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Principle 1: People face trade offs
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Decision making requires choosing between different options available to you
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P1: Efficiency vs equality
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Efficiency- the property of society getting the most it can from its scarce resources
Equality- the property of distributing economic prosperity uniformly among the members of society
In other words, efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices.
Equality- the property of distributing economic prosperity uniformly among the members of society
In other words, efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices.
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Principle 2: Opportunity Cost
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Whatever must be given up to obtain some item
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Principle 3: Rational People Think at the Margin
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...
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P3: Rational People & Marginal change
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people who systematically and purposefully do the best they can to achieve their objectives
Comparing marginal benefit vs marginal cost
a small incremental adjustment to a plan of action
Comparing marginal benefit vs marginal cost
a small incremental adjustment to a plan of action
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Principle 4: People Respond to Incentives
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An incentive is something that induces a person to act, such as the prospect of a punishment or reward. Because rational people make decisions by comparing costs and benefits, they respond to incentives. You will see that incentives play a central role in the study of economics.
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Principle 5: Trade can make everyone better off
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Trade means everyone can specialize in what they do best
Enjoy a greater variety of goods and services
Enjoy a greater variety of goods and services
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Principle 6: Markets are usually a good way to organize Economic activity
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Market economy vs central planning
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P6: Market economy vs Central Planning
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Market Economy- an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
central planning: Communist countries operated on the premise that government officials were in the best position to allocate the economy's scarce resources. These central planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted well-being for the country as a whole.
central planning: Communist countries operated on the premise that government officials were in the best position to allocate the economy's scarce resources. These central planners decided what goods and services were produced, how much was produced, and who produced and consumed these goods and services. The theory behind central planning was that only the government could organize economic activity in a way that promoted well-being for the country as a whole.
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P6: Adam Smith's invisible hand
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When a government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand's ability to coordinate the decisions of the households and firms that make up an economy.
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Principle 7: Governments Can Sometimes Improve Market Outcomes
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One reason we need government is that the invisible hand can work its magic only if the government enforces the rules and maintains the institutions that are key to a market economy. Most important, market economies need institutions to enforce property rights so individuals can own and control scarce resources.
We all rely on government-provided police and courts to enforce our rights over the things we produce—and the invisible hand counts on our ability to enforce those rights.
We all rely on government-provided police and courts to enforce our rights over the things we produce—and the invisible hand counts on our ability to enforce those rights.
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P7: Property rights
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the ability of an individual to own and exercise control over scarce resources
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Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services
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Almost all variation in living standards is attributable to differences in countries' productivity—that is, the amount of goods and services produced by each unit of labor input.
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P8: Productivity
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the quantity of goods and services produced from each unit of labor input
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Principle 9: Prices Rise When the Government Prints Too Much Money
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When a government creates large quantities of the nation's money, the value of the money falls. In Germany in the early 1920s, when prices were on average tripling every month, the quantity of money was also tripling every month.
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P9: Inflation
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an increase in the overall level of prices in the economy
decreases the value of money
decreases the value of money
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Principle 10: Society Faces a Short-Run Trade-Off between Inflation and Unemployment
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Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services.
Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services.
More hiring means lower unemployment.
Higher demand may over time cause firms to raise their prices, but in the meantime, it also encourages them to hire more workers and produce a larger quantity of goods and services.
More hiring means lower unemployment.
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P10: Business cycle
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fluctuations in economic activity, such as employment and production
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Ch 10:Need to know circular flow diagram
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Households buy goods and services from firms, and firms use their revenue from sales to pay wages to workers, rent to landowners, and profit to firm owners. GDP equals the total amount spent by households in the market for goods and services. It also equals the total wages, rent, and profit paid by firms in the markets for the factors of production.
inner loop is inputs an outputs
outer loop is flow of dollars
inner loop is inputs an outputs
outer loop is flow of dollars
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Ch 10: GDP
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"Market value of all final goods and services produced within a country in a given period of time"
Measures the total income of everyone in the economy
Measures the total expenditure on the economic output of goods and services
Measures the total income of everyone in the economy
Measures the total expenditure on the economic output of goods and services
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Ch 10: Componet of GDP
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Y= C + I + G + NX
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Ch 10: Y
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GDP Output=income
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Ch 10: C
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Consumption- spending by households on goods and services, with the exception of purchases of new housing
durable goods- consume over a long period of time (cars and appliances)
nondurable goods- use right away (food and clothing)
durable goods- consume over a long period of time (cars and appliances)
nondurable goods- use right away (food and clothing)
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Ch 10: I
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Investment- GDP measures expenditure on goods and services, here the word investment means purchases of goods (such as business capital, residential structures, and inventories) that will be used to produce other goods and services in the future.
