UNIT 1 Macroeconomics Basics + PPC

Command Economy

Central Authority that controls the who, what, and how.

Advantage: allows people to receive goods and services they normally couldn’t get

Disadvantage: loss of individual freedom to choose, no variety, low quality goods

Traditional Economy

Doing things how they’ve always done it. (Who, what, and how is and will be the same)

Advantage: no uncertainty for the future

Disadvantage: discourages new ideas and creativity

Market Economy

Based on capitalism, supply, demand, and the price system help people make decisions and allocate resources. (Who, what, and how is affected by consumers and private businesses)

Advantage: high degree of individual freedom, variety of goods, decentralized decision-making

Disadvantage: not providing for basic human needs, shortage of services, high degree of uncertainty

Utility

Usefulness and satisfaction

5 Key Economic Assumptions

1\.) Scarcity

2\.) Trade-offs

3\.) Everyone acts in their own self interest

4\.) Everyone acts rationally by comparing the marginal costs and benefits of every choice

5\.) Real life situations can be shown through models/graphs

Normative Statement

Statement that includes value judgement. (What should be)

Positive Statement

Statement based on facts. (What is or will be)

Opportunity Cost

The most desirable result given up as a result of a decision. (Next best option)

Trade-offs

The alternatives given up when choosing one course of action over others.

Economics

The study of choices of individual firms and governments.

Four Factors of Production

1\.) Land

2\.) Labor

3\.) Capital

4\.) Entrepreneurship

Entrepreneurship

Leaders that combine factors of production to create goods and services. Ex: Owner

Human Capital

Any skills/knowledge gained by a worker through education and experience. Ex: Knowing how to cook

Physical Capital

Human made resources to create other goods and services. Ex: Processed goods, machines

Labor

The effort a person puts forward to create goods and services. Ex: Cook, Baker

Land

Untouched natural resources.

7 Economic and Social Goals

1\.) Economic freedom

2\.) Economic efficiency

3\.) Economic growth

4\.) Full employment

5\.) Economic security

6\.) Price stability

7\.) Economic equity

Economic Freedom

The freedom to buy or sell what we want, to make choices.

Economic Efficiency

Using resources wisely and productively.

Economic Growth

The improving standard of living.

Full Employment

The highest amount of labor force that could be employed within an economy.

Economic Security

When the government provides a safety net in times of economic downturn.

Price Stability

Goods and services will consistently be available at stable prices.

Economic Equity

Workers being paid according to skill level and not being discriminated against by race, age, gender, religion, ethnicity, etc.

Production Possibilities Curve

Model that shows alternative ways that an economy can use it’s scarce resources.

4 Assumptions of PPC

1\.) Only 2 goods can be produced

2\.) There is full employment of resources

3\.) There are fixed resources (Ceteris Paribus, all other things being equal)

4\.) There is fixed technology

Efficiency (PPC)

Condition in which economic resources are being used to produce the max amount of goods and services. (On the curve)

Production Efficiency (PPC)

Products are being produced in the least costly way. (Any point on PPC)

Allocated Efficiency (PPC)

Products being produced are the ones most desired by society. (Optimal/specific point on the curve that depends on desires of society)

3 Ways a PPC Can Shift Outwards

1\.) Increase in productive resources (Quantity or quality)

2\.) New Technology

3\.) International Trade

Product Market

Goods and services produced by businesses that are sold to households

Resource Market

Resources are sold to businesses by individuals/households

Microeconomics

Relationship between households businesses and government in resource and product markets

Private Sector

Individuals and business

Public Sector

Government

Transfer Payment

Government redistributes income (welfare/social security)

Factor Payment

Payment for the factors of production/household income

Subsidy

Government payment to businesses for production

Household

Person/group of people living in a residence

Absolute Advantage

Can produce the most outputs or requires the least input

Comparative Advantage

Producer with the lowest opportunity cost

Terms of Trade

Agreed upon conditions that would benefit both countries

Outputs

Shows the max that each country can produce (other goes over)

Inputs

Shows the number of resources/hours required to make products (other goes under)

Trade Barriers

Policies designed to make it more difficult to conduct international trade

Tariff

Tax on an imported good set by a nation

Import Quota

Limit imposed by a nation on the quantity of a good that can be imported during a given period of time

Export Subsidy

Government payment to domestic producers to reduce production costs

Voluntary Export Restrictions

Self-imposed limitations on the number of products shipped to a particular country

Law of Demand

Quantity demanded of a good falls when the price of the good rises

Quantity Demanded

Amount of a good that buyers are willing and able to purchase at different prices

Demand Schedule

Table that shows relationship between the price of a good and the quantity demanded

Demand Curve

Graph of the relationship between the price of a good and the quantity demanded

Market Demand

Sum of all individual demands for a particular good or service

Shifts in Demand Curve

1\.) Consumer income

2\.) Price in related goods

3\.) Consumer tastes

4\.) Expectations in price changers

5\.) Number of buyers

6\.) Government intervention

Substitutes

When a fall in price reduces the demand for another good/vice versa

Complements

When a fall in the price of one good increases the demand for another good/vice versa

Law of Diminishing Marginal Utility

When consuming anything the addition satisfaction will eventually start to decrease

Inferior Good Demand increases as income decreases/decreases as income increases

Demand increases as income decreases, and demands decreases as income increases

Normal Good

Demand decrease as income decreases, demand increases as income increases

Law of Supply

As price increases the quantity producers make increase, and as price falls the quantity produces make fall

Shifters of Supply

1\.) Price and availability of resources

2\.) Number of sellers

3\.) Technology

4\.) Government action

5\.) Expectations of future profit

Market Equilibrium

Point when supply and demand meet = full efficiency of price and quantity

Shortage

Quantity demanded is more than supplied (price is raised by producers)

Surplus

Quantity supplied is more than needed leading to leftover product (price is lowered by producers)

Shifters of Quantity Demanded/Supplied

Price and only price