Unit 1- Intro to Economic Thinking

scarcity

limited resourcesrelative to unlimited wants, necessitating choices

resources (factors of production)

Land, Labor, Capitol, and Entrepreneurship

Mircoeconomics

the study of inidivdual parts of the overall economy

Macroeconomics

big pitcure themes such as infaltion, unemployment, gross dometic product, and how the government interacts with the economy.

Free Market Economy

Capitalism, Free-enterprise, less government control, in the hands of individuals and businesses

Command Economy

An economic system where the government makes all economic decisions, including production, investment, prices, and incomes; more government control

Incentives

Factors that motivate individuals or businesses to act in a certain way, influencing their choices and behaviors in the economy

Trade-offs

Involves giving up one option in favor of another when making decisions, as resources are limited.

Opportunity Cost

Scarcity of reasources forces people to make choices, This is the reuslt of those choices. Highest valued Alternative that must be sacrificed when making a choice

Opportunity Set

When you have your choices narrowed down to two. The set of all possible combinations of goods and services that a consumer can purchase given their budget constraints.

Opportunity benefit

What you choose; to gain from a decision, representing the value of the next best alternative that was not chosen.

Marginal Thinking

the additional unit of a good that has different benefits, incentives, and costs than the previous unit. It involves evaluating the additional benefits and costs of consuming one more unit of a good or service.

Trade

The exchange of goods and services between parties, often involving a mutual agreement on value.

Positive Economics

Information that can be verified

Normative analysis

opinions

Economic Freedom

freedom of individuals and other economic actors to answer the basic economic questions and operate in their own self-interest

Economic Effeiency

Using resources in their most efficient way so as to maximize production and employment

Economic Equity

Fairness in economic opportunity and participation; ensuring competition

Economic Security

preventing outside forces from manipulating or sabotaging the economy; protecting resources; managing the money supply

Economic Stability

maintaining a stable economy that is free from widely fluctuating depressions, panics, crashes, or currency failures.

Economic Growth

maintaining steady increases in real GDP per capita.

Nominal rate of interest

percentage; the price paid for the use of money (current price/value)

Real rate of interest

percentage; the inflation-adjusted value (price/value adjusted for inflation)

Nominal GDP

amount of output our economy produces in one year measured in current dollars

Real GDP

amount produced in one year adjusted for inflation

Ceteris Paribus

“holding all else constant”/ “other things being equal”; Holding variables not accounted for in the model constant

Capital

tools used in production: financial/real =money; or physical

Investment

purchase of real capital

Allocative Efficiency

Production mix maximizes the beneifits to society

Productive Efficiency

When the only way to increase the production of one good comes at the expense of another.

Recession/Contraction

Period of economic decline. Productive efficiency isn’t being met, and the economy is producing INSIDE the curve, there is unemployment of resources

Expansion/Recovery

Period within the cycle inwhich real GDP is increasing

Law of Diminishing Returns

When there is a diminishing increase in output as captial is added (curve flattens out as it increases).

Law of Increasing Cost

bowed out PPC

Law of Increasing Relative Cost

refers to the increasing opportunity cost of production that occurs as you move along the production curve.

Consumer Goods

good produced for current consumption (food, housing, clothing, entertainment)

Capital Goods

goods that help produce other valuable goods (building factories, roads, machinery, computers)

Real Investment

using reasources to make new capital

Absolute Advantage

an entity can absolutely produce more of a good or service than any other entity

Comparitive Advantage

calculation of the lowest opportunity cost; who can produce a good or service less expensively, or more productively, in terms of another good.

Terms of Trade

the price at which trade occurs

Tariffs

taxes on imported goods

Quota

limits on imported goods

Regulations

impose strict rules on imported goods

Money

currency + demand deposits

Currency

Cash money: paper notes, coin

Medium of Exchange

Spending; any assest that sellers are willing to accept as payment for goods and services; “something in the middle”

Commodity Money

(limited/ double purpose/ ineffiecent); Money that is an actual physical commonidty such as gold, silver, or tabacoo, limits inlfation

Commonidty-Backed Money

Money that can be exchanged for a commodity at a fixed rate; value of commoidity=value of money

Fiat money

(has no other use than as money); no value execpt as medium of echange; no intristie value; comes from government mandate

Unit of Account

Pricing; using money to measure value, price or worth

Store of Value

Saving; storing wealth from one pt to another holds up to inflation (ex. saving for something)

M1

spending money; =Currency + Demand Deposits + savings accounts; accesible and spendible

M2

M1 + small time deposits + money market funds

Inflation

A general increase in price level; expressed as percentage change in the previous year’s price level

Real Income

Measure the purchasing power of a change in income (nominal wage increase - inflation = rage wage increase)

Real Interest

measures the rate of interest after inflation rate is removed; (nominal interest rate - aniticpated inflation rate = return)

Discount Rate

% of DD which cannot be loaned

Reserve Requirement

% of DD which cannot be loaned

MS

Currency + Checkable Deposits

TR (total Reserves)

RR + ER

MM (money multipler)

1/ .RR

dMS (Change in money supply)

MM x ER

dMS Bonds (change in money supply regarding bond sales and purchases)

= MM x $ Value of Bonds

3 Economic Questions

What to Produce? How to Produce? For whom to produce?