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Scarcity
all factors of production are scarce; therefore, the production of goods and service are also scarce
Labor
human effort and talent, physical and mental. ex. education and training (human capital)
Land and Natural Resources
any resource created by nature
Physical Capital
human-made equipment like machinery as well as buildings, roads, vehicles, and computers
Entrepreneurial Ability
the effort and know-how to put the other resources together in a productive venture
Traditional Economy
tied to the evolution of economics, and it is related to subsistence and tribal life
Command Economy
consists of the central planning of the economy which differed in different regions of the world depending on the political regime
Market Economy
where buyers and sellers perform transactions. built around Laissez Faire ("free market") philosophy
Mixed Economy
a mix of command and market structure→ government plays a role in organizing the economy to some degree
Opportunity Cost
the value of what was given up
Production Possibilities Curve
simplified model of an individual, or a nation, that can choose to allocate its scarce resources between the production of two goods or services
What does the slope of the curve measure in an PPC curve?
opportunity cost of the good on the x-axis
What does the inverse slope of the curve measure in an PPC curve?
opportunity cost of the good on the y-axis
Productive Efficency
when the economy is producing the maximum output for a given level of technology and resources
Allocative Efficency
the economy is producing the optimal mix of goods and services
Optimal Allocative Efficiency
the combination of goods and services that provides the most net benefit to society
Market Failure
when a market fails to produce the allocative efficient quantity
Economic Growth
the ability to produce a larger total output over time
Economic Contraction
when a country's economy shrinks due to factors such as reduced spending by consumers, businesses, or the government
Absolute Advantage
producing goods/services more efficiently, using fewer inputs
Comparative Advantage
this principle is the basis for showing how nations can gain from free trade
Terms of Trade
the country’s export prices to income prices and determines the relative price between the nation’s exports and imports
Law of Demand
holding all else equal, when the price of good rises, consumers decrease the quantity demanded of that good
Ceteris Paribus
to predict how a change in one variable affects a second, we hold all other variables constant
Acronym of Determinants of Demand
INSECT:
I - Income
N - Number of Buyers/Consumers
S - Substitutes
E - Expectations of Future Prices
C - Completements
T - Taste and Preferences
Supply
the different quantities of goods and services that are willing to produce at various price levels
Law of Supply
holding all else equal, when the price of good rises, the quantity of good supplied increases
Quantity Supplied
the amount of a good or service that is produced at a particular price level (one point)
Demand Line
the entire line with all of the points that make it up
Determinants of Supply Acronym
R- Resources
O - Other good prices
T - Taxes
T - Technology
E - Supplier Expectations
N - Number of Competitors
Market Equilibrium Price
price that the market sets, where buyers buy the exact amount which the sellers are willing to produce
Market Disequilibrium
occurs when shortage or suplus in the market
Market Shortage (Excess Demand)
when the quantity demanded exceeds the quantity supplied → prices rise to eliminate shortage
Market Surplus (Excess Supply)
when the quantity supplied exceeds the quantity demanded → prices fall to eliminate surplus
Circular Flow of Economic Activity
a model that shows how households and firms circulate resources, goods, and incomes through the economy, and also includes government and banks
Closed Economy
a circular flow model that assumes there is no foreign sector (imports and exports).
Circular Flow Model: Consumer
the people who buy the goods/services in an economy and provide labor and receive wages/income from the factor market
Circular Flow Model: Firms
any business that produces goods and supplies them to the product market and then receives the payment for those goods and receive factors of production from the factor market and then pay them with wages
Circular Flow Model: Product Market
an exchange of goods and services for money between firms and households
Circular Flow Model: Factor Market
where factors of production such as labor, capital, and land are bought and sold
Gross Domestic Product (GDP)
the market value of the final goods and services produced within a nation in a given period
Aggregate Spending (GDP)
the sum of all spending from four sectors of the economy. GDP = C + I + G + (X – M)
Aggregate Spending: Consumer Spending
spending done by customers
Aggregate Spending: Investment Spending
current spending to increase output or productivity later
New capital machinery purchased by firms.
New construction for firms or consumers.
The market value of the change in unsold inventories.
Aggregate Spending: Government Spending
purchases made by the government for final goods and services and investments in infrastructure
Aggregate Spending: Net Exports
Exports → X, Imports → M
Aggregate Income (AI)
the sum of all income—Wages + Rent + Interest + Profit—earned by suppliers of resources in the economy
Value-Added Approach
a third approach to calculating GDP that considers all stages of production of a final good and the value that was added to the final good along the way
What is not included in GDP?
Illegal Activities:
Unpaid work
Transfer payments
Intermediate goods
Depreciation
What are the 5 uses of GDP in economics?
measuring economic growth
comparing living standards
assessing business cycles
formulating economic policies
attracting foreign investment
What are the 4 limitations of GDP?
