ECO 101
Terms
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- Economics
- study of how individuals/societies choose to use the scarce resources that nature and previous generations have provided
- Opportunity cost
- Best alternative that we forgo or give up when we make a choice/decision
- Scarce
- Limited
- Marginalism
- The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.
- Sunk Costs
-
costs that cannot be avoided because they have already been incurred
tuition
Outlet Mall - Efficient Market
- Market in which profit opportunities are eliminated almost instanteously
- Industrial Revolution
- Period in England during the late 18th century and early 19th century which new manufacturing technology/ transportation gave rise to the modern factory system/massive movement of the population from the countryside to cities
- Microeconomics
- Branch of economics that examines the functioning of individual industries and the behavior of individual decision making units- that is firms/households
- Macroeconomics
- Branch of economics that examines economic behavior of aggregates,income, employment, output.
- Macro vs Micro
-
Micro is analysis of a tree, and its structure , how that tree works to be the most efficient
Macros is analysis of a forest, and as a whole, how that forest is being most efficient - Positive economics
- An approach to economics that seeks to understand behavior and the operation of systems without making judgments. Its describes what exists and how it works.
- Normative economics
-
An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad and may prescribe courses of action.
aka Policy Economics - Descriptive economics
- compilation of data that describe phenomena and facts
- Economic theory
- statement or set of related statements about cause and effect, action and reaction
- Model
- Formal statement of a theory usually a mathematical statement of a presumed relationship between two or more variables
- Variable
- A measure that can change from time to time or observation to observation
- Ockham's razor
- Principle that, irrelevant detail should be cut away
- Ceteris Paribus
-
A device used to analyze relationship between 2 variables while the values of other variable are held unchanged
Concept helps us simplify reality to focus on relationships that interest us - Post hoc, ergo propter hoc
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"after this(in time), therefore because of this" A common error made in thinking about causation: If event A happens before Event B, it is not necessarily true that A caused B
Post Hoc Fallacy - Fallacy of composition
- erroneous belief that what is true for a part is necessarily true for the whole
- Empirical economics
- collection/use of data to test economic theories
- Economic Policy
-
Criteria for judging economic outcomes
1) Efficiency
2) Equity
3) Growth
4) Stability - Efficiency
- In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost
- Equity
- Fairness
- Growth
- An increase in the total output of an economy
- Stability
- A condition in which national output is growing steadily, with low inflation and full employment of resources
- Graph
- two-dimensional representation of a set of numbers or data.
- Time series graph
- shows how a single measure or variable changes over time
- Certesian Coordinate System
- constructed by drawing two perpendicular lines
- Slope
- Rise/Run
- Positive Slope
-
Increases in X are associated with increases in Y
Decreases in X are associated with decreases in Y - Negative slope
-
When X increases, Y decreases
X decreases, Y increases - 3 Economic based questions
-
what gets produced?
How is it produced?
Who gets what is produced? - Captial
- things that are produced and then used in the production of other goods and services
- Factors of productions
-
Inputs into the process of production.
aka Resources - Production
- The process that transforms scarce resources into useful goods/services
- Inputs
-
aka resources aka factors of production.
Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants - Outputs
- Goods and services of value to households
- Theory of comparative advantage
- Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers
- Absolute advantage
- Producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources
- Comparative advantage
- producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost
- Consumer goods
- Goods produced for present consumption
- Investment
- The process of using resources to produce new capital
- ProductionPossibility Frontier
-
ppf
graph that shows all the combinations of goods and services that can be produce if all of society's resources are used efficiently - Unemployment
- During economic downturns or recessions, industrial plants run at less than their total capacity. When there is unemployment of labor and capital, we are not producing all that we can
- Inefficiency
-
Waste and mismanagement are the results of a firm operation below its potential
Inefficiency results from mismanagement of the economy instead of mismanagement of individual private firms - Marginal rate of transformation (MRT)
- Slope of the production possibility frontier (ppf)
- Economic Growth
-
an increase in the total output of an economy
occurs when society acquires new resources or when it learns to produce more using existing resources - Command economy
-
An economy in which a central government either directly or indirectly sets outputs target, incomes and prices
Centrally planned economy - Laissez faire economy
-
"allow them to do(French"
an economy which individual people and firms pursue their own self-interest without any central direction or regulation
Free market economy - Market
- Institution through which buyers and sellers interact and engage in exchange
- Free enterprise
- the freedom of individuals to start/operate private businesses in search of profits
- Distribution of output
- The amount that any household gets depends on its income and wealth
- Income
- the amount that a household earns each year, it comes in a number of forms: wages, salaries, interest and the like.
- Wealth
- the amount that households have accumulated out of past income through saving or inheritance.
