econ unit 1 vocabulary/concepts

economics

the study of scarcity and choice; how individuals, businesses, and governments allocate scarce resources to meet their needs and wants.

factors of production

resources used to produce goods and services: capital, entrepreneurship, land, labor (CELL)

entrepreneurship

innovation and ideas; the process of creating, organizing, and managing a new business venture in order to generate profit by taking on financial risks

tradeoff

sacrificing one thing for the sake of gaining another

opportunity costs

your 2nd choice, or the highest valued option you gave up; the value of the next best alternative that is forgone when making a choice

ceterus peribus

“all other things being equal”

full efficiency

full employment level of output; producing at maximum output with available resources, any point on the PPC curve; all available resources, particularly labor, are utilized efficiently

allocative efficiency

mix of goods and services matches consumer preferences, maximizing total benefit to society

specialization

the practice of individuals, firms, or countries focusing on the production of a specific good or service in which they have an advantage, rather than attempting to produce a wide variety of goods and services

constant opportunity cost

a situation where the trade-off between two goods remains the same, meaning that the amount of one good that must be given up to produce an additional unit of another good does not change.

increasing opportunity cost

the principle that as production of one good increases, the opportunity cost of producing additional units of that good also increases

comparative advantage

having the lowest opportunity cost (giving up the least) among the producers

absolute advantage

being able to produce more of a good with a given amount of time and resources

output method

OOO

input method

IOU

terms of trade

indicate the rate at which one good can be exchanged for another

mutually beneficial terms of trade

between the producer’s opportunity cost and the buyer’s opportunity cost

market

producers and consumers meet to exchange goods/services for payment

competitive market

there are MANY buyers and sellers of the same good/service

law of demand

a higher price for a good will lead people to demand a smaller quantity of it

demand curve

demand slopes down

law of supply

all other things equal, the price and quantity supplied for a good are positively related

supply curve

super slope

change in price

change in quantity demanded/supplied; movement ALONG the curve

change in anything else

change in supply/demand; SHIFT OF the curve

demand shifters

Income of buyers

Number of buyers

Expectations

Price of related goods

Tastes/preferences

INEPT

supply shifters

Income - taxes/subsidies

Number of producers

Expectations

Price of resources

Technology

INEPT

market equilibrium

a good/service price has moved to a level that the quantity of the good demanded is the same as the good supplied

equilibrium price/market clearing price

price at which demand matches supply

equilibrium quantity

the amount of goods bought and sold at the equilibrium price

disequilibrium

when the market price differs from the price that would equate quantity demanded with quantity supplied

surplus

more supply than demand, will drive price down until equilibrium is reached

shortage

more demand than supply, will push the price up to equilibrium

national income and product accounts/national accounts

track spending by consumers/sales of producers, business investment spending, government purchases, and other flows of money among different sectors of the economy

product markets

markets for goods and services

factor markets

markets in which firms buy resources needed to produce goods and services

income approach to calculating gdp

adding up the income earned by factors of production in the economy - WAGES (labor), RENT (land), INTEREST (capital), and PROFIT (entrepreneurship)

GDP=W+R+I+P

value-added approach to calculating gdp

adding up the value of all final goods and services produced in the economy; excludes intermediate goods

expenditure approach to calculating gdp

adding up aggregate spending on domestically produced final goods and services

GDP=C+I+G+Xn

unemployment

individuals are considered unemployed if they don’t currently have a job and have been actively seeking a job during the past 4 weeks

labor force

people who are currently working and those who are actively looking for work, or LF = employed + unemployed

labor force participation rate

% of the working age population that is willing and able to work, or LFPR = (labor force / population age 16+) * 100

unemployment rate

UER = (number of unemployed workers / labor force) * 100

frictional unemployment

unemployment due to the time workers spend in the job search

structural unemployment

unemployment resulting from a mismatch between the characteristics of job seekers and the types of jobs available

cyclical unemployment

overall unemployment resulting from downturns in business cycle

natural rate of unemployment

the rate of unemployment that arises from the effects of frictional and structural unemployment, or NRU = frictional + structural

changes in the NRU

Changes in Government Policies: Minimum wage, unemployment benefits, job training, employment subsidies

Changes in Labor Force Statistics: Age of workers, experience levels, etc.

