An Increase in Supply: an increase in the quantity demanded but no change in demand—a

movement along, but no shift of, the demand curve.

A Decrease in Supply: 1. When supply increases, the price falls and the quantity increases.
2. When supply decreases, the price rises and the quantity decreases.
All the Possible Changes in Demand and Supply
1. Change in Demand with No Change in Supply
2. Change in Supply with No Change in Demand
3. Increase in Both Demand and Supply
4. Decrease in Both Demand and Supply
5. Decrease in Demand and Increase in Supply
6. Increase in Demand and Decrease in Supply
Demand Curve: The law of demand says that as the price of a good or service falls, the quantity
demanded of that good or service increases.
Supply Curve: The law of supply says that as the price of a good or service rises, the quantity
supplied of that good or service increases.
Market Equilibrium: the equilibrium price (P*) and equilibrium quantity (Q*) at the intersection
of the demand curve and the supply curve, is called Market Equilibrium.
GDP: GDP, or gross domestic product, is the market value of the final goods and services
produced within a country in a given time period.
Measuring GDP: there are two approaches available for measuring GDP, and both are used.
They are
1. The expenditure approaches: The expenditure approach measures GDP as the sum of
consumption expenditure (C), investment (I), government expenditure on goods and
services (G), and net exports of goods and services (X – M).
2. The income approaches: The income approach measures GDP by summing the incomes
that firms pay households for the services of the factors of production they hire—wages
for labor, interest for capital, rent for land, and profit for entrepreneurship.
Real GDP: Real GDP is the value of final goods and services produced in a given year when
valued at the prices of a reference base year.
Nominal GDP: Nominal GDP is the value of final goods and services produced in a given year
when valued at the prices of that year.
The Uses of Real GDP:
real GDP for two main purposes:
1. To compare the standard of living over time
2. To compare the standard of living across countries

Limitations of Real GDP

1. Household production
2. Underground economic activity
3. Health and life expectancy
4. Leisure time
5. Environmental quality
6. Political freedom and social justice
Why Unemployment Is a Problem?
1. Lost incomes and production
2. Lost human capital
Three Labor Market Indicators
1. The unemployment rate
2. The employment-to-population ratio
3. The labor force participation rate
The Unemployment Rate: The unemployment rate is the percentage of the people in the labor
force who are unemployed.
Frictional Unemployment: The unemployment that arises from the normal labor turnover we’ve
just described—from people entering and leaving the labor force and from the ongoing
creation and destruction of jobs—is called frictional unemployment.
Structural Unemployment: The unemployment that arises when changes in technology or
international competition change the skills needed to perform jobs or change the locations of
jobs is called structural unemployment.
Cyclical Unemployment: The higher than normal unemployment at a business cycle trough and
the lower than normal unemployment at a business cycle peak is called cyclical unemployment.
“Natural” Unemployment: Natural unemployment is the unemployment that arises from
frictions and structural change when there is no cyclical unemployment—when all the
unemployment is frictional and structural.
natural unemployment rate: Natural unemployment as a percentage of the labor force is called
the natural unemployment rate.
Full employment: Full employment is defined as a situation in which the unemployment rate
equals the natural unemployment rate.
The Real Wage Rate: Real wage rates that bring unemployment are a minimum wage and an
efficiency wage.
Inflation: A persistently rising price level is called inflation;
Deflation: a persistently falling price level is called deflation.
Why Inflation and Deflation are Problems
1. Redistributes income
2. Redistributes wealth
3. Lowers real GDP and employment
4. Diverts resources from production
The Consumer Price Index: Consumer Price Index (CPI), which is a measure of the average of
the prices paid by urban consumers for a fixed basket of consumer goods and services.
Construction/calculating the CPI: it involves three stages:
1. Selecting the CPI basket
2. Conducting the monthly price survey
3. Calculating the CPI
The Biased CPI:
The main sources of bias in the CPI are
1. New goods bias
2. Quality change bias
3. Commodity substitution bias
4. Outlet substitution bias
Alternative Price Indexes: The alternatives are
1. Chained CPI
2. Personal consumption expenditure deflator
3. GDP deflator: The GDP deflator includes all the goods and services that are counted as
part of GDP