Economics I term study guide

What is economics?

Social science concerned with making OPTIMAL choices under conditions of scarcity

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants
🌷 Creates OPPROTUNITY COSTS = needing to use MARGINAL ANALYSIS

opportunity cost

whatever must be given up to obtain some other item
🌷 make a choice between alternatives

Economic perspective

a viewpoint that envisions individuals and institutions making RATIONAL DECISIONS by comparing the marginal benefits and marginal costs

Utility

happiness or pleasure obtained / consumed by goods and services

Marginal analysis

comparing marginal benefits (pros) and marginal costs (cons) used for decision making
🌷MARGINAL: "extra"; "additional"
🌷MARGINAL: change in or incremental (ie quantity v. price)

Purposeful behaviour

people make decisions with some desired outcome in mind
🌷 decisions that will make people better off, not worse off

Rational self interest

individuals / institutions look for ways to INCREASE UTILITY
🌷goal is to MAXIMISE SATISFACTION

Scientific method

the process of objectively establishing facts through testing and experimentation

Scientific Method Steps

1️⃣ Hypothesis - possible explanation of cause and effect.
2️⃣ Theory - Favorable Test of Hypothesis.
3️⃣ Economic Law - a well tested and widely
accepted Theory.
🍄Accept, reject, or modify the hypothesis.
4️⃣ Economic Principle - A widely accepted
generalization about the economic behavior of
individuals or institutions.
🍄come up with tendencies of industries
5️⃣ Economic Models - a combination of laws and principle - simplified representation of how something works such as a market or segment of the economy.
🍄observe industry + collect data

Other things equal assumption

the assumption that factors other than those being considered do not change (ie price changes, but factors of production dont)

Microeconomics

study of the INDIVIDUAL consumer, firm, or market
EX: apple inc

Macroeconomics

study of the ENTIRE consumer, firm, or market; the structure and performance of national economies and government policies that affect economic performance
focuses on: economic growth, business cycle, interest rates, inflation, and the behaviour of major economic aggregates (household, business, gov. sectors)

positive economics

economic statements that are factual / true.

normative economics

economic statements that are involve judgements. (Ie "what the economy should be like")
☀️not driven by data
☀️based on judgment or opinions

economising problem

limited income and unlimited wants

Budget line

line that demonstrates different combinations of two products a consumer can buy with a specific budget, given the products prices.
🌝 what we can and can't get on a budget

Society's economic problem

needing to make choices because economic resources are limited
🌎 referencing to limited production

Economic resources

factors of production
⛅️land: includes all natural resources
In the production processes. (Nature made!!)
⛅️labour: physical action and menatl activities that people use in production
⛅️capital (investments): man-made manufactured aid used in production (ie computers)

Entrepreneurial ability

human visionary ability to undertake risk to successfully create new ideas that make new products, services, and processes for today's FUTURE
❄️ special human resource SEPARATE from labour
❄️ can "see into the future" (visionary) of what industry needs
❄️ people willing to take risks
❄️ can expand the budget line

Functions of Entrepreneurs

☂️ to manage the other factors
of production
☂️ take initiative; taking risks
☂️ make strategic business decisions; "setting up the goal"
☂️ innovate; always come up with new ideas

PRODUCTION POSSIBILITIES MODEL

model that shows different combinations of two goods that an economy can produce

PRODUCTION POSSIBILITIES CURVE

curve showing different combinations of two goods / services that can be produced in FULL EMPLOYMENT, FULL PRODUCTION economy where the available supplies of resources and tech are fixed
🌊 different combinations of two products that can be made with specific set of resources, assuming FULL EMPLOYMENT

LAW OF INCREASING OPPROTUNITY COSTS

the production of a god increases, the opprotunity cost of making additional units goes up
🌪 as the nation chooses
🌪 more particular goods produced = its marginal opportunity cost increases
🌪 As the economy produces additional units of PIZZA, more of ROBOTS must be given up.
⛄️ MC of additional PIZZA will rise as more pizza is made
☃️ the MB of additional PIZZA decreases as more pizza is made

optimal output

MB = MC
🌈making the best choice
🌈which QUANTITIES of PIZZAS and ROBOTS maximise satisfaction / profit
🌈 resources are being used smartly when MB = MC

Growth

Expanding output

Economic system

determines what goods are produced, how they are produced, and who gets them
☄️a method of organising an economy
☄️can help solve society's econimising problem

ECONOMIC SYS DIFFER AS TO. . .

