Economics I midterm term Notes 

CHAP 1

WHAT IS ECONOMICS? Social science concerned with making OPTIMAL choices under conditions of scarcity

SCARCITY (definition): limits placed on goods and services available for consumption as a result of having little ECONOMIC RESOURCES 🌷 Creates OPPROTUNITY COSTS = needing to use MARGINAL ANALYSIS

OPPROTUNITY COST (definition): amount of products that have to be sacrificed in order to make another. 🌷 society sacrifices the opprotunity of getting the next best thing that could have been created with those resources

🌷 make a choice between alternatives

ECONOMIC PERSPECTIVE: a POV that sees industries and institutions making rational decisions by comparing marginal benefits v marginal costs 🌷 not comparing reasons = not rational decisions 🌷 comparing pros (marginal benefits) v cons (marginal costs)

UTILITY (definition): happiness or pleasure obtained / consumed by goods and services

MARGINAL ANALYSIS (definition): 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 (definition): making decisions with a desired outcome 🌷 decisions that will make people better off, not worse off

RATIONAL SELF INTEREST (definition): individuals / institutions look for ways to INCREASE UTILITY 🌷goal is to MAXIMISE SATISFACTION

🌺Marginal Benefit (PROS) is GREATER than the Marginal Cost (CON), then the choice is rational and will maximize utility (HAPPINESS).🌺

🌺If Marginal Benefit (PROS) is LESS than Marginal Cost (CONS), then the choice is not worth it.🌺

SCIENTIFIC METHOD (definition): 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🌗 does a job explaining and predicting his individuals and institutions behave in producing, exchanging, and consuming goods and services🌓

OTHER THINGS EQUAL ASSUMPTION: assumptions that factors other than those being considered did not change

MICROECONOMICS: study of the INDIVIDUAL consumer, firm, or market 🪐micro = small

MACROECONOMICS: study of the ENTIRE consumer, firm, or market 🪐macro = big 🪐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.

☀️can be duplicated

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

ECONIMISING PROBLEM: limited income and unlimited wants

THE BUDGET LINE (definition): 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

ATTAINABLE: all possible combinations of products inside or on the budget line

BUDGET LINE: combinations on or to the left of the line

TRADE OFFS: limited income forces people to choose what they can and can’t buy

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 💧producing less: MC (con) low 💧producing more: MB (pro) high

GROWTH: expanding output

CHAP 2

ECONOMIC SYS.: 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

Econ sys. are classified according to the 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”; 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 SYS.: socialism / communism 🍆 highly CENTRALISED 🍆 GOV. OWNERSHIP OF RESOURCES (Econ. DICTATORSHIP

🍆 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 SYS.: 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 of 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

TECHNOLOGY AND CAPITAL GOODS ARE ENCOURAGED IN MARKET SYS: 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

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)

ACTIVE BUT LIMITED GOV: 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)

GOV. FAILURES: shortcomings that lead to misallocation of resources 🥞 creating too many regulations that are not effective

THE FIVE FUNDAMENTAL QUESTIONS ARE. . . 🥘 WHAT goods and services will be produced? 🥘 HOW will goods and services be produced 🥘 WHO will get the goods and services? 🥘 HOW will the system change? 🥘 HOW will the system prompt progress?

THE FIVE FUNDAMENTAL QUESTIONS: highlights the economic choices underlying the Production Possibility Curve 🥫 reflects reality of scare of resources in a world of unlimited Wants

Q1: WHAT WILL BE PRODUCED?

A1: goods / services that create a PROFIT (added value to a nation)

PROFIT: total revenue greater than total cost (money earned MINUS cost of making product = profit) 🍨 results in expanded production and the movement of resources towards that industry

LOSS: total cost greater than total revenue (cost of making product MINUS money earned)

CONSUMER SOVEREIGNTY: determined by the consumers of what type and quantities of goods / services that will be made with the limited amount of resources in the economy

DOLLAR VALUE: the “votes” that consumers cast for the making of preferred product 🍯 consumer preferences 🍯 communicates to businesses

Q2: HOW WILL GOODS BE PRODUCED?

