Final EC211

Economics

The study of how society allocates scarce resources to meet unlimited wants.

Microeconomics

Focuses on individual decision-making and markets, such as households and businesses.

Macroeconomics

Examines the economy as a whole, including growth, inflation, and unemployment.

Trade-offs

To get one thing, you give up another.

Opportunity Cost

The next best alternative forgone.

Rational Thinking

Decisions are made by comparing costs and benefits.

Incentives Matter

People respond to rewards and punishments.

Trade Benefits All

Allows for specialization and greater efficiency.

Markets Organize Activity

Markets allocate resources efficiently through prices.

Governments Can Improve Markets

Addresses market failures and promotes equity.

Country’s Standard of Living

Depends on production of goods/services.

Inflation

Occurs when more money chases fewer goods.

Opportunity Cost (alternative definition)

The value of the next best alternative given up.

Supply

Entire relationship between price and quantity.

Quantity Supplied (QS)

The specific amount producers will sell at a given price.

Demand

Entire relationship between price and quantity buyers want.

Quantity Demanded (QD)

The specific quantity buyers will purchase at a given price.

Adam Smith

Known for The Wealth of Nations and the concept of the Invisible Hand.

Invisible Hand

Market forces that guide resources to efficient uses.

Scarcity

Limited resources for high demand.

Rarity

Limited in existence, not necessarily in demand.

Rationing Methods

Examples include prices, queues, lotteries.

Market Failures

Causes include externalities, market power, and lack of information.

Equilibrium

Where demand equals supply.

Surplus

Quantity supplied > Quantity demanded (price above equilibrium).

Shortage

Quantity demanded > Quantity supplied (price below equilibrium).

Circular-Flow Diagram

Shows the flow of money, goods, and services between households and firms.

Production Possibility Frontier (PPF)

Illustrates the trade-offs between two goods.

Comparative Advantage

Ability to produce a good at a lower opportunity cost.

Absolute Advantage

Ability to produce more of a good overall.

Elasticity

Measures responsiveness of quantity to price changes.

Price Elasticity of Demand

Influenced by availability of substitutes, necessity, etc.

Substitutes

Goods that replace each other (e.g., coffee vs. tea).

Complements

Goods that are used together (e.g., peanut butter and jelly).

Externalities

Effects of a transaction on third parties (e.g., pollution).

Ceteris Paribus

Latin for "all else equal", used in economic models.

Post Hoc Ergo Propter Hoc

False assumption that correlation equals causation.

Positive Statements

Based on facts (e.g., Inflation is 5%).

Normative Statements

Based on opinions (e.g., Inflation should be lower).

Normal Goods

Demand rises with income (e.g., steak).

Inferior Goods

Demand falls with income (e.g., instant noodles).

Price Ceiling

A legal maximum price (e.g., rent control).

Price Floor

A legal minimum price (e.g., minimum wage).

Tax Incidence

Who bears the burden of a tax?

GDP

Measures all goods and services produced in a country.

Real GDP

Adjusted for inflation.

Nominal GDP

Measured in current prices.

Consumer Price Index (CPI)

Measures changes in the price of a basket of goods/services.

Producer Price Index (PPI)

Tracks price changes at the producer level.

Interest Rate

Nominal rate adjusted for inflation.

Unemployment Rate Formula

Unemployment Rate = (Unemployed ÷ Labor Force) × 100.

Frictional Unemployment

Short-term unemployment between jobs.

Structural Unemployment

Mismatch of skills and jobs.

Cyclical Unemployment

Due to economic downturns.

Functions of Money

Medium of exchange, store of value, unit of account.

Commodity Money

Has intrinsic value (e.g., gold).

Fiat Money

Value by government decree (e.g., U.S. dollars).

Money Supply (M1)

Includes currency, demand deposits, and traveler’s checks.

Monetary Policy

Managed by the Federal Reserve (e.g., interest rates).

Fiscal Policy

Managed by the government (e.g., taxes, spending).

Open Market Operations

Buying/selling bonds by the Federal Reserve.

Discount Rate

Interest rate for loans to banks.

Current Federal Reserve Chairperson

Jerome Powell.

Tariffs

Taxes on imports that raise prices for consumers.

NAFTA

Free trade agreement between the U.S., Canada, and Mexico; replaced by USMCA in 2020.

GATT

General Agreement on Tariffs and Trade; reduced global trade barriers.

WTO

World Trade Organization; enforces global trade rules.

Purchasing-Power Parity (PPP)

Concept that currencies adjust so the same goods cost the same in different countries.