Intro to Economics Notes PDF

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Mainly notes from Chapters 3, 4, 7, 8. 9, 13. Important note is the Exam topics within as well as Essay questions and answers. Teacher: Prof. Nancy Boone...

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Intro to Economics

Chapter 3: Supply and Demand - Heart and soul of the market 

Law of Demand: inverse relationship between the price of a good and the quantity consumers are willing to purchase. o Really just common sense between two items that are being traded. o Availability of Subsites  Market Demand schedule: A chart of whatever people are buying at whatever price points businesses are selling said object. o When they are graphed, it is called a demand curve  The height of the curve reflects the consumer's valuation of the marginal unit  Consumer Surplus: Can be graphed below the demand curve but above the actual price paid. Aka the money you saved on a particular item you bought  Market Price: the sweet spot between the most people would pay and the least people would be willing to pay.  Elastic Demand: A change in price leads to a relatively large change in quantity demanded o Demand will be elastic when close substitutes for the good are readily available.  Inelastic Demand: A change in price leads to a relatively small change in quantity demanded. o Usually when few, if any, close substitutes are available.  Change in demand: will shift the curve outward  Change in Quantity demanded: will create movement along the same demand curve in response to the public Changes in the Demand::::  Consumer income  Numbers of consumers  Price of a related good  Expectations  Demographic changes  Changes in consumer tastes and preferences Productions::  Producers acquire resources and use them to make output.  They will incur costs as they bid resources away from their alternative uses. o Opportunity cost of production: The sum of the producer's costs of employing each resource required to produce the good.  Firms will not stay in business for long unless they are able to recover from the cost of the resources and still be able to move forward  Economic Costs: the cost of all resources used to produce the good.  Accounting cost: Every cost you could ever think of  Profit: when a firm's revenues exceed its costs. o Firms supplying goods for which consumers are willing to pay more than the opportunity cost of the resources required to produce the good will make a profit. o Firms making profits will expand, while those making losses will contract  In essence: Profits are rewards/Losses are a penalty  Law of Supply: Relationship between price of product and amount of it that will be bought.

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Elastic supply: sensitive to changes in price Inelastic supply: not sensitive to changes in price. When demand decreases: The equilibrium will rise.: When Demand increases: The equilibrium will fall.  Invisible Hand: The dependency of market prices to direct individuals pursuing their own self interests into productive activities that also promote the economic well-being of society. o This direction, provided by markets, is a key to economic progress. Exam material  Economic systems  Institutions  Capitalisms, communisms, socialism , facistism  Objective and subjective  Opportunity cost  Positive and normative economics  Ceteris parabis  Fallacy of  Micro and macro economics  Productions possibilities curve  Creative destruction  Division of labor  The law of comparative advantage and utility Essay questions:  The Christian concept of bearing one another's burdens and how it applies to economics  Show the difference between self-centeredness and self interest. Linkage between Resources and Product Markets  Markets for resources and products are closely linked.  If demand for the product are increased, it'll increase the demand for the resources  Households supply them to earn income  Price controls o A price ceiling establishes a max price that sellers are legally permitted to charge. o When a price ceiling keeps the price of a good below market equilibrium, there will be both direct and indirect effects.  Shortage: quantity demanded will exceed the quantity supplied. Waiting lines may develop.  Quality deterioration and changes in other non-price factors favorable to sellers & unfavorable to buyers. o The quantity exchanged will fall and the gains from trade will be less than if the good were allocated by markets.  Effects of Rent Control o Shortages and black markets will develop o The future supply of housing will decline o The quality of housing will deteriorate

Intro to Economics

Non-price methods of rationing will increase in importance Inefficient use of housing will result Long-term renters will benefit at the expense of newcomers.  Price Floor o A price floor establishes a minimum legal price for the good or service. (minimum wage) o When a price floor keeps the price of a good above the market equilibrium, it will lead to both direct and indirect effects.  (direct Effect) Surplus: sellers will want to supply a larger resource.  Black Markets and the importance of the Legal Structure o A market that operates outside the legal system o The primary sources of black markets are:  Evasion of a price control  Evasion of a tax  Legal prohibition on the production and exchange of a good o Black markets have a higher incidence of defective products, higher profit rates, and greater use of violence to resolve disputes.  Importance of the legal system  The Importance of Tax o Tax Incidence  The Legal assignment of who pays tax is called the statutory incidence.  The actual burden does not depend on who legally pays it.  Deadweight loss o The actual burden of a tax depends on the elasticity of supply relative to demand  As supply becomes more inelastic…  Average Tax Rate o The average tax rate equals tax liability divided by taxable income.  Progressive tax is the one in which the average tax rate rises with income  A proportional tx is one in which the average tax rate stays the same across income levels  A regressive tax rate means your taxes will fall as your income falls.  The marginal tax rate is calculated as the change in tax liability divided by the change in taxable income.  Tax rate and base o Tax Rate: defined as the % at which an activity is taxed o Tax Base: defined as the amount of the activity that is taxed o Tax revenues: defined as tax rate multiplied by tax base  Laffer Curve o Illustrates the relationship between tax rates and revenues. o If you're taxing people too high, people will manage to find a way around it. But if you lower the rate, people are more willing to spend more and pay the tax. The Impact of a Subsidy  A subsidy is a payment to either the buyer or seller of a good, usually on a per unit basis.  The supply and demand framework can be used to analyze the impact of a subsidy as it was used to analyze the impact of a tax. o o o

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As in the case of a tax, the division of the benefit from a subsidy is determined by the relative elasticities of demand & supply…

*When considering the aspect to carry someone's burden, this is a voluntary action based on one person's choice to help another rather than when there is a compulsory choice like taxes or welfare.* A Measure of Output  GDP: The market value of final goods and services produced within a country during a specific time period, usually a year.  GDP is the most widely used indicator of economic performance.  Different stages of production  What counts toward GDP? o Only transactions involving production count.  Financial transactions & income transfers are excluded because they do not reflect actual production. o Only a particular country, and only what is counted during that period  GDP is measured in dollars  GDP is a measure of both output and income. Thus, there are two ways it can be measured. o Can be derived by totaling the expenditures on final-user goods and services produced during the year. o Either add up all sales receipts or all expenditures counts.  Expenditure Approach: GDP is the sum of expenditures on final-user goods and services purchased by households, investors, gov, and foreigners.  Total expenditure approach o Net exports o Government purchases o Gross private investment o Personal consumption purchases  Resource Cost - Income Approach: o Employee compensation o Self-employment income o Rents o Interest o Corporate profits o Not all components of GDP results in an income payment to a resource supplier. TO get the GDP using this method, we need to account for 3 factors:  Indirect business taxes  Depreciation:  Net income of foreigners o When using this approach sum all those above up  When these numbