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Economics
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is the study of people's constrained choices in a world of scarcity and uncertainty
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scarcity
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the 1st principle of economics says that people try to Optimize, they choose the best available option
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stability
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the 2nd principle of economics says the markets gravitate toward equilibrium positions- situations in which nobody would benefit by changing his/her behavior
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choice
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is the unifying feature of all things that economist's study
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scarcity
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the other cornerstone of the economic thinking
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scarce resources
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are things that people want, where the quantity that people want often exceeds the quantity that is available—at a given point in time
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reproducible goods
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some economists argue—are not really scarce
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positive economics
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descriptive
Observing- some people took more than one and not everyone got a piece
Observing- some people took more than one and not everyone got a piece
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Normative Economics
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prescriptive
Judging- each student should just take one so that everyone gets a piece
Judging- each student should just take one so that everyone gets a piece
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Omitted Variable
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if we ignore something that contributes to cause and effect, then that something is an omitted variable. A correlation might not make sense until the omitted variable is added
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Reverse Causality
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reverse causality is when there is a cause and effect but it goes the opposite way
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How can we tell the difference between correlation and causation?
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1. Controlled Experiments- subjects are randomly put into treatment (something happens) and control (nothing happens) grouped by the researcher
2. Natural Experiments- subjects end up in treatment or control groups due to something that is not purposely determined by the researcher (Black Death)
2. Natural Experiments- subjects end up in treatment or control groups due to something that is not purposely determined by the researcher (Black Death)
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properties of a good economic question
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1. Relevant and Important-economic research contributes to societal wellbeing
2. Can be Answered- economic questions can be answered theoretically and verified empirically
2. Can be Answered- economic questions can be answered theoretically and verified empirically
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optimization
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making the best choice possible with given info and knowledge
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Equilibrium
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a system needs a point of rest or stability: when everyone is optimizing, no one would be better off with a different choice
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Empiricism
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putting theory to the data to obtain the most compelling answers for interesting questions
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standards of living
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- Differences of standard of living across countries is large
- This is due to technology differences
- This is due to technology differences
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productivity
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the quantity of goods/services produced from each hour of a worker's time
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Inflation
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a sustained increase in the overall level of prices in the economy
- When gov makes more money the purchasing value of money falls
- When gov makes more money the purchasing value of money falls
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Business Cycle
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fluctuations in economic activity, such as employment and production
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Market Power
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the ability of a single or few economic actor to have a substantial influence on market prices
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Economic Agent
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- an individual or a group that makes a choice
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Scarce Resources
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- the things that people want, where the quantity desired exceeds the quantity available
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Scarcity
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people have unlimited wants in a world of limited resources
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Positive Economics
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what people actually do
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Normative Economics
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what people ought to do
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Macroeconomics
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the study of economic aggregates and economy-wide phenomena
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Income Per Capita
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average income per person
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Recession
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a sustained period of weak or negative growth in real GDP (output) that is accompanied by a significant rise in unemployment rate
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Unemployed
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1. Does not have a job 2. Has actively looked for work in the prior 4 weeks 3. Is currently available for work
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Unemployment Rate
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the fraction of the labor force that is unemployed
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National Income Accounts
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measure the level of aggregate economic activity in a country
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Production Approach
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- As economists we want to measure the total market value of annual production in the nation of Fordica
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Market Value of Production
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quantity of cars x price of a car (5 million cars x $30,000 a car=150 billion)
- Also called GDP
- Also called GDP
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GDP
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(gross domestic product) the market value of the final goods and services produced in a country during a given period of time (measure of production)
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Expenditure Approach
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- Households and firms- some in Fordica, some foreign, buy all the cars and the total expenditure by fordica is the same (150 billion)
- If goods are not purchased by a household or firm- owned by the firm
- If goods are not purchased by a household or firm- owned by the firm
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Income Approach
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- Assume that Ford pays $X to their workers, (150 billion - $X) is the rest of the revenue that is given to the people that own the company
$X + ($150 billion -$X) =$150 billion
$X + ($150 billion -$X) =$150 billion
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identity
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-two variables that are defined in a way that makes them mathematically equal
Aggregate Accounting Identity- production=expenditure=income
Aggregate Accounting Identity- production=expenditure=income
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circular flow diagram
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- Helps to understand basic structure of modern economy
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Production
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- represents the goods and services that are produced by firms. Ultimately sold to households
(Arrow is from firm to households)
(Arrow is from firm to households)
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Expenditure
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- The payments for goods and services (households to firms)
(Arrow from households to firms)
(Arrow from households to firms)
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Income
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- Represents the payments that are made from firms to households to compensate the households for the use of their physical capital and labor
- Payments include wages, salaries, interest, dividends
(Arrow from firm to household sector)
- Payments include wages, salaries, interest, dividends
(Arrow from firm to household sector)
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Factors of Production
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- The productive resources owned by households and used by firms in the production process
(arrow from household to firm)
(arrow from household to firm)
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value added
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-(firm's sales revenue minus the firm's purchases of intermediate products from other firms)
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Y
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represents the total market value of goods/services that are produced in the domestic economy
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C
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represents consumption- household expenditures on the consumption of goods/services (domestic and abroad)
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I
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represents investment- expenditures on investment goods by private agents (excluding the gov) including investment goods produced domestically and abroad
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G
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represents government expenditure- government purchases of goods/services produced domestically and abroad
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(NATIONAL INCOME ACCOUNTING IDENTITY)
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Y=C+I+G+X-M
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GNP
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"gross national product" the market value of production generated by the factors of production—both capital and labor—possessed or owned by the residents of a particular nation
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Nominal GDP
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the total value of production (final goods and services) using current market prices to determine the value of each unit that is produced (standard GDP measure)
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Real GDP
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the total value of production (final goods and services), using market prices from a specific base year to determine the value of each unit that is produced
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The GDP Deflator
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100 times the ratio of nominal GDP to real GDP in the same year. It is the measure of how prices of goods and services produced in a country have risen since the base year
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Consumer Price Index
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is 100 times the ratio of the cost of buying a basket of consumer goods using target year prices divided by the cost of buying the same basket of consumer goods using base-year prices
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Inflation Rate
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the rate of increase in prices. It is calculated as the year-over-year percentage increase in a price index
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GDP per Capita
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dividing GDP by the total population in the country (per person)
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Purchasing Power Parity
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constructs the cost of a representative basket of commodities in each country and uses these relative costs for comparing income across countries
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GDP per worker
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DEFINED as GDP divided by the number of people in employment
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Productivity
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the value of goods/services that a worker generates for each hour of work
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GDP per worker
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is particularly informative when we would like to understand why some economies are more productive than others (focuses directly on GDP)
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The one dollar a day per person poverty line
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is a measure of absolute poverty used by economics and other social scientists to compare the extent of poverty across countries
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Human Development Index
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combines GDP per capita life expectancy, and measures education to more holistically measure standard of living
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Human Capital
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each person's stock of skills to produce output or economic value
- Workers can have more human capital than others
- Workers can have more human capital than others
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Physical Capital
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any good used for production (machines, buildings
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Technology
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- refers to a set of devices and practices that determines how efficient an economy uses its labor and capital
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Aggregate Production Function
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- Describes the relationship between the aggregate GDP of a nation and the factors of production
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