1. People face trade-offs
2. The cost of something is what you give up to get it.
3. Rational people think at the margin
4. People respond to incentives
Princples Concerning people's economic interactions
1. Trade makes everyone better off
2. Markets are usually a good way to organize the economy
3. Governments can sometimes improve market outcomes
1. A country's standard of living depends on its ability to produce goods and services.
2. How the ecomoy works is prices rise when government prints too much money.
3. Society faces a short-run trade off between inflation and unemployment.
Two groups: Firms and Households
Two loops: Outer loop shows the flow of money. Inner loop shos the flow of input and output
The flow of dollars between firms and households
Inflation short cirucuits
Positive analysis: describes a situation
Normative Analysis: recommends how things should be (harder to prove)
1. Ecnomist can be policy advisors
2. Resources used to create products difficult to determine
When a producer uses the least amount of input necessary to produce a good.
Ex. Growing flowers and grass in a shorter amount of time
2. Price of Related Goods
5. Number of Buyers
If everything elses is equal, the quantity of supplied of a good rises when the price of a that good rises.
Quantity Supplied: Amount of a good that the seller is willing and can sell
Change in supply: Change in how much it costs to produce a good.
1. Decide if the demand or supply curve is being shifted.
2. Which direction it is shifted
3. Use diagram to see how the shift affected curve
Change in quantity divided by change in price.
Price elasticity of demand = [ (Q2 - Q1) / (Q2 + Q1) / 2]
[ (P2 - P1) / (P2 + P1) / 2]
How you can raise the price without losing demand from consumers. Compare prices to competitors.
Measures how much the quanitity supplied changes in response to teh price of a good.
Important determinant is time. Supply does not change in a short period of time
No, if the price ceiling is below the equilibrium it becomes binding. A binding price ceiling creates a shortage of goods and the sellers must ration their goods among buyers
Incidence is how the burden of a tax is shared among the people in an economy.
Shifts in the supply and demand curve determine how the burden of tax is shared between the buyer and the seller.
Consumer surplus is the amount a buyer is willimg to pay for an item minus what they actually pay for it. RELATED TO DEMAND
A measure of the benefits a buyer gets from being a part of the market.
Lowering a price can raise consumer surplus.
The amount a seller is paid for a good minus the seller's cost of providing it. RELATED TO SUPPLY
As the price rises the amount of sellers willing to sell their good increases
Consumer Surplus and producer surplus used to study.
Works to incrase the surplus for both consumers and producers.
Do labor taxes impact labor supply in the short run and long run?
In the short run a raise in labor taxes could impact the labor supply.
Long run- no. People still need wages and jobs
Tax placed on goods that are being produced abroad and sold domestically.
Tax on imported goods.
When a person's actions are beneficial to the well-being of another.
Ex. renewing historical pieces, education
When the impact of one person's actions adversely affects other bystanders.
Ex. exhaust, barking dogs
Why is gasoline taxed so heavily?
Reduces the amount of people who drive.
A good that is excludable is a good that people can be prevented from using.
A rival in comsumption is good that when one person uses the good it diminishes other's use of the good.
Goods that are not excludable or rivals in consumption.
Ex. National Defense
If the marginal revenue is more than a marginal cost the firm should increase their output. If the marginal cost is more than the marginal revenue the output should be decreased.
MC = MR
They are making enough money to make up for the time and money spent on keeping the business oing
All costs covered
A single firm owns a key resource
A firm can supply a good for less cost than the other firms
Created by government (exclusive rights)
A monopoly can influence the price out its output. A competitive firm takes the price given by market conditions
A competitive firm faces a horizontal demand curve because it can sell as little or as much as it wants at a certain price.
A monopolist demand curve slopes downward curve slopes downward because if they raise tyhe price the consumers buy less.
Why does a monopoly not have a supply curve?
Similar to a tax
Can charge prices for a good above marginal price so that not all consumers will value this good at this price and therefore not buy the good.
The business practice of selling the same good at different prices to different customers.
Coupons for people with certain professions
Sherman Anit-Trust Act- Reduce the market power of the large trusts that dominated the ecnonomy
Clayton Anti-Trust Act- Strengthened the governement's power and its authorized private lawsuits
The market value of all final goods and services produced within a country.
Martket Value: used to measure the economic activity
All: Legal items
Final: Final good only (counting more than once)
1. Consumption: how much a household spends on goods
2. Investment: purchase of goods that will be used in the future
3. Governement Purchases: Spending local, state, federal
4. Net Exports: amount spend on domestically produced goods by foreigners minues spending on foreign goods
Nominal: Production of goods and services valued at current prices
GDP: Production of goods and services valued at constant prices
Why should policy makers care about GDP?
Subsitution bias: Not all prices change at the same rate
Introduction of new goods: more options
Quantity of goods and services produced from each unit of labor input.
Measureed by physical capital, human captital, natural resources, and technological knowledge.
Work together to effect economic growth.
Property Rights: Exerise authority over the property they own. Enforced by court system.
Political Stability: Unstable government less control over property rights, not invest
Bond: Certificate of indebtedness
Stock: claim to partial ownership in a firm.
National income made up identites:
GDP: (Y = C + I + G + NX)
Closed Economy: ( Y + C + G = I)
Financial Markets: (Y - C - G = Y)
Eventually, the US has debt with many countries. The larger the debt becomes the less willing other countries will be to accept more debt.
Unable to fund and support activites that help economy grow.
Frictional unemployment: when it takes times for workers to search for the job that best suit their tastes and skills.
Structural unemployment: number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
Wages above equilibrium wages paid by firms to increase worker productivity.
Firms want to hire the most qualified workers. Keep workers from leaving to work for competition
Medium of exchange: itme that buyers give to sellers when they want to purchase a good
Unit of Account: yardstick people use to post prices and record debts
Store Value: an item that people use to transfer purchasing power from present to future
M1: demand deposits, traverlers checks, other checkable deposits, and currency
M2: Everything in M1 and saving deposits, small time deposits, money market mutual funds, and few minor categories
Regulate banks and ensure the health of the banking system.
Controls the quantity of money that is made available in the ecnonomy
The Fed sells bonds in open-market, they receive money in exchange. When the Fed buys bonds they pay out money and expand the money supply.
People hole money because it is used for all exchanges.
Monetary Injection: shifts supply curve to the right. The value of money decreases and the equilibrium price rises.
Classical Dichotomy: theoritical seperation of nominal and real variables.
Monetary Neutrality: The proposition that changes in the money supply do not affect real variables
M x V = P x Y
Increase in the quantity of money in an economy must be reflected in one of the other three variables.
Recession: a period of declining real incomes and raising unemployment
Depression: Severe recession
Irregular and Unpredictable: flourish, downsize
Most Macroecomic Quantities Fluctate Together:
As output falls, unemployment rises: produce less product
Changes in money supply affect nominal variables but not real variables.
Fallacy: Classical economics is that the theory does not hold in the short run.
Explain short-run flucuations in ecnomic acitivty arount is long-run tred.
THe aggregrate demand cruve shows the quantity of goods abroad want to buy at each price level
Aggreage Supply Curve shows the quantity of goods that all firms produce in all markets
Consumers are wealthier and have a higher demand for the consumptions of goods.
Interest Rates Fall
Quantity of money changed.
Govermenet caused shifts
Sticky Wage Theory: wages are slow to adjust
Sticky price theory: prices adjust slowly