USU Econ 1500 Final (Randy Simmons)

Incentives:

THEY MATTER!! Things that motivate what people do. People respond to incentives.

Invisible Hand:

Individuals acting in their own self-interests, simultaneously benefit society.

The Great Economic Problem:

How to use our limited resources to satisfy our unlimited wants.

Opportunity Costs:

What you are giving up by making a certain decision. (value of the opportunity lost by choosing something else)

Marginal:

Change in price by having just one more/one less.

What are examples of incentives?

Salary, rewards, bonuses, food, sex

What is the great economic problem?\

How to use our limited resources to satisfy our unlimited wants.

What are trade-offs?

The benefits gained or lost when a decision is made.
Value of opportunities lost

What are opportunity costs? Give an example

The loss of potential gains from other opportunities. Example: Missing out on investing money because I spent it on a movie ticket

What does it mean to think on the margin?

Think about what will be gained or lost by having just one more/one less.
Cruise control on the highway

Absolute Advantage:

When a company/country can produce something cheaper/more efficient than another. Lower resource cost.

Comparative Advantage:

when someone can produce a good at the lowest opportunity cost they have the comparative advantage. Lower opportunity cost.

Production Possibilities Frontier:

-Shows all possible combinations of production amounts for two products given the same amount of labor

What are the benefits of trade?

Each group will be better off when preferences differ
Gaining new resources
Making connections
You may be able to buy something cheaper than your willingness to pay
You may be able to sell something for more than the lowest you'll accept
Each party will be satisfied and receive what they want

Can a country benefit from trade if it has absolute advantage?

Yes

Trade makes people better off when....

Preferences differ

How does trade increase productivity?

It increases specialization and division of labor

Trade leads to increased...productivity.. through

...specialization

Without trade, there is no....

specialization

The demand curve:

A function that shows the quantity demanded at different prices

The supply curve:

A function that shows the quantity supplied at different prices.

Quantity demanded:

The quantity that buyers are willing and able to buy at a particular price.

Quantity supplied:

The quantity that sellers are willing and able to sell at that particular price.

What are demand-shifters?

Definition: Something that makes consumers willing to pay more for any quantity of a good (I will pay even more money for that)
Examples: Fashion, Price of coffee creamer,
P.I.P.E.T. (Population, Income, Price of complements and substitutes, Expectations, Tastes)
PRICE ITSELF IS NOT A DEMAND SHIFTER

What are supply-shifters?

Definition: Something that will change the quantity of a good or service supplied at each price.
Examples/Types:
-price of inputs
-technological innovation*
-taxes and subsidies
-changes in opportunity costs
- If you have a lemonade stand but can sell limeade for cheaper than lemonade, you're going to sell limeade
-number of sellers
-expectations
-Exit or entry of producers
PRICE ITSELF IS NOT A SUPPLY SHIFTER

As price changes, how does quantity demanded change?

When the price is lower, more quantity will be demanded. When the price is higher, less quantity will be demanded.

As price changes, how does quantity supplied change?

As price goes up, quantity supplied increases.
As price goes down, quantity supplied decreases.

If supply decreases, how does the curve shift?

Supply curve shifts left.

If demand increases, how does the curve shift?

The curve will shift to the right

Why does the demand curve slope down?

(think high price, low quantity demand, vice versa)
Higher price, surplus of product

Why does the supply curve slope up?

(think low price, low quantity supply, vice versa)

How does demand differ from quantity demanded?

"Demand" is how much people value a given product, usually shown by plotting the theoretical quantity of a good purchased at every price.
ALL PRICES
Quantity Demand is a movement along a fixed demand curve, a change in demand is a shift of the entire demand curve
SINGLE POINT ON THE CURVE

What determines quantity supplied?

Price (Price determines QUANTITY)

Equilibrium

Where quantity demanded is equal to the quantity supplied.

Shortage:

A situation in which quantity demanded is greater than quantity supplied.

Surplus

Too much product and not enough buyers.

Gains from trade:

Consumer surplus + producer surplus (total Surplus, the triangle on the left of the graph).

Consumer surplus:

The consumers gain from exchange; difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.

Producer surplus:

The positive difference between what a producer is willing to sell a good for and the market price.

How does price respond to surplus?

Downward pressure on price

How does price respond to shortage?

Upward pressure on price.

Buyers compete with...

other buyers.

Sellers compete with

other sellers, Sellers are in competition with others that changes the prices of goods. Much like gas stations.

What do prices tell us? Why do they matter?

Prices help us understand the supply and demand as well as inflation rates.
**Price is information wrapped in an incentive

Price Floors:

A set level that the price cannot go below.
Examples: Minimum Wage, Airline tickets

Price Ceilings:

A set level that the price cannot go above
Examples: Dollar menu, Five dollar Pizzas at Little Caesars, Rent controls
NOTE: Economists draw upside down houses.

Lost gains from trade:

With price controls, some profitable trades will not be made, resulting in deadweight loss.

Deadweight loss:

The reduction in surplus caused by a market distortion or inefficiency.

What are potential impacts of price ceilings?

Loss of quality
Shortage of product

Potential impacts of price floors?

