Economics

economics - how individuals make choices to satisfy unlimited wants

• established by Adam Smith

cost-benefit analysis - people rationally compare the pros and cons of actions and choose based on benefit

economic analysis

1. observe

2. describe

3. measure

4. theory

Types of Economics

Types of Studies:

• Positive Economics

  • use cause-and-effect to predict events

• Normative Economics

  • judgements based off what should be

  • cannot be proved false or true

• Pareto Efficiency

  • efficiency of resource allocation

  • resource allocation - assigning tasks/resources to a certain business

  • exists so that people may benefit

Two Economic Fields:

• Microeconomics

• Macroeconomics

Microeconomics

• -Examines the economy on an individual level

• agents - individual consumers, groups of consumers, producers

• supply and demand

• how agents behave and interact

  • determines prices and distribution of products

Supply and Demand:

Demand:

• the amount buyers are willing to purchase

• main determinant - price

• law of demand: inverse relationship between price and demand

• demand schedule: lists the price and corresponding quality of products

• dependent variable = demand

• independent = price

  

• market demand curve = sum of individual demand curves

  • quantity that every customer demands at each price

• shifts in demand curve:

  • External Factors - Consumer Income, Prices of Related Goods, Consumer Preference, Consumer Expectations, Consumer Numbers

• Elasticity of demand curve = demand curve shape

  • factors: substitutes (good), necessity (lower than luxury), time horizon (direct relationship), market size (inverse relationship)

  • decreases along demand curve

• 

• 

Supply:

• amount sellers are willing to produce

• most determinant = price

• law of supply: direct relationship between supply and products

• supply schedule: lists price and corresponding products

• market supply curve = sum of all quantities at supplier prices

  • movement - change in quantity supplied

  • shift - change in supply [inward(left) = decrease, outward(right) = increase]

    • factors: Production Costs, Technological Process, Price Expectations, Number of Suppliers

    • 

• Elasticity

  • supply and price relationship sensitivity

  • factors: difficulty of transportation, time, production decisions of firms

  • f = final

  • i = initial

    

  • 

  • good elasticity = increase in price = small decrease in product quantity

• Revenue = price x quantity

  • Unit Elasticity: price increase = equivalent quantity decrease

Markets:

Market - all buyers and sellers of a certain product

• formal (stock exchange) & informal (gas station) markets

• interdependent: relying/trading with strangers for supplies

• Production Possibilities Frontier - summarizes an economy’s possible products

  • moving along curve = substituting 1 good for another

  • linear curve- constant opportunity cost

  • most resources are best for 1 good; or else efficiency decreases

  

//////

• Absolute Advantage

  • produces good more efficiently/ ability to produce more of a good or service

• Comparative Advantage

  • ability to produce at lower opportunity costs

  • parties with different comparative advantages will benefit

Equilibrium:

• point where all the forces in a system are balanced and stable

Market equilibrium = when supply and demand are equal

• price taker - any buyer/seller

• Perfectly Competitive Market -

  1. Homogeneous/Standardized product

  2. Large Number of buyers and sellers

  3. Transparent market price info

  4. No entry barriers

  • near equilibrium, allocates sources well, benefits consumers

  • consumer surplus: extra consumer benefit

  • producer surplus: market price exceeds opportunity cost

  • total market surplus: total participant benefits

• 

• marginal revenue = revenue from selling a unit

• primary commodity markets

• Changes in Market Equilibrium

• 

• 

Firms:

• Economic actors that combine labor, capitol equipment, and raw materials to produce goods with max profits

• Total Revenue = output quantity x price

• Total costs - expenses

• Accounting costs/profit: monetary costs/profit

  • Accounting Revenue = accounting profit - explicit cost

• Economic costs/profit: monetary and opportunity costs/profit

  • economic profit = monetary profit - opportunity costs

  • Economic Revenue = economic profit - explicit costs - implicit costs

• Fixed Costs - must be paid regardless

• Variable Costs - paid based on amounts produced

• marginal cost - cost from producing an extra unit

• Average cost - total production cost of each output

  