A2: choose the CHEAPEST way to produce desired product(s) 🍵 consumer is going to compare prices 🍵 have the right mix of resources to determine the cheapest cost of unitb 🍵 MINIMISE COST PER UNIT BY USIBG TECH AND RESOURCES 🍵 choose the cheapest option that will generate revenue

Q3: WHO WILL GET THE OUTPUT?

A3: consumers with the ABILITY and WILLINGNESS to pay market price (listed price!!) 🍿 having the ABILITY TO PAY depends on income 🍿 in market system consumer income AND product prices determine how the output will be distributed

Q4: HOW WILL THE SYSTEM CHANGE?

A4: through communication of the consumer preferences through dollar votes

🥠 Business then responds to this by producing more, or less, or none of the product

COMPETITIVE MARKET reallocated resources in response to change in consumer taste, technology advances, and changes in availability in resources

Q5: HOW WILL THE SYSTEM PROGRESS?

A5: through technological advances, higher standards of living, and higher capital accumulation

PROGRESS: greater economic output and greater economic output PER PERSON (per capital)

ECONOMIC OUTPUT PER PERSON: higher standard of living 🎂 technological advances and Capital Accumulation both contribute to higher standard of living

🥜 The market system creates PROFITS for technological advance and capital accumulation

🥜An entrepreneur or firm that introduces a popular new product will be rewarded with increased revenue and profits

CAPITAL ACCUMULATION: it provides the resources necessary to produce more capital goods through the increased dollar votes for capital goods 🧃 as people buy, businesses make more profit

UNITY OF PRIVATE AND SOCIAL INTEREST: Self-interested behaviour of both the business and the suppliers of resources result in the greatest amount of economic efficiency possible for the society. 🍻 firms and resource suppliers seeking to grow their own selfish interest and operating within an outline of highly compete ve market system

GOOD VALUES OF THE MARKET SYSTEM -efficiency -profits (incentives) -freedom

THE DEMISE OF COMMAND SYSTEM: The incentive problem: No adjustments for surplus or shortage (not fit to handle change and manage profits fairly and effectively)

THE CIRCULAR FLOW MODEL: the relationships the market economy makes continuous, repetitive flows of goods and services and money 🍩 The money flow facilitates the workings of the economic system

CIRCULAR FLOW DIAGRAM: An illustration showing the flow of resources from households to firms and of products from firms to households — The Real Flow

THE REAL FLOW: are accompanied by reverse Money Flows from firms to households and from households to firms

Q: HOW DOES THE MARKET SYSTEM DEAL WITH RISK? A: investors and owners only deal with with it

CHAP 3

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

CHAP 26

3 key Economic Evaluation Measures:

1. REAL GDP
2. UNEMPLOYMENT
3. INFLATION

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: a 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. 🎂 gross domestic product

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:

🍥 output per person RISES

🍥 NOT experienced by all countries

🍥 NO GROWTH in living standards BEFORE THE INDUSTRIAL REVOLUTION

INDUSTRIAL REVOLUTION: creates 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

PT 1: SAVING 🫒 household saving is collected by banks, which are lent the funds to businesses who can invest it in equipment, factories, or other capital goods

SAVING: happens when CURRENT consumption is LESS than CURRENT output 🧇 current income MINUS (-) current spending

🧇 SAVING RATE: saving DIVIDED BY ( / ) current INCOME

PT 2: 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

FINANCIAL INVESTMENTS: PURCHASING FINANCIAL assets (stocks, bonds, mutual funds) or REAL assets (house, land, factories) in expectations of financial gain

ECONOMIC INVESTMENT V FINANCIAL INVESTMENT:

-Economic investments = expenses that increase physical capital (ie roads) and intangible ideas (ie formulas) that help produce goods / services

