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Terms
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Begin with a definition: 3 sentences
1. Narrow understanding/concept
2. Description
3. Use
Then add history, implications, make comparisons and contrasting statements. Most importantly, make connections.
3C's: Compare, contrast, connect
1. Narrow understanding/concept
2. Description
3. Use
Then add history, implications, make comparisons and contrasting statements. Most importantly, make connections.
3C's: Compare, contrast, connect
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Economics
answer
A branch of knowledge that studies how societies produce and distribute goods and services.
KEY= Production and distribution of goods
KEY= Production and distribution of goods
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Economic system
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An economic system is made up of the laws, customs, institutions (unchallenged/absolute practices), and human behavior of societies
KEY= Laws, Customs, Institutions, Human behaviors
KEY= Laws, Customs, Institutions, Human behaviors
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Microeconomics
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Focus= EFFICIENCY; studies economic production/distribution rules and systems and judges the efficiency of them (what can be done better, what can be eliminated)
Units/Tools= INDIVIDUALS, consumers, products, producers. All used to measure efficiency
Government involvement= Less is preferred. Use individual view for efficiency
Units/Tools= INDIVIDUALS, consumers, products, producers. All used to measure efficiency
Government involvement= Less is preferred. Use individual view for efficiency
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Macroeconomics
answer
Focus= STABILITY; studies production/distribution systems of economics to question the stability of the economic system through changes and constants
Units/Tools= AGGREGATE views of jobs/employment, prices, output, GDP to measure stability
Government involvement= Invite government to get holistic picture for measuring stability
Units/Tools= AGGREGATE views of jobs/employment, prices, output, GDP to measure stability
Government involvement= Invite government to get holistic picture for measuring stability
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Positive economics/Statement
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A statement that is descriptive, yet factual and objective. It can be false, but it contains no opinion.
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Normative economics/Statement
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A statement that is based on opinions or value judgements. They are subjective and difficult to settle on because they are based on opinion and experience.
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Model
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An academic term that gives a simplified version of the real world based on assumptions. (Example: a map)
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Theory
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A statement that connects 2 variables, based on predictions or action plans from assumptions in the model.
"If A, then B"
Typically, A causes B but watch out for a fallacy of false cause.
Use data to test validity of theories.
"If A, then B"
Typically, A causes B but watch out for a fallacy of false cause.
Use data to test validity of theories.
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Fallacy of false cause
answer
An erroneous theoretical statement, or fallacy, that confuses correlation with causation, falsely stating that A causes B.
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Ceteris Parabus
answer
ceteris= all other things
parabus= equal
A phrase meaning that only 1 variable changes and all other things stay the same or equal.
parabus= equal
A phrase meaning that only 1 variable changes and all other things stay the same or equal.
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Goals of Economic System
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Efficiency, stability, equity (equal distribution), and growth
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3 Basic Questions
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In economics, there are three basic questions about production and distribution.
1. What has been produced?
2. How was it produced?
3. Who was it distributed to/produced for?
1. What has been produced?
2. How was it produced?
3. Who was it distributed to/produced for?
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4 Types of factors of production
answer
-Natural resources (land)
-Human resources (labor)
-Capital (equipment/tools has to be planned and made)
-Entrepreneur (person who makes it happen; must have vision, organizing power, and courage to take risk)
Need all 4 to produce!
-Human resources (labor)
-Capital (equipment/tools has to be planned and made)
-Entrepreneur (person who makes it happen; must have vision, organizing power, and courage to take risk)
Need all 4 to produce!
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Relationship of Scarcity, Choice, and Opportunity Costs
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Everything is scarce.
Scarcity forces choice.
Choice results in an opportunity cost.
Scarcity forces choice.
Choice results in an opportunity cost.
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Scarcity
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An economic concept referring to a situation when our want for soemthing is greater than how available it is at zero cost.
