconomies of scale - The property whereby long-run ATC rises as the
quantity of output increases
● Constant returns to scale - the property whereby long-run ATC stays the same
as quantity output changes

7. Components of GDP. Difference between real and nominal GDP

● GDP (Gross Domestic Product): market value of all final goods and services
produced within a country in a given period of time
 ○ reflect value of final goods CURRENTLY produced (tangible and
intangible services) by a country
■ Usually in a year or in a quarter
● Components - Y = C + I + G + NX
○ Y = GDP
○ C = Consumption : spending by households on goods and services
○ I = Investments : purchase of goods that will be used in the future to
produce more goods and services
○ G = Government Purchases : Spending on goods and services by
government (salaries, public works, etc)
○ NX = Net Exports : exports - imports
● Real vs Nominal GDP
○ Real
■ value of economic output adjusted for price changes
■ the economic output adjusted for the effects of inflation
○ Nominal
■ Production of goods and services valued at current prices

8. How government is involved in creating a monopoly. Why would they create one?
Example
● Monopoly: a firm that is a sole seller of a product without close substitutes
○ Causes for this
Barriers to entry: others firms cannot enter the market to
■
compete with the monopoly
■ Monopoly resources: a key resource required for production is
owned by the monopoly
■ Government regulation: government gives a single firm
exclusive right to produce a certain good or service
■ Production process: the monopoly can produce output at a lower
cost
● Natural Monopolies
○ These monopolies are created naturally because there is only one
available source for the service.
■ Water
● Government-Created Monopolies
○ Given exclusive right by government
○ Sheer political clout (authority to make decisions)
○ For purposes of public interest
 ○ Example: firms with products protected by copyright/patent laws

9. Explain “in-kind” transfer programs. Pros and Cons

○ In-Kind transfers are goods and services given to those in need; Basically
donations but not in cash/monetary value
○ Have to be considered when measuring a population's’ income
○ Pros:
i. Forces people to “buy” necessary goods like education and food
ii. If given money, people might buy useless things
iii. Programs that receive pure money might be corrupt
iv. Farmers and teachers are guaranteed a job if food/education stamps are
implemented
○ Cons:
i. “Inefficient and disrespectful”
ii. People should be allowed to manage own money
iii. Government has to spend more money on administering subsidies
1. They have to go to farmers and set up a deal
2. Many questions and debates on :what to buy and from who
3. Food logistics: packaging, delivery, storage
iv. Family might need cash in case of emergency
v. Cash is generally easier to manage compared to food
1. But is subject to scammers

10. How price ceilings affect market outcome? Short run and long run effects? Use rent
control as an example
○ Price ceilings only affect the market if the price ceiling is below equilibrium point
○ Short Run effects may be very consumer friendly, but in the Long Run it is very anti-
consumer
○ Rent control is used to protect tenants and dormers (One of the consumers that rent
condominiums temporarily)
i. If Rent Control (Price Ceiling) is below the equilibrium price, Tenants pay
cheaper rent
1. Pro Consumer
2. Higher demand for renting rather than buying
ii. Lower rent means that renters earn less money. They cut costs by not maintaining
their units. Consumers get low-quality condominiums
iii. Less people want to go into the renting market. Some inside the market want to
get out. Some may not renew rental contracts. Overall, the supply of rentable
condos will decrease.
iv. Long run, there will be either less condos for rent or condos for rent will be very
low-quality or a combination of both. Either way, consumers suffer in the long
run
The study of economics is about the relationship between production distribution and
consumption of goods and services. The word circular means that it is circle. The word flow
means that it continues from one aspect to another. Because there is a circular flow it
shows that everything in economics is related to one another. This is important to know
because as citizens and future game changers we must take into account every action we
make because a change in one aspect can change the whole flow of the diagram.

The central bank is the national bank. Meaning that it is a countries “bank”. Their role is to
finance and facilitate operations of government funds and banks. Part of their job includes
to print and issue currency and implementing government currency policies. That being said
they have the authority to implement different policies that affect how money flows in
and out of the banks.

Money is simply the medium of exchange widely accepted by the world at the current
moment. As of now 5/16/18 we use money in the form of bills. 10,000 years ago people’s
money might have been in the form of rocks and 10,000 years from now it could be in the
form of data we never know.

Currency is bills and coins in the hands of the public.

It is important to control the amount of currency circulated because too much will cause
inflation. Inflation happens when too much currency is printed thus increasing demand to
uncontrolled levels which will then force suppliers to jack up prices eventually making the
value of the currency so low.

Aggregate demand has the same equation as GDP.

GDP = CONSUMPTION + INVESTMENT + GOVERNMENT PURCHASES + NET EXPORT

Consumption in relation to the wealth effect. More money means more consumption. More
consumption means more demand. When the curve goes down it means demand is up and
prices are down. But prices aren’t down people having a lot of purchasing power makes it
down.

Investment in relation to the interest rate effect. When interest goes down it means that
the amount the an investor has to pay annually or whatever is lower. Because you have to
pay less on the investment you would be less hesitant to invest. More appealing investment
means more demand.

Exchange Rate in relation to net export. When currency depreciates its ability to purchase
foreign goods lessens. But at the same the local products become cheaper in the eye of
foreigners. This does two things, it encourages exports and discourages imports. Part of
the equation is +Net Exports which is exports-imports. With a higher net export the
aggregate demand increases.

For this question just give math equations for each components they should burn one
minute each

How to make a cup of ice powdered lemonade

Ingredients required: water, powdered lemonade, frozen water

Things required to create ice powdered lemonade: workers, freezers, stirring jar or
stirring machine

ALL NUMBERS HERE ARE MADE UP

Marginal Cost:
water = $1
powdered lemonade = $1
labour = $1,
random shit = $1
total = $4.
To make another cup of ice powdered lemonade = $4

Average Fixed Cost

$2 for one
$1 for two
.66$ for three

Average Variable Cost

$3 for one
$3.5 for two

Average Total Cost

$4 for one
$ 3.5 for two
$3 for three
$ 3.5 for four
$ 4 for five

- Goes down then up because fixed cost goes down but then variable increases.
- DMP example your kitchen can make 10 lemonades efficiently but once you go over
that employees start bumping into each others and spilling shit
-
Example for real vs nominal GDP.

The Nominal GDP for the year 2018 is 100. This 100 value is based on the current value of
the all the components added.

However the Real GDP for the year 2018 in terms of 1988 is 69. This 69 value is adjusted
for inflation. Remember that back in 1988 the purchasing power of dollars was different.
But for this case let us say that it was stronger. That $1 could buy you a television but now
it would take $10. This means that unlike the NOMINAL GDP we took into account the
inflation which is why the REAL GDP is smaller than the NOMINAL GDP because the
NOMINAL only takes into account the present moment.

Why would the government want a monopoly?

- Encourages the improvement of products
- If drug companies are given patents for new types of drugs, competitors
would want to create a superior product to get a new patent. A superior
product means that it was improved from last time and improvement is
always the goal of any country