-Financial investment = buying financial assets (stocks) or real assets (property) in hopes of financial gain

UNCERTAINTY, EXPECTATIONS, SHOCK

EXPECTATIONS: what consumers, firms, and others expects to happen in the future economic conditions

SHOCKS: UNEXPECTED changes in (whole) demand or supply 🥧 negative shocks = output decreases

DEMAND SHOCK & FLEXIBLE PRICES: Product prices that freely move upward or downward when product demand or supply changes ❤️ the more flexible the price = price will be able to adjust to unexpected changes in demand ❤️ economy can always produce at its CHEAPEST (optimal) capacity ❤️ does NOT need to lay off employees

DEMAND SHOCKS & FIXED PRICES: economy will respond to demand shocks through short-run changes in OUTPUT AND UNEMPLOYMENT rather than changes in price 🤍 change through other factors OTHER THAN PRICE (since it’s fixed)

DEMAND SHOCK & STICKY PRICES: Product prices that remain in place (at least for a while) even though supply or demand has changed

🧡 prices DO NOT move = negative demand shocks (recessions, unemployment)

🧡 can be a result of businesses being afraid of price wars

🧡 sticky prices may be put in place becayse businesses don’t want to annoy customers with with frequently changing prices

STICKY PRICES: CONSUMERS & FIRMS

SHORT RUN: ❤️‍🩹 consumers like stable prices (fixed or sticky) ❤️‍🩹 firms want to avoid price wars

LONG RUN: ❣️ all prices are flexible ❣️ firms adjust to unexpected, other than permanent changes in demand

REASONS FOR STICKY PRICES:

1. consumer preference
2. reduces business price wars

A major factor that causes sticky prices is. . .

💚 the stickiness (or fixed price) of the cost of labour to a business

💚 managers are reluctant to reducd number of employees bc it will cause low morale for the remaining workers

CHAP 27

GDP: total market value of all FINAL GOODS and FINAL services made annually within the boundaries of a nation 🍺 GDP is most important WHERE final output is produced, NOT WHO produced it 🍺 ignore INTERMEDIATE GOODS

FINAL GOODS / SERVICES: goods / services purchased by ultimate users (costumers) 🍫 EXAMPLE: a haircut purchased by a father for his 12yr old son

INTERMEDIATE GOODS: things purchased by a business to better it🍯 EXAMPLE: Chevrolet windows purchased by a General Motors assembly plant are not a final goods

🦋 The value added of a firm is the market value of the firm's output less the value of the inputs bought from others 🦋 selling price MINUS input = added value (total sale)

NONPRODUCT: transactions must be excluded from GDP singe they have NOTHING to do with production of final goods 🐔 EXAMPLE second hand sales sell used car to a friend 🐔 Transfer payments are excluded when calculating GDP because they do not reflect current production

INCOME APPROACH: sums compensation to employees, rent, interest, proprietors' income, corporate profits and taxes on production and imports 🐧 looks at GDP in terms of the income created or derived from producing goods and services 🐧 adds up all the income generated by the production of FINAL GOODS and FINAL SERVICES to measure the GDP 🐧 it includes supplements like benefits paid by employers on behalf of employees (NOT SOCIAL SECURITY, IS A PART OF INCOME / COMPENSATION)

NATIONAL INCOME: incomes earned by US RESOURCE SUPPLIERS PLUS taxes on production and imports 🐱 represents income earned by American- owned resources – incomes earned by Americans in the United States or abroad

ADJUSTMENTS TO MOVE FROM NATIONAL INCOME TO GDP:

1. SUBTRACT (MINUS) FOREIGN FACTOR INCOME (income Americans gain from supplying resources abroad). THEN ADD income that foreigners gain from supplying resources in the US
2. statistical discrepancy — balancing amount due to underground income
3. ADD depreciation (consumption of fixed capital)An estimate of the amount of capital    consumed in producing the gross domestic product
4. DEPRECIATION IS ADDED TO National Income to arrive at GDP because it is money from current production set aside for the ultimate replacement of used-up capital goods    🍄 amount business set aside to ultimately replace worn out capital. This is    amount that is not paid out to employees for their output
5. \

