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)
  • \

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
  • \

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
  • \

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
  • \

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
  • \

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
  • \

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