Principle 2
The true cost of something is the opportunity cost
Principle 1
Choices are necessary bc resources are scarce
Principle 3
How much is a decision at the margin
Principle 4
People usually respond to incentives, exploiting opportunities to make themselves better off
Principle 5
Gains from trade
Principle 6
Bc people respond to incentives, markets move toward equilibrium
Principle 7
Resources should be used efficiently to achieve society’s goals
Principle 8
Because people usually exploit gains from trade, mRkets usually lead to efficiency
Principle 9
When markets don’t achieve efficiency, government intervention can improve society’s welfare
Principle 10
One persons spending is another persons income
Principle 11
Overall spending sometimes gets out of line with the economy’s productive capacity
Three types of models
Production possibilities frontier
Comparative advantage
Circular flow diagram
Production possibilities frontier
Demonstrates trade off between an economy that produces two goods
Quantity pairs inside or on the frontier are
Possible
Quality outside or not on the frontier are
Not possible
Positive economics
Attempts to analyze how the world works
Normative economics
Describes how the world should work
Circular flow diagram
Represents transactions by showing the flow of goods and services and flow of money
Quantity supplied DOES NOT equal supply
Quantity supplied : single price or point on line
Supply: entire curve
Supply is normally
Upward sloping
Higher price means
Increase supplied
Lower price means
Decrease in the quantity supplid
Change in price result in
Movement
Change in other factors result in
Shifts
Rightward shift of a supply curve means
Increase in supply
Leftward shift of supply curve means
Decrease in supply
What shifts a supply curve
Input prices (k=capital! labor! material) Prices Technology Expectations Number of producers
Market demand equation
Qd= 800-20P
D = alpha-(beta times P)
A demand curve is
Downward sloping
Law of demand
High price means reduced quantity demanded
Low price means increased quantity demanded
Movements along the curve
Changes in quantity demand of good x due to change in price
Shifts along the curve
Changes in quantity demanded of good x due to any other factor
What shifts a demand curve
Income
Tastes
Expectations
Prices of related goods/services
Substitutes
As price goes up for y, demand goes up for x
Coffee and tea
Donuts and muffins
Complements
As price goes up demand goes down
Car and gas
Peanut butter and jelly
A perfectly competitive market is in
Equilibrium
Finding equilibrium price
D= 800-20P
S=30P-200
Finding equilibrium quantity
Plug in price into supply
S=30(P)-200
Surplus
Excess supply
Shortage
Excess demand
Price controls
When governments intervene, they are imposing price controls
Price ceiling
Upper limit, rent control
Price floor
Lower limit
Minimum wage
When are price controls not bad
If markets are failing/inefficient
What is the main price control in the US
Rent control
Ceilings go below or above equilibrium level?
Below
Price ceilings produce shortages if?
The ceiling price is lower than equilibrium price
How do price ceilings create inefficiency
- Reduce quantity of good consumed below the efficient level
- Inefficient allocation to consumers
- Leads to wasted time and effort, hunting for the good
- Leads to lower quality good
* * also create black markets**
Quota
Quantity control by which gov. Regulates how much can be bought or sold
Wedge/quota rent
Earnings that the license holder receives from ownership of the license
How do quantity controls create inefficiencies?
Due to missed opportunities by preventing mutually beneficial transactions
* also create incentives for illegal activity*
Macroeconomics
Deals with economy as a whole
The whole is greater than the sum of its parts
:)
Paradox of thrift
When someone is worried about the possibility of economic hard times, they prepare by cutting their spending, this depresses the economy and the person will end up worse off
- and vice versa
Self regulating economy
What they thought we had before the Great Depression
Keynesian economics
Economic slumps are caused by inadequate spending and can be mitigated by government intervention
- monetary and fiscal policy
Monetary policy
Uses changes in the quantity of money to alter the interest rates and affect overall spending
- federal reserve
Fiscal policy
Uses changes in government spending and taxes to affect overall spending
Real GDP
A measure of the economy’s overall output
Recession
(Or contractions) are periods of economic downturn when output and employment are failing
- poor labor market conditions
- lower standards
- shrinking profits
- psychological costs
Expansion
(Recoveries) are periods of economic upturn when output and employment are rising
Business cycle
The short run alternation between recessions and expansions
Business cycle peak
The point at which the economy turns from expansion to recession
Business cycle trough
Point at which the economy turns from recession to expansion
What is the most widely used indicator of the labor market?
The unemployment rate
Long run economic growth
The sustained upward trend in the economy’s output over time
Inflation
Rising overall level of prices
- discourages holding cash
Deflation
Falling overall level of prices
Price stability
When the overall level of prices changes slowly or not at all
- goal for economists
Open economy
an economy that trades goods and services with other countries
Trade deficit
When the value of goods and services bought from foreigners is more than the value of goods and services it sells to them
- but not the end of the world, many successful countries have them
Trade surplus
When the value of goods and services bought from foreigners is less than the value of the goods and services it sells to them
National income and product accounts
Track consumer spending, producing sales, business investment spending, gov purchases,
- can be visualized with a circular flow diagram
How do households obtain incomes?