⚡️who owns factors of production (land, labour, capital, entrepreneurial vision
⚡️ the method used to motivate, coordinate, and direct economic activity

Economic system are classified according to what?

DEGREE OF CENTRALISATION/DECENTRALISATION
🍎CENTRAL: controlled by GOVERNMENT (think C for China; Communism)
🍎DECENTRAL: controlled BY THE PEOPLE (think individual; institutional)

LAISSEZ-FAIRE CAPITALISM

"pure capitalism"; gov. cannot interfere. type of Econ sys. where the gov. does not interfere with the economy
🍇DECENTRALISED
🍇economic activity is in control of the INDIVIDUAL (buyers & sellers)
🍇system is SELF CORRECTING

In Laissez-Faire capitalism the role of the gov. is,

STRICTLY LEGAL
🍊 role is limited to protecting priv. property
🍊gov. is REQUIRED to ensure mutual agreement of transactions is taken place between buyers-sellers
🍊NO INTIMIDATION OR COERCION IN THE MARKET

THE INVISIBLE HAND OF "PURE CAPITALISM"

determines what goods are made, how they are made, and who gets them. IN ADDITION helps solves society's econimising problem

Command system

socialism / communism
🍆 highly CENTRALISED
🍆 GOV. OWNERSHIP OF RESOURCES (Econ. DICTATORSHIP)

In command system, factors of production are,

OWBED BY THE GOVERNMENT. economic activity is coordinated by a CENTRAL PLANNING BOARD

Central Planning Board

group of gov. officials who determine what is made, how much is made, and the price of products

Market system

priv. individuals / institutions own most economic resources which MARKET & PRICE serve as a dominant coordinating mechanism used to allocate those resources
🍒 mix of decntralised decision making
with SOME GOV CONTROL
🍒allows priv. ownership of capital
🍒self-interested behaviour (maximise profits, minimise cost)

IN THE USA MARKET SYS THE GOV. . .

🍒 plays a substantial role
🍒 sets rules for economic activity, promotes economic stability + growth
🍒 provides certain goods / services otherwise not be produced at all
🍒 NOT the main or dominant econ. force

Private property

right of private people and firms to dispose, manage, own, control, obtain, and leave / hand over (bequeath) land, capital, and other property
🍠 encourages investment, innovation, exchange if assets, maintenance of property, and economic growth—INCLUDING intellectual property through patents, copyrights, and trade marks

Property rights

encourages people to make mutually agreement of economic transactions

Freedom of enterprise

allows FIRMS to obtain economic resources and to use said resources to produce products of their own choosing + to SELL their products in MARKET OF THEIR CHOICE

Self interest

firms, property owner, workers, and consumer believes is best for itself and seeks to obtain
🌽Market System allows consumers, resource suppliers, and businesses to pursue their self interest

ENTREPRENEURS TRY TO

MAXIMISE PROFITS AND MINIMISE LOSSES
each characteristic tries to maximise profits, income, and satisfaction the economy goes up if competition is there

Competition

requires TWO OR MORE independently acting buyers + sellers. Serves to decentralise economic power
defuses power and limits any action of single seller / buyer
MARKET + PRICES are the coordinating mechanism of the market system

In market systems,

encourages the extensive use and development of technology and capital goods. (Tools, machinery, large-scale factories)

Specialisation

to concentrate on one or small number of goods & services
allows economies to take better advantage of their resources and their capabilities
It enhances efficiency and output by enabling individuals, regions, and nations to produce goods and services for which their resources are best suited

Division of labour

human specialisation; separation of tasks between a group of people
🍞increases productivity

What is an active bit limited government?

In market systems, it may be needed to alleviate market failures

Market failures

over production of goods that have social costs
businesses tendency to increase monopoly power in Market System (have selfish interest)

Money

a convenient means of exchanging goods / services WITHOUT engaging in barter
eliminates barter
is socially defined; whatever society accepts as a medium of exchange
influences economy

Barter

DIRECT exchanges of one good or service to another good or service; SWAPPING ONE GOOD FOR ANOTHER (wheat in EXCHANGE FOR oranges)

Gov. failures

shortcomings that lead to misallocation of resources
creating too many regulations that are not effective

What are markets?

