ultimate econ review

Scarcity

Individuals, businesses, and governments have unlimited wants but limited resources

Consumer Goods

goods made for direct consumption

Capital Goods

Goods made for indirect consumption

Trade Offs

All possible options given up when you make a choice

Opportunity Cost

The one best option given up when you make a choice including the money, time, and forgone

Centrally Planned Economics

Economic system where the gov't owns the resources and decides what to make, how to make it, and who gets it. Total gov't control of the economy .

Free-Market Economies

Economic system where individuals own the resources and decides what to make , how to make it, and who gets it. Little or no government involvement in the economy.

Mixed Economies

Almost all economies are a mixture of the above systems

Investment

business spending on capital (tools and machinery) that makes business more productive

Capital Stock

the amount of capital businesses have. The more capital stock, the more output they can make

Shifting the PPC

1. change in resource quantity or quality
2. change in tech
3. change in trade (changes amt of consumption)

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Product Market

places where individuals buy goods and services from businesses

Factor Market

Places where businesses buy the factors from individuals

Factor Payments

Payments made by businesses. Rent for land, wages for labor, interest for capital

Transfer Payments

Payments made by the gov't to meet a specific goal rather than pay for goods and services (welfare)

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The Law of Demand

Inverse relationship between price and quantity

The Law of Supply

Direct relationship between price and quantity supplied

AS & AD Graph Demand Shifters

1. Tastes and preferences
2. Number of Consumers
3. Price of Related Goods (substitutes and complements)
4. Income
5. Future Expectations

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AS & AD Graph Supply Shifters

1. Prices/ availability of inputs
2. Number of producers
3. technology
4. Gov't action (taxes and subsidies)
5. Expectations and Future profit

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Price Ceiling

Legal cap of prices designed to keep prices artificially low

Price Floor

Minimum legal price sllers can sell a product for

Subsidy

Gov't payment to producers designed to encourage them to double more

Double Shift Rule

If two curves shift at the same time, either price or quantity will be indeterminate

GDP

The dollar value of all final goods and services produced in a country in a year

C+I+G+(X-M)

Expenditure Approach to GDP

adds up all the spending done in the economy by households, businesses, the gov't, and other countries

Nominal GDP

measures current prices and does not account for inflation

Real GDP

GDP adjusted for inflation and expressed in constant, or unchanging, dollars

Not Included in GDP

1. Intermediate goods-GDP includes only final goods (car, not tires and metal)
2. Non-production transactions including used goods or financial transactions (stocks, real estate)
3. Non-Market Activities (black market production and distribution)

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Fritional Unemployment

Temporily unemployed or being between jobs. Individuals are qualified workers with transferable skills but they aren't currently working

Structural Unemplyment

Changes in the structure of the labor force make some skills obsolete. Workers do not have transferable skills and these jobs will never come back.

Cyclical Unemployemnt

Unemployment that results from economic downturns. As demand falls for G&S, labour falls and workers are fired

Discouraged Job seekers

People that are no longer looking for a job because they gave up. Since there people are not counted in the labor force, the unemployment rate may be too low.

Underemployed part-time workers

Someone who wants more hours but can't get them is still considered fully employed. The unemployment rate ignores the plight of such workers.

Consumer Price Index

an index number that shows how price changes over time for a fixed basket of consumer goods.

CPI\=Px of mrkt basket/px of mrkt basket in base year X100

GDP Deflector

is an index number that measures all prices and is used to convert nominal GDP into real GDP.

GDP Deflector\=Nominal GDP/Real GDP X100

Deflation

a decrease in price level (opposite of inflation)

Disinflation

a decrease in the rate of inflation. Prices rise but not as quickly

Velocity of Money

the average \# of times a dollar is spent and re-spent over a given period of time

Quantity Theory of Money

MxV\=PxQ

AD Shifters

1. Consumer Spending
2. Investment Spending
3. Gov't Spending
4. Net Exports

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AS Shifters

1. Resource Prices

2. Actions of Gov't

3. Productivity

Negitive Supply Shock

An unexpected decrease in the availability of a key resource that temporarily decreases productivity

Positive Supply Shock

an unexpected increase in the availability of a key resource that temporarily increase productivity

Stagflation

when there is high inflation and a sluggish economy. Usually accompanies a negative supply shock

Autonomous Consumption

The minimum amt of consumer spending when people have no income

Disposable Income

The amt of money households have to spend or save after taxes

Classical Economy Theory

The belief that the economy self-corrects and gov't intervention will do harm

Keynesian Economic Theory

The belief that the gov't should activley manipulate the economy to reach full employment

Discretionary Fiscal Policy

congress creates a new bill that is designed to change AD through gov't spending and taxation

Non-Discretionary Fiscal Policy

Permanent spending or taxation laws enacted to work counter cyclically to stabilize the economy

Multiplier Effect

The Idea that an initail change in spending will set off a spending chain that is magnified in the economy. The strength of the multiplier depends on the amt that consumers spend of new income

Marginal Prospensity to consume

how much people consume rather then save when income changes

Marginal Propensity to Save

how much people save rather then consume when income cahnges

Deficit Spending

if the gov't increases spending without increasing taxes they will increase the annual defecit and the national debt

Time Lags

Congress takes time to write, debate, pass, and implement legislation

Crowding Out

Gov't spending might cause unintended effects that weaken the impact of the policy. Ex: deficit spending to increase AD would increase interest rates and decease investment

Philips Curve

Financial Sector

The part of the economy made up of institutions ( like banks) that focus on pairing lenders and barrowers

Assets

Any item of economic value that can be converted into cash. Something owned

Liabilities

A legal or financial obligation that must be paid back. Something owed

Liquidity

The ease in which an asset can be converted into medium of exchange. Cash and money in checking accounts is very liquid. A car or a home is not a liquid asset.

3 Functions of Money

1. A Medium of exchange
2. A unit of account
3. A store of value

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Types of Money

1. Commodity money (has other value)
2. Fiat Money (just paper money)

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Money Market Demand Shifter

1. Changes in px level
2. Changes in income
3. Changes in taxation that effects investment

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Money Market Supply Shifter

1. Reserve Ratio -decresing reserve ratio then increases money supply
2. Discount rate -desreasing discount rate, increasing money supply
3. Open Mrkt Operations -The fed buys bonds to increase money supply

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-The fed buys bonds to increase money supply

The Federal Reserve

the central bank of the united states which regulates commercial banks and adjusts the money supply to adjust intrest rates to meet economic goals. (Monetary Policy)

Maturity

a barrower issues a bond that must be paid back by a certain amt of time. That time is its maturity. A bond can be sold early at an agreed upon price.

Fractional Reserve Banking

Process where banks hold a portion of deposits in reserve and loan the rest of the money out