economics ..., the study of how society manages its scarce resources scarcity ...

not enough to go around resources ...simple things that satisfy human wants, used to make other things ceteris paribus ..., all other things held constant trade-offs ..., all the alternatives that we give up whenever we choose one course of action over another macroeconomics ...the study of aggregate economic variables. And the national and global economy microeconomics ...study of decisions individual businesses make marginal ...additional command economy ...central authority makes decisions on production and consumption. (Soviet Union) positive economics ..., An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. normative economics ..., the part of economics involving value judgments about what the economy should be like; focused on which

economic goals and policies should be implemented; policy economics land ...production resources from nature. (water trees) pay rent. labor ...human resources. (physical effort, knowledge and skills). Pay wages, salary. capital ...produced tools of the trade. (buildings, machines, tools). pay interest. entrepreneurship ...the intelligence, imagination and ability to take risks needed to start up and maintain a business (Bill Gates). profit. market economy producers and consumers decide what is made, how much, and for whom. full employment ...all resources are being used efficiently full production ..., our nations resources are being allocated in the most efficient manner possible consumer vs. capital goods ...consumer goods are: shoes food, clothes. capital goods are man-made tools of production: a fishing boat, a machine. production possibilities curve ... illustrates trade-offs and the optimum efficiency

opportunity cost ...what must be given up to get what you want economic growth ...expansion of the production possibilities frontier. economic system ...how the questions "what to produce?", "how to produce it?" and "For whom is it produced?" traditional economy ..economic decisions made based on what has always been done. traditions. circular flow model ...represents transactions in an economy demand (curve) graphed demand schedule demand schedule ...how much consumers will be willing and able to buy at all different price levels Quantity demanded ...actual amount consumers are willing and able to buy at a specific price law of demand ...at a higher price, less is demanded. factors of demand TRIBE Tastes Related goods (price) Income # of Buyers price Expectations

normal goods a rise in income increases the demand for inferior goods a rise in income decreases the demand for substitute goods a similar cheaper product will be substituted for more expensive goods change in demand (curve) entire curve can be shifted by factors of demand. (TRIBE) complementary goods a pair of goods that when one price decreases, ppl are more likely to buy the other. EX: free parking next to a stadium increases ticket sales supply (curve) ...graphed supply schedule supply schedule ...how much of a good or service Producers are willing and able to supply at every price law of supply ...higher price = higher Quantity supplied. Quantity supplied ...how much producers are w&A to produce at one price level Factors of supply ...ROTTEN Resources: cost and availability Other goods' prices Taxes, subsidies, gov regulations Technology (productivity)

Expectations of the producer Number of firms in the industry Change in supply curve ...left is less. right is more equilibrium ...intersection of economic lines. (supply and demand). quantity supplied = quantity demanded @ a certain price. market clearing price ...causes economy to move toward equilibrium price. Qs=Qd ...equilibrium Surplus ...quantity supplied is greater than quantity demanded. Shortage ...quantity demanded is greater than quantity supplied price ceiling ...gov set price below equilibrium *legal price maximum price floor ...gov sets price above equilibrium *legal price minimum Gross domestic product (GDP) ...total dollar value of all FINAL goods and services in one year. C+I+G+ Xn= GDP Intermediate goods ...bought from firm to firm that are inputs in producing final goods and services

final goods ...goods and services sold in the end to the consumer expenditures approach GDP measures\d with this approach C+I+G+Xn =GDP gross private domestic investment ...market value of built, but NOT sold goods. government purchases ...government expenditures on goods and services net exports ...exports-imports indirect business taxes ...taxes hidden in the purchase price (like gas) consumption of fixed capital ...depreciation depreciation ...consumption of fixed capital net domestic product ...subtract depreciation (consumption of fixed capital) from GDP. keeps economy's output from being overstated. personal income ...income directly and indirectly earned by household. spendable income includes:welfare and unemployment benefits disposable income

...actual amount to spend consumption+savings nominal GDP ...GDP not adjust for inflation. shows final value of Goods and Services. price index a number that compares prices in one year with some earlier base year CPI ......measures changes in prices of goods in a specific market basket that consumers purchase. per capita ...per person business cycle ...the highs and lows of a the economy as people buy and sell goods and services productivity real output/ input peak ...high point in economy. during growth contraction ...recession trough ...lowest point during economic contraction recovery ...economy expands moving from a trough to a peak

economic growth an increase in RGDP rule of 70 ...70 / annual % rate of growth in economy = how long it will take for economy to double labor force ...people over 16 who: -are employed or actively seeking employment unemployment rate # of employed / # in work force discouraged workers unemployed people who have given up looking for a job frictional unemployment ...voluntary unemployment. short term as workers move from one job to another. as they look for a better opportunity structural unemployment involuntary unemployment. change in the structure of an economy. Workers skill do not equal employers needs. cyclical unemployment involuntary employment. caused by decrease in total spending in the economy. Businesses do not need as many workers to meet the demand. natural rate of unemployment ...3-5% unemployment. there is always structural and frictional unemployment GDP gap forfeited output due to failure to create sufficient jobs

