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economic perspective

recognizes that all choices involve costs and that these costs must be involved in economic decision. to achieve a goal people must make decisions that reflect their purposeful self-interest, thirdly people compare marginal benefits against marginal costs and will choose the situation where the marginal benefit is greater than the cost.

microeconomics

specific view of economy, targets specific units in the economy, study research questions as how prices and inputs are determined for particular products and how consumers will react to price changes

macroeconomics

focuses on whole economy, or large segments of it

positive economics

investigates facts and cause and effect relationships, and how the economy actually is

normative economics

subjective views of what ought to be or what polices should be used to address an economic issue. most disagreements between economists involve this form of economics

economizing problem

problem arises because individuals and society have unlimited economic wants, and economy and resources are limited.

opportunity cost

when a choice has to be made, the next best alternative that was not chosen

budget line

graphically the meaning of many concepts defined in chapter, sacricity, choice, trade offs,

production possibility curve

shows economic concepts and used to describe macroeconomic conditions related to unemployment, economic growth, and trage.

economics

studies how individuals institutions and society make the optimal or best choices under conditions of scarcity, for which economic wants are unlimited and the means or resources are limited

economic perspective

has three interrelated features; opportunity cost, utility and marginal analysis

opportunity cost

giving up the next best alternative to the choice that was made

utility

people seek to increase their satisifaction or utility, from consuming a good or service, they are purposeful because they weigh the costs and benefits in deciding how to best increase utility

marginal anaylsis

assess how the marginal costs of a decision compare with the marginal benefit

scientific method

develops a hypothesis which is a proposition that is tested and used to develop and economic theory

economic principle or law

a highly tested and reliable economic theory. theories, principles and laws are meaningful statements about economic behavior or the economy that can be used to predic the likely outcome of an action or event

economic model

created when several economic laws or principles are used to explain or describe reality

economic resources

scarce natural, human or manufactured inputs used to produce goods and services

factors of production

are also economic resources, classified into four categories land, labor, capital, entrepreneurial ability

four assumptions used with production possibility model

1. there is full employment of available resources 2. the quanity and quality of resources are fixed. 3. the state of technology does not change, 4. there are two types of goods and services being produced - consumer goods and capital goods

production possibility table

indicates the alternative combinations of goods an economy is capable of producing when it has acheived full employment and optimal allocation. the table illustrates the fundamental chocie every economy must make; what quantity of each product it must sacrifice to obtain more of another

production possibility curve

the data in the production possibility curce can be plotted on graph, each point on the curve represents some maximum output of the two goods

law of increasing opportunity cots

the opportunity cost of producing an additional unit of one good is the amount of the other good that is sacrificed. states that the opportunity cost of producing one more unit of a good ( the marginal opportunity cost) increases as more of the good is produced

production possibility curve bowed out from origin

beucase the law of increasing opportunity costs

opportunity cost of producing an additional unit of a good increases as more of it is produced

because resources are not completely adaptable to alternative uses

marginal cost curve for a good increases

because of the law of increasing opportunity costs, marginal benefit curve decreases becuase the consumption of goods yields less and less satisfaction

last word chapter one- sound reasoning about economic issues requires the avoidance of five pitfalls

bias- preconceived belief or opinion that is not warranted by facts. loaded terminology- use of terms in a way that appeals to emotion and leads to a nonobjective analysis of the issues. fallacy of composition- the assumption that what is true of the part is necessairly true of the whole. post hoc fallacy- after this, therefore because of this, is the mistaken belief that when one event precedes another, the first event is the cause of the second. confusing correlation- with causation means that two factors may be related, but that does not mean that one factor caused the other.

opportunity cost

always measured in terms of a forgone alternative, from a production possibilities table, you can easily calculate how many units of one product you forgo when you get another unit of product

graphs

independent variable ( income) on horizontal axis, dependent variable ( consumption) on vertical axis

economic system

two basic types- command system, market system

command system

extensive public ownership of resources and the use of central planning for most economic decision making in the economy. also called socialism or commmunism

market system

extensive private ownership of resources and the use of markets and prices to coordinate and direct economic activity. called capitalism

economic system

set of institutions and a coordination mechanism to respond to the economizing problem for an economy

market system has nine characteristics

private property, freedom of entreprise and freedom of choice, self interest, competition, markey, new technology, specialization or division of labor, money of exchange, government is active but limited role

the system of prices and markets and households and business firms choices furnish the market economy with answers to five fundamental questions

