Basic Economics: Supply, Demand, and Market Dynamics

Scarcity

Unlimited wants, limited resources

Opportunity cost

Next best alternative forgone

Marginal analysis

Decision based on extra benefit vs extra cost

Production possibilities curve (PPC)

Shows tradeoffs and efficiency

Efficiency (on PPC)

Producing on the curve

Inefficiency (inside PPC)

Underutilized resources

Demand

Buyers' willingness to purchase

Supply

Sellers' willingness to produce

Equilibrium

Where supply = demand

Shortage

Quantity demanded > quantity supplied

Surplus

Quantity supplied > quantity demanded

Demand shifters (T.I.P.E.S)

Tastes, Income, Prices of related goods, Expectations, Number of buyers

Supply shifters (P.I.N.T.S)

Productivity, Input costs, Number of sellers, Technology, Subsidies/taxes

Elastic demand

Responsive to price changes

Inelastic demand

Not responsive to price changes

Unit elastic

%Q = %P

Elasticity formula

%ΔQ ÷ %ΔP

Perfectly inelastic

Vertical curve (no change in quantity)

GDP

Value of all final goods/services

GDP formula

C + I + G + (X − M)

Nominal GDP

Current prices

Real GDP

Inflation-adjusted

Economic growth

Increase in real GDP

Frictional unemployment

Job transitions

Structural unemployment

Skill mismatch

Cyclical unemployment

Recession-based

Natural rate of unemployment

Frictional + structural

Full employment

Economy at natural rate

M1

Cash + checking deposits

M2

M1 + savings + time deposits

Money supply increase

Interest rates fall

Money supply decrease

Interest rates rise

Bond prices vs interest rates

Inverse relationship

Money multiplier

1 ÷ reserve requirement

Controlled by

Federal Reserve

Expansionary monetary policy

Buy bonds, lower rates, increase money supply

Contractionary monetary policy

Sell bonds, raise rates, decrease money supply

Discount rate

Rate banks borrow from Fed

Reserve requirement

% banks must hold

Open market operations

Buying/selling government bonds

Fiscal policy

Government spending & taxes

Expansionary fiscal policy

Increase G or decrease taxes

Contractionary fiscal policy

Decrease G or increase taxes

Multiplier effect

Spending creates more spending

Crowding out

Government borrowing raises interest rates, reduces private investment

Aggregate demand

C + I + G + (X − M)

AD increase

Price level ↑, output ↑

AD decrease

Price level ↓, output ↓

SRAS decrease

Inflation + recession (stagflation)

Long-run equilibrium

Economy at full employment output

Inflation

Rising price level

Deflation

Falling price level

Demand-pull inflation

AD increases

Cost-push inflation

SRAS decreases

Stagflation

Inflation + unemployment together

Exports

Goods sold abroad

Imports

Goods bought from abroad

Net exports

Exports − imports

Trade deficit

Imports > exports

Trade surplus

Exports > imports

Comparative advantage

Lower opportunity cost

Absolute advantage

More efficient producer