- Price theory
-
Invisible Hand
Basic economics questions are answered without government
The market is left on its own and is coordinated by price - Firm
- organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy
- Entrepreneuer
- Person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business
- Households
- Consuming units in an economy
- Product or output Market
- Markets in which goods/services are exchanged
- Input or factor markets
- markets in which the resources used to produce goods and services are exchanged
- Labor market
- Input/factor market in which households supply work for wages to firms that demand labor
- Land market
- Input/factor market in which households supply land or other real property in exchange for rent
- Factors of production
- Inputs into the production process. Land,labor, and capital are 3 key factors of production.
- Quantity demanded
- amount (numbers of units) of a product that a household would buy in a given period if it could all it wanted at the current market price.
- Law of demand
-
negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as prices falls, quantity demanded increases
actual shape of an individual household demand curve, whether it is sleep or flat, whether it is bowed in or bowed out- depends on the unique tastes and preferences of the household and other factors. - Net worth
-
total value of what a household owns minus what it owes
aka wealth - Normal goods
- Goods for which demand goes up when income is higher and for which demand goes down when income is lower
- Inferior goods
- Goods for which demand tends to fall when incomes rises
- Substitutes
- Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases
- Perfect substitutes
- Identical products
- Complementary goods
-
Complement-
goods that go together; a decrease in the price of one results in an increase in demand for the other and vice versa. - Shift of a demand curve
- Change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions
- Movement along a demand curve
- Change in quantity demanded brought about by a change in price
- Market demand
- Sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
- Profit
- difference between revenues and cost
- Quantity supplied
- the amount of a particular product that a firm would be willing and bale to offer for a sale at a particular price during a given time period
- Supply schedule
- Table showing how much a product firms will sell at alternative prices
- Law of supply
- Positive relationship between price and quantity of a good supplied: an increase in market price will lead to an increase in quantity supplied and a decrease in market price will lead to a decrease in quantity supplied
- Supply Curve
- Graph illustrating how much of a product a firm will sell at different prices
- Cost of production
- depends on a number of factors including the available technologies and the prices and quantities of the inputs needed by a firm ( labor land capital )
- Movement along a supply curve
- change in quantity supplied brought about by a change in price
- Shift of a supply curve
- change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. Shift is brought about by a change in the original conditions
- Market Supply
- Sum of all that is supplied each period by all producers of a single product
- Equilibrium
- condition that exists when quantity supplied and quantity demanded are equal. at equilibrium there is no tendency for price to change
- Excess demand or shortage
- Condition that exists when quantity demanded exceeds quantity supplied at the current price
- Excess supply or surplus
- Condition that exists when quantity supplied exceeds quantity demanded at current price
- Price rationing
- the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied
- Queuing
- waiting in line as a means of distributing goods and service: a non price rationing mechanism
- Favored customers
- Those who receive special treatment from dealers during situation of excess demand
- Black market
- Market in which illegal trading takes place at market determined prices
- Price floor
- minimum price below which exchange is not permitted
- Minimum wage
-
price floor set for the price of labor
Leads to unemployment - Microeconomics chapter 5
- examines the functioning of individual industries and the behavior of individual decision making units firms and households
- Macroeconomics chapter 5
- Deals with the economy as a whole. Macro focuses on the determinants of total national incomes, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices
- Aggregate behavior
- behavior of all households and firms together
- Sticky Prices
- prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded
- Major concerns of macroeconomics
-
Output growth
Unemployment
Inflation/Deflation - Business cycle
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cycle of short term ups and down in the economy
peaks and troughs
expansion/recession - Aggregate output
- total quantity of goods/services produced in an economy in a given period
- Recession
- period during which aggregate output declines. Conventionally a period in which aggregate output declines for two consecutive quarters
- Depression
- prolonged/ deep recession
- Expansion or boom
- Period in the business cycle from a trough up to a peak during which output and employment grow
- Contraction, recession or slump
- Period in the business cycle from a peak down to a through during which output and employment fall
- Unemployment rate
- the percentage of labor force that is unemployed
- Inflation
- an increase in the overall price level
- Hyperinflation
- period of very rapid increases in the overall price level
- Deflation
- decrease in the overall price level
- Circular flow
- a diagram showing the income received and payments made by each sector of the economy
- Transfer payments
-
cash payments made by the government to people who do not supply goods, services or labor in exchange for these payments.
ex Social security benefits
veterans benefits
welfare payments - three market arenas
-
Goods/services market
Labor market
Money market - Goods-and-services market
- Firms supply to the goods-and-services market. Households, the government, and firms demand from this market.