1. what goods and services will be produced? how will goods and services be produced? who will get the goods and services? how will the system acommodate change? how will the system promote progress?

consumer sovereignty

consumers are in command and express their wishes for the goods and services through dollar votes

creative destruction

creation of new technology creates market positive of firms adopting new technology and destroys market using old technology

invisible hand

compeitition in economy compels firms seeking to promote their own interests to promote the best interests of the society as a whole- efficient use of resources, incentive the system provides for productive activity, personal freedom

circular flow model or diagram

device used to clarify the relationships between households and businessses in market economy. resource market- households sell and firms buy resources. product market- firms sell and households buy products. - look at diagram

last word ch 2

there are twns of billions of ways that resources could be arragned in a market economy, but most combinations would be useless. the reason tha a market economy produces the few combinations from the total possible that are productive and serve human goals is becuase of private property. with it, people have an incentive to make the best use of their resources and find the most rewarding combination

market

any institution or mechanism that brings together buyers ( demanders) and sellers ( suppliers) of a particular good or service

demand

schedule of prices and the quantities that buyers would purchase at each of these prices during a selected period of time

law of demand

states that there is an inverse or negative relationship between price and quantity demanded. other things equal, as price increases, buyers will purchase fewer quantities, and as price decreases they will purchase more quantities. there are three explainations for the law of demand: diminishing marginal utility, income effect, substitution effect

diminishing marginal utility

after a point, consumers get less satisfaction or benefit from consuming more and more unitys

income effect

a higher price for a good decreases the purchasing power of consumers incomes so they cant buy as much of the good

substitution effect

higher price for a good encourages consumers to search for cheaper substitutes and thus buy less of it

demand curve

has a downward slope and is a graphic representation of the law of demand

determinants of demand

price has most important influence but others are consumers tastes, the number of buyers in market, consumer income, price of goods, and consumer expectations- increase or decrease in entire demand schedule and demand curce ( change in demand) results from a change in one or more determinants of demand

normal goods

income and demand are positively related

inferior good

income and demand are negatively related

subsititute good

increase in the price of a related good will increase its demand . one good that will be used in place of another

complementary good

increase in the price of a related good will decrease its demand. one good that is used with another good

change in demand

means that the entire deamnd curve or schedule has changed because of a change in one of the above determinants of demand

change in quantity demanded

means that there has been a movement along an exisiting demand curve or schedule because of a change in price

supply

a schedule of prices and the quantities that sellers will sell at each of these prices during some period of time

law of supply

shows a positive relationships between price and quantity supplied, other things equal, as the price of the good increases more quantities will be offered for sale, and that as the price of the good decreases, fewer quantities will be offered for sale

supply curve

graphic representation of supply and the law of supply; it has an upwardsloipe indicating the positive relationship between price and quantity supplied

determinants of supply

price has most important influence but other factors are resource prices, technology, taxes and subsidies, price of other good, price expectation, and number of sellers in market

change in supply

increase or decrease in the entire supply schedule and the supply curve, it is the result of a change in or more of the determinants of supply that affect the cost of production

change in supply

means that the entire supply curve or schedule has changed because of a change in one of the above determinants of supply

change in the quantity of supplied

means that there has been a movement along an existing supply curve or schedule becuase of the change in price

equilibrium price

or market-clearing price of a product is that price at which quantity demanded and quantity supplied are equal.

