FINAL Flashcards
economics
study of human behavior that emphases rational decision making
scarcity
implies choice
opportunity costs and trade offs mean nothing is free
you must give something up when you make a choice
ex: going to class vs sleeping in
rational self interest
rational means people tend to choose the correct means to achieve their goals
rational decision
makes respond to incentives and make decisions at the margin
ex: everytime you come to class, get $20 vs the class smelling bad you wouldn’t come
ceteris paribus
other things the same or other things held constant
resources are used to
produce goods and service
ex: machines, skills NOT money
postive econ
what is
normative econ
ought or should be
production possibilities frontier
a graph that shows all the different combinations of output of two goods that can be produced using available resources and technology
key to mass production is
specialization
supply curve
a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given period
demand curve
a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time
quantity demanded
the total amount of a good or service that consumers demand over a given interval of time
normal goods
a good that experiences an increase in its demand due to a rise in consumers’ income
inferior goods
one whose demand drops when people’s incomes rise
Change in demand versus change in quantity demanded
A change in quantity demanded refers to a movement along a fixed demand curve – that’s caused by a change in price. A change in demand refers to a shift in the demand curve – that’s caused by one of the shifters: income, preferences, changes in the price of related goods and so on.
Change in supply versus change in quantity supplied
A change in quantity supplied is a movement along the supply curve in response to a change in price. A change in supply is a shift of the entire supply curve in response to something besides price
things that can shift demand
- normal goods
- inferior goods
- changes in prices of substitutes and compliments
- Weather, climate, population, taxes, regulation, subsidies
normal good
- a good that experiences an increase in its demand due to a rise in consumers’ income.
- Normal goods have a positive correlation between income and demand.
- Examples of normal goods include food staples, clothing, and household appliances.
inferior goods
- one whose demand drops when people’s incomes rise
- When incomes are low or the economy contracts, inferior goods become a more affordable substitute for a more expensive good.
substitutes
- This means if the price of one product increases, the demand for the other increases.
- For example, coffee can be said to be a substitute for tea, and solar energy is a substitute for electricity. If the price of coffee goes up, the demand for tea goes up, too, and vice versa.
compliments
- a product or service that adds value to another
- they are two goods that the consumer uses together
- For example, cereal and milk, or a DVD and a DVD player.
equilibrium
Economic equilibrium is a condition or state in which economic forces are balanced.
consumer surplus
Difference between what consumers are willing to pay and what they actually pay
producer surplus
The difference between the price producers get for selling the good and the marginal cost of producing it (or it is the difference between the price and the minimum amount a firm would have to be paid to produce a unit of the good)
total surplus
Consumer surplus + producer surplus
subsidy
- Payment made by the government that does not necessarily require an exchange of economic activity in return
- Take the form of payments to businesses
marginal benefit
Additional benefit with 1 or more
marginal cost
Additional cost with 1 or more
MB = MC at…
equilibrium
labor markets
Differences in supply and demand lead to differences in wages
efficiency
an economic state in which every resource is optimally allocated to serve each individual or entity in the best way while minimizing waste and inefficiency
price controls
restrictions imposed by governments to ensure that goods and services remain affordable
price ceilings
- prevent a price from rising above a certain level
- When a price ceiling is set below the equilibrium price, quantity demanded will exceed quantity supplied, and excess demand or shortages will result.
- ex: rent control
price floors
- a minimum legal price
- ex: minimum wage
shortage
when the quantity demanded exceeds the quantity supplied
surplus
the gain consumers and producers receive in a particular transaction and is a measure of market wellbeing
deadweight loos
Lost consumer and producer surplus
To Summarize
1. Price controls overrule the market price, unless nonbinding
2. Binding price ceilings create shortages
3. Binding price floors create surpluses
4. Price controls are generally inefficient, eliminating them means more value-increasing trades take place
elasticity
- A measure of how responsive one variable is to a change in another variable; calculated as the percentage change in quantity divided by the percentage change in price
- E = %Q/%P
- kind of like the slope
elasticity of demand
- Goods with many substitutes will have elastic demand
- Goods with few substitutes will have inelastic demand
- If price goes up but quantity doesn’t change much, demand is inelastic. If quantity changes a lot, demand is elastic.
elasticity of supply
- Goods for which it is easy for producers to greatly increase or decrease production will have elastic supply.
