1st Half Flashcards
Chapters 1, 9-12
Four Core Principles of Economics
- Cost-Benefit Principle: incentives that shape decisions.
- Opportunity Cost Principle: true cost of something which includes next best alternative.
- Marginal Principle: decisions about quantities best made incrementally.
- Interdependence Principle
Willingness to Pay
convert nonfinancial (c&b) to money. How much you want to buy something given a price. (How much it will benefit you, how much you like it.)
Economic Surplus
total benefits minus total cost. Measures how much a decision improved your well-being.
A high-trust society can lead to easier transactions and developments. Mutually beneficial transactions with honesty.
Scarcity
limited money, time, attention and willpower, production resources.
○ Calculating Opportunity Cost: it’s not just about what you pay, but what you give up.
Sunk Cost
cost that cannot be reversed. Whatever choice you make exists regardless, therefore not an opportunity cost. Good decision makers ignore this.
Production Possibilities Frontier (PPF)
shows different sets of output that are attainable with scarce resources. Illustrates trade-offs.
If you are on the line, you are efficient. If you are inside, you most likely wasted your time (not all hours used). Outside of it may be unattainable (in the study case).
Interdependence Principle
Your Choice Depends On:
1. Your other choices
2. Choices of others
3. Developments in other markets
4. Expectation about the future
When any of these factors change, your best choice may change. You are part of a larger network.
The Circular Flow
Each flow of real resources is matched by an equal and opposite flow of money.
It shows:
1. Market value of total output must be equal to total spending.
2. Total spending must equal total income. Total output, total spending, and total income are ALL EQUAL.
Gross Domestic Product (GDP)
the market value of all final goods (consumed by end user) and services produced within a country (Canada) in a given year.
GDP - “The Market Value”
value each product in the market (market price).
GDP - “Of All”
includes all goods and services you purchase, including what government purchases for you. (Vaccines, public education, road/bridge construction, etc.)
○ Does NOT include economic activity outside of markets (if you wash your own car yourself).
GDP - “Final Goods and Services”
counting only the final goods and services(new car your buy), not including intermediate goods(parts and labour). Used cars are just a transfer of asset so it doesn’t count.
- “Produced” - omitting resale of already purchased goods.
GDP - “Produced”
omitting resale of already purchased goods.
GDP - “Within a Country”
include all goods produced within Canada.
GDP - “In a Given Year”
add up the flow of output over a year.
First Perspective of GDP
- Total Spending
○ Measure GDP by adding up every dollar of spending.
Who’s doing the spending, what they are buying.
Y (GDP) = C(Consumption) + I(Investment) + G(Government Purchases) + NX (Exports-Imports)
Second Perspective of GDP
- Total Output
○ Measure GDP by adding up every dollar’s worth of output produced.
○ What’s being made and by whom?
Value Added: the amount of which the value of an item is increased at each stage of production.
Total Sales - Cost of Intermediate Inputs
Third Perspective of GDP
- Total Income
○ Measure GDP by adding up every dollar of income earned.
○ Where income is going, who’s enjoying the fruits of economic activity?
Total Income = sum of total wages and total profits.
Nominal GDP
measures TODAY’s prices.
○ It is useful for analyzing what GDP is right now, based on the prices you face today. But not useful for GDP over time.
Example: even if apples sell the same quantity in the market nominal GDP only takes account the current price and not the previous years’.
Real GDP
measured in constant prices. Excludes effects of price changes. It is called this because it measures the REAL change in production and focuses on changes in the quantity produced.
○ It is useful for the comparisons of GDP over time.
○ Nominal is P*Q
○ Real GDP is the average price (Pt + Pt-1 / 2) * Q
Scaling Big Numbers to Make Them More Understandable
- Evaluate what is means per person.
- Compare big numbers to the size of the (total) economy.
- Compare big numbers to their own history.
- Use the rule of 70 to evaluate long-run growth rates. (years it takes to double something = 70/annual growth rate)
Compound Annual Growth Rate (CAGR)
Annualized return on an investment over time, requires only three primary inputs: investment’s beginning value, ending value, time period.
CAGR = (ending value/beginning value)^(1/number of years) - 1
Simple Average
The mean of the growth rates.
Production Function
the methods by which inputs are transformed to outputs. It determines total production that’s possible with a given set of ingredients.