EXPENDITURE APPROACH: adds all spendings made for final (total) goods and final (total) services to measure GDP 🦨 EXAMPLES total purchases of plants, machinery, and equipment, businesses, residential construction, research-and-development activities, the creation of new works of art or music, AND CHANGES IN INVENTORIES

CHANGE IN INVENTORY: -Add Increase in Inventory for current year output not yet sold. -Subtract Decrease in Inventory for prior year output sold in current year

DURABLE GOODS: consumer goods with an expected use of 3+ years (cars, appliances, homes)

NONDURABLE GOODS: consumer goods with an expected use of less than 3 years (food, clothing, gasoline)

NET PRIVATE DOMESTIC INVESTMENT: Gross private domestic investment less (MINUS) consumption of fixed capital (depreciation) 🌲 the addition to the nation’s stock of capital during a year

GOV. PURCHASES: The expenditures of all governments in the economy for those final goods and final services 🪨 doesn’t include gov. transfer payments like social security because they a) transfer gov gov receipts to certain households and do not generate any sort of production

GDP = C + Ig + G + Xn (or Mn)

C = personal Consumption spending Ig = Gross private domestic Investment G = Government purchases Xn = eXports Mn = iMports

NET DOMESTIC PRODUCT (NDP): gross domestic product LESS (MINUS) depreciation (consumption of fixed capital

NATIONAL INCOME (NI): the sum (total added earnings) of wages and salaries, rent, interest, profit, proprietors’ income, and such taxes

PERSONAL INCOME (PI): measured income received, whether earned or unearned

DISPOSABLE INCOME (DI): personal income LESS (MINUS) personal taxes. Money used for personal consumption and spending and personal saving

NOMINAL GDP: is based upon the proves that were in effect when goods / services (output) was produced. It is based on CURRENT PRICES

REAL GDP: is output valued at constant base-year prices 🎄 Nominal GDP is deflated to determine Real GDP when prices rise; Nominal GDP inflated when prices fall 🎄 to calculate real GDP, it is the base year and then the current year’s prices (nominal) adjusted accordingly 🎄 A GDP that has been deflated or inflated to reflect changes in price levels

CHAP 28

ECONOMIC GROWTH: an increase in REAL GDP (current yr output) over a period of time OR an increase in REAL GDP per capita (per person) over time 🦋 calculated as a percentage rate of growth either on a quarterly or annual basis

DURING A RECESSION: growth rate will be negative instead of positive 🍫 during the 2009 recession econ growth was negative 2.4 🍫 in 2017-2018 econ growth was positive 2.9

GROWTH IN GDP: expansion of total output relative to population results in rising wages, higher income, and higher standards of living 👻 growth in GDP is considered an economic goal 👻 growth lessens the burden of scarcity

REAL GDP PER CAPITA: inflation—adjusted output per person 😼 real GDP DIVIDED BY ( / ) population

RULE OF 70: method in determining HOW MANY YRS IT WILL TAKE FIR SOME MEASURE TO DOUBLE, GIVEN ITS ANNUAL PERCENTAGE INCREASE

equation to figure out how many yrs for price level to double: 70 / annual percentage rate of growth

GDP numbers do fully consider for quality improvements in products / services 🐸 tends to UNDERESTIMATE growth of econ well-being—increase in time leisure is not included

MODERN ECON GROWTH: historically recent phenomenon in which NATIONS FOR THE FIRST TIME HAVE 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 and living standards

LEADER COUNTRIES: countries leading econ growth. They develop and use the most advanced technologies (which become available to follower countries)

🐟 examples of leader countries: the USA and Japan

FOLLOWER COUNTRIES: countries that adopt advance tech that were previously developed and used by leader countries 🦈 examples of follower countries: South Korea and China

