Econ Semester 1

Intro

marginal benefit: what you gain
opportunity cost: most desirable alternative given up
trade-offs: ALL alternatives given up
Production Possibilities Curve * Assumptions * produce two goods * full employment of resources * fixed resources * fixed technology * Shifters: * change in resource quantity or quality * change in technology * change in trade
Capital Goods (y axis) * any good used to increase production
Consumer Goods (x axis) * what you buy for consumption
Factors of Production * Land * Labor * Capital * Entrepreneurship

Supply and Demand

Demand Shifters (TIMER) * Tastes and preferences * Income * Market Size * Expectations * Price of Related Goods * Substitutes * Complements
Supply Shifters * Prices/Availability of Inputs * Number of Sellers * Technology * Government Action (taxes & subsidies) * Expectations of Future Profit
Supply on top, demand on bottom
Quantity: x axis
Price: y axis

Ceilings and Floors

Price ceiling * maximum legal price a seller can charge for a product * happens below equilibrium on S/D graph
Price floor * minimum legal price a seller can charge for a product * happens above equilibrium on S/D graph
Elasticity * how sensitive quantity is to a change in price * \

Complex Shifts

If two shifts change at the same time, either price or quantity will be indeterminate

GDP

only counts final goods
% Change in GDP = (year 2 - year 1)/year 1 x 100
GDP per capita can measure a nation’s standard of living
Not included * intermediate goods * nonproduction transactions (stocks, bonds) * Non-Market and Illegal Activities
Expenditures approach: add up all spending of final goods and services in a given year
GDP = C + I + G (X-M)
4 Components * consumers spending * investment * businesses buy capital * government spending * net exports (exports - imports)
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Unemployment

Unemployment rate = (# unemployed)/(# labor force) * 100
labor force * 16 years or older * able and willing to work * not institutionalized * not in military, school full time, or retired
Frictional unemployment * temporary, between jobs * seasonal unemployment
Structural Unemployment * changes in labor force make some skills obsolete * technological unemployment
Cyclical Unemployment * recessionary
Natural Rate of Unemployment * frictional + structural unemployment
Full Employment Output (Y) * Real GDP when no cyclical unemployment
Unemployment benefits reduce incentives to search for jobs
Unemployment rate criticisms * doesn’t account for discouraged workers * doesn’t account for underemployed workers * doesn’t account for race/age inequalities
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Inflation

Causes * government prints too much money * Demand pulls up prices * Higher production costs increase prices
Wage-price spiral
Deflation causes people to hoard financial assets
Hurt by inflation * lenders * people with fixed incomes * savers
Helped by inflation * borrowers
Nominal wages * measured by dollars
Real Wage * adjusted for inflation
Inflation Rate
Consumer Price Index * (Price of Market Basket)/(Price of market basket in base year)*100
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Calculating GDP

GDP Deflator * current level of prices relative to level of prices in the base year * Deflator = (Nominal GDP)/(Real GDP) * 100 * Nominal GDP = (Deflator * Real GDP)/100
Real Interest Rates * % increase in purchasing power that a borrower pays
Nominal Interest Rates * % increase in money that borrower pays
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Intro to LRAS

Shifters of AD * GDP, C, I, G, Xn
Shifters of AS * Government actions * changes in productivity
Price levels on y axis
Real GDP
Huge changes change LRAS
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Shifting AD/AS

AD = C + I + G + (X-M)
AS = R + A + P
Economy can be in either three places * Recessionary Gap * Full employment * Inflationary Gap
Stagflation * Stagnate economy + inflation

LRAS

Short Run wages and resource prices will not change when price level changes
Long run, wages and resource prices will change when price level changes
Permanent change in PPC will shift LRAS * change in resource quantity/quality * change in technology * change in trade
If investment increases, capital stock increases and PPC shifts outward. LRAS shifts
Only investment causes economic growth
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Financial Assets and Loanable Funds

Commodity money * something that performs the function of money and has intrinsic value, gold, silver, cigarettes
Fiat Money * something that serves as money but has no other value, paper money
3 Functions of Money * medium of exchange * unit of account * store of value
Financial and Non Financial Assets always * appreciate * depreciate
Liquidity * how easy it is for an asset to turn into money
M1 Highest Liquidity * currency in circulation * checkable bank deposits (checking accounts) * traveler’s checks
M2 (Near Moneys) * M1 * savings deposits (money market accounts) * time deposits (CDs = certificates of deposit) * Money market funds
What isn’t counted * stocks * crypto currency * gift cards * houses/equity * foreign currency
checking account * immediate money * 1 step to get it, use ATM * no interest
Savings account * 2 steps to get it * time and effort * low interest accrued
M1 is part of M2
Real Interest Rate * % increase in purchasing power that a borrower pays (adjusted for inflation) * Real = nominal IR - expected inflation
Nominal Interest Rates * % increase in money that the borrower pays not adjusting for inflation * Nominal = real + expected inflation
Loanable Funds Graph * M2 Money and Real Interest Rates
Transaction demand for money * people hold money for everyday transactions
Asset demand for money * people hold money since it is less risky than other assets
If interest rates rise, quantity demanded falls (public wants to store their money in interest accruing assets)
If interest rates lower, quantity demanded increases (no incentive to store money in assets)
Money Demand Shifters * changes in price level * changes in income * changes in technology
Money supply set by federal reserve system
Loanable Funds Market * private sector supply and demand for loans * real interest rate y axis * quantity of loans x axis * Demand shifters (investors) * changes in perceived business opportunities * changes in government borrowing * Supply shifters (lenders) * changes in private savings behavior * changes in public savings * changes in foreign investment * changes in expected profitability * If government borrows from private sector, demand for loans increases * real interest rates increase * crowding out effect
If interest rates increase, aggregate demand decreases because people want to save rather than spend. Price levels decrease, because demand decreases.
If there is political instability * demand decreases, worried consumers/businesses borrow/invest less * supply decreases, foreigners take money out of the country

Fiscal Policy and Money Multiplier

Fiscal Policy * actions by congress
Monetary Policy * actions by federal reserve
What Congress can do * taxes * spending * transfers
Contractionary Fiscal Policy * decrease government spending * increase taxes
Expansionary Fiscal Policy * increase government spending * decrease taxes
MPC * marginal propensity to consume
MPS * marginal propensity to save
MPC + MPS = 1
MPC = (change in consumption)/(change in disposable income)
MPS = (change in savings)/(change in income)
Spending Multiplier = 1/MPS
Total Change in GDP = Multiplier x Initial Change in spending
Multiplier for taxes/transfers * MPC/MPS
Government spending costs less money but can cause crowding out
Taxation costs more money

Fiscal Policy Problems

Discretionary spending must be approved
Mandatory spending is uh mandatory
Budget Deficit * expenditures exceed revenue
National debt * accumulation of all budge deficits
Lag * significant time between economic problem and when government is aware of the problem
Automatic Stabilizers * transfers like unemployment and food stamps * Progressive income tax