Okun's Law ..., 1 percent more unemployment results in 2 percent less output Inflation ...increase in price level over time Demand pull inflation ...prices increase b/c consumer demand increase Cost push inflation ...prices increase b/c the cost of making a product increases nominal vs. real income ...nominal is not adjust for inflation. real is adjust for inflation cost of living adjustments ...extra money from the government or an employer to offset the impact of inflation. based on CPI or PPI saving schedule ..., indicates the amounts households plan to save at different income levels, given a price level MPC, MPS ...marginal propensity to consumer, marginal propensity to save. Investment demand curve ..., a curve that shows the amounts of investment demanded by an economy at a series of real interest rates planned investment the amount that firms plan or intend to invest aggregate expenditures

The total amount of spending on final goods and services in the economy; consumption ( spend-ing by consumers), investment ( (spend-ingbyconsumers),investment( spending by business), spending by government, and net foreign spending on U. S. goods ( the difference between U. S. exports and U. S. imports). equilibrium GDP the GDP at which the total quantity of final goods and services purchased is equal to the total quantity of final goods and services produced Unplanned investment Occurs when actual sales are more or less that businesses expected, leading to unplanned changes in inventories. expenditure multiplier (1/(1-MPC)) ...change in expenditure X multiplier = change in GDP tax multiplier (-MPC/MPS) ...Change in taxes X mulitplier = Change in GDP C+I+G AD Equation C+I+G+Xnet aggregate demand balanced budget multiplier (always=1) ... MPC + MPS recessionary gap ...operating below full employment . Unemployment > 5% inflation gap ...above equilibrium. inflation is probably >5% lump sum tax

A tax that is the same amount for every person. aggregate demand ...total amount of goods and services consumers are willing and able to consumer. C+I+G+Xn real balances effect when a price increases, your buying power is decreased, causing you to buy less interest rate effect as price level decreases consumers demand for money increases. ~interest rates (the price of money) increase ~increased interest rates cause investment components of aggregate demand to decrease foreign purchases effect ..., increase in the price level ( relative to foreign price level) will reduce US exports bc US products are now more expensive for foreigners and expand US imports bc foreign products are less expensive for Us consumers. as a consequence, net exports will decrease which means there will be a decrease in the quantity of good and services demanded in the US economy as the price level rises. a decrease in the price level will have opposite effect aggregate supply ...short run and long run. ASSR price changes with demand. can cause inflation. ASLR does not change with different price levels. menu costs the cost to firms of changing prices fiscal policy the government uses taxes and spending policies to battle economic problems. budget deficit

when the government spends more more money than it collects annually in taxes. contractionary fiscal policy policy by the government to combat inflation. EX: increased personal income taxes and decreased government spending. budget surplus when the government is receiving more money in taxes annually than it is spending. built-in stabilizers ...a change to the economy that occurs naturally and is not caused by government intervention. progressive taxes ..., A tax rate that increases as the amount of ones income increases proportional taxes ..., taxes that require all income groups to pay the same percentage of their income in taxes regressive taxes an income tax whose rates decrease as income level rises full employment budget ... What the federal budget would be if the economy were producing at a full-employment level of output. crowding out effect The government is demanding more from the loanable funds market. This increases interest rates which makes it more difficult for businesses and consumer to borrow from the loanable funds market. supply-side economics ...economic belief that any problem in the economy can be solved by lessening business taxes and regulation.

time lags periods between the time fiscal policy is enacted and the time it becomes effective council of economic advisors ..., established by Employment Act of 1946- advise the President on economic policy- 3 members, appointed by President and approved by Senate, employment act of 1946 ..., Enacted by Truman, it committed the federal government to ensuring economic growth and established the Council of Economic Advisors to confer with the president and formulate policies for maintaining employment, production, and purchasing power money the physical medium of exchange. must be portable, durable, scarce, and uniform medium of exchange ...money unit of account ...standard of value. (ex. a $200 car vs a $20,000 car) store of value (wealth) stabilizes value of money. this allows for savings accounts. M1 smallest most liquid form of money includes: checkable/demand deposits, travelers checks, coins and currency NOT vault cash. token money ..., Bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or

metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value. commodity money ..., objects that have value in themselves and are also used as money Fiat money money backed by federal government. Checkable deposits ..., are also known as demand deposits. These are checking accounts time deposits if longterm deposit is worth more than initial investment total demand for money ..., the sum of the transactions demand for money and the asset demand for money. transactions demand ..., demand for money as a medium of exchange to make payments. The level varies directly with nominal GDP asset demand the demand for money as a store of value instead of other assets such as certificates of deposit, corporate bonds or stocks federal reserve system the central bank of the U.S.. Uses monetary policy to stabalize the economy. Act as the banker bank Board of Governors (BOG) 7 governors who are nominated by the president and confirmed by the senate. they serve 14 year terms. They make decisions for the Fed.

Federal Reserve Banks the 12 banks chartered by the U.S. government to control the money supply and perform other functions. Fractional reserve system system requiring financial institutions to set aside a fraction of their deposits in the form of reserves actual reserves Required Reserves plus Excess Reserves. Federal funds rate the interest rate at which banks loan money to other banks money multiplier shows how much a new deposit in the bank can impact the money supply (1/ reserve requirement)