Econ Final

Economics

The study of the use of scarce resources which have alternative uses.

Opportunity Cost

The hidden cost of an item that states that when you use time or money for something, you loose the opportunity to spend it on something else

how to calculate opportunity cost

the value difference of the option chosen and the value of the next best option.

Marginal Thinking

Analyzing the additional benefits and costs of a small change in behavior

Incentives

Factors that motivate or influence economic behavior

what are the three question all econ systems must answer?

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

Market Economy

Economic system where resources are allocated through markets and prices

Command Economy

Economic system where government controls resource allocation

Mixed Economy

Combination of market forces and government intervention

Production Possibilities Frontier (PPF)

A graph showing the maximum possible output combinations of two goods

Factors of Production

The four resources used to produce goods and services - land, labor, capital, and entrepreneurship

Land (Factor of Production)

Natural resources used in production including raw materials, water, air, and physical space

Labor (Factor of Production)

Human effort used in production including physical and mental work

Capital (Factor of Production)

Human-made resources used to produce goods and services including tools, equipment, buildings, and technology

Entrepreneurship (Factor of Production)

The ability to organize the other factors, take risks, innovate, and create new businesses

Scarcity

The fundamental economic problem that resources are limited but wants are unlimited

Economic Efficiency

Producing the maximum output with given resources

Productive Efficiency

Producing at the lowest possible cost

Allocative Efficiency

Producing goods and services most valued by society

Law of Demand

As price increases, quantity demanded decreases (and vice versa)

Demand Curve

Graphical representation of the relationship between price and quantity demanded

Movement Along Demand Curve

Caused by changes in price

Shift in Demand Curve

Caused by non-price factors such as income, preferences, expectations, related goods prices, or number of buyers

Normal Goods

Goods for which demand increases when income increases

Inferior Goods

Goods for which demand decreases when income increases

Substitutes

Goods that can be used in place of each other (e.g., butter and margarine)

Complements

Goods that are used together (e.g., peanut butter and jelly)

Elasticity of Demand

Measure of how responsive quantity demanded is to a change in price

Elastic Demand

When percentage change in quantity demanded is greater than percentage change in price

Inelastic Demand

When percentage change in quantity demanded is less than percentage change in price

Unit Elastic Demand

When percentage change in quantity demanded equals percentage change in price

Law of Supply

As price increases, quantity supplied increases (and vice versa)

Supply Curve

Graphical representation of the relationship between price and quantity supplied

Movement Along Supply Curve

Caused by changes in price

Shift in Supply Curve

Caused by non-price factors such as production costs, technology, expectations, number of sellers, or government policies

Elasticity of Supply

Measure of how responsive quantity supplied is to a change in price

Producer Expectations

How future price expectations affect current supply

Consumer Expectations

How anticipated price increases change current demand

Market Equilibrium

The point where supply and demand curves intersect

Equilibrium Price

The price at which quantity demanded equals quantity supplied

Equilibrium Quantity

The amount bought and sold at the equilibrium price

Surplus

When quantity supplied exceeds quantity demanded at a given price

Shortage

When quantity demanded exceeds quantity supplied at a given price

Price Floor

Minimum price set by government that creates a surplus when set above equilibrium

Price Ceiling

Maximum price set by government that creates a shortage when set below equilibrium

Sole Proprietorship

Business structure with a single owner, simple to form, unlimited liability

Partnership

Business structure with two or more owners, shared management, unlimited liability

Corporation

Business structure that is a legal entity separate from owners, limited liability, double taxation

Limited Liability Company (LLC)

Business structure that combines benefits of corporation and partnership

Cooperative

Business structure owned and operated by members for mutual benefit

S Corporation

Special type of corporation that avoids double taxation by passing income directly to shareholders

Perfect Competition

Market structure with many sellers, identical products, no barriers to entry, and perfect information

Monopolistic Competition

Market structure with many sellers, differentiated products, and low barriers to entry

Monopoly

Market structure with a single seller, high barriers to entry, and price-setting power

Inflation

A general increase in prices and fall in the purchasing value of money

Deflation

A general decrease in prices and increase in the purchasing value of money

Disinflation

A decrease in the rate of inflation

Stagflation

Combination of high inflation and high unemployment with slow economic growth

Cost-Push Inflation

Inflation caused by rising input costs (wages, raw materials)

Demand-Pull Inflation

Inflation caused by aggregate demand exceeding aggregate supply

Core Inflation

Inflation rate excluding volatile food and energy prices

Hyperinflation

Extremely high and typically accelerating inflation

Consumer Price Index (CPI)

Measures changes in prices of a fixed basket of consumer goods and services

Personal Consumption Expenditures (PCE)

Measures price changes in all goods and services consumed by households

Difference between CPI and PCE

PCE tends to report lower inflation because it accounts for substitution effects and has broader coverage

Nominal Interest Rate

The stated interest rate not adjusted for inflation

Real Interest Rate

Nominal Interest Rate minus Inflation Rate

Gross Domestic Product (GDP)

Total market value of all final goods and services produced within a country in a specific time period

GDP Expenditure Formula

Consumption + Investment + Government Spending + Net Exports

GDP Income Formula

Wages + Interest + Rent + Profit

Nominal GDP

GDP measured at current market prices

Real GDP

GDP adjusted for inflation, allowing for comparison across time periods

GDP Per Capita

GDP divided by population, a measure of average standard of living

Economic Growth

Increase in the production of goods and services over time

Business Cycle

Recurring pattern of expansion, peak, contraction, and trough in economic activity

Recession

Period of economic decline with two consecutive quarters of negative GDP growth

Depression

Severe and prolonged recession

Unemployment Rate

Percentage of the labor force that is unemployed

Labor Force

People who are either employed or unemployed but actively seeking work

Labor Force Participation Rate

Percentage of working-age population in the labor force

Requirements to be counted as "Unemployed"

Not working, actively looking for work, and available to work

Structural Unemployment

Unemployment due to mismatch between worker skills and job requirements

Frictional Unemployment

Temporary unemployment during job transitions

Cyclical Unemployment

Unemployment due to economic downturns

Seasonal Unemployment

Unemployment due to seasonal changes in demand for workers

Natural Rate of Unemployment

The lowest sustainable unemployment rate in a healthy economy

Money

Anything generally accepted as payment for goods and services or repayment of debt

Commodity Money

Money that has intrinsic value (e.g., gold, silver)

Representative Money

Money that represents something of value (e.g., gold certificates)

Fiat Money

Money that has value because the government declares it as legal tender

M1 Money Supply

Currency in circulation plus demand deposits (checking accounts)

M2 Money Supply

M1 plus savings accounts, money market accounts, and small time deposits

Medium of Exchange

Function of money that allows it to be used to buy goods and services

Store of Value

Function of money that allows it to retain purchasing power over time

Unit of Account

Function of money that allows it to measure and compare the value of goods and services

Liquidity

Ease with which an asset can be converted to cash without significant loss of value

Fractional Reserve Banking

Banking system where banks keep only a fraction of deposits as reserves and lend out the rest

Reserve Requirement

Minimum amount of reserves that banks must hold against deposits

Money Multiplier

The maximum amount of money the banking system can create from each dollar of reserves

Fiscal Policy

Government decisions on taxation and spending to influence the economy