People want more than is available. Productive resources (human, natural, and capital) are limited. This leads to the problem called scarcity. Cost benefit is taken into account.
Opportunity Cost- make a choice between two different goods or services. The one thing we choose to give up is our opportunity cost.
Allocating scarce resources determines what is produced, in what way, and for whom it is for.
Production of goods or services, with more goods and services, there is a higher standard of living and a variety of choices.
Cost of something is what you sacrifice to attain it.
People respond to incentives
Efficiency- society getting the maximum benefits from its scarce resources.
Equality- distributing economic prosperity equally among all members of society.
Supply and Demand
Inflation- increase in the general level of prices for goods and services.
Market equilibrium- desires of buyers and sellers align.
Marginal cost- the change in total cost that comes about making one additional item.
Economies of Scale- cost advantage that comes about when the output of a product increases. Inverse relationship between quantity produced and per-unit fixed costs.
Types of Control:
- Pure competition– many sellers with similar products
- Monopolistic competition– many sellers compete with substitutable products within price range.
- Oligopoly– few companies control the majority of industry
- Pure monopoly– one firm sells product.
Fiscal vs. Monetary Policy
Consumer Price Index (CPI): A cost of living index. It measures total cost of goods or services bought by a consumer within a country.
—-> Fixed Basket: A group of goods and services that their quantities do not change over time. This is used for the Consumer Price Index (CPI) calculation.
Gross Domestic Product (GDP)- Total market value of goods and services produced within a country within a given time.
—–> GDP per capita: This is the total GDP divided in the population. This describes the average GDP of a typical individual.
Gross National Product (GNP): Sum of total market value of goods and services produced by the citizens of a certain country, without a specific location.
Base Year: The time (year) for which quantities or the prices are used calculations for the index are taken.
Cost of Living: Index based on the amount of money needed to buy the market basket of goods purchased by a typical consumer.
- Cyclical: Employment based on the business cycle.
- Frictional: The time from when a person lost a job and is actively looking for a job.
- Structural: Based on the mismatch between needs of employers and the workforce. Example: Milkman’s were needed to deliver milk before, now they are not needed as consumers can buy them at a store.
- Seasonal Unemployment: Certain jobs available during certain seasons.
Stagflation: When inflation and unemployment increase.
Underemployment: Having qualifications, but not enough for a certain job.
Purchasing Power: amount of goods and services that a unit of currency can purchase.
Standard of Living: Economic well-being an individual enjoys.
Assets: Cash, stocks, and bonds are great examples. Assets are physical goods that have wealth and value.
Balance Sheet: Accounting tool that compares assets and liabilities.
Deposit- Money put into an account.
Withdrawal: Money taken out of an account.
Federal Reserve: Federal group that controls the money through monetary and fiscal policy.
——->Federal Reserve Banks: Branches of this group that serve as banks not controlled by the government. They accept, make deposit, give withdraw, and make loans.
——->Reserve Requirement: Percentage of deposit that banks are required to keep in reserves and not given out as loans. Can be manipulated by the feds under monetary policy.
Interest: Money paid by a borrower to a lender for the money used for the loan. Example: $100,000 loan with 5% interest is paid back as $105,000.
——> The 5% is what is called the Interest Rate.
Lender: One who loans
Liabilities: Money owed to the lender.
Capital: Physical and intellectual property used to produce goods and services.
Open Market: A market for selling and buying goods and services in which many countries can compete in.
Physical Capital: Machinery used by labor to produce goods and services.
Disposable Income: Income that is available to spend after taxes.
Consumption: Money spent on goods and services by consumers.
Deficit: Money owed is greater than money collected. Surplus: Opposite of deficit.
Law of Diminishing Returns: Concept that as labor increases, the amount of revenue from that labor decreases.
Marginal Product: Additional amount of goods generated by using one more unit of work.
Market-Clearing Price: Price of a good or service at which quantity supplied is equal to that demanded. Also known as the equilibrium price.
Optimization: Maximum utility by using resources effectively. These resources can be money, goods, etc.
Price Ceiling: Maximum price set by government on a specific good. Usually set below market price, thus it becomes a shortage.
Price Floor: Minimum price set by government on a specific good. Usually set above market price, thus it becomes a surplus.
Substitution Effect: Increase prices of one good causes a buyer to buy more of another good because the original good has become too expensive.
Utility: Measure for levels of happiness.