Terms in this set (71)
Anything that can be used to produce something else. There are FOUR "Factors of Production":
1.) LAND - natural resources (mineral, timber, etc.)
2.) LABOR - effort of workers (education)
3.) CAPITAL - manufactured goods used to produce other goods
4.) ENTREPRENEURSHIP - innovation
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another
Analysis of facts or data to establish scientific generalizations about economic behavior
Involve beliefs or value judgments about what ought to be. Normative economics forms the basis of economic policies.
Increase in the maximum possible output of an economy.
PRODUCTION POSSIBILITIES CURVE
Illustrates TRADE-OFFS. Production at point A is feasible and efficient; B is impossible; C is feasible and inefficient.
Usually a concave graph because of specialization of resources.
When an economy produces at a point ON its PPC.
An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers/make them as well off as possible. Marginal Cost = Marginal Benefit
GAINS FROM TRADE
From specialization of work, there is an increase in output.
The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.
The ability of an individual, firm, or country to produce a good or service more with the same amount of time and resources as other producers.
TERMS OF TRADE
To find the range of MUTUALLY BENEFICIAL terms of trade of a good, find anything between the opportunity cost of one side with the opportunity cost of the other.
Changes in DEMAND CURVE
PRICE LEVEL causes MOVEMENTS ALONG CURVE-- the QUANTITY DEMANDED changes.
1.) Prices of RELATED GOODS
5.) # of CONSUMERS
LAW OF DEMAND
The HIGHER the price of good, the LOWER the quantity.
SUBSTITUTES & COMPLEMENT (Related Goods)
SUBSTITUTES: The decrease of price of a similar alternative will cause a decrease in demand of the original good as consumers are more inclined to buy the alternative instead of it.
COMPLEMENTS: The decrease of price of a complementing good will increase the demand of the original good as they are bought together.
NORMAL VERSUS INFERIOR GOODS ( Income)
NORMAL GOOD: When rise in income increases demand for a good. (Olive Garden)
INFERIOR: When a rise in income decreases demand for a good (McDonald's)
Changes in SUPPLY CURVE
The quantity producers are willing to produce is the QUANTITY SUPPLIED, which depends on the price they are offered. It results in a MOVEMENT along the curve.
1.) INPUT PRICE
2.) PRICES of RELATED GOODS
5.) # of PRODUCERS
LAW OF SUPPLY
Price and quantity supplied are positively related; Higher the price, the more a good is produced
When demand INCREASES/DECREASES & supply DECREASES/INCREASES, EQ PRICE RISES/FALLS, but QUANTITY is ???
When BOTH demand and supply INCREASE/DECREASE, equilibrium quantity RISES/FALLS but equilibrium price is ???
PRICE CONTROLS: PRICE CEILING & PRICE FLOOR
Max/Min price sellers are allowed to charge a good/service. May lead to inefficient use of resources (poor allocation) and wasted resource.
CIRCULAR FLOW DIAGRAM
HOUSEHOLDS engage in CONSUMER SPENDING with money which they earn as owners of factors of production.
(RENT land, WAGE labor, and INTEREST on capital)
Stocks and goods and raw materials held to facilitate business operations.
Spending on new productive physical capital like machinery, structures, and inventories.
THREE APPROACHES TO CALCULATING GDP
1.) Value-Added Spending: survey firms and add up contributions to value of final goods
2.) Expenditure: add up AGG. SPENDING on DOMESTICALLY produced final goods (C+I+G+X-IM)
3.) Income: add up total income earned by households from firms (rent, wages, interest, profit)
Items NOT Included in GDP Calc.
INTERMEDIATE GOODS, INPUTS, USED GOODS, STOCKS/BONDS, FOREIGN GOOD
LABOR FORCE PARTICIPATION RATE
LABOR FORCE / POP. 16+ LOOKING FOR WORK x 100
UNEMPLOYMENT RATE EQ.