- If the price goes up but quantity supplied doesn’t change much, supply is inelastic. If quantity changes a lot, supply is elastic.
market failure
When individuals pursuit of rational self-interest leads to a collectively, inefficient and irrational outcome
monopoly
When there are very few firms, price is too high and quantity is too low
nonrivalvous public good
Consumption does not reduce how much others could consume
nonexcludeable public good
People who do not pay for the good cannot be excluded from consuming it
externalities
A buyer and seller are happy with a transaction, but costs or benefits are imposed on a third party
negative externalities
- An External costs are imposed on a 3rd party
- “People do too much of a harmful thing”
- Examples: Pollution, congestion, not taking care of home
positive externalities
- An external benefit is imposed on a 3rd party
- Ex: “people do too little of a beneficial thing”
- Examples: taking good care of my house, education
- Solutions: taxes and subsidies, cup and trade, command and control
tragedy of the commons
- When a resource is unowned or owned in common, it is often overused or abused
- Ex: fishing, common pasture
- Solutions: individual tradeable quotas
tragedy of the anticommons
- There are too many people who can veto the use of a resource
- Ex: patent thickets, russian shopping malls
information problems
- When one or both parties to a transaction lack important information
- Ex: used car sales, education signing (4 years of busy)
public choice
Governments are made up of rationally self-interested people who respond to the incentives created by laws and norms
public interest
Democratic governments aggregate votery inferences and create effective, beneficial policy (we the people)
voters
they vote for politicians offering their preferred policy bundles
rational ignorance
Becoming informed has high costs and low benefits
rational abstention
Voting has high costs and low benefits
rational bias
People may hold erroneous beliefs and have no incentive to correct them
politicians
- Like entrepreneurs they try to find the bundles of policies that voters like
- What do they want: to be elected
- What must they maximize to get: votes
bureaucrats
Like managers of firms, they carry out the policies created by politicians
mixons law
There are 2 reasons a government agency will request more funds
1. They are doing a good job
2. They are doing a bad job
special interest effect
When a concentrated special interest group goes against a dispersed group, the special interest group tends to win
- example: Tax preparers vs. people who want simpler taxes; Sugar producers and corn farmers vs consumers; farmers vs taxpayers
Shortsightedness
politicians tend not to look beyond the next election
rent seeking
- The pursuit of a benefit or income that cannot be competed away
- A game: bidding on a $20 bill (no equilibrium)
- An important example: crony capitalism
stocks
entities that can accumulate or be depleted, such as a bathtub, which fills with water from a faucet
flows
are entities that make stocks increase or decrease, like a faucet or drain affects the level of water in a bathtub
GDP: Gross Domestic Product
the market value of all final goods and services produced within a country (or other geographic area) within a year (or other time period)
final vs intermediate good
- Final Goods: Goods that have reached the final consumer, NOT to be confused with intermediate goods, which are sold with the intent to be sold again as part of a new product.
example of final vs intermediate good
Ex: The hamburger you bought at Burger King is for you, the final consumer. You don’t intend to resell that burger (unless you do, weirdo). The buns Burger King bought to make that hamburger are intermediate goods, as BK intended to use them to make the burger you would buy.
expenditure approach
- Y=C+I+G+NX
- GDP formula: Y(GDP) = C(consumption) + I(investment) + G(government spending) + NX(net exports, or exports - imports).
income approach
Income (wages, rent, interest) + indirect business taxes + depreciation + net income of foreigners
per capita GDP
- GDP per capita = GDP/population.
- In other words, “How much stuff is there per person?”