Groups of individuals and/or organizations that have:
1. Desire or needs for products in a product class
2. Ability, willingness, and authority to purchase such products

National markets

MARKET RUN IN A COUNTRY
🍁 US real estate (example)

International market

buyers and sellers from ALL OVER THE WORLD exchange good / service
🐿 New York Stock Exchange (example)

Competitive market

independently acting buyers + sellers come together to exchange standardised products
🎍 EX the stock market
🎍 involve Demand, Supply, Price, and quantity
🎍 PRICE is set through interactivgchoices of buyers / sellers

What is demand?

the desire, ability, and willingness to buy a product
🍀 can be demonstrated as a table / curve
🍀 when finding demand we ONLY factor that the cause of people to buy more or less if a product is the PRICE of the good
when price changes, this is a reaction from the consumer

Law of demand

other factors affecting demand stay the same. As price falls, the quantity of demand rises. As price rises, the quantity of demand falls

ACCORDING TO LAW OF DEMAND. . .

there's an inverse (opposite) relationship between PRICE and QUANTITY demanded (if other factors remain the same)

LAW OF DIMINISHING MARGINAL UTILITY

as consumer increases consumption of a good or service, the utility received from each additional unit of the good or service decreases.
additional units = less satisfaction. Price must be lower to make up for it
additional (marginal) value is less

Income effect

a change in quantity demanded of a product that is a result of change in real income (purchasing power) caused by the change of the price if the product
🐐 price goes up, if purchasing power goes up

Substitute effect

as the price of a product goes up, people don't buy and buy the cheaper option

The demand curve is

illustrates the inverse (opposite) relationship between price and quantity
🐠 downward sloping Curve
(quantity X, Price Y)
🐠 as the price goes DOWN more
will be in demand

Changes in demand

🐥 change in QUANTITY DEMAND is caused by the PRICE OF PRODUCT (shift left)
🐥 change in quantity demand by OTHER FACTORS (shift right)

Determinants of demand

change in consumer taste
and preferences
(right shift = favourable change,
left shift = unfavourable change)
change in PRICE RELATED GOODS

Normal goods

goods that we buy more if because income increases. We buy fewer normal goods when our income decreases.
🐙 EX eating at a restaurant

Inferiour goods

goods we buy more of as our income decreases. We buy fewer inferior goods if our income increases
EX grocery products, instant noodles

Complementary goods

goods that are used together so they are demanded together
🐢 school tuition and textbooks
🐢 when the price of one complement increases, the demand for the other decreases ("as enrollment increases, the tuition goes up")

Substitute goods

products / goods that can be used in place of each other
🐔 Ben and Jerry's ice cream
and Haagen-Dazs ice cream

What is supply?

table / curve that shows various amounts of a product that producers are willing and are able to make available for sale at each of a series of possible prices during a specified period of time

Supply curve assumes that,

only factor that causes businesses to produce more or less is the price of the product

What is the law of supply?

the other factors affecting supply stay the same. As the price rise, the quantity supplied rises. If price falls, the quantity supplied falls
🐞 has a direct relationship
🐞 the quantity of a good supplied varies directly with its price
🐞Given product costs, a higher price means greater profits and thus an incentive to increase the quantity supplied

To find market supply, we must

horizontally (left to right) ADD the sum of quantities by each individual producer at each price
Quantity supplied (X), price (Y)

Determinants of supply

Factors other than price that determine the quantities supplied of a good or service
🙈 also known as "supply shifters" because changes in determinants of supply will cause the supply curve to shift right or left
🙈 EX change in resource prices, technology, price if other goods, producer expectation

Market equilibrium

the demand curve and supply curve intersect
🐒 price producers agreed to supply
🐒 consumers have value
🐒 generate both Productive Efficiency and Allocative Efficiency

Equilibrium Price

when the PRICE of quantity demanded and quantity supplied are equal
🐼 negociating mechanism
🐼 agreement between suppliers and consumers

Equilibrium QUANTITY

when the QUANTITY of the demanded and quantity supplied are equal

Equilibrium price & quantity

the intersection of the downward sloping demand curve and upward sloping supply curve