CATCH UP GROWTH: rapid increases in REAL GDP per capita that can be gained when a poor follower country adopts (the new advanced tech) rather than reinvents cutting edge tech

HOW INSTITUTIONAL GROWTH IS STRUCTURED

1 democracy

2 Competitive Market Systems

3 Strong Property Rights

🐧 these structures promote and sustain economic growth

STRONG PROPERTY RIGHTS: people won’t invest if they believe their investments are not safe from theft or a corrupt government 😽 patents and copyrights 😽 Efficient financial institutions 😽 Literacy and widespread education 😽 Free trade

SUPPLY FACTORS IN GROWTH: The four determinants of an economy’s physical ability to achieve economic growth by increasing potential output and shifting out the production possibilities curve

SUPPLY FACTORS:

1. INCREASED quantity and quality of NATURAL reassures
2. INCREASED quantity and quality of HUMAN reassures
3. INCREASE in SUPPLY (or stock) of CAPITAL GOODS
4. improvements in tech    🤖 Any increases or improvements in these supply factors will increase the potential size of an economy’s GDP    🤖 relate to the physical ability of the economy to expand

DEMAND FACTOR: Households, businesses, and government must purchase the economy’s expanding output 🙀 The requirement that aggregate demand increase as fast as potential output if economic growth is to proceed as quickly as possible

EFFICIENCY FACTOR: must achieve econ efficiency and full employment 👹 goal to achieve optimal output (producing cheap, selling high) 👹 allocating reassures efficiently

The economy must use its resources in the least costly way to provide the specific mix of goods and services that maximizes people’s well-being

LABOUR FORCE SIZE: depends on the size of the working-age population and the labour force participation rate

LABOUR FORCE RATE: the percentage of the working-age population that is ACTUALLY in the labour force

LABOUR PRODUCTIVITY: total output divided by the quantity of labour manage to produce the output

FACTORS AFFECTING PRODUCTIVITY GROWTH

1. technological advances (40%)
2. quantity of capital (30%)
3. Education and training (15%)
4. economies of scale and resource allocation(15%)

-Technological advances: the discovery of knowledge

-Quantity of Capital: more and better plant and equipment make workers more productive

-Education + training: investment in human capital. The knowledge and skill that make people productive

-Economies of Scale: The situation when a firm’s average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and, hence, its output). It is reductions in per-unit production costs that result from increases in output levels

-Recourse allocation: Workers moving from low productivity employment to high productivity employment

PRODUCTIVITY GROWTH: increase in growth is bc of the significant wave of new technologies paired with global competition 🥶 the main route for improving the standards of living for a nation’s workers 🥶 Affects real output, real income, and real wages. 🥶 Pay higher wages without lowering profit.

HIGH PRODUCTIVITY GROWTH

CONTRIBUTED TO THESE FACTORS:

1 Information technology—new and efficient ways of delivering and obtaining info from wifi, internet, computers, etc

2 Start up firm—new business focused on creating and introducing a particular new product or employing a specific new production or distribution method

😈 use various aspects of information technology

😈EX: intel (microchip), Google, Apple, Microsoft

PRODUCTIVITY SLOWDOWN

1. high debt levels accumulated by people and businesses BEFORE Great Recession
2. excess capacity existing, which makes firms reluctant to purchase newer, more productive equipment    😇 still paying off debt
3. new products that are technology based are being offered for FREE to the people, so it’s not measured in GDP    🎓 EX: Instagram, Twitter, Facebook, etc
4. Technological progress just may be at a stall, meaning growth will continue to stagnate until invention and innovation speed up again

GROWTH IS BAD: -affects the environment (pollution, climate change, etc) -growth is not sustainable. (can use up all of earth’s finite supply of natural resources) -little evidence that growth helped solve sociological problems (poverty, homelessness, discrimination) -increases human stress (led to higher living standards, but it doesn’t translate to a better life)