-If something has a price, then it is scarce
-If people want more than what is available at zero cost, than it is scarce
-The price is what balances supply and demand
-Everything is scarce
-Scarcity is a fundamental concept of economics
-If something has a price, then it is scarce
-If people want more than what is available at zero cost, than it is scarce
-The price is what balances supply and demand
-Everything is scarce
-Scarcity is a fundamental concept of economics
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Choice
answer
A situation in which someone is forced by scarcity to select one option over another.
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Opportunity Costs
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An economic term representing what is lost (the next best choice) when you make a choice.
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Opportunity Cost of X (FORMULA)
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OCx = ( - change of y) / (+ change of x)
-Create an opportunity cost for the variable you gain (x)
- X always increases, Y always decreases
-Always divide by what is increasing
-Create an opportunity cost for the variable you gain (x)
- X always increases, Y always decreases
-Always divide by what is increasing
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4 Assumptions about Opportunity Cost
answer
1. Assume resource supply will NOT change
2. Assume that the available technology will NOT change
3. Assume that available resources are fully employed
4. Assume that there are only 2 goods in the economy
2. Assume that the available technology will NOT change
3. Assume that available resources are fully employed
4. Assume that there are only 2 goods in the economy
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Production Possibilities Model
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A model of real world issues representing opportunity costs with a table or a graph.
Book definition: A graphical relationship that shows how much output can be produced by a given quantity of factor inputs.
Book definition: A graphical relationship that shows how much output can be produced by a given quantity of factor inputs.
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PPF/PPC
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Production Possibilities Frontier/Curve:
The curve of the graph in a Production Possibilities Model. The curve represents the Attainable & Efficient scenarios (Letter A).
What is under the line represents what is Attainable but Inefficient (Letter C).
What is above the line represents what is Unattainable (Letter B).
The slope/steepness of line represents the opportunity cost.
The X- Axis is the variable that increases, and what the opportunity cost is measuring.
The Y- Axis is the variable that is lost, or decreases.
The curve of the graph in a Production Possibilities Model. The curve represents the Attainable & Efficient scenarios (Letter A).
What is under the line represents what is Attainable but Inefficient (Letter C).
What is above the line represents what is Unattainable (Letter B).
The slope/steepness of line represents the opportunity cost.
The X- Axis is the variable that increases, and what the opportunity cost is measuring.
The Y- Axis is the variable that is lost, or decreases.
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Attainable vs. Unattainable
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Attainable scenarios lie under the PPC.
Unattainable scenarios lie above the PPC.
Unattainable scenarios lie above the PPC.
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Technical Efficiency
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A means of performance when you're using resources in the best way possible to efficiently complete a task.
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Allocative Efficiency
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A means of performance when you're finding a balance to reach the best goal for the people to fulfill a need.
-Allocating resources to fulfill needs efficiently
-Choosing the right combination of goods.
-Allocating resources to fulfill needs efficiently
-Choosing the right combination of goods.
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Theories from PPF
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1. If you want more of X good, then you must have less of Y good.
2. Law of Increasing Opportunity Cost: If you produce more of X good, then the opportunity cost will rise. This is true for everything.
2. Law of Increasing Opportunity Cost: If you produce more of X good, then the opportunity cost will rise. This is true for everything.
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Shift of PPF/PPC
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When you change any of the assumptions; change the availability of resources, add or take away used technology, or when you do not employ all available resources, then the OC line/PPF shifts.
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Economic Growth on PPF
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When the PPC shifts to the right, there has been economic growth.
