Econ Memorization Terms

scarcity

not enough resources to satisfy all wants

opportunity cost

the next best alternative you give up

absolute advantage

produce the most with the given input, or produce with fewer inputs

comparative advantage

lower opportunity cost of producing something

command economy

government controlled, owns resources

market economy

determined by supply and demand, no government involved

mixed economy

both market and command economy

traditional economy

customs, tradition, and culture determines economy

law of demand

as prices increases, quantity demanded decreases

law of supply

as prices increases, quantity supplied increases

determinants of demand

taste, related goods, income, number of buyers, expectations

substitutes

as price of good A goes up, quantity demanded of good B goes up

complements

as price of good A goes up, quantity demanded of good B goes down

inferior good

as income increases, quantity demanded decreases

normal good

as income increases, quantity demanded increases

determinants of supply

input prices, related goods, expectations, number of producers, technology

elasticity

measure of responsiveness to change

consumer surplus

willingness to pay - actual price, area below demand curve

producer surplus

actual price - cost, area above supply

allocative efficiency

producing where society desires, MC = D, no DWL

utility

measure of satisfaction

diminishing marginal utility

total utility increases at decreasing rate

production function

how much output based on input

diminishing returns

as input increases, output increases at decreasing rate

economies of scale

ATC decreasing as quantity increases

accounting profit

total revenue - explicit costs

economic profit

total revenue - explicit and implicit costs

profit maximization

MR = MC

perfect competition

lots of buyers and sellers, identical products, ease of entry/exit, 0 profit in LR

monopoly

1 firm selling unique product, barriers to entry, controls price

natural monopoly

experiencing economies of scale, more efficient than multiple sellers

monopsony

1 buyer of labor

oligopoly

few sellers, identical/differentiated products, some barriers to entry, can collude and act as monopoly

collusion/cartel

oligopolies behave like monopolies, acting in unison

game theory

study of how people behave in strategic situations

dominant strategy

always do no matter other person’s choice

nash equilibrium

when both choose their best option and end in the same box

monopolistic competition

many buyers and sellers, differentiated products, 0 profit in LR

derived demand

demand for factors of production depends on the product’s demand

marginal revenue product

additional revenue from 1 additional input

externalities

unaccounted for impacts on a third party that didn’t buy or sell the good

public goods

nonrival, nonexcludable, free rider problem

private goods

rival, excludable

club goods (artificially scarce, natural monopoly)

nonrival, excludable

common resources

rival, nonexcludable, tragedy of the commons

lorenz curve

graph showing income inequality

Gini coefficient

measures income inequality, 0 = equal, 1 = unequal

elasticity equation

%change in Qd/%change in P

income elasticity

%change in Qd/%change in income, - = inferior, + = normal

cross price elasticity

%change in Qd A/%change in P B, - = complements, + = substitutes

marginal utility per dollar

MU A/$ A = MU B/$ B

ATC

TC/Q, AVC + AFC

AVC

VC/Q

AFC

FC/Q

MC

change in TC/change in Q

MR

change in TR/change in Q

hiring rule

MRP = MFC

business cycle

fluctuations in economy, expansion, peak, recession, trough

frictional unemployment

in between jobs, looking for work

cyclical unemployment

comes from business cycle, deviation from natural rate of unemployment

structural unemployment

longer term, can’t find work due to lack of skill of surplus of workers

natural rate of unemployment

normal rate of unemployment, 4-6%

discouraged workers

given up looking for work, not counted in unemployment

inflation

rapid rise in prices of all goods and services

Gross Domestic Product

total market value of all final goods and services produced in an economy in a given time period

transfer payments

government gives money to households with no return of goods or services

components of GDP

consumption, investment spending, government spending, net exports

nominal GDP

production of goods and services at current prices, not inflation adjusted

real GDP

production of goods and services at constant price, inflation adjusted

Aggregate Demand

curve that shows the quantity of goods and services that households, firms, government, and customers abroad want at each price level

short run aggregate supply

upward sloping, as price level increases, quantity supplied increases. Shifters: wages, resources, productivity

long run aggregate supply

vertical, price level doesn’t affect output. Shifters: technology, factors of production

supply shock

negative-supply shift left, positive-supply shift right. unexpected change in price of resources

multiplier effect

additional shift in AD from expansionary fiscal policy and consumer spending

marginal propensity to consume/save

for every increase in 1 dollar of income, how much you spend/save

crowding out effect

the decrease in AD from expansionary fiscal policy due to increased interest rates leading to less investment spending

sticky wage/price theory

SRAS is upwards sloping as prices and wages can’t change in the SR

financial assets

stocks, bonds, bank deposits

present value

amount of money today needed to make a future amount at current interest rates

future value

amount of future money given present money and interest rate

money supply

vertical, set by Fed, amount of money in the economy

money demand shifters

how much money people like as cash, PL, income, technology

reserve requirement

fraction of deposits banks need to keep

fractional reserve banking system

banks keep part of deposits, not loan all out

discount rate

interest rate for borrowing from Fed

federal funds rate

interest rate on loans between banks

contractionary monetary policy

reduce money supply, sell bonds, increase reserve requirement, increase discount rate

expansionary monetary policy

increase money supply, buy bonds, decrease reserve requirement, decrease discount rate

ample reserves market

Fed uses interest on reserves to control money supply, as there are too much reserves

contractionary fiscal policy

decrease AD, increase taxes, decrease government spending and transfers

expansionary fiscal policy

increase AD, decrease taxes, increase government spending and transfers

loanable funds market

matches borrowers and savers at the real interest rate

supply curve in loanable funds

upwards sloping, savers, as interest rate increases, more savings

demand curve in loanable founds

downwards sloping, borrowers, as interest rate increases, less borrowing

government deficit

spending > tax revenue

cost push inflation

SRAS left, increase in cost of production leads to inflation

demand pull inflation

AD right, increase in demand for goods and services leads to inflation

determinants of economic growth

technology, land, labor, capital

trade balance

exports = imports

FOREX

market for trading currencies. Shifters: interest rates, income, price level, taste/preferences