equilibrium quantity

is equal to the quantity demanded and supplied at the equilibrium price

surplus

excess supply, if the price of a product is above the market equilibrum price

shortage

excess demand, price of product is below the market equilibrium price

productive efficiency

in which the goods and services society desires are being produced in the least costly way

allocative efficiency

resources are devoted to the production of goods and services society most highly values

price ceiling

set by governement prevents price from performing its rationing function in a market system. it creates a shortage at the government set price

price floor

minimum price set by government for the sale of a product or resource. it creates surplus at the fixed price

last word ch 3

the supply and demand anaylsis can be used to understand the shortage of organ transplants. the demand curve for such organs is downsloping and the supply is fixed (vertical) and left of the zero price on the demand curve. transplanted organs have a zero price. at that price the quantity demanded is much greater than the quantity supplied creating a shortage that is rationed with a waiting list. a competitive market for organs would increase the price of organs and then make more available for transplant - make the supply curve up-sloping), but there are moral and cost objections to this change

business cycle

focuses on two topics; long run economic growth and short run changes in output and employment

recession

long term growth trend leads to higher output and standards of living for an economy, but along the way there can be short-run variability that produces a decline in output

real gross domestic product, real GDP

is a measure of the value of final goods and services produced by the domestic economy during a time period, typically a year. the term real refers to the fact that in comparing the value of GDP ( price times quantity) from one year to the next, prices are held constant so only quantities of goods and services produced by the economy or real output changes.

modern economic growth

in which output per person and standards of living increased.

economic investment

refers to the purchase of newly created capital goods such as new tools, new machinery, or new buildings that are bought with the purpose of expanding a business

financial investment

refers to the purchase of an assest such as a stock, bond or real estate that is made for the purpose of financial gain

economic shocks

when expectations differ significantly from reality, unexpected happen

demand shocks

unexpected changes in the demand for products. most shorn run fluctations in economy come from demand shocks

supply shocks

occur with unexpected changes in supply of products

sticky prices

price of most products are inflexible or slow to change,causes issues with demand shocks - bc with demand shock if cant change price then change comes in output and employment

inventory

store of output that has been produced but not sold. when demand is low, inventory stock will rise.

national income accounting

consists of concepts that enable those who use them to measure the economy's output, to compare it with past outputs, to explain its size and the reasons for changes in its size and to formulate policies designed to increase it

gross domestic product GDP

the market value of all final goods and services produced in the domestic economy during the year is measured

gdp

is a monetary measure that is calculated in dollar terms rather than in terms of physical units of output, gdp includes in its calculation only the value of final goods ( consumption goods, capital goods, and services purchased by final users and that will not be resold or processed further during the current year, GDP excludes the value of intermediate goods to avoid multiple goods, another way to avoid multiple counting is to measure and add only the value added- market value of a firms output minue the value of the input the firm bought from other to produce the output

expenditures approach

required the summation of the total amounts of the four trypes of spending for final goods and services. includes; personal consumption expenditures C, gross private domestic investment Ig, government purchases G, net exports Xn. GDP = C+Ig+G+Xn

personal consumption expenditures F

are the expenditures of households for durable goods and nondurable goods and for services

gross private domestic investment Ig

is the sume of the spending by business firms for machinery, equipment, and tools; spending by firms and household for new construction buildings, and the changes in the inventories of business firms. * increase in inventory increases investment bc part of output that produced but not sold. decrease in inventories decrease investment bc included as part of output from a prior year

government purchases G

are the expenditures made by all levels of governments ( federal, state and local) for final goods from businesses and for the direct purchases of resources including labor

net exports Xn

in an economy is calculated as the difference between exports Xn and imports M. it is equal to the expenditure made by foreigners for goods and services produced in the economy minus the expenditures made by the consumers, governments and investors

income approach

adding the income derived from the production and sales of final goods and services. six income items are compensation of employees, rents, proprietors income, corporate profits, taxes on production and imports,

consumption of fixed capital

added to national income to get to GDP because it is cost of production that does not add to anyones income. it covers depreciation of private capital goods and publicly owned capital goods such as roads or bridges

net domestic product NDP

is the annual output of final goods and services over and above the privately and publicly owned capital goods worn out during the year. it equal to the GDP minus depreciation. depreciation ( consumption of fixed capital)

national income NI

the total income earned by US owners of land and capital and by the US suppliers of labor and entrepreneurial ability during the year plus taxes on production and imports. it equals NDP minus a statistical discrepanncy and plus net foreign factor income

personal income PI

is the total income received- where its earned or unearned by the housholds

disposable income

total income available to households after the payment of personal taxes. calculated by taking personal income- personal taxes.

