Untitled Flashcards Set

The following two facts provided the basic foundation for the field of economics:
1-Unlimited wants
2-Limited economics resources

Economic Resources:

1. Land or Natural Resources

2. Labor or human resources

3. Capital

4. Entrepreneurship

DEFINITION: Economics is the study of how to allocate our limited resources among unlimited wants
In the process of resource allocation, we face many problems
Microeconomics: It is the study of an individual unit in the economy, such as behavior of an individual market, etc.
Macroeconomics: It is the study of economy as a whole The method of Economics:
Economics asks and attempts to answer two kinds of questions: Positive and Normative
Positive Statements deals with facts (without value judgment)
Normative Statements involves value judgments; statements about what ought to be
Positive economics is divided into two groups: Descriptive economics and Economic theory Descriptive Economics is the compilation of data that describe facts
Macroeconomic Theory involves construction of models of behavior of certain economic variables
Variable: It is a piece of information that takes on different values at different times.
Model: is a formal statement of theory; consists of one or more relationships between/among macro variables (or values)
Market: A market is an institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods and services.
Demand: It refers to the entire relationship between the quantity demanded and the price of a good as illustrated by demand schedule and demand curve.
Demand Schedule: A table that shows the quantity demanded at each price level
Quantity demanded: the amount of a good that buyers are willing to and able to buy it.
Demand curve: A graphical representation of demand schedule
What determines the demand?
Change in Demand: When the determinants of demand, other than the price of the good, change, there is a change in demand. (Shift of the demand curve)

• An increase in Demand means a rightward shift of the demand curve

• A decrease in the demand means a leftward shift in the demand curve

Movement along the demand curve: When the price of the good changes, there is a movement along the demand curve (No change in demand).
Supply: It refers to the entire relationship between the quantity supplied and the price of a good as illustrated by supply schedule and supply curve.

Supply Schedule: A table that shows the quantity supplied at each price level
Quantity Supplied: the amount of a good that seller are willing to sell.

Supply curve: A graphical representation of supply schedule
The law of a supply: The positive relationship between price and quantity supplied.

What determines the supply?
Change in Supply: When the determinants of supply, other than the price of the good, change, there is a change in supply. (Shift of the supply curve)

• An increase in Supply means a rightward shift of the supply curve

• A decrease in the supply means a leftward shift in the supply curve

Movement along the supply curve: When the price of the good changes, there is a movement along the supply curve (No change in supply).

MARKET EQUILIBRIUM

The condition that exists when the quantity supplied equals the quantity demanded.
Equilibrium price:
The price at which quantity supplied equals the quantity demanded.

Equilibrium Quantity:

Quantity that is bought and sold at the equilibrium price

Surplus (Excess Supply):

Amount that quantity supplied exceeds quantity demanded.
Shortage (Excess demand):
Amount that quantity demanded exceeds quantity supplied.\

Consumer Surplus & Producer Surplus
DEFINITIONS OF SOME MACRO CONCEPTS Inflation refers to a sustained increase in the average price level
Economic Growth: An increase in total output
Growth Rate: Percentage change in total output
Recession refers to a period of time during which total output of the economy declines
Deflation refers to the decline in the average price level Depression: A severe recession
EX: Great Depression, 1929-1933

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STAGFLATION: It refers to a period within which inflation and recession coexist
EX: Stagflation of 1973-1975
If government wants to increase the level of national output to reduce the rate of unemployment, it should stimulate aggregate demand

Cost: Inflation
If government wants to decrease the average price level or high inflation, it should discourage aggregate demand Cost: Unemployment
Government policies that are designed to increase or decrease AD are called DEMAND MANAGEMENT POLICIES or STABILIZATION POLICIES. UNEMPLOYMENT
TYPES OF UNEMPLOYMENT

1. Frictional Unemployment

2. Structural Unemployment

3. Cyclical Unemployment

4. Seasonal Unemployment

COST OF UNEMPLOYMENT
CONCEPT OF FULL EMPLOYMENT DETERMINANTS OF UNEMPLOYMENT
COSTS OF INFLATION
The purchasing power of a given sum of money is the value of goods and services that it can buy
Nominal Wage Rate: It is the wage rate in current dollars. Real Wage Rate: It is the wage rate adjusted for inflation. Nominal Interest Rate & The Real interest rate:
GROSS DOMESTIC PRODUCT:
GDP is the sum of dollar value of all final goods and services produced in an economy over certain time period. FINALGOODS & INTERMEDIATE GOODS:
GDP at current prices or Nominal GDP
Real GDP or GDP at constant prices.
HOW TO MEASURE GDP
GDP on the sum of values added (VALUE ADDED), Income, and Expenditure approach (Handout #2)
Price Index as a measure of economy’s price level Consumer Price Index & GDP Price Deflator
Growth Rate of Economy’s Output
Aggregate Demand:
At each price level, AD is the total amount that all consumers, business firms, government agencies and rest of the world are willing to spend on goods and services, i.e.,
Fiscal Policy: Government fiscal policy is its plan for spending and taxation. It is designed to change aggregate demand in the desired direction
At equilibrium Y = C + I + G + X-M
There is a positive relation between C and DI which is called consumption function.
Slope of CF is called Marginal Propensity to Consume (MPC)
MPC shows by how much consumption will increase if disposable income increases by $1.00.
Equation of consumption function is: C = a + b DI