Stocks, bonds, rent
Where does the income they don’t retain go?
Taxes
Or gained via transfers
Disposable income
Income = income + transfers - taxes
Yd = Y + TR - T
Private savings equations
Savings = income - consumption
Governments participate by
Purchasing goods and services
Transferring money
Collecting taxes
Borrowing
Budget balance equation
…
Firms participate by
Purchasing goods and services
Accumulate inventories of finished products
Investment spending
Purchases of productive capital and changes to inventory
Rest of the world participates by
Purchasing US goods and services (exports)
Selling foreign products to US (imports)
Foreign lending and foreign borrowing
Net exports
Exports minus imports
NX = EX - IM
- if it’s negative you have a deficit
- if it’s positive you have a surplus
Final goods and services
Goods and services sold to the final or end user
Laptop, house, cAr
Intermediate goods and services
Goods and services that are inputs for production
Gross domestic product
The total value of all final goods and services produced in an economy in a given period, usually a year
3 approaches to calculating GDP
Direct approach
Expenditure approach
Earned factor income approach
Value added approach
Intermediate goods are excluded so we don’t double count
Real GDP measures
Aggregate output
Aggregate output
The total quantity of FGS the economy produces during a year, calculated as if prices had not changed
Nominal GDP
The value of FGS at today’s prices
Chain dollars?
.
Aggregate price level
Single number capturing the measure of the overall level of prices/cost of living
Market basket
Hypothetical consumption bundle, used to measure overall price level.
- Florida citrus fruit example
Price index
A normalized measure of the overall price level
Inflation rate
Annual percent change of the price index
Consumer price index
The most common measure of aggregate price level
Intended to show how the cost of all purchases by a typical urban family has changed over time.
- might overstate inflation
Producer price index
Measures the cost of a typical basket of goods and services purchased by producers (firms)
- used to be known as wholesale price index
GDP deflator
(Nominal GDP/real GDP) times 100
Two goals of macro
Low unemployment and price stability
- however these two conflict
Employment
Number of people currently employed in the economy, either part time or full time
Unemployment
Number of people ACTIVELY LOOKING, but aren’t currently employed
- does not include disabled individuals, retired workers, children, students
Labor force
The sum of employment and unemployment
Labor force participation rate
Percentage of the population aged 16 or older that is in the labor force
Labor force / pop. 16 and older times 100
Unemployment rate
Percentage of the total number of people in the labor force who are unemployed
Number of unemployed workers/labor force times 100
3 types of workers not counted in unemployed(the reason unemployment rate is understated)
Discouraged workers
Marginally attached workers
Underemployed
Discouraged workers
Hardworking people capable of working but have given up looking for a job bc there are none
Marginally attached workers
Would like to be employed and have looked for a job in the recent last but are not currently looking for work
Underemployed
Number of people who work part time bc they cannot find full time jobs
What kind of relationship is between growth in the economy and unemployment rate?
A strong negative relationship
Economic expansions don’t always mean unemployment will fall
After some recessions ended, it still continued to rise
Jobless recovery
A period in which the real GDP growth rate is positive but the unemployment rate is still rising
- also called growth recession
National unemployment rate has never dropped below
2.9%
Job search
Time people spend looking for employment
Frictional unemployment
Unemployment due to time workers spend in job search
- a certain level is beneficial
Structural unemployment
More people are seeking jobs in a particular labor market than there are jobs available at the current wage rate.
- occurs when wage rate is above We.
Factors leading to wage rate in excess of We
Collective bargaining Minimum wage Labor strikes Efficiency wages Side effects of gov policies Mismatched between employees and employers
Minimum wage
National is 7.25 an hour
Collective bargaining
Working together to fight for higher wages, rather than alone
Labor strike
A collective refusal to work
Efficiency wages
Wages that employers set above the equilibrium wage rate as an incentive for better employee performance
- if people get paid more, they’ll work harder to keep their jobs because a new job won’t pay as much
Natural rate of unemployment
Frictional plus structural
Cyclical unemployment
The deviation of the actual rate of unemployment from the natural rate due to downturns in the business cycle
Actual unemployment
Natural plus cyclical
What can cAuse unemployment rate to fall?
Job training and employment subsidies
Real wage
Wage rate divided by price level
Real incomes
Income divided by the price level
Level of prices DOESNT MATTER but
Rate of change does
Inflation rate equation
Price index yr 2 - price index yr 1 divided by price index in year 1 times 100
Shoe leather cost
Increased costs of transactions caused by inflation, wears down the leather on ur shoes from running around to get more money
Menu cost
The real cost of changing a listed price
- a worker having to physically change the price
Unit of account costs
The costs arising from the way inflation makes money a less reliable unit of measurement
Interest rate
The price calculated as a percentage of the amount borrowed that lenders charge borrowers the use of their savings for one year
Nominal interest rate
The interest rate expressed in dollar terms
Real plus inflation
Real interest rate
.