Econ Final

Scarcity

Resources are scarce and society has limited resources therefore we cannot produce all goods and services people want

Economics

The study of how society manages its scarce resources

Principle 1

People face trade offs

Principle 2

The cost of something is what you give up to get it

Principle 3

Rational people think at the margin

Principle 4

People respond to incentives

Principle 5

Trade can make everyone better off

Principle 6 

Markets are usually a good way to organize economic activity

Principle 7

 Governments can sometimes improve market outcomes

Principle 8

A country's standard of living depends on its ability to produce goods and services

Principle 9

Prices rise when the government prints too much money

Principle 10

 Society faces a short tun trade off between inflation and unemployment

Efficiency

society is getting the most it can from its scarce resources

Equality

distributing economic prosperity uniformly among the members of society

Opportunity Cost

whatever must be given up to obtain some item

Rational People 

 systematically and purposefully do the best they can to achieve their goals, given the available opportunities

Marginal Change

small incremental adjustment to a plan of action

Incentive

something that induces a person to act

Market Economy

the decisions of a central planner are replaced by those of millions of firms and households

Productivity 

quantity of goods and services produced from each unit of labor

Inflation

an increase in the overall level of prices in the economy

Business Cycle

fluctuations in economic activity, such as employment and production 

Assumptions

Can simplify the complex world and make it easier to understand

Circular Flow diagram 

visual model of the economy

Production Possibilities Frontier (PPF)

 A graph that shows the various combinations of outputs that the economy can possibly produce with the available factors of production and production technology 

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Macroeconomics

the study of economy wide phenomena, including inflation, unemployment, and economic growth

Positive Statement 

Make a claim about how the world is

Normative Statement

Make a claim about how the world ought to be

When income decreases

the demand curve shifts to the left

When income increases

the demand curve shifts to the right

Consumer Price Index (CPI)

A measure of the overall cost of the goods and services bought by a typical consumer

Inflation rate

The percentage change in the price index from the preceding period

Core CPI

 Measure of the overall cost of consumer goods and services excluding food and energy

Producer Price Index (PPI)

 Measure if the cost of a basket of goods and services bought by firms

Substitution Bias

Consumers substitute toward goods that become relatively cheaper, mitigating the effects of price increases

Introduction of new goods

The introduction of new goods increases variety, allows consumers to find produces that more closely  meet their needs

Unmeasured quality change

Improvements in the quality of goods in the basket increase the value of each dollar

Indexation 

 the automatic correction by law or contract of a dollar amount for the effects of inflation

Nominal interest rate

 Interest rate usually reported without a correction for the effects of inflation

Real interest rate

 interest rate correct for the effects of inflation

Productivity

 quantity of goods and services produced from each unit of labor

Physical Capital 

The stock of equipment and structures that are used to produce goods and services

Human Capital

Knowledge and skills that workers acquire through education, training, and experience

Natural Resources

The inputs into the production of goods and services that are produced by nature, such as land, rivers, and mineral deposits

Technological Knowledge

Society's understanding of the best way to produce goods and services

Diminishing returns 

Benefit from an extra unit of an input declines as the quantity of the input increases

Catch-up effect

The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

Foreign Direct Investment

Capital investment that is owned and operated by a foreign entity

Vicious Cycle

Policies that lead to more rapid economic growth would naturally improve health outcomes, which in turn would further promote economic growth

Market

 A group of buyers and sellers of a particular good or service

Competitive market

Market where is there are so many buyers and sellers each has a negligible impact on market price

Law of Demand

 others things being equal, when the price of a good rises, the quantity demand falls, and when the price falls, the quantity demanded rises

Quantity demanded

Amount of a good that buyers are willing and able to purchase

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded

Demand Curve 

a graph of the relationship between the price of a good and the quantity demanded

Market Demand 

the sum of all the individual demands for a particular good or service

Market Demand Curve

Shows how the total quantity demanded of a good varies as its price changes, holding constant all the other factors that affect consumer purchases

Shift to right in demand curve 

Change that increases quantity buyers want to purchase at any price

Shift to left in demand curve 

Change that decreases quantity buyers want to purchase at any price

Normal good

An increase in income leads to an increase in demand

Inferior good

 An increase in income leads to a decrease in demand

Substitutes

Increase in the price of one leads to the increase in the demand for the other

Complements

Increase in the price of one leads to a decrease in the demand for the other

Law of Supply  

other things being equal, when the price of a good rises, the quantity supplied also rises, and when the price falls, the quantity supplied falls as well

quantity supplied

Amount of a good that sellers are willing and able to sell

Supply Schedule

A table that shows the relationship between the price of a good and the quantity supplied

Supply curve

A graph of the relationship between the price of a good and the quantity supplied

Market supply curve

Shows how the total quantity supplied varies as the price varies, holding constant all other factors that influence producers decisions about how much to sell

Shift to right in supply curve 

Change that increases quantity sellers want to sell at any price

Shift to left in supply curve

Change that decreases quantity sellers want to sell at any price

Equilibrium

Quantity of the good that buyers are willing and able to buy exactly balances quantity that sellers are willing and able to sell

Equilibrium price

Balances the quantity supplied and quantity demanded

Equilibrium quantity

Quantity supplied and quantity demanded at the equilibrium price

Surplus 

 Quantity supplied is greater than quantity demanded

Shortage

Quantity demanded is greater than quantity supplied

Law of supply and demand

 Claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded of that good into balance

Factors of production

Inputs like labor, land, capital, and natural resources

GDP

The market value of all final goods and services produced within a country in a given period

GDP excludes 

• Most items produced and sold illicitly

• Most items produced and consumed at home

Final good

goods intended for the user

Intermediate goods

goods used as components or ingredients in the production of other goods

Nominal GDP

The production of goods and services valued at current prices

Real GDP

 The production of goods and services valued at constant prices 

GDP Deflator 

measures the current level of prices relative to the level of prices in the base year

Labor Force 

Total number of workers, including both the employed and unemployed

Unemployment rate

Percentage of the labor force that is unemployed

LFPR

Percentage of the adult population that is in the labor force

Natural rate of unemployment

normal rate of unemployment around which the unemployment rate fluctuates

Cyclical unemployment

Deviation of unemployment from its natural rate, Associated with short run fluctuations in economic activity

discouraged workers 

 individuals who would like to work but have given up looking for a job

Frictional unemployment

 Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills (short-term)

Structural unemployment

Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one (long term

Job search

 The process by which workers find appropriate jobs given their tastes and skills

unemployment insurance

A government program that partially protects the incomes of workers who become unemployed (increases frictional unemployment)

Efficiency wages 

Above equilibrium wages paid by firms to increase worker productivity

Money

Set of assets in an economy that people regularly use to buy goods and services

Medium of Exchange

item that buyers give to sellers when they want to purchase goods and services

Unit of Account

Yardstick people use to post prices and record debt

Store of Value

 item that people can use to transfer purchasing power from the present to the future