# of unemployed workers / LABOR FORCE x 100
Should be equal to the sum of the employed and the unemployed
Nonworking people who are capable of working but gave up looking for a job, part of MARGINALLY ATTACHED WORKERS
MARGINALLY ATTACHED WORKERS
People who would like to be employed/have looked for a job in the past but are currently not
Inevitable unemployment that results from workers' job search to find a job that matches their skills
When workers lack skills required for available jobs OR there are more people looking for jobs than there are jobs available (SURPLUS of LABOR) OR workers' jobs become obsolete
NATURAL RATE OF UNEMPLOYMENT
Frictional + Structural Unemployment
Natural + Cyclical Unemployment
Wage rate / Price Level
Income / Price Level
High inflation = High Cost of Holding Money
The measure of the overall PL. Cost of Consumer Purchases in a given year / Cost of Market Purchases in a base year x 100
Given by new price index - old price index / old price index x 100
CONSUMER PRICE INDEX
Measures cost of the market basket of typical American family.
MARGINAL PROPENSITY TO CONSUME (MPC)
The increase in consumer spending when disposable income increases by $1. It is the change in CS divided by change in DI (disposable income)
MARGINAL PROPENSITY TO SAVE (MPS)
The increase in household savings when DI increases by $1. 1-MPC
1 / (1-MPC) or 1 / MPS It indicates the total rise in RGDP that results from each $1 of an initial rise in spending.
shows how a household's consumer spending varies with the household's current disposable income and agg. consumer spending
Changes in Expected DI
when purchasing power of consumers change consumer spending
INTEREST RATE EFFECT
when interest rates change as a result of changing demand consumer spending
AGGREGATE DEMAND CURVE
SHIFT FACTORS/THINGS THAT IMPACT CONSUMER SPENDING AND THEREFORE DEMAND:
3.) Existing Physical Capital
4.) GOVERNMENT POLICY: Fiscal & Monetary
Use of government purchases of goods and services, transfers, or TAX POLICY
Bank's use of changes in quantity of money or IR
AGGREGATE SUPPLY CURVE
SRAS SHIFT FACTORS:
1.) COMMODITY [INPUT] PRICES (Increase will cause leftward shift)
2.) NOMINAL WAGE (Increase will cause leftward shift)
4.) EXPECTATIONS of INFLATION
LONG RUN AS
Is VERTICAL because changes in aggregate PL, in the long run, have NO EFFECT on aggregate output.
Combination of inflation and falling aggregate output
When aggregate output is below potential output; caused by negative demand shock. Left of LRAS curve on graph. High unemployment.
When aggregate output it above potential output; caused by positive demand shock. Right of LRAS curve. Low unemployment.
Actual agg. output - Potential output / Potential output x 100
1.) Increase Gov. Purchase
2.) Cut Tax
3.) Increase Transfer
1.) Decrease Purchase
2.) Increase Tax
3.) Decrease Transfer
-MPC/(1-MPC) The factor by which a change in tax changes RGDP
taxes that don't depend on the taxpayer's income
price charged by lenders to borrowers for the use of savings in one year
Savings and investment are always equal for the economy
THREE TASKS OF FINANCIAL SYSTEM
1.) Reduce Transaction Cost
2.) Reduce Financial Risk
3.) Provide Liquidity
TYPES OF FINANCIAL ASSETS
1.) LOAN: lending agreement b/w an individual lender and an individual borrower
2.) BOND: Seller pays a sum of interest each year to buyer of the bond
3.) Loan-Backed Security (Mortgage)
4.) STOCKS: Share in ownership of a company
An institution that transforms funds from individuals into many assets. Types include:
1.) MUTUAL FUND
3.) LIFE INSURANCE
Creates a stock portfolio before reselling its shares to investors (reduces risk)
Nonprofit institution that invests savings of members and provides retirement income
3 ROLES OF MONEY
1.) MEDIUM OF EXCHANGE
2.) STORE OF VALUE: consistent purchasing power
3.) UNIT OF ACCOUNT
TYPES OF MONEY
1.) COMMODITY MONEY (gold, silver)
2.) COMMODITY-BACKED: no intrinsic value (paper money)
3.) FIAT MONEY ($)
M1: currency in circulation (cash), traveler's check, checkable bank deposit
M2: M1 + "near-moneys" that pay interest
1.) DEPOSIT INSURANCE: guarantee that depositors will be paid even if bank can't pay
2.) CAPITAL REQUIREMENTS: hold assets
3.) RESERVE REQUIREMENTS
4.) DISCOUNT WINDOW
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