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Ch 10: G
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Government Purchases-spending on goods and services by local, state, and federal governments
Because GDP is intended to measure income from, and expenditure on, the production of goods and services, transfer payments are not counted as government purchases.
Because GDP is intended to measure income from, and expenditure on, the production of goods and services, transfer payments are not counted as government purchases.
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Ch 10: NX
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Net exports- Exports- imports
exports- Goods that are purchased by foreigners in other countries
imports- Purchasing goods produced in another country
exports- Goods that are purchased by foreigners in other countries
imports- Purchasing goods produced in another country
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Ch 10: Nominal GDP
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the production of goods and services valued at current prices
"we multiply the quantities of hot dogs and hamburgers by their prices."
"we multiply the quantities of hot dogs and hamburgers by their prices."
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Ch 10: Real GDP
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uses constant base-year prices to value the economy's production of goods and services.
"We calculate real GDP by first designating one year as a base year. We then use the prices of hot dogs and hamburgers in the base year to compute the value of goods and services in all the years."
"We calculate real GDP by first designating one year as a base year. We then use the prices of hot dogs and hamburgers in the base year to compute the value of goods and services in all the years."
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Ch 10: GDP Deflator
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(Nominal GDP/ Real GDP) x 100
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Ch 10: Inflation rate:
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Inflation rate in year 2: ((GDP Deflator in year 2- GDP deflator in year 1)/ GDP Deflator in year 1) x 100
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CH 11 Consumer Price Index (CPI)
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Measures overall prices
Overall cost of goods and services bought by a "typical consumer"
Calculated by the Bureau of Labor Statistics (BLS)
Airplane purchase is apart of GDP but not CPI
Overall cost of goods and services bought by a "typical consumer"
Calculated by the Bureau of Labor Statistics (BLS)
Airplane purchase is apart of GDP but not CPI
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Ch 11: The formula for turning dollar figures from year into today's dollars
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Amount in year T dollars x (price level today/ price level in year T)
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Ch 11: Indexed
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the automatic correction by law or contract of a dollar amount for the effects of inflation
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Ch 11: Nominal Interest rate
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the interest rate as usually reported without a correction for the effects of inflation
tells you how fast the number of dollars in your bank account rises over time
tells you how fast the number of dollars in your bank account rises over time
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Ch 11: Real Interest Rate
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the interest rate corrected for the effects of inflation
=nominal inflation rate- inflation rate
tells you how fast the purchasing power of your bank account rises over time
=nominal inflation rate- inflation rate
tells you how fast the purchasing power of your bank account rises over time
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Ch 11: Substitution Bias, Introduction of new goods, & Unmeasured quality change:
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1- CPI assumes basket is fixed. When prices change, people will likely buy substitutes (Salad v Fruit)
2- When new goods are introduced, dollar becomes more valuable. CPI does not reflect this.
Example: Where is $100 worth more, a small store with few items or large store with many items?
3- If the price of a computer increase because it has netter computing power, CPI doesn't account for this.
2- When new goods are introduced, dollar becomes more valuable. CPI does not reflect this.
Example: Where is $100 worth more, a small store with few items or large store with many items?
3- If the price of a computer increase because it has netter computing power, CPI doesn't account for this.
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Ch 11: GDP deflator vs cpi
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GDP Deflator
-Reflects prices of all goods and services produced domestically
-GDP excludes imports (since its subtracted from GDP equation)
-Compares prices of currently produced goods and services to price of goods and services in the base year
Consumer Price Index (CPI)
-Reflects prices of goods and services bought by consumers
-Includes imports if its part of typical consumer basket
-Compares prices of a fixed basket of goods and services to price of the basket in base year
-Reflects prices of all goods and services produced domestically
-GDP excludes imports (since its subtracted from GDP equation)
-Compares prices of currently produced goods and services to price of goods and services in the base year
Consumer Price Index (CPI)
-Reflects prices of goods and services bought by consumers
-Includes imports if its part of typical consumer basket
-Compares prices of a fixed basket of goods and services to price of the basket in base year
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Ch 11: Calculating CPI
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Fix the basket
Which goods/ services are most important to the typical consumer
Basket is fixed. Quantities dont change
Find prices of each good in the basket
Compute cost of basket
Same as calculating nominal GDP ( Price at current time multiplies by basket quantity)
Same quantity of goods, this is what it means to fix the basket
Choose a base year and compute CPI
We choose a base year to compare how prices are rising
Consumer price index= (price of basket of goods and services incurrent year/ price of basket in base year) x 100
Base year will always be 100!