Differing Populations
Inequality
Environment
Shadow/Black Economy
Employed
if a person has worked for pay at least one hour per week
Unemployed
if a person is not currently working but are actively seeking work
Labor Force
sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U). LF = E + U
Out of the Labor FOrce
A person is classified as out of the labor force if they have chosen to not seek employment
Labor Force Participation
the ratio of the size of the labor force to the size of the population 16 years and older. LFPR = (LF/Pop)*100
Unemployment Rate
the percentage of the labor force that falls into the unemployed category. Sometimes called the jobless rate. UR = 100 × U/LF
Discouraged Workers
citizens who have been without work for so long that they become tired of looking for work and drop out of the labor force
Frictional Unemployment
a type of unemployment that occurs when someone new enters the labor market or switches jobs
Seasonal Unemployment
a type of unemployment that is periodic, predictable, and follows the calendar
Structural Unemployment
a type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand
Cyclical Unemployment
a type of unemployment that rises and falls within the business cycle
Full Employment
when the economy is experiencing no cyclical unemployment
Natural Rate of Unemployment
unemployment rate associated with full employment, somewhere between 4 to 6 percent in the United States
Consumer Price Index (CPI)
the price index that measures the average price level of the items in the base year market basket. This is the main measure of consumer inflation
Deflation
the general decrease in prices
Inflation
general increase in prices
Disinflation
a decrease in the rate of inflation
Inflation Rate
the percent change in aggregate price level across an entire economy in a year
Market Basket
a collection of goods and services used to represent what is consumed in the economy
The Annual Rate of Inflation on Goods Consumed by the Typical Consumer
the percentage change in the CPI from one year to the next.
GDP Deflator
includes all items that make up domestic products
Nominal Income
today’s income is measured in today’s dollars. These are dollars unadjusted by inflation
Real Income
today’s income is measured in base year dollars. These inflation-adjusted dollars can be compared from year to year to determine whether purchasing power has increased or decreased
CPI Difficulties: Consumer Substitute
as the price of goods begins to rise, consumers seek substitutes → base year market basket a poor representation of the current consumption pattern
CPI Difficulties: Goods Evolve
the emergence of new products (smartphones) and the extinction of others (manual typewriters) is understood by firms and consumers, but the market basket must reflect this or it risks becoming irrelevant.
CPI Difficulties: Quality Differences
some price increases are the result of improvements in quality. Prices that increase because the product is fundamentally better are not an indication of overall inflation → overstated CPI
Real Rate of Interest
the percentage increase in purchasing power that a borrower pays a lender
Costs of Inflation: Menu Costs
results from firms having to change prices
Costs of Inflation: Shoe-leather costs
refers to the time and effort that people end up spending to counterattack the effects of inflation
Costs of Inflation: Loss of Purchasing Power
when inflation causes the value of the individual dollar to decrease over time
Costs of Inflation: Wealth Distribution
involves the real value of wealth being transferred from one group to another
Nominal GDP
the value of current production at the current prices
Real GDP
the value of current production but using prices from a fixed point in time
Price Index
a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year
The Business Cycle
the periodic rise and fall in 4 phases present in economic activity. Can be measured by changes in real GDP
Business Cycle: Expansion
a period where real GDP is rising
Business Cycle: Peak
the top of a business cycle where expansion has ended
Business Cycle: Contraction
a period where real GDP is falling
Business Cycle: Recession
unofficially defined as two consecutive quarters of falling real GDP
Business Cycle: Depression
a prolonged, deep contraction in the business cycle
Business Cycle: Trough
the bottom of the cycle where a contraction has stopped
Aggregate Demand (AD)
the inverse relationship between all spending on domestic output and the aggregate price level of that output
What does aggregate demand measure?
the sum of consumption spending by households, investment spending by firms, government purchases of goods and services, and net exports (exports minus imports)
What are the 3 general groups of substitutes for national output?
Foreign sector substitution effect, interest rate effect, and wealth effect
Foreign Sector Substitution Effect
when goods and services produced in other nations are more appealing due to domestic inflation → brings real GDP down
Interest Rate Effect
wait-and-see mentality for goods and services in the future as prices rise and real GDP falls
Wealth Effect
as aggregate price level rises, the purchasing power of wealth decreases → reduce quantity of domestic output purchased
Wealth
the value of accumulated assets like stocks, bonds, savings, and cash on hand
What does a combination of foreign section substitution, interest rate and wealth effects predict?
a downward sloping AD curve → as aggregate prices rise, the consumption of domestic output (real GDP) falls (inverse relationship)