- GDP per capita can be used as a rough estimate of a place’s standard of living.
nonmarket production
Production that doesn’t involve a monetary transaction counted
black and grey market production
Housework isn’t counted, Black (illegal) and Gray (not taxed or accounted for) Market isn’t counted. This makes poor countries look worse off than they are.
leisure and job quality
GDP doesn’t account for more leisure or improvements in work comfort
product quality and new goods
- GDP doesn’t account for improvements in products quality
- Ex: 1980s computer = $3,000 vs 2000s Iphone = $1,000 (different qualities
economic “bads”
Bad things, such as hurricane damage, are not counted. In fact, GDP may go up after a hurricane because of all the production to make up for the damage, which is misleading.
income inequality and poverty
GDP per capita doesn’t show how the money is divided (the rich have way more of it than the poor).
So why use GDP at all?
We need to compare the relative wealth of nations, and GDP is the best we’ve got at the moment. Lmk if you think of something better so we can get you your Nobel prize.
deflation
A decrease in the price level
disinflation
A decrease in the inflation rate
Nominal GDP
GDP as measured by today’s numbers
Real GDP
GDP measured using prices from a base year, so we can see how much the economy has grown when adjusting for inflation
GDP Deflator
GDP deflator = (nominal GDP/real GDP) * 100
Ex: If nominal GDP is 10, and real GDP is 12, then the GDP deflator is (10/12)*100, or 83.33
GDP deflator > 100 means that prices are rising.
GDP deflator < 100 means that prices are falling.
percent change formula
(New - Old)/Old … * 100 if you want it in percentage form
CPI overstates inflation because of
- Improvements in product quality
- It doesn’t account for changes in consumption due to prices.
recession
GDP falls
Unemployment rises
Inflation falls
growth in business cycle
GDP grows
Unemployment falls
Inflation rises
Labor Force Participation Rate
- Labor force/noninstitutionalized civilian adult population
- AKA the amount of people working or are looking a job/the amount of people age 16+ who could be working
- Keep in mind the labor force includes people looking for a job.
unemployment rate
- Unemployed/labor force
- AKA unemployed/employed + unemployed
- In order to qualify as unemployed, you must have actively searched for a job within the past month.
discourage workers
have stopped looking for jobs (this makes unemployment look lower than it really is)
underemployment
someone who worked 2 hours in a week is still counted as employed.
frictional unemployment
Search unemployment, takes time to find a job
structural unemployment
workers who have become unemployed due to the structure of the economy changing such that their skills are no longer in demand (this may soon happen to truck drivers if self-driving vehicles are released into the market).
seasonal unemployment
Predictable annual patterns in unemployment
cyclical unemployment
- Unemployment caused by the business cycle
- Ex: recession ends
natural rate of unemployment =
- frictional + structural
- When cyclical unemployment is zero
Full Employment
The amount of employment when unemployment is at the natural rate
potential GDP
The level of GDP when unemployment is at the natural rate
menu costs
The cost of updated price lists
shoeleather costs
High inflation means higher interest rates and that means more frequent and costly trips to the band
unexpected inflation
- Causes people to use resources to shield themselves from inflation
- Sticky and flexible prices
- Production tends to shift away from goods with sticky prices
- The costs of unexpected inflation are worse under very high inflation, because higher inflation tends to be more variable for reasons we do not understand.
loanable funds market
- Functions like a normal supply and demand graph, with interest rates on the Y axis instead of price.
- Nominal vs Real interest rates are affected by the inflation premium (expected inflation) because loaners must add inflation to their loan price if they want to make a profit.
fisher’s equation
l = r + pi
i = nominal interest rate
r = real interest rate
Pi = expected inflation/inflation premium
appreciation
The dollar buys more foreign currency
depreciation
The dollar buys less foreigh currency
dollars that leave the country…
come back
Exports – Imports =
Capital Outflow – Capital Inflow
trade deficit
means that imports are greater than exports, AKA net exports are negative
trade surplus
means that exports are greater than imports, AKA net exports are positive.
