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Determinants of Demand
Income, Availability and price of complements, Availability and price of substitute goods, Taste/ consumer preference, Expectations, Size of Market
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Determinants of Supply
Cost of Inputs, Technology, Cost of alternative goods, Expectations, Number of producers
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PPF
Production Possibilities Frontier
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3 Assumptions of PPF
- 1. Fixed point in time.
- 2. Involves 2 goods or services.
- 3. All resources are deployed efficiently.
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3 Economic Assumptions
- 1. People will act in a rational manner.
- 2. People will act in their own best interest.
- 3. People will utilize information to make decisions.
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Factors of Production
- Land - Natural Resources
- Labor
- Capital
- Entrepreneurial Skill
- Time
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Schedule of what consumers are willing and able to purchase at various prices.
Demand
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Price varies inversely with quantity demanded.
Law of Demand
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Schedule of what producers are willing and able to sell at various prices.
Supply
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Social science concerned with how society allocates scarce resources.
Economics
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Strictly conservative economic theory where the market dictates and there is no government involvement.
Austrian
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Economic theory that favors government involvement in the form of large infrastructure projects.
Keynesian
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Economic theory that states market and government are tangled. Economic decisions are based on political factors.
Public Choice
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Economic theory concerned with the money supply.
Monetarist
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Economic theory which applies common sense and very little math.
Classical
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Classical theory with lots of math. Applies economic theory to non-economic issues.
Chicago
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Economic theory that promotes removing barriers to production.
Supply-Side
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Processing current available information before making a decision.
Rational Expectations
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Using past events to make current decisions.
Adaptive Expectations
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Post hoc ergo propter hoc
After it, therefore, because of it.
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Ceterus parabus
All other things being equal.
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3 basic economic questions
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The next best option.
Opportunity Cost
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Arena where buyers and sellers meet to make transactions.
Market
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Labor Force
Everyone over 16 who is able to work and is looking for work.
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People who are excluded from the Labor Force
Disabled, Incarcerated, Institutionalized
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Labor Force Participation Rate
Labor Force divided by Potential Labor Force
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Unemployment Rate
Unemployed divided by Labor Force
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Problems with Unemployment Rate
Diccouraged Worker Effect, Underemployment
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Discouraged Worker Effect
Survey Respondents report that they aren't looking for work because of embarrassment.
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Underemployment
Not being able to use specific skill set.
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4 types of Unemployment
- Cyclical
- Seasonal
- Structural
- Frictional
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Cyclical Unemployment
Related to the Business Cycle
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Structural Unemployment
Due to the nature of an industry changing - Technology, Outsourcing
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Frictional Unemployment
Literally between jobs
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Inflation
General rise in level of prices or devaluation of currency.
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Consumer Price Index
Determined by the Market Basket, a list of common household expenditures.
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Problems with CPI
- New goods take longer to incorporate
- Quality of goods is not taken into account
- Substitution Effect is not taken into account
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COLA
Cost Of Living Adjustment
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Quantity Theory of Money
Money times Velocity equals Price times Quantity. Velocity and Quantity are fixed.
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Demand Pull
Demand rising in one sector causes demand to fall in another. Assumes people don't have access to credit.
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Gresham's Law
If people no longer have faith in currency, it becomes worthless.
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3 Focuses of Macroeconomics
- Growth
- Inflation
- Unemployment
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Gross Domestic Product
Total dollar value of all final goods and services produced within a country's borders for a given period of time.
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Real
Adjusted for Inflation
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Problems with the GDP
- Black Market
- Non Market - Household Labor, etc.
- Leisure Time
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Reasons for US shift to service based economy
- Dual Income Households
- Mass Production Overseas
- Improved Transportation
- Communication
- Health Care
- Credit
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Stock
Piece of ownership of a company
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Bond
Piece of debt owed by a company.
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Fractional Reserve Banking
Banks lend out most of the money deposited with them.
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Number of regional Fed Banks
12
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Monetary Policy
Changing the money supply to impact economic conditions.
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Money Multiplier
1/rr (Reserve Requirement)
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Loose Money Policy
More currency in the market. Used to fight unemployment.
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Tight Money Policy
Less currency in the market. Used to fight inflation.
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Fiscal Policy
Use of taxes to impact the economy.
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MPC
Marginal Propensity to Consume. What you spend from each additional dollar, after obligations are met.
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Autonomous Spending
Spending unrelated to level of income.
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AE
Aggregate Expenditures. Everything purchased in the economy.
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AE>GDP
Causes Deficit, Inflation
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AE<GDP
Causes Unemployment.
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3 Issues with Fiscal Policy
- Recognition Lag
- Implementation Lag
- Operational Lag
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Perverse Incentives
Incentive that backfires on one of the parties.
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Psychic Income
Intangible reward for work.
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