- Money Market
-
Households supply funds to this market in the expectation of earning income in the form of dividends on stocks and interest on bonds
Much of the borrowing and lending of households,firms and the government, and the rest of the world are coordinated by financial institutions
ex.
Treasury bonds,notes and bills
corporate bonds
shares of stock
dividends - Treasury bonds, notes and bills
- Promissory notes issued by the federal government when it borrows money
- Corporate bonds
- Promissory notes issued by firms when they borrow money
- Shares of stock
- Financial instruments that give to the holder a share in the firm's ownership and therefore the right to share in the firm's profits
- Dividends
- portions of a firms profits that the firm pays out each period to its shareholders
- Fiscal Policy
- Government policies concerning taxes and spending
- Monetary policy
- tools used by the federal reserve to control the quantity of money, which in turn affects interest rates
- Great Depression
- Period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930's
- Fine-tuning
- Phrase used by Walter Heller to refer to the government's role in regulating inflation and unemployment
- Stagflation
- situation of both high inflation and high unemployment
- John Maynard Keynes
- much of the framework of modern macroeconomics comes from the works of john Maynard Keynes, whose general theory of employment, interest and money was published in 1936
- Gross domestic product
-
GDP
Total market value of all final goods and services produced withing a given period by factors of production located within a country
- National incomes and product accounts
- Data collected and published by the government describing the various components of national income and output in the economy
- Final goods and services
- Goods and services produced for final use
- Intermediate goods
- Goods that are produced by one firm for use in further processing by another firm
- Value added
- Difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage
- Gross national product
-
GNP
The total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced - Expenditure approach
-
method of computing GDP that measures the total amount spent on all final goods/services during a given period.
GDP= C+I+G+(EX-IM)
C household spending on consumer goods
I gross private domestic investment - spending by firms and households on capital, that is, plant, equipment, inventory, and new residential structures
* includes change in business inventories
G government consumption and gross investment
- Personal consumption expenditures
-
Expenditures by consumers on goods and services
(C) - Durable goods
- Goods that last a relatively long time, such as cars, households, furniture
- Non durable goods
- Goods that are used up fairly quickly, such as food, clothing
- Services
- Things we buy that do not involve that production of physical things, such as legal and medical services and education
- Gross private domestic investment
- Total investment in capital- that is, the purchase of new housing, plants, equipment, and inventory by the private (or nongovernment) sectory
- Nonresidential investment
- Expenditures by firms for machine, tools, plants
- Residential investment
- Expenditures by households and firms on new houses and apartment buildings
- Change in business inventories
-
Amount by which firms inventories change during a period. Inventories are the goods that firms produce now but intend to sell later.
Included in expenditure approach of GDP - Depreciation
- Amount by which an assets value falls in a given period
- Gross investment
-
Total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period
Gross investment - depreciation = net investment - Net investment
- Gross investment minus depreciation
- Government consumption and gross investment
-
expenditures by federal, state and local governments for final goods and services
(G) - Net exports
- (EX-IM) difference between exports and imports. figure can be positive or negative
- National income
- total income earned by factors of production owned by a country's citizens
- Compensation of employees
- includes wages, salaries and various supplements - employer contributions to social insurance and pension funds, for ex paid to households by firms and by the government
- Propietor's Income
- income of unincorporated businesses
- Rental income
- income received by property owners in the form of rent
- Corporate profits
- Income of corporations
- Net interest
- Interest paid by businesses
- Indirect taxes minus subsidies
- taxes such as sales taxes, customs duties, and license fees less subsidies that the government pays for which it receives no goods or services in return
- Net business transfer payments
- Net transfer payments by businesses to others
- Surplus of government enterprises
- Income of government enterprises
- Net national product
- (NNP) gross national product minus depreciation; a nation's total product minus what is required to maintain the value of its capital stock
- Statistical discrepancy
- Data measurement error
- Personal income
- Total income of households
- Disposable personal income/ after-tax income
- Personal income minus personal income taxes. Amount that households have to spend or save
- Personal saving
- Amount of disposable income that is left after total personal spending in a given period
- Personal saving rate
- Percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.
- Current dollars
- Current prices that we pay for goods and services
- Nominal GDP
- GDP in current dollars
- Base year
- The year chosen for the weights in a fixed weight procedure
- Fixed-weight procedure
- procedure that uses weights from a given base year
- Weight
- importance attached to an item within a group of items
- GDP deflator
-
is one measure of the overall price level
(nominal GDP/real GDP) * 100 - Underground economy
- part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP
- Gross national income
-
GNI
GNP converted into dollars using an average of currency exchange rates over several years
adjusted for rates of inflaction - Income approach
-
Method of computing GDP that measures the income- wages, rents, interest, and profits- received by all factors of production in producing final goods and services.