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Adam Smith
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-Father of modern economics
-Published "Wealth of Nations" in 1776
-The idea of economics before him was that wealth was measured by how much gold was in the King's treasury/safe
-Published "Wealth of Nations" in 1776
-The idea of economics before him was that wealth was measured by how much gold was in the King's treasury/safe
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6 Things that make countries grow
answer
1. Specialize on tasks and skills
2. Division of labor, divide jobs to different workers
3. Markets, means to sell goods
4. Money, for purposes of universal exchange (an adequate supply of money)
5. Laissez faire, less/no government control/involvement for production and distribution (leave us alone)
6. Free trade, makes bigger market, trade everywhere (globalization)
2. Division of labor, divide jobs to different workers
3. Markets, means to sell goods
4. Money, for purposes of universal exchange (an adequate supply of money)
5. Laissez faire, less/no government control/involvement for production and distribution (leave us alone)
6. Free trade, makes bigger market, trade everywhere (globalization)
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Law of absolute advantage
answer
Countries should specialize to their absolute advantage
Advantage= if you can make something by using less resources than anyone else
"If a country has absolute advantage in a product, then it should make it"
Advantage= if you can make something by using less resources than anyone else
"If a country has absolute advantage in a product, then it should make it"
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David Ricardo
answer
-Student of Adam Smith
-Said cost should be determined by how much you sacrifice to make/do one thing
-Said cost should be determined by how much you sacrifice to make/do one thing
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Law of comparative advantage
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if one person has no specialization but lower opportunity cost than another person
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Market
answer
A system which brings buyers and sellers together. The market tells us how much of a good will be produced, and what will be the price of that good.
"Everything is done through market." - Habib
"Everything is done through market." - Habib
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Buyer Demand
answer
To have demand, a buyer must:
-Want to purchase
-Be able to purchase
-Be willing to pay
-Want to purchase
-Be able to purchase
-Be willing to pay
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Assumptions of Buyer Demand Analysis
answer
To analyze demand of one good, enforce ceteris parabis.
Assumptions:
1. Income of buyer does NOT change
2. Buyers change does NOT change
3. Prices of complimentary goods do NOT change
4. Prices of substitute goods do NOT change
5. Expected future price/income does NOT change
6. The number of buyers does NOT change
*Assumptions 1-5 = individual demand
*Assumption 6 = market demand
Assumptions:
1. Income of buyer does NOT change
2. Buyers change does NOT change
3. Prices of complimentary goods do NOT change
4. Prices of substitute goods do NOT change
5. Expected future price/income does NOT change
6. The number of buyers does NOT change
*Assumptions 1-5 = individual demand
*Assumption 6 = market demand
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Demand Parameters
answer
Parameters are the factors that do NOT change.
-Income of buyer
-buyer's taste
-prices of complementary goods
-prices of substitute goods
-future price/income
-number of buyers
-Income of buyer
-buyer's taste
-prices of complementary goods
-prices of substitute goods
-future price/income
-number of buyers
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Demand Curve
answer
A model of the demand for a single good.
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Two Factors Measured for Demand Curve
answer
1. Price of product (dependent (y) variable)
2. Quantity Demand of product (independent (x) variable)
2. Quantity Demand of product (independent (x) variable)
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Law of Demand
answer
When price increases, quantity of demand decreases.
When price decreases, quantity of demand increases.
When price decreases, quantity of demand increases.
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Proof of Law of Demand
answer
Buyers compare the marginal gain from a product to the marginal cost of the product. This lead to the purchase.
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Movement along Demand Curve
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This is the result of a change in the QUANTITY of demand.
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Shift of Demand Curve
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This is the result of a change in one or more of the parameters/assumptions.
Income rises - curve shifts right
Income falls - curve shifts left
Price of complimentary goods rise - curve shifts left
Price of comp goods fall - curve shifts right
Price of substitute goods rise - curve shifts right
Price of sub goods falls - curve shifts left
Income rises - curve shifts right
Income falls - curve shifts left
Price of complimentary goods rise - curve shifts left
Price of comp goods fall - curve shifts right
Price of substitute goods rise - curve shifts right
Price of sub goods falls - curve shifts left
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Gross Domestic Product (GDP)
answer
A dollar number that is a flow variable measuring the quantity of all finished goods and services in a country in one calendar year. It is the market value of all goods and services combined.
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Flow variable
answer
A variable that has to be accompanied by a measure of time
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Stock variable
answer
A variable that is static/stable. Time is an irrelevant factor.
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Y
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Universal symbol for GDP
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GDP: Product method
answer
Y= P1Q1 + P2Q2 + P3Q3..... + PnQn + G2
P= price of finished product
Q= quantity of finished product
G= government goods
PQ does not include government made products in market price. Can measure by using price of private sector, but prefer to measure market price of government goods by cost of production.