medium of exchange
removes the inconvenience of bartering over goods
unit of account
helps us measure value
store of value
- more easily kept than goats or gold
- Know that fiat money is given value by the government, whereas commodity money is tied to some good (like the gold standard)
liquidity
M0: currency in circulation (dollars going around the economy)
M1: M0 + demand deposits and travelers checks
M2: M1 + savings accounts and investments
M3: M2 + large time deposits
fiat
has value “by order of the state”
commodity money
Is tied to the value of some physical good or resource
monetary base
Currency in circulation + currency in bank vaults + reserves held on deposit at the FEDERAL reserve
federal reserve
The US central bank that attempts to control money supply and inflation
money multiplier
- The money multiplier is equal to 1 divided by the reserve ratio, or M = 1/rr.
- If $100 is given to a bank, with a reserve ratio of 10% (meaning 90% will be loaned out, adding to the money supply), then M = 1/0.10, so M = 10. Just multiply the original amount, $100, by 10 to find out how much that initial deposit will add to the money supply (spoiler alert: it’s $1,000).
reserve requirement
The Fed can require banks to hold a minimum fraction of deposits in reserve. Increasing the reserve requirement decreases money supply, as banks will not be able to lend out as much as before.
discount rate
The interest rate the Fed charges on its loans to banks. By increasing the discount rate, the Fed can lower money supply as banks become less incentivized to borrow and can therefore make less loans (it also works in reverse if the Fed decreases the discount rate).
open market operations
Congress borrows money to spend by selling treasury bonds. The Fed can buy these bonds from banks, giving them liquid cash to loan out and increasing the money supply. To decrease the money supply, the Fed can sell bonds so that banks have less cash available for other loans.
interest on reserves
After the 2008 recession, Congress gave the Fed the ability to pay interest to banks on the money they keep in reserves, providing an incentive for banks not to loan out all their cash. By decreasing interest paid to banks for reserves, the Fed increases the money supply because banks have less incentive not to loan out cash. By increasing interest paid on reserves, the Fed decreases the money supply because banks will have more incentive to keep money in reserve instead of loaning it out. (Note: interest on reserves is basically the exact opposite of the discount rate if you think about it).
version 1: equation of exchange
MV = PY
M = money supply
V = velocity of money (how many times is the same dollar used to make a purchase)
P = price level (measurable through CPI or GDP Deflator)
Y = Real GDP (you may have noticed that the choice of variable makes absolutely no sense. I remember it by thinking “Y, God, Y did you use variable Y to represent real GDP? It doesn’t even have a Y”).
version 2: equation of exchange
% change M + % change V = % change P + % change Y
economic growth
- an increase in GDP, but what we really care about is Real Per Capita GDP
- Happens because of increases in productivity
rule of 70
- If something is growing at a rate of X%, then it will double in 70/X years.
- Ex: with an annual growth rate of 2%, the size of the economy will double in just 30 years (which is why our kids and grandkids will think we all grew up poor).
natural resources
- Helpful but neither necessary nor sufficient for growth
- Having one really valuable resource can be harmful for growth
physical and human capital
- Are subject to diminishing returns
- ex: If everyone gets a PhD – not special
Secure and well-defined private property rights
People need to be able to own things and benefit from their profitable effective use
rule of law
Everyone faces the same predictable laws and consequences for violating them
Competitive markets
Competition disciplines firms and discourages them from wasting resources
Stable money/inflation
Low, stable, predictable inflation encourages growth
Low trade barriers
Trade allows us to avoid wasting resources producing things in which we do not have comparative advantage
stocks
- Ownership shares in companies
- Sell stocks to increase money for business
- Allow stockholders to vote on company decision
Bonds
bonds
- are debt
- If a business or government goes into bankruptcy, bond holders are supposed to be paid first
bonds
- are debt
- If a business or government goes into bankruptcy, bond holders are supposed to be paid first
diversification
- Buying stock in 1 publicly traded company is very risky
- Invest a little but in different sticks
