ECON 103 Midterm: Exam 2 Review

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ECON 103
Prof.Donald J.Boudreaux

Econ 103 Exam 2 Review Session Price ceilings: QS: quantity supplied QD: quantity demanded MV: money people are willing to pay for the good Need to know:  Price ceilings/floors  5 consequences of price ceilings o Causes a shortage o Now some mechanism is required to determine who gets the available item, and who will not get it o Reduces the amount the consumers actually get o Bc the price reduces the amount supplied, it makes the item more precious (worth more) o Reduces the quality of the good  Minimum wage o If it increases employers will demand less workers (demand goes down) –demand covers the labor o Supply of workers goes up – supply covers the workers willing to work  Law of one price: explains for what we observe with pricing (the price will be around the same in the same market, no matter who is selling it) o Why? Driven by arbitrage o Arbitrage: means that people will buy for a low price and then will sell it at a higher price somewhere else – this raises the price in the old locations, while reducing it in the new location  Capital and Current accounts: o Current account: refers to imports and exports (value of these transactions are recorded through the current account) o The values of the investments is recorded in capitol account  Purchase of real estate  Purchase of ownership in a firm (stock)  Lending money to foreigners  Holding on to money (saving) Ex 1: American buying $1000 worth of steal in Mexico (import –Current account) Mexican uses money to buy wood (import of wood into Mexico is in the current account) This wood is an export for America (recorded in current account) Net of this exchange is 0. Imports are neg. ($1000) Exports + (30
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