Use the CPI to calculate the inflation rate
Inflation rate in year 2= ((CPI in year 2 - CPI in year 1)/ CPI in year 1 ) x 100
Inflation in year 2 = ((New -Old)/ Old ) x 100
cpi= (price of basket of goods and services in current year/ price of basket in base year) x 100
Which goods/ services are most important to the typical consumer
Basket is fixed. Quantities dont change
Find prices of each good in the basket
Compute cost of basket
Same as calculating nominal GDP ( Price at current time multiplies by basket quantity)
Same quantity of goods, this is what it means to fix the basket
Choose a base year and compute CPI
We choose a base year to compare how prices are rising
Consumer price index= (price of basket of goods and services incurrent year/ price of basket in base year) x 100
Base year will always be 100!
Use the CPI to calculate the inflation rate
Inflation rate in year 2= ((CPI in year 2 - CPI in year 1)/ CPI in year 1 ) x 100
Inflation in year 2 = ((New -Old)/ Old ) x 100
cpi= (price of basket of goods and services in current year/ price of basket in base year) x 100
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Ch 2: production possibilities frontier (PPF)
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a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
efficient- on the line
inefficient- inside the line
Unattainable- outside the line
efficient- on the line
inefficient- inside the line
Unattainable- outside the line
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Ch 2 : PPC- Curve shifts due to
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economic growth and technological progress
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Ch 2: Positive Statements
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DEscriptive: DEscribes the world as is
Confirm or refute by examining evidence
"Lower prices increase the quantity demanded for a good"
Confirm or refute by examining evidence
"Lower prices increase the quantity demanded for a good"
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Ch 2: Normative Statements
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Perspective: Prescribe how the world should be
"Gas prices should be lower"
"Gas prices should be lower"
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Ch 2: Why economists disagree
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-Economists may disagree about the validity of alternative positive theories of how the world works.
-Economists may have different values and therefore different normative views about what government policy should aim to accomplish.
-Economists may have different values and therefore different normative views about what government policy should aim to accomplish.
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Ch 15: Frictional unemployment
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unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
is inevitable simply because the economy is always changing.
is inevitable simply because the economy is always changing.
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Ch 15: Structural unemploymemt
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unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
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Ch 15: Unemployment insurance
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a government program that partially protects workers' incomes when they become unemployed
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Ch 15: Union
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a worker association that bargains with employers over wages and working conditions
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Ch 15: Collective bargaining
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the process by which unions and firms agree on the terms of employment
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Ch 15: Efficiency wages
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above-equilibrium wages paid by firms to increase worker productivity
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Ch 15: Labor force participation rate
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(Labor force/ adult population) x 100
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Ch 15: Cyclical unemployment
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-Short run deviations of unemployment around its natural rate
The ups and downs of unemployment ( recessions/ expansion)
Revolves around the natural rate of unemployment
The ups and downs of unemployment ( recessions/ expansion)
Revolves around the natural rate of unemployment
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Ch 15: Unemployment rate
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( # of unemployed/ labor force) x 100
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Ch 15: Discouraged worker
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those who have given up finding a job (typically due to long periods of unemployment). Not in labor force
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Ch 15: Labor force participation has increased substantially for women over the last 60 years. Why?
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-Technology (less household tasks)
-Improved birth control (reduced number of children)
-Changing political and social attitudes
-Improved birth control (reduced number of children)
-Changing political and social attitudes
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Ch 15: Worker turnover
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Less workers will want to lease due to higher wages than other companies. Turnover is costly to companies I costs to training and hiring)
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Ch 15: Worker health
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Better paid workers can food more nutritious diets, making them more productive
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Ch 15: Worker quality
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higher wages incentive more people to apply for a job, thus higher chance of getting better applicants
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Ch 15: worker effort
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high wages make workers more eager to keep their jobs and thus motivate them to put in their best effort
-If wages were at equilibrium, it's not as big of a deal to get fired because you can find another job with the same wage. Harder to find a job that pays above market wages
-If wages were at equilibrium, it's not as big of a deal to get fired because you can find another job with the same wage. Harder to find a job that pays above market wages
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