P= price of finished product
Q= quantity of finished product
G= government goods
PQ does not include government made products in market price. Can measure by using price of private sector, but prefer to measure market price of government goods by cost of production.
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Intermediate good
answer
A product of service made by one firm, sold to another firm to be included in the finished product (tires, buttons, filters).
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Finished good
answer
A product or service that is purchased/used by the end user (cars, jeans).
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Per Capita GDP
answer
GDP/population of country
Used in comparison of countries GDP. However, it must be adjusted by distribution of GDP amongst people
Used in comparison of countries GDP. However, it must be adjusted by distribution of GDP amongst people
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Defects of GDP concept
answer
1. Non-Market Goods (NMG)
A. illegal goods
B. black market to avoid taxes
C. goods traded on barter
D. goods made and consumed within household
2. Should add dollar value of NMG, and dollar value of leisure time, and dollar cost of environmental pollution to GDP equation
EX: Y= P1Q1 + P2Q2 + P3Q3.... + PnQn + G2 + $NMG + $Leisure - $environmental pollution
A. illegal goods
B. black market to avoid taxes
C. goods traded on barter
D. goods made and consumed within household
2. Should add dollar value of NMG, and dollar value of leisure time, and dollar cost of environmental pollution to GDP equation
EX: Y= P1Q1 + P2Q2 + P3Q3.... + PnQn + G2 + $NMG + $Leisure - $environmental pollution
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GDP: Income method
answer
Add up all sources of income from four resources.
Resources : Income
1. Land: Rent
2. Labor: Wages
3. Capital: Interest
4. Entrepreneurs: Profit/loss
Resources : Income
1. Land: Rent
2. Labor: Wages
3. Capital: Interest
4. Entrepreneurs: Profit/loss
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GDP: Expenditure method
answer
Quantity of goods bought by:
Households (Consumption C)
Firms (Investment I: Actual investments + unsold goods)
Government (G1)
Foreigners (Exports - Imports: X - M)
Y= C + I + G + (X - M)
*G= G1 (government purchases of goods) and G2 (purchases of resources)
Households (Consumption C)
Firms (Investment I: Actual investments + unsold goods)
Government (G1)
Foreigners (Exports - Imports: X - M)
Y= C + I + G + (X - M)
*G= G1 (government purchases of goods) and G2 (purchases of resources)
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GDP: Value Added
answer
Value added= Dollar value of sales - Dollar value of resources and intermediate goods used
*continuously adding value
*continuously adding value
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Budget deficit
answer
This should equal 0.
G1-G2-Taxes= Budget deficit
G1: govt purchases of goods
G2: govt purchases of resources
G1-G2-Taxes= Budget deficit
G1: govt purchases of goods
G2: govt purchases of resources
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Trade deficit
answer
This should equal 0.
X-M= 0
Exports - Imports=0
X-M= 0
Exports - Imports=0
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GDP Equilibrium
answer
The GDP must be in equilibrium. This is a state of the GDP when Y is actually equal to C + I + G + (X - M).
Only finished goods are shown in the measure of GDP.
Only finished goods are shown in the measure of GDP.
question
Balanced budget
answer
The budget is balanced when G1 + G2= Taxes. No money should be borrowed by the government from the financial markets.
question
Supply
answer
To have a supply, there must be a willingness to sell and the ability to sell.
question
6 Parameters of Supply Model
answer
1. Price of inputs/resources
2. Technology
3. Taxes on the item
4. Subsidy on the item
5. Temporary shocks (bad weather, labor strike)
6. The number of sellers
These things DO NOT change
2. Technology
3. Taxes on the item
4. Subsidy on the item
5. Temporary shocks (bad weather, labor strike)
6. The number of sellers
These things DO NOT change
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Law of Supply
answer
If price goes up, then quantity supplied will go up. If price goes down, then quantity supplied will go down.
