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What is Economics?
The study of how people try to satisfy seemingly unlimited and competing wants through careful use of limited resources
What is the fundamental economic problem facing all societies?
Scarcity
What are the basic questions of economics?
What, how, for whom
What are the factors of production?
Land(natural resources)
Capital (man made tools equipment/machinery)
Labor (people doing the work)
Entrepreneurship (risk takers in search of a profit who do something innovative w/ existing resource)
What are the characteristics of the 3 Economic Systems?
Traditional (doing things the same they’ve always been done)
command( what/how/ for whom the government says to produce)
Market( buyers and sellers make the decisions-most efficient)
What are the features of capitalism, free enterprise?
Market economies are based on a system of capitalism and free enterprise (entrepreneur)
Trade off vs opportunity cost
Trade-off is a list of possible choices
Opportunity cost what you lose when choosing or making a decision your second choice
Adam Smith (1723-1790)
advocated free trade and "the Invisible Hand of competition"
Father of economics
paradox of value
The situation where some necessities, such as water, have little monetary value, whereas some non-necessities, such as diamonds, have a much higher value.
cost-benefit analysis
a study that compares the costs and benefits to society of providing a public good
Law of Demand
Quantity demanded of a good or service varies inversely (higher/lower prices = smaller/larger quantity demanded)
Law of supply
Sellers/producers will normally offer more at higher prices and less at lower prices
What factors cause shifts in DEMAND?
Consumer taste
Number of consumers
Consumer income
Substitute
Complements
Change in expectations( way people thing abt the future)
What factors cause a shift in SUPPLY?
Cost of inputs
Technology
Number of sellers
Government policies (taxes, regulations, subsidies)
Productivity
Expectations
How are supply-demand models used to locate equilibrium?
by finding the point where the quantity demanded equals the quantity supplied. This point, where the supply and demand curves intersect, determines both the equilibrium price and quantity in the market
What/how does a shortage look/occur on a supply-demand graph?
occurs when the price is below the equilibrium price, and the quantity demanded is greater than the quantity supplied. This creates a gap between the two curves, indicating that consumers want to buy more than is available at that price
What/how does a surplus look/occur on a supply-demand graph?
The horizontal distance between the supply curve and the demand curve at a price above the equilibrium price. This visual representation indicates that the quantity supplied is greater than the quantity demanded at that specific price, meaning there is more supply than demand in the market
Price ceiling vs Price Floor
Ceiling- below equilibrium, can lead to shortage
Floor- minimum wage, can lead to surplus
Demand elasticity
how much the quantity demanded of a product or service changes in response to changes in its price, income, or the prices of related goods
Components of GDP
Consumer spending
investment spending
Government
Net exports
Nominal GDP vs Real GDP
Nominal- when GDP is not adjusted to remove the effects of inflation
Real- when distortions of inflation have been removed(reflects what GDP would have been if prices hadn’t changed from base year)
Consumer Price Index (CPI)
Measures the average change in prices over time that consumers pay for a collection of goods and services (widely used to measure of inflation)
GDP
Measure of national output
“Dollar amount of all newly produced finished goods and services within a nations borders each year”
Aggregate Demand
Sum of consumption:
Total demand for goods and services in a national economy
Aggregate supply
Sum of Production:
Total amount of goods and services produced in a national economy
Types of unemployment
Frictional/seasonal - temporary unemployment
Structural/technological- caused by lack of skill need for job or machines take over peoples jobs
Cyclical- caused by economy going down(shrinking)
Business cycle
Periodic expansion and contraction of nation economy
Recession
Contractionary that last 2 or more quarters
Labor force
Anyone over age of 16 who works or has looked for a job in the last 30 days
Expansionary/recovery
expansionary policies aim to stimulate economic growth, while recovery refers to the process of an economy bouncing back from a recession.
Demand-pull and cost-push inflation
Demand-pull inflation occurs when increased demand outstrips supply, leading to higher prices. Conversely, cost-push inflation arises from rising production costs
Progressive tax
Tax were percentage of in income paid in tax rises level of income rises
Proportional tax (flat tax)
Tax in which percentage of in income paid in tax is the same regardless of the level of income
Sales tax
a consumption tax imposed by the government on the sale of goods and services
Property tax
Local government revenue sources
For education and public welfare
FICA Taxes
(Federal insurance contributions act)
• second most important federal tax
• levied both employers and employees
•pays for social security and Medicare
Federal Deficit vs. National Debt
Federal-occurs when the government spends more money than it collects in revenue within a given fiscal year
National-the total amount of money a government owes to its creditors
Fiscal Policy
the government's use of its spending and taxation to influence the economy
Monetary Policy
Making decisions to increase or decrease money supply
Expansionary policy
policies implemented to stimulate economic growth by increasing aggregate demand
Contractionary policy
a set of measures taken by a government or central bank to slow down economic growth, reduce inflation, and curb excessive demand
Functions of money
Medium of exchange
Store of value
Measure of value
Reserve Requirements
The percent of a deposit a bank is required to keep by law
Regressive Tax
When the effective tax rate decreases as income goes up
Mandatory Spending
Social Security
Income Security
Medicare