nominal GDP

toatl output of final goods and services produced by an economy in 1 year multiplied by the market prices when they were produced, prices change each year. to compare total output overtime nominal GDP is converted to real GDP to account for these price changes

price index

used to derive real GDP from nominal GDP, price of a market in a given year/ price in base year multiplied by 100.

to get real GDP

divide nominal GDP by price index in hundreths

GDP shortcomings

excludes the value of nonmarket final goods and services that are not bough and sold in the markets, such as unpaid work done by people on their houses, excludes increased leisure enjoyed by ppl, doesnt account for the value of improvements in quality of products, doesnt measure the market value of the final goods and services, doesnt record pollution, doesnt measure noneconomic sources as reduction in crime, drugs etc

last word ch 7

the bureau of economic analysis BEA is a unit of the department of commerce that is responsible for compiling the national income and product accounts. it obtains date from multiple sources to estimate consumption, investment, government purchases, and net exports for the calculation of GDP

economic growth

defined in two ways- increase in real GDP over some time or as in increase in real GDP per capita- which takes size of population into account

rule of 70

approximate number of years required to double GDP can be calculated by rule of 70 which involes dividing 70 by the annual percentage rate of growth

modern economic growth

described by improvments in living standards that is continual and sustaned overtime

ingredients of growth

supply factor, demand factor, efficiency factor

supply factor

includes the quantity and quality of resources ( natural, human and capital) and technology

demand factor

influences the level of aggregate demand in the economy that is important for sustaining full employment of resources

efficiency factor

affects that efficient use of resources to obtain maximum production of goods and services ( production efficiency) and to allocate them their highest and best use by society (allocative efficiency)

labor productivity

real GDP=worker hours x labor productivity

labor force participation

the house of work are determined by the size of the working age population, labor force participation is the percentage of working age population in the labor force

labor productivity

real output per work house - is determined by many factors such as technological advance, the quantity of capital goods and the quality of labor, the efficiency in the use of inputs

growth accounting

two main factors are increases in quantity of labor ( hours of work) and increases in labor productivity

five factors to help increase labor productivity

technological advance, quantity of capital, human capital, economies of scale and improved allocation of resources

economies of scale

means that there are reductions in the per-unit-cost for firms as output expands. these economies occur as the market for products expands and firms have the opportunity to increase output to meet this greater demand

improved allocation of resources

occurs when workers are shifted from lower- productivity employment to higher- productivity employment in an economy, included in the category would be reductions in discrimminations in labor markets and reduced barriers to trade, both of which increase the efficient use of labor resources

productivity growth based on several factors

information technology, start up firms and increasing returns, network effects and learning by doing

last work ch 8

china has experienced annual rates of economic growth of almost 9% over the past 25 years. real income per capita has also increased by about 8 percent annually since 1980. the increased output and rising incomes fueled increases in savings and investment that in turn contribute to an increase in the stock of capital goods and technological advance. this economic growth is not without economic problems such as trade disputes, rising inflation , the unemployment of rural workers and government ineffieciencies

business cycles

peak, recession, trough -when output is no longer declining, this low point followed by expansion

unemployment rate

calculated by dividing the number of persons int labor force who are unemployed by the total number of persons in the labor force

unemployment rate criticized for two reasons

1. part time workers are considered fully employed, discouraged workers who have left the labor force are not counted as unemployment

frictional unemployment

due to workers with marketable skills searching for new jobs or waiting to take new jobs, this type of unemployment is short term, inevitable, and also generally desirable bc it allows people to find more optimal employment

structural unemployment

due to the changes in technology and in types of goods and services consumers wish to buy, these changes affect the total demand for labor in particular industries or regions. such unemployed wokrers have few desired markeyable skills so they often need retrainin, more eduction or have to move if they are to be employed

cyclical unemployment

arised from a decline in total spending in the economy that pushes an economy into an economic downtown or recession.

full employment unemployment rate or the natural rate of unemployment NRU

is the sume of frictional and structural unemployment and is achieved when cyclical unemploymen is zero ( the real output of the economy is equal to its potential output) NRU is the unemployment rate that is consistent with full employment. it is not however, automatically achieved and changes over time.