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Proof of Law of Supply
answer
Marginal cost of production must be covered by the price for the quantity of supply
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Marginal cost
answer
What you sacrifice
The cost of the last/next unit
The cost of the last/next unit
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Left shift of supply curve
answer
= increase in marginal cost
question
Right shift of supply curve
answer
= decrease in marginal cost
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Rules of a Market
answer
1. If at any price, quantity demanded > quantity supplied, then Price increases (EXCESS DEMAND/SHORTAGE)
2. If at any price, quantity supplied > quantity demanded, then Price decreases (EXCESS SUPPLY/SURPLUS)
3. If at any price, quantity demanded = quantity supplied, then Price does not change (EQUILIBRIUM; best case scenario)
2. If at any price, quantity supplied > quantity demanded, then Price decreases (EXCESS SUPPLY/SURPLUS)
3. If at any price, quantity demanded = quantity supplied, then Price does not change (EQUILIBRIUM; best case scenario)
question
Curve model graph shifts
answer
A= Demand curve shifts right; shortage, decrease in marginal cost
B= Demand curve shifts left; surplus, increase in marginal cost
C= Supply curve shifts right; shortage, decrease in marginal cost
D= Supply curve shifts left; surplus, increase in marginal cost
B= Demand curve shifts left; surplus, increase in marginal cost
C= Supply curve shifts right; shortage, decrease in marginal cost
D= Supply curve shifts left; surplus, increase in marginal cost
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Employed
answer
Any person 16 years and older who works for pay
question
Unemployed
answer
People who want a job but do not have one. Must be actively looking for a job
question
PEW
answer
People Eligible to Work
Population
-People under 16 years old
-People in institutions (prisons, hospitals)
=PEW
Population
-People under 16 years old
-People in institutions (prisons, hospitals)
=PEW
question
Unemployment rate
answer
# of Unemployed persons/ Labor force
question
LFT
answer
Labor Force True
This labor force metric includes discouraged workers in count
This labor force metric includes discouraged workers in count
question
Errors in unemployment calculation
answer
1. Discouraged workers not counted (should be counted as unemployed)
2. Part time workers who want full-time jobs counted (should not be counted as unemployed)
3. People paid under the table not counted (should be counted as unemployed)
2. Part time workers who want full-time jobs counted (should not be counted as unemployed)
3. People paid under the table not counted (should be counted as unemployed)
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Cost of unemployment
answer
1. Loss of GDP, waste of resources
2. Psychological and societal pressure on people who are unemployed
3. Unemployment affects minority groups more heavily
4. Long durations of unemployment
5. Financial burden on government
6. Can lead to more crimes
2. Psychological and societal pressure on people who are unemployed
3. Unemployment affects minority groups more heavily
4. Long durations of unemployment
5. Financial burden on government
6. Can lead to more crimes
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Types of unemployment
answer
1. Frictional: New entrants or returners take short period of time to FIND a job
2. Structural: Demand for a product a job produces has died so there is a loss of jobs, no job for that skill. Must retrain.
3. Cyclical: the % of the unemployment rate that is above the NRU (4-6%) due to business cycles
2. Structural: Demand for a product a job produces has died so there is a loss of jobs, no job for that skill. Must retrain.
3. Cyclical: the % of the unemployment rate that is above the NRU (4-6%) due to business cycles
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NRU
answer
Natural Rate of Unemployment
4-6%
The standard percentage of the population that is unemployed due to frictional and structural unemployment.
4-6%
The standard percentage of the population that is unemployed due to frictional and structural unemployment.
