Econ - Module 3

Market

Process of buyer/seller exchanging goods + services

Competitive Market

Many buyers and sellers selling identical products, where no one can control the price and prices are set by supply and demand.

Demand

entire demand curve—shows the relationship between price and quantity at all prices

Quantity Demanded

the specific amount consumers are willing and able to buy at one particular price

supply

how much good/service market can offer at given point

Quantity supplied

the specific amount producers are willing and able to sell at one particular price

Demand Curve

relationship b/w price + quality demanded; Downward sloping

Reasons for law of demand (3)

1. Substitution effect: when price rises, consumers switch to cheaper alternatives.

2. Income effect: when price rises, purchasing power falls, so people buy less.

3. Diminishing marginal utility: each additional unit gives less satisfaction, so consumers will only buy more at lower prices.

Market demand

the total quantity of a good or service that all consumers in a market are willing and able to buy at each price.

Determinants of demand (5)

• Income

• Prices of related goods (substitutes & complements)

• Tastes and preferences

• Expectations (future prices or income)

• Number of buyers

Normal good

Income ↑ demand ↑

Inferior good

Income ↑ demand ↓

Extension of demand

an increase in quantity demanded caused by a decrease in price (movement down the demand curve).

Contraction of demand

a decrease in quantity demanded caused by an increase in price (movement up the demand curve).

Law of supply

as the price of a good increases, the quantity supplied increases, and as the price decreases, the quantity supplied decreases

Change in Quantity Supplied

change in price of good

Supply Determinant

• Input prices (costs of production)

• Technology

• Taxes and subsidies

• Number of sellers

• Expectations (future prices)

• Prices of related goods in production

Shortage

buyers want more than whats availible

Surplus

quantity supplied quantity demanded

Price Ceiling

max legal price; causes shortages

price floor

minimum legal price; cause surplus

Traditional Econ System

An economic system where decisions about what to produce, how to produce, and for whom to produce are based on customs, traditions, and beliefs passed down through generations.

Command/planned econ system

An economic system where the government makes all major economic decisions

Free Market econ system

individuals and businesses make economic decisions based on supply and demand, with little to no government intervention.

Mixed Econ System

combines elements of a free market and a command economy, where both private businesses and the government play roles in economic decision-making.

Transitional Econ System

Change from command to one w/ less gov control

Gross Domestic Product

total value of all goods+ services produced within a country’s borders in a given period

(Includes foreign owned companies)

Nominal GDP

The value of all final goods and services produced within a country, measured using current prices (not adjusted for inflation).

Real GDP/Constant dollar GDP

GDP adjusted for inflation

• Nominal GDP - Inflation = RGDP

Per capita real GDP:

how much economic output there is per person, using prices that don’t change with inflation.

Nominal Income

current dollar amt of person’s income

Real Income

nominal income adjusted for inflation

Real Income Formula

[(Nominal Income)/CPI]x100

Inflation Rate Formula

[(CPI current year - CPI previous year)/CPI] x 100

Full employment

everyone who wants a job and is able to work can find one

Full employment ≠ zero unemployment

Philips Curve

A graph showing the inverse relationship between inflation and unemployment in the short run—as inflation rises, unemployment tends to fall, and vice versa.

Austrian School perspective:

emphasizes individual choice, free markets, and minimal government intervention

Frictional unemployment:

short-term unemployment when people are between jobs or entering the workforce.

Structural unemployment:

Caused by a mismatch of skills or location (jobs change, workers don’t).

Cyclical unemployment:

Happens during economic downturns when demand falls.

Institutional Unemployment

Caused by policy/insrtutional rule

Inflation

general increase of prices of goods and services; Measuered by CPI

Price Level

average level of price in economy

Deflation

decrease in overall price level

Consumer Price Index

Measure of price of a basket of consumable goods+services

Who loses on inflation

1. ppl on fixed income

2. Lenders

3. ppl w/ long term contract

Who wins on inflation

1. Debtors

2. Firms raise price

Menu costs

costs to firms of changing prices

Shoe leather cost

time, effort, and inconvenience people face from trying to avoid holding cash during inflation

4 Stages of Business

1. Expansion

2. Peak

3. Contraction

4. Trough

Expansion

Real GDP rises, unemployment decreases, consumer spending increase

Peak

Highest point of econ activity, GDP growth slows, econ start overheating

Contraction

Real GDP falls, unemployment rise, spending decrease

Trough

Lowest cycle point, end of contraction + start of recovery

Recession vs. Depression

• Recession → economy slows down a bit

• Depression → economy crashes hard for a long time

Econ Indicators (4)

1. Leading indicator

2. Stock Market indicator

3. Coincident indicator

4. Logging indicator

Leading indicators

Change before the economy changes → predict the future

Lagging indicators

Change after the economy changes → confirm trends

Coincident indicators

Change at the same time as the economy → show what’s happening now