GROWTH IS GOOD: -primary path to higher standards of living -Growth need not debase the environment -no indication that we’re running out of resources -IS ACTUALLY SUSTAINABLE because it’s based on expansion and application of knowledge, which is limited by imagination

PEAK—point where the biz. cycle reached TEMPORARY MAXIMUM ❤️‍🩹 economy near / reached full employment ❤️‍🩹 level of real output is at or very close to the economy’s capacity RECESSION—period of DECLINING REAL GDP paired with LOW REAL INCOME and higher rates of unemployment TROUGH—biz cycle reached TEMPORARY MINIMUM 🈹recession ends here 🈹expansion (recovery) begins 🈹econ experiences severe unemployment 🈹REAL GDP is LESS THAN POTENTIAL OUTPUT EXPANSION—which real GDP, income, and employment rise towards full employment level.

FLUCTUATIONS IN BIZ. CYCLE: caused by a COMBINATION of ECONOMIC SHOCK WITH PRICE STICKINESS

ECONOMIC SHOCKS: events that EXPECTEDLY SHIFT DEMAND AND SUPPLY

STICKY PRICES: are prices barely able to adjust to economic shocks ⛔️ EX: UNEXPECTED decrease in demand

ECONOMIC SHOCKS THAT CAUSE BIZ CYCLE

1. POLITICAL EVENTS (ex war)
2. FINANCIAL INSTABILITY
3. INNOVATION (creating NEW innovations and production methods can boost the economy to economic peak. Afterwards the economy may slow down or even decline)
4. PRODUCTIVITY CHANGES
5. MONETARY FACTORS (Printing more money causes inflationary boom. Printing less money causes output decline and eventually decrease in prices)

WHO ARE AFFECTED: firms and industries MAKING CAPITAL GOODS and DURABLE CONSUMER GOODS — SUFFERS from CONTRACTIONS, but BENEFIT from EXPANSION

PART TIME: these workers are counted as unemployed even if they want full time work

DISCOURAGED PEOPLE: they’re NOT counted as unemployed because they are NOT CURRENTLY SEEKING WORK (group 2)

FRICTIONAL EMPLOYMENT: people searching for jobs or waiting to take jobs soon 🟣 caused by workers voluntarily changing jobs and by temp. layoffs

STRUCTURAL EMPLOYMENT: Occurs due to changes in the structure of the demand for labor 🟢 occurs when certain skills become difficult to have or location of job changes

CYCLICAL EMPLOYMENT: type of unemployment caused by insufficient total spending (insufficient aggregate (whole) demand) 🔵 Caused by the recession phase of the business cycle

NATURAL RATE OF UNEMPLOYMENT (NRU): the unemployment rate at which ACTUAL INFLATION equals ( = ) EXPECTED INFLATION 🟪 unemployment rate when there is NO CYCLICAL UNEMPLOYMENT

FULL EMPLOYMENT-UNEMPLOYMENT: Equaling the total FRICTIONAL UNEMPLOYMENT and STRUCTURAL UNEMPLOYMENT bc they are the type of unemployment that ALWAYS HAPPENS and is a natural part of economy

POTENTIAL GDP: reflects the level of GDP associated with the NATURAL RATE OF UNEMPLOYMENT

ACTUAL UNEMPLOYMENT IS GREATER THAN POTENTIAL UNEMPLOYMENT. . . Is operating BELOW the PRODUCTION POSIBILITY CURVE 🍮 nation is producing BELOW what could possibly be made, given our resources and level of technology

DEMAND-PULL: increase in price level (inflation) resulting from INCREASES IN WHOLE DEMAND ☕️ total spending exceeds the economy’s ability to PROVIDE goods / services

COST-PUSH: increase in price level (inflation) due to INCREASE in RESOURCE COSTS (ex raw material prices)

PER-UNIT PRODUCTION COST: The average production cost of a particular level of output; total input cost divided by units of output

CORE INFLATION: The underlying increases in the price level after volatile food and energy prices are removed because they are subject to wide swings in prices that can be temporary in nature