• Average Fixed Cost (AFC)

• Marginal Cost (MC)

• Average Variable Cost (AVC)

• Average Total Cost (ATC)

  

Failures:

• When Competitive Markets fail to produce socially desired outcomes

• Externalities - costs or benefits of uninvolved 3rd parties

• Negative: harm on others

• Positive

• Internalizing externalities - paying directly to market (taxes, fines)

  • helpful to the individual

• Coase Theorem by Ronald Coase

  • private parties should be able to solve inefficiencies of externalities

  • not really effective

• Quoata - numerical limit on quantity

• Rivalry in property rights and public goods

  • 

• Imperfect competition

  • few suppliers

  • monopolies → scarcity → contrived scarcity

• Legilsation

  • something something idk

• Oligopoly

  • a market with some interdependent firms

  • produce both different and homogeneous products

  • common

  • ex. Organization of Petroleum Exporting Countries (OPEC) - oil

  • collusion - non-competitive/secret (sometimes illegal) agreement between rivals to disrupt market equilibrium

    • cartel - groups involved

• Monopolistically Competitive

  • most common

  • ex. restaurants, clothing, service

  • competition through advertising, branding (but not prices)

  

Influences on Microeconomic Markets

• lowkey common sense (taxes, gov, business)

Macroecomics

• -Studies economics on a national level

• Aggregation: combines multiple factors into 1 variable

• 2 Main Concerins:

  • Long-term

  • Short-term

Money and Inflation:

• Money is:

  • A medium of exchange

  • A unit of account

  • A storage of value

• Wealth = all value in economy

  • highly liquid: currency, stocks

  • not liquid: real estate, land

• Commodity Money - made of material with intrinsic worth (ex. gold)

• Fiat Money - value from gov order

• Demand Deposits - money stored in accounts (withdrawn at anytime)

• Time Deposits - money stored in accounts (cannot be withdrawn whenever)

• Money Market Accounts - money stored with restrictions

• Monetary Base, M0 - narrowest possible definition of money supply

  • M0 - all currency held by general public

  • M1 - very liquid forms of money

  • M2 - M1 + saving accounts, money market funds, and deposits

• Price level and Inflation

  • Inflation - currency value decreased

    • sustained rise in general price level

    • reduces money’s value and purchasing power

  • CPI - Consumer Price Index

    • measures inflation

    • 

  • Price Level - price relative to a base; average of current prices of goods and services for the entire economy

    • Aggregate Price Level = price level for the entire economy

    • price level rises —> more expensive

• Money Market in the Long Run

  • Long Run - time it takes for the Demand money = Supply money

  • value of money depends on supply and demand

  • Quantity Money Theory/ Equation of Exchange = MV = PY

    • amount of money spent = amount of money used

    • M = money stock/supply

    • V = money velocity (frequency of money transactions in some time)

    • P = current average price level

    • Y = output of goods and services

• Financial Institutions

  • coordinates the economy’s saving and investment decisions

  • financial markets - a place people can save money by giving to investors

  • investments - buying new capital equipment

  • Debt Finance - bond insurance

    • Bond - obligation to bond holder

    • Date of Maturity - date when payment + interest is due

      • longer maturity period = greater risk of price change

    • Principle - original bond value

    • large corporations will sell bonds to the public for funds

    • Default - risk of bond buyer if borrower goes bankrupt

    • Borrower: Seller

  • Equity Finance - stock sales

    • Stocks - share of onwership of a firm

    • National Association of Securities Dealers Automated Quotation System (NASDAQ)

    • New York Stock Exchange (NYSE)

    • prices depends on supply and demand

    • Dividends - shareholders receive this if the company does well

  • Financial Intermediaries

    • Intermediary - 3rd party used for connection (ex. banks)

    • Mutual Funds - allow shareholders with little money to buy stocks/bonds

• The Federal Reserve

  • Amount of Money in the US = public interactions, commercial banks, and the Federal Reserve System (Fed)

