Economics

Economics

the study of how scarce resources are used to satisfy unlimited wants

Resources

we never had enough to satisfy all of our wants

scarcity

the lack of a product or resource

Shortage

a short term lack of a product or resource

Necessities

goods which satisfy basic human needs

Luxuries

goods which consumers want, but don't need

Consumer goods

products used for immediate consumption. ex: cars, foods, toys

Producer Goods

products used to make consumer goods. ex:hammer and cranes

Three Factors of Production

Land, Labor, Capital

Land

natural resources such as trees, water, or minerals

Labor

mental and physical labor such as autoworkers or scientists

Capital

factories, machines (producer goods), and money

Rational Self Interest

economists believe that people choose options that give them the greatest satisfaction. People use available information, weigh costs and benefits, and make a self-interested choice.

Macroeconomics

the study of the economy as a whole

Positivist Economics

focus on measurable outcomes

Normative Economics

the question of what we should do. The analysis of the economy as an ethical value judgment

Production Possibility Curve (PPC)

shows the tradeoff between spending projects or production of one good to another

Shift on PPC

signifies either economic growth or economic decline

Opportunity Cost

the value of the foregone good, or the next best alternative

Adam Smith

Division of Labor-production more efficient

Pursue self-interests, competition is good=cheaper products

government should keep off the economy

profits drive economy w/ self interests

nations benefit w specializing in production of goods & by trading for items that they are less efficient in producing

Two Key Factors of PPC Shifting

1.Change in the amount of productive resources in the economy

2. Changes in technology and productivity

Adam Smith:Laissez Faire

government should keep off the economy

Adam Smith: Free Trade is crucial

nations benefit w specializing in production of goods & by trading for items that they are less efficient in producing

Adam Smith: Invisible Hand

profits drive economy w/ self interests

Two Types of Advantages in Free Trade

absolute; comparative

Absolute

economists look at the amount of labor hours/costs it will take to produce a product

Theory of Comparative Advantage

even nations with absolute advantages still benefit from trade. Both nations trading would benefit from trading products if they specialized in items that they have the lowest opportunity cost to produce.

Opportunity Cost Formula

Forgone Good(The other good)/Good you are calculating opportunity costs for

Demand

the willingness and ability for consumers to pay for its goods and services

Law of Demand

As prices go up, demand goes down: As prices go down, demand goes up

Substitute Products

products that replace another product

Complementary Products

products that go with another product

Income effect

As consumers' incomes fluctuate, so does the level of demand

Supply

the quantity supplied will increase

Law of Supply

As prices go up, quantity supplied will increase: As price goes down, the quantity supplied will decrease

Price of Inputs

when the cost of land, labor, tax/tariff, and capital change in the process of production

equillibrium (Market Clearing Price)

the point where the supply curve and the demand curve intersects

Normal Goods

products for which the demand increases when the income of people increase. Also applies conversely when the income lowers

Inferior goods

products that decrease in demand, even when the income of people rise

Diminishing Marginal Utility

As a person increase consumption of a product, there is a decline in the marginal utility that person gets from consuming each additional product

Diminishing Marginal Returns

This happens when a factor of production is increased and at some pointy, each additional unit produced will decline. For Example, adding more workers when production is near 100% will decrease marginal output

Indeterminate Shifts in Supply and Demand

When both the supply and the demand curves move simultaneously, the movement of prices and quantities can be indeterminate because we don't know which one is more decisive than the other

Price Ceiling

government policy which sets the legal maximum price that may be charged for that good. Cause a shortage in the good.

Price Floor

government policy that sets the minimum price that can be charged for a product. Leads to a surplus in the goods

Negative Externalities

the negative costs paid by society for a private exchange

Positive Externalities

The positive costs paid by society for a private exchange

Unemployment

those that are in the civilian labor force who are looking for work by cannot find a job

Unemployment Rate Calculation

unemployed/work force x 100

Underemployed

Those that have jobs, but will work part time or below their skill level

Discouraged Workers

those that have given up looking for jobs. (not in the labor force)

Overemployed

those that are working two jobs or over 40 hours per week

Frictional Unemployment

temporary unemployment of workers that are moving from one job to the next

Seasonal Unemployment

those that are employed for a specific season and are now unemployed

Structural Unemployment

unemployment due to the decline of industries so that the skill levels that these workers possess render useless for employment

Cyclical Unemployment

Unemployment due to job loss caused by a recession

Full & Natural Rate of Unemployment

• There will always be those that are unemployed due to frictional unemployment.

• excludes cyclical unemployment and includes frictional and structural unemployment.

Inflation

a short term rise in prices of a specific commodity

Deflation

a short term decrease in prices of a specific commodity

Consumer Price Index (CPI)

used by the government to measure the change in basic consume prices over time using a market basket, or the price of essential commodities

Consumer Price Index Formula

(current prices)/(Base Prices) x100

Anticipated Inflation

Rate of inflation that consumers, the government and business believe will occur

Unanticipated Inflation

causes problems as prices rise or decline more than expected

Nominal Interest Rate

price of borrowing money in current dollars

Real Interest Rate Formula

nominal interest rate - anticipated rate of inflation

Gross Domestic Product Formula

Consumption + Government Spending + Investment + Net Export

Per Capita GDP

amount of GDP produced in a country per person

Per Capita GDP Formula

GDP/population

GDP Deflator

Nominal GDP/Real GDP x 100

Gross Domestic Income

Wages + Profits + Rents

Say's Law: The Relation Between GDP and GDI

Supply creates its own demand

Producing goods generates the demand to purchase other goods

Impacts of GDP Increase

• may bring negative externalities like pollution which

adversely effects the quality of life of a people.

• Economic growth does not mean a fairly distributed income to poor sectors of society.

• Economic growth has the potential of increasing the standard of living for a nation's citizens

Expansion

when GDP grows, unemployment falls, and prices tends to rise

Contraction

when the GDP falls, unemployment rises and prices often falls

Aggregate Demand

Consumption + Investment + Government Spending + Net Exports

Interest Rate Effect

Price rise means the value of money goes down, therefore, the demand to borrow money increases and drives up interest rates. If interest rates fall, the prices will also fall

Open Economy Effect

if the price levels go up, our net exports drop. If our price levels drop, then our exports increase. Change in prices lead to a change in RGDP

Wealth Effect aka Real Balance Effect

if price level rises, people's purchasing power goes down and if price levels fall, people's purchasing power goes up

Classical Model Assumptions

pure competition exists, wages and prices are flexible, people are motivated by self-interest, people cannot be fooled by money illusion

average propensity to consume

real consumption/real disposable income

Average Propensity to Save + Average Propensity to Consume

=1

Average Propensity to Save

Real savings/Real Disposable income

Keynesian Multiplier

the ratio of change in equilibrium level of real national income to the change in autonomous expenditures

Multiplier Equation

1/(1-MPC) or 1/MPS

Keynesian Income Model

Macro Model

Demand Pull Inflation

The Sticky Price Model

Contractionary Gap

Cost Push Inflation

Secular Deflation