Changes in Labor Market Institutions: Policy interventions and organizations within labor markets. (Ex: Labor Unions, temporary employment agencies, social media platforms for job searches)

business cycle

fluctuations in economic activity that an economy experiences over a period of time. measured by indicators including employment and aggregate output

expansion

economic upturn; period of rising output and employment

recession

economic downturn; period of contracting employment and output

aggregate output

the economy’s total production of goods and services for a given time (usually a year)

actual unemployment

Natural Unemployment + Cyclical

potential output

full employment level of output; the level of GDP with the natural rate of unemployment (NRU)

inflation

an increase in the general prices of goods and services/a decrease in the purchasing power of a dollar

deflation

fall in overall price level/increase in buying power

disinflation

declining rate of inflation

hyperinflation

rapid/out of control inflation from a human-made disaster

shoe-leather costs

increased cost of transactions caused by inflation

menu costs

real cost of changing listed prices

unit-of-account costs

costs arising from the way inflation makes money a less reliable unit of measurement

price indexes

help measure inflation by summarizing the prices of goods and services with a single number; any number <100 means we have deflation and >100 means we have inflation

market basket

hypothetical consumption bundle of consumer goods and services; used to track average price changes on consumer goods and services

consumer price index (CPI)

an index that measures the cost of a market basket of goods and services purchased by a typical urban household; quantity stays the same, price changes

Market Basket = (yr 1 quantity x yr 2 price) + (yr 1 quantity x yr 2 price)

              Good 1         Good 2  

(price of market basket this yr, / price of market basket base yr.) * 100

consumer inflation rate

((new cpi - old cpi) / old cpi) * 100

nominal interest rate

real interest rate + expected inflation rate

real interest rate

nominal interest rate - actual inflation rate

real income

(nominal income/CPI) x 100

nominal GDP

nGDP = PxQ

nGDP = C + Ig + G + Xn

real GDP

rGDP = GDP adjusted for inflation; quantity changes, price stays the same

(yr 2 quantity x yr 1 price) + (yr 2 quantity x yr 1 price)

        Good 1         Good 2

(nominal gdp / gdp deflator) * 100

real GDP per capita

rGDP / population

real GDP growth rate

((Yr. 2 GDP – Yr. 1 GDP) / Yr. 1 GDP) X 100

GDP deflator

(nGDP / rGDP) * 100

real income

(nominal income / CPI) * 100

aggregate demand

a schedule or curve that shows the amounts of real output that buyers collectively desire to purchase at each possible price level

wealth effect

higher price level reduces the real value of the public’s accumulated savings (and vice versa); Since the public has lost wealth in terms of real dollars, it must reduce spending

interest-rate effect

when price level rises, people need more money, so the demand for borrowed money increases (which increases the interest rate); Higher interest rates discourage spending

foreign purchases effect

when U.S. price level rises, foreign purchases of American goods decrease and Americans buy more foreign goods; This causes imports to increase and exports to decrease. (Xn decreases)

aggregate supply

a schedule or curve showing the level of real domestic output that firms will produce at each price level

sticky wages

nominal wages that are slow to fall in the face of high employment or slow to rise in the face of labor shortages

AD shifters

a change in any component of GDP - C+Ig+G+Xn

SRAS shifters

change of input prices

change in productivity

LRAS shifters

A change in the quantity of the factors of production

A change in the quality of factors of production

Any technological progress

• In other words, ANYTHING THAT WOULD SHIFT THE PPC

• Means full employment level of output, NRU, and economic capacity have all changed too

stabilization policy

policies aimed at reducing the severity of recessions and fighting excessively strong expansions

discretionary fiscal policy

when the gov’t. takes deliberate action to impact ADa

average propensity to save

percentage of total income that is saved (saving/income)

average propensity to consume

percentage of total income that is consumed (consumption/income)

marginal propensity to save

the fraction of any income change that is saved 

marginal propensity to consume

the fraction of any income change that is spent

functions of money

• Medium of exchange

• Unit of account

• Store of value

characteristics of money

• Durability

• Portability

• Divisibility

• Hard to counterfeit (recognizable)

• Relative scarcity

commodity money

money with intrinsic value

representative money

convertible, or commodity-backed money

fiat money

money by decree; value derived from official status or acceptability

M1 supply

cash, checkable deposits, traveler’s checks, savings accounts

M2 supply

M1 + near monies

• Near monies - not cash, but can easily be converted to cash, like certificates of deposit

federal reserve system

• Central bank of the United States

• Two parts:

  • Board of Governors - 7 app./conf. members; 14-year terms

  • Chair appointed every 4 years; currently Jerome Powell

• 12 regional Federal Reserve Banks

  • These are privately owned

• Functions:

  • Provide financial services as the “banker’s bank”

    • U.S Treasury has its bank account with the Fed

  • Supervise and regulate banking institutions

  • Maintain stability of the financial system

Conduct MONETARY POLICY- both contractionary and expansionary

demand in the money market

represents the relationship between the nominal interest rate and the quantity of money (M1) people want to hold

shifters for money demand

• Four main shifters/determinants

  • Changes in aggregate price level

    • Demand for money is actually proportional to the price level - if prices increase by 10%, it will take 10% more money to buy a market basket of goods/services

  • Changes in rGDP (national income) 

    • When national income increases, spending increases, so more money is needed 

  • Changes in technology

    • More technology available actually makes money demand decrease because it is easier to make purchases without large quantities of physical currency 

  • Changes in institutions

    • Has to do with banking regulations, etc.

      • When banks were finally allowed to give interest on checking accounts (after 1980), more people shifted money to their checking accounts, increasing the demand for money

shifters for money supply

three federal reserve tools (OMOs, RRR, DR),