SURPLUS

when the quantity supplied of a product goes ABOVE the quantity demanded at a specific price
🐹 the quantity supplied is ABOVE THE EQUILIBRIUM

SHORTAGE

when the quantity demanded of a product is BELOW the quantity supplied at a specific price
🐱 quantity demanded is BELOW EQUILIBRIUM
🐱 consumers are willing to buy more, producers are not (cannot make more)

Rational functioning

forces supply and demand to establish a price where buying and selling choices are coordinated (working together)
🐺 forces to create stability in a market
🐺 figuring out prices is a good tool to eliminating market shortages and surpluses

COMPETITIVE MARKET

can allocates society's resources efficiently to the particular product
choice of consumers collectively telling the producers what to do

Productive efficiency

producing a good in the cheapest way possible; production costs are minimised
compelled by price

Allocative efficiency

to obtain the production of the products most wanted by consumers
🍛 marginal cost and marginal
benefit are equal (the sum of consumer surplus and producer surplus is maximised)
🍛 value consumer gains from the price
🍛 maximising utility (consumer); maximising revenue (producer)

Price ceiling

legally established MAXIMUM price of a good or service
🐶 usually set BELOW the equilibrium price
🐶 creates chronic SHORTAGES
🐶 EXAMPLE: rent control

Price floor

legally established MINIMUM price of a good
🐰 normally set ABOVE equilibrium price
🐰 creates chronic SURPLUSES
🐰 EXAMPLE: minimum wage law

3 key Economic Evaluation Measures:

1) Real GDP
2) UNEMPLOYMENT
3) INFLATION

What is the business cycle?

recurring INCREASES AND. DECREASES in the level of economic activity periods of many years
🍣 short contractions (decreases) and expansions (increases)
🍣 reflects FLUCTUATION in output and unemployment
🍣 consists of peak, recession, trough, and expansion PHASES

Recession

point in time where output and standard of living as DECLINED
🍧 downward phase
🍧 EX 2007-2009 recession

GDP

measures the value of FINAL goods / services produced within a nation during a specific time, typically within a year
🍺 GDP is most important WHERE final output is produced, NOT WHO produced it
🍺 ignore INTERMEDIATE GOODS

Nominal GDP

measures DOLLAR VALUE of the goods / services at their CURRENT PRICES
🍭 INCREASE in nominal GDP may not actually indicate that more goods /services are being made by an economy
🍭 cannot measure output
🍭*GDP WITH INFLATION

REAL GDP

N. GDP eliminates price changes that happened over time in an economy. An INCREASE in R. GDP indicates that more goods/ services are being made by an economy
🍡 uses BASE YEAR PRICE
🍡 increased output
🍡 *ADJUSTED TO INFLATION

Unemployment

people who are available to work and are ACTIVELY SEEKING WORK but cannot find jobs
🍮 the economy failed to FULLY employ (fully use) its LABOUR FORCE
🍮 the economy failed to utilise and use ALL economic resources

Inflation

Increase in overall level of prices
🍚 EXAMPLE gas prices

Modern economic growth

historically recent phenomenon in which NATIONS FOR THE FIRST TIMEHAVE EXPERIENCED SUSTAINED INCREASES IN REAL GDP PER CAPITA
🐋 dramatically affected cultural, social, and political arrangements
🐋 countries experiencing modern econ growth tended to move towards democratic governments
🐋 people's life spans have doubled because normal people can participate in leisured activities due to an increased wealth ans living standards

Industrial revolution

created growth in living standards. output rose at a much higher rate than growth in population, which lead to forever-increasing living standards in industrialised countries

What is saving?

happens when CURRENT consumption is LESS than CURRENT output
current income MINUS (-) current

HOW is saving collected?

(Household) collected by banks, which are lent the funds to businesses who can invest it in equipment, factories, or other capital goods

Saving rate

saving DIVIDED BY ( / ) current INCOME

What is investment?

happens when RESOURCES are devoted to INCREASING FUTURE OUTPUT

Economic investment

expenses that INCREASE volume of physical capital (roads, wireless networks, factories) & intangible IDEAS (formulas, processes, algorithms) that help to make goods and services