Wasteful quality increases
Surplus of good
Price ceilings are effective when they are BELOW the equilibrium.
Price floors are effective when they are ABOVE the equilibrium.
Example of a price ceiling- A price cap (cause shortages - think of gas in the 1970s or toilet paper during COVID - sellers couldn't raise prices, rent controls).
Example of a price floor- Minimum wage.

Real:

Adjusted for inflation, can be compared to other real prices throughout time.

Nominal:

Not adjusted for inflation.

Finished goods:

Goods that are ready for consumer sale.

Intermediate goods:

Goods that are sold to companies before they are sold to consumers.

Consumer price index:

A measure of the overall cost of the goods and services bought by a typical consumer. The average price of a basket of goods.

GDP: Gross Domestic Product :

How many goods and services are produced in a country within a year.

GDP per capita:

The Market value of all finished goods and services in a country in a year divided by population.

Business Fluctuations:

Increases and decreases in economic activity.

What is the national spending approach?

The national spending approach splits GDP into consumption, investment and government purchases, and net exports (exports-imports)

What are the weaknesses of GDP?

GDP doesn't include productive citizens that are important such as stay at home moms and volunteers. It also doesn't include black market activities.

What does GDP per capita show vs normal GDP?

GDP per capita shows the economic output per person.

Why do we ever use GDP per capita?

It is helpful for determining the average individual's standard of living.

The rule of 70:

Number of years to double GDP = 70 / annual growth rate %

Growth miracles:

Rapid economic growth (Japan)

Growth disasters:

No economic growth or decreasing growth. Example: Argentina

Institutions:

The "rules of the game", Institutions are only effective with a fair and honest government, free and open markets, and property rights and protections.

Physical capital:

Machinery and equipment that allows for growth- for example, a horse drawn cart, the car, a shovel, a bulldozer.

Human capital:

What is between your ears! The knowledge and skills used by people in the economy to contribute to economic output.

Technological knowledge:

Knowledge of how to operate within a certain field- knowledge gained by experience

Free rider:

Someone who doesn't contribute to the overall growth or gains of an economy.

Example of a Free rider:

Examples: Communist china- people not working in the field but eating the harvested food.

According to the rule of 70, if a sum of money was invested at 7%, how long would it take to double?

70/7 = 10, Ten Years

What are examples of institutions?

Honest government
Property rights
Free and Open Market

Why do institutions matter?

They are the "rules of the game" that structure economic incentives. They influence if and how much people participate in their economy (Ex. If you don't have strong property rights, people are less likely to buy land)

How does the average GDP per capita relate to most of the world's GDP per capita?

A few select countries that perform better bring up the overall average. Most countries fall beneath this average

How does corruption connect to GDP and economic growth?

Corruption slows down GDP and economic growth
It makes it more profitable to be corrupt than it is to be just, therefore wasting capital and wealth that could be invested in other places.

Cutting-edge growth:

Growth due to new ideas.

Catching-up growth:

Growth due to capital accumulation.

Marginal product of capital:

The increase in output caused by the addition of one or more units of capital. The marginal product of capital diminishes as more and more capital is added.

Steady-state level of capital:

Capital stock not increasing or decreasing, intersection of depreciation and investment on graph then go up to the corresponding point on the production function curve.

Conditional convergence:

The tendency - among countries with similar steady-state levels of output - for poorer countries to grow faster than richer countries and thus for poor and rich countries to converge in income.

What's the iron law of diminishing returns and how does it play a factor in growth rates?

The rate of return is lower than the investment. Losing its value over time.
Each additional unit gives less impact than the one before it if the level of labor remains the same.

What's the deal with the Solow model? What's it used for/why do we use it?

The Solow model is how we can measure long term growth

What stage of growth is the US at? Is this short-term or long-term, and slow or long?

Slow long term growth
Cutting Edge Growth

What are the factors of production?

Physical capital, human capital, and technological knowledge

What's an example of a spillover?

Ideas created by one company that are copied by other companies. TV subscriptions, plastic skis, coca cola products.
(Quick note: patents protect the implication of an idea and the business itself, not the idea)

Saving:

Income that is not spent on the consumption of goods.

Investment:

The purchase of new capital goods.

The life cycle theory of savings:

The theory that we borrow in our younger years, like college loans, save during our working years, and dissave during our retirement.

Time preference:

The desire to have goods or services sooner rather than later.

Financial intermediaries:

Entities (banks, bond and stock markets) that reduce the cost of moving savings from savers to borrowers and investors.

Default risk:

The risk that the borrower will not pay back the loan.

Collateral:

Something of value, that, by agreement, becomes the property of the lender if the borrower defaults.

Crowding out:

When the government borrows enough money to raise interest rates, which discourages people from borrowing. (Decreases availability for private spenders)

Insolvent:

When a firm has liabilities that exceed its assets.

What are the factors that determine the supply of savings?:

Smoothing consumption, Impatience, marketing and psychological factors, and interest rates.

As interest rate increases, demand to borrow...?:

Decreases.

As interest rate decreases, demand to borrow....?: .

Increases

What's the purpose of financial intermediaries?

To be the bridge between buyers and sellers and therefore lower risk factors involved in borrowing or lending, as well as to judge potential investments so the public doesn't have to.
They are the "middle man" and make borrowing easier as well, as you only have to go to one place to borrow instead of hundreds.

What're examples of financial intermediaries?

Banks, stock and bond markets