GDP gap

is a measure of that cost. it is the difference between actual and potential GDP, when the difference is negative it means that the economy is underperforming relative to potential

okuns law

predicts that for ever 1% the actual unemployment rate exceeds the natural rate of unemployment, there is a negative GDP gap of 2%

consumer price index CPI

primary measure of inflation in US

demand pull inflation

result of excess total spending in the economy or too much spending- increasing demand is pulling up the price

cost push inflation

result of factors that raise per-unit-production costs. this average cost is found by dividing the total cost of the resource inputs by the amount of output produced. as these costs rise profits are squeezed. major source of this inflation has been supply shocks from an increase in the price of resource inputs

real income

determined by dividing nominal income by the price level expressed in hundreths

unanticipated inflation

hurts fixed-income receivers, savers, and creditors because it lowers the real value of their assests

last work ch 9

do changes in the stock market affect the economy? the evidence indicates that changes in stock prices have only a weak effect on consumption and investment and the macroeconomy. stock market bubbles where there is a large increase in stock prices that then decline rapidly can adversely affect the macroeconomy. stock prices are relatively good indicator of future business conditions bc they are related to business profits

45 degree line

on the graph would show where consumption would equal disposable income, the difference is saving

consumption schedule

shows the amounts that households plan to spend for consumer goods at various levels of income, given a price level. break even income is where consumption is equal to disposable income

saving schedule

indicates the amounts households plan to save at different income levels, given a price level

average propensity to consume APC and average propensity to save APS

the precentages of income spent for consumption and saved, they sum to 1

marginal propensity for consume MPC and marginal propensity to save MPS

the percentages of additional income spent for consumption and saved sum to 1

MPS AND MPC

are slopes of consumption and saving schedule

wealth effect

household income increases, they will spend more and save less bc of this increase in money

expected rate of return

directly related to the net profits that are expected to result from an investment. marginal benefit of investment for a business

real rate of interest

price paid for the use of money. it si the marginal cost of investment for a business. when the expected real rate of return is greaterthan the real rate of interest, a business will invest bc the investment is profitable

investment dmeand curve

shows this inverse relationship between the real rate of interest and the level of spending for capital goods. the amount of investment by the business sector is determined at the point where the marginal benefit of investment equals the marginal cost

six noninterest determinants of investment demand, and a change in any of these determinants will shift the investment demand curve

acquisition, maintenance, operating costs for capital goods change, business taxes, increase in technological progress,stock of exisiting capital goods, planned changes in inventories,expectations of future, capital goods are duarble, innovation is not regular, profit expectations, other expectations

multiplier

ratio of the change in the real GDP to initial change in spending. the intitial change in spending typically comes from investment spending, but changes in consumption, net exports, or government spending. multiplier = 1/ (1-MPC) or 1/MPS. workbook pg 110

last word ch 10

art buchwald once wrote a humorous story about the multiplier that illustrates the spiral effect on consumer spending from a reduction in income. a car salesman reserved a car for a regular customer, but the customer cant buy the car bc he is getting divorced. which spirals a bunch of other people to lose work.

aggregate expenditures model

developed during great depression. with its constant price assumption is valuable for analysis of our modern economy because in many cases prices are sticky or stuck, model useful for understanding how economic shocks affect output and employment when prices are fixed or sticky- assumed the economy is private and closed- no international trate or government spending and also assumes that output or income measures are equal, real GDP= disposable income

equilibrium GDP is the

real GDP at which aggregate expenditures C+Ig=GDP, aggregate expenditures schedule crosses the 45-degree link, slope of this curve is equal to the marginal propensity to consume

equilibrium is acheived when planned investment equals savings

and there are no unplanned changes in inventories

equilibrium real GDP in an open economy

means real GDP is equal to consumption plus investment plus net exports

recessionary expenditure gap

equilibrium real GDP is less than the real GDP consistent with full employment realy GDP

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