question
Full employment
answer
When the unemployment rate is less than or equal to the NRU (4-6%)
question
Business cycles
answer
A. PEW
B. Labor Force
B1. Employed vs. B2.Unemployed
Not In Labor Force - Discouraged Workers vs. Truly NILF (Retirees, people not in want of work)
B. Labor Force
B1. Employed vs. B2.Unemployed
Not In Labor Force - Discouraged Workers vs. Truly NILF (Retirees, people not in want of work)
question
PEW flow chart
answer
All prices are increasing
question
Inflation
answer
1. Cost in administrative/manual labor and duties to physically make price changes
2. Saved money loses value
3. All prices do not change in the same way so it affects people differently, some negatively and some positively
4. Lenders lose, borrowers gain
2. Saved money loses value
3. All prices do not change in the same way so it affects people differently, some negatively and some positively
4. Lenders lose, borrowers gain
question
Costs of inflation
answer
All prices are generally decreasing
question
Deflation
answer
Consumer Price Index
Used to measure prices of consumer goods in economy. It includes 71,000 typical/common american products
Used to measure prices of consumer goods in economy. It includes 71,000 typical/common american products
question
CPI
answer
A base unit to measure price for all years compared to 1983 base year with a CPA # of 100
question
CPA #
answer
= (CPA of new year - CPA of last year)/CPA of last year x 100
question
% Increase in inflation
answer
Market Rate Interest = Real Rate of Interest (RRI) required + anticipated Inflation Rate (IR)
-set by lenders
-set by lenders
question
MRI
answer
Real Rate of Interest= Market Rate Interest (MRI) - actual Interest Rate (IR)
question
RRI
answer
Producers Pricing Index
Includes 200,000+ products typically purchased by businesses
*PPI is the weather forecast for CPI
Includes 200,000+ products typically purchased by businesses
*PPI is the weather forecast for CPI
question
PPI
answer
English economist with theory that a country should spend more during a recession to reboost economy
He says consumption depends on current income and is in a positive linear relationship with GDP
The General Theory 1936
Says GDP equilibrium depends on aggregate demand, that consumption depends on income after taxes, and GDP depends on consumption
He says consumption depends on current income and is in a positive linear relationship with GDP
The General Theory 1936
Says GDP equilibrium depends on aggregate demand, that consumption depends on income after taxes, and GDP depends on consumption
question
J.M. Keynes
answer
C= Consumption
A= autonomous consumption (120) a base amount of consumption assumed to affect all consumers
BY= % of current income spent on consumer goods (slope)
A= autonomous consumption (120) a base amount of consumption assumed to affect all consumers
BY= % of current income spent on consumer goods (slope)
question
C = A + BY
answer
Marginal Propensity Consumption (b)
= Change of consumption/ change of income
the desire or capacity to consume, measures what percent of income is spent on consumer goods
= Change of consumption/ change of income
the desire or capacity to consume, measures what percent of income is spent on consumer goods
question
MPC
answer
Y is the supply side
C + I + G + NX is the aggregate demand side
C is based on past income, current income, future income, and the demonstration effect (neighbors)
C + I + G + NX is the aggregate demand side
C is based on past income, current income, future income, and the demonstration effect (neighbors)
question
Y = C + I + G + NX
answer
Marginal Propensity to Save = 1 - MPC
question
MPS
answer
The base amount consumed, even when income is $0. It is independent of income, gets add to income induced consumption to equal total consumption (A)
question
Autonomous Consumption
answer
C = A + BY
Consumption= Autonomous Consumption + (MPC * Income)
Consumption= Autonomous Consumption + (MPC * Income)
question
MPC graph
answer
= MPS * Income
What is spent even when there is no income. (AC + I + G + NX)
What is spent even when there is no income. (AC + I + G + NX)
question
Autonomous Expenditure
answer
Shows the growth of GDP when one factor of autonomous expenditures, such as government spending, increases.
KM= 1/1-MPC ----or----- KM= 1/MPS
KM * Increased auto expense= what you add to find raised GDP
For the multiplier to work...
1. All expenditures must occur within the country continuously
2. There must be unemployed resources within the country
3. Unemployment must be the result of a drop in demand (structural unemployment)
KM= 1/1-MPC ----or----- KM= 1/MPS
KM * Increased auto expense= what you add to find raised GDP
For the multiplier to work...
1. All expenditures must occur within the country continuously
2. There must be unemployed resources within the country
3. Unemployment must be the result of a drop in demand (structural unemployment)
question
Keynesian Multiplier
answer
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