chapter 1 from class PP: preliminaries Flashcards
economics
the study how a society manages its scarce resources
Macroeconomics
Branch of economics that deals with aggregate economic variables
level and growth rate of national output
interest rates
unemployment
inflation
microeconomics
Branch of economics that deals with the behavior of individual economic unit
consumers, firms, workers, and investors
the markets that these units comprise
explain the societies scare resources?
unlimited wants but limited ressources
whats trade off
basically housing your time and what to do with it
choosing one thing before another
who face tradeoffs
everyone
Consumers, workers, sellers, etc
market economy
all resources are owned by people
how is a market economy good for progress?
The business owners have a lot of decisions to do that are well suited to improve their profits, to ensure customer satisfaction, etc
Regular worker will work harder In hopes of getting that promotion or raise
planned economy
all resources are owned by the government
why is a planned economy bad for progress?
Managers do not really care whether product is sold, all they care is about a certain production of goods
Regular workers wouldn’t want to work to hard, he will still be paid same amount
who sets prices in a market economy? how?
Consumers and producers negotiate which sets the price
who sets prices in a planned economy? what does this do?
Prices and quantity are set by the government
There will be a lot over expensive crappy products
Creates black markets and corruption
why are markets usually efficient?
encourage specialization
optimally allocate resources and goods using a price mechanism
Producers and consumers
what is the goal of economic theories?
developed from a set of assumptions
explained observed phenomena
predict future phenomenons
what is an economic model?
mathematical representation, based on economic theory, of a firm, a market, or some other entity
Simplified version of reality
what let us measure the accuracy of our predictions?
Statistics and econometrics
normative analysis
subjective and value judgement
ex:
I should be earning as much as Jane
We must pull our economy out of recession
positive analysis
objective statement based on facts
ex:
Jane earns more than me.
The economy is booming now
what is a market?
a group of buyers and sellers that, through their actual or potential interactions, determines the price of a particular product
people choose to be there
is the labor market a market?
yeee
are taxes a market? why?
naaaah
people don’t choose to pay taxes
narrow market
a market with like way more direct competitors selling very similar products
ex: market for blue jeans
wide market
competitors that could sell products similar or that could replace yours
ex: market for pants
arbitrage
practice of buying at a low price at one location and selling at a higher price in another
A way of making quick and almost riskless profit
what are the downsides of arbitrage?
market is not competitive
perfectly competitive market
There are many buyers and many sellers;
products are identical or very similar;
Each buyer/seller is a “price taker” (no one can affect the market price).
They are too small or insignificant to affect the market
can markets with many producers not be competitive? how?
yeeee
individual firms can jointly affect the price
can can markets with a small amount of producers be competitive? how?
yeeee
for purpose of analysis
whats the extent of a market?
boundaries of a market, both geographical and in terms of range of products produced and sold within it
why must the extent of a market important to consider?
For some goods, it makes sense to talk about a market only in terms of very restrictive geographic boundaries
We must also think carefully about the range of products to include in a market
why is market definition important?
A company must understand who its actual and potential competitors are for the various products that it sells or might sell in the future
Market definition can be important for public policy decisions
Is Uber in a taxi market?
Is Netflix in a cable TV market?
What market is Samsung in?
nominal price
absolute price of a good, unadjusted for inflation
real price
price of a good relative to an aggregate measure of prices
price adjusted for inflation
Consumer Price Index (CPI)
measure of the aggregate price level
“average” of consumer prices
Producer Price Index (PPI)
measure of the aggregate price level for intermediate products and wholesale goods
how can you compare prices in different years?
- Convert New price to Old dollars
- Convert old price to new dollars
- You can simply compare the rate of change of the price in their original year’s $
- Converting New price to Old dollars
Old Real Price = Old CPI / New CPI) X New nominal Price
- Converting old price to new dollars
Real new price = (new CPI / old CPI) X Old Nominal price
- comparing the rate of change of the price in their original year’s $
rate of change in price =
(New Nominal Price - Old Nominal price) / (Old Nominal price) X 100
rate of change in CPI (inflation) = (New CPI - Old CPI) / Old CPI X 100