  • Fed Central Banks

    • 12 regional banks per central bank

    • ran by 7 board of governors

    • Federal Open Market Committee (FOMC)

    • 

  • Fractional Reserve Banking

    • fractions keep a deposit of loans/deposits

  • bank run - when depositors rush to deposit in a bank

  • monetary policies increase/decrease the effective money supply

  • Contractionary policy - decreases money supply

  • Expansionary policy - increases money supply

• Supply and Investment in aggregate

  • identity - an equation that is always true

  • something gdp agghghghgh

• GDP (Gross Domestic Product)

  • interest in economic output

  • market value of all final goods and services

  • Simon Kuznets - developed modern concept of GDP (1934)

  • GDP = expenditures = C + I + G + NX

    • C = Household Consumption

    • I = Firm Investment

    • G = Government purchases

    • NX = Foregin Net Exports

    • real GDP - calculated by converting prices to the baseline year; to remove inflation;

    • average labor per capita

    • nominal GDP - calculated in prices of current year

    • depends on quantity of goods and services

    • larger economies should have greater GDPs (typically)

    • Human capita: skills acquired

• Economic Growth

  • 19th century - great US and European economic growth

  • circular flow model - relationship between sectors of the economy

  • factor market - where firms buy factors of production

  • factors of production - labor, capital, etc.

  • business secotr = firms

• Unemployment

  • Bureau of Labor Statistics (BLS):

    • measures monthly unemployment rate

  • 3 Types of Unemployment

    • Structural Unemployment

      • from change in consumer tastes, or technology

    • Cyclical Unemployment

      • business cycle

    • Frictional Unemployment

      • from time between changing jobs

  • effect on output

    • output group = potential - actual output gap

    • Aruthur Okun - noted output and cyclical unemployment relationship

    • Okun’s Law - if the unemployment rate changes by 1%, the output gap changes by 2%

Short-Run Fluctuations:

• the Aggregate Demand Curve

  • Aggregate Demand (AD)

    • the 4 components of GDP (C + I + G + NX)

    • 

    • price level decrease = decrease in product prices

  • wealth effect

    • similar to income effect

    • price decrease →income increase →customers buy more

  • interest effect

    • price increase →more expensive →more borrowing money →increase rates go up

  • foreign exchange effect

    • cheaper domestic goods →consumers want more

• Shifts of the Aggregate Demand Curve

  • changing local and foreign consumption = curve shifts

  • firm investment altered = curve shifts

    • direct relationship

  • consumer opinion

  • gov taxes

• short-run aggregate supply curve (SRAS)

  • potential goods in the short-run

  • 

  • depends on long-run potential output and price level expectations

  • Shift in the Aggregate Supply Curve

    • change in price levels

  • Business Cycle

• The Keynesian Model

  • developed by John Maynard Keynes

  • so like idc

• Fiscal policy

  • allows gov to impact the overall economy

  • Expansionary Fiscal Policy - expand gov spending and lower taxes

  • Contractionary Fiscal Policy - decrease gov spending and raise taxes

Climate Change

Climate Commons: shared atmosphere for a stable climate

Economic Concepts and Climate: Theory and Practice

• Externalities - irregularities in otherwise regularly-functioning markets (ex. public places)

• Uni-directional/1 Way - externalities that only affect one party

• Reciprocal - both parties affected

• Collective Action = Expectations + Norms + Institutions

• common property - belong to whole group

• discount rate: interest rate used to determine the value of future cash flows

  • time value of money

  • 

• people are myopic

  • myopic: short-sighted

• Topics similar to Social Science Section

  • disagreements between countries, leaders, and organizations

  • more money-based contributions

• Policy Responses

  • Do Nothing

  • Unilateralism

    • geoengineering

    • a single country taking action without consulting others

  • Negotiations

    • int treaties and cooperation

  • Multileralism

    • global organizations

    • alliance between countires