Economics Resources, Market Dynamics, and Business Cycles

Resources

Anything used to produce something else

Categories of Resources

Land, Labor, Capital, Entrepreneurship

Land resource

Geographic expanses and materials in/on territory (materials are not considered individual item until removed from territory)

Capital resource

Physical: equipment, machinery, buildings to generate productivity

Human: training, education, skills & knowledge to generate productivity

Opportunity cost

What is given up for an opportunity (sacrificed opportunity/gained opportunity)

Positive economics

analyzes the way economy actually works

normative economics

analyzes the way the economy should work (more subjective)

Business cycle

Fluctuations in economic activity, alternation between downturns and upturns

Depression

Deep and prolonged period of downturn

Recession/Contraction

period of economic downturn when output and employment are falling

Expansion/recovery

periods of economic upturn when output and employment are rising

Peaks/troughs

high points and low points in business cycle (change from periods)

Unemployment rate

the portion of people in the labor force who are not working

Labor force

employed + unemployed

GDP/Aggregate Output

Total production of goods and services for given time period

Aggregate prices

Overall price level of goods and services.

Inflation rate

annual percentage change in aggregate price

Price stability

aggregate price level is changing slowly

Deflation

a decrease in the general level of prices; generally associated with economic contraction

Disinflation

a reduction in the rate of inflation

Ceteris Paribus

"all else equal" assumption

Movement along supply curve

change in quantity of good due to change in price

Shift of supply curve

Change in quantity of good despite consistent price

Market equilibrium

quantity of goods demanded by consumers equals quantity supplied by producers

Production possibilities curve/frontier

illustrates trade-offs between two products if production is maximized

Efficiency in Production

no resources are wasted in production (represented by any point on curve in PPC)

Efficiency in allocation

distribution in perfect accordance with consumer demand (not shown on PPC)

Absolute advantage

ability to produce a good most efficiently

Comparative advantage

ability to produce good at lower opportunity cost than competitor (specialize in product for which you have lowest opportunity cost)

Terms of trade

prices at which goods and services are exchanged (prices should lie between opportunity cost of traders)

Law of demand

price is inversely related to quantity demanded (higher prices -> lower demand)

Law of supply

price is directly related to quantity supplied (higher prices -> higher supply since producers want more profit)

Demand schedule

shows how much of a good or service consumers will want to buy at different prices

Change in demand factors (acronym)

T - Tastes (consumer preferences)

R - Related goods (substitutes & complements)

I - Income (normal goods & inferior goods)

B - Buyers (number of consumers)

E - Expectations

Normal goods

demand rises as consumer income rises

Inferior goods

demand decreases as consumer income rises

Consumer expectations

if consumers believe prices will increase later, they buy now; if they believe prices will decrease later, they wait now

Change in supply factors

I - Inputs (inputs to production)

R - Related goods (substitute & complement products)

E - Expectations (producer expectations)

N - Number (number of producers)

T - Technology (advances in tech increase supply)

Substitute in production

a good that can be produced in place of another good using same resources

Compliment in Production

a good that is produced along with another good from same input

Producer expectations

if prices will increase, supply decreased now; if prices will decrease, supply increases now

Surplus

supply exceeds demand; prices above equilibrium

Shortage

demand exceeds supply; price is below equilibrium

Price controls

legal restrictions on market prices

Price ceiling

maximum price; helps consumers; creates shortage/inefficient resource allocation; leads to black markets

Price floor

minimum price; helps producers; causes surplus

Quantity control

legal limit on quantity (quota)

Demand price

Price consumers are willing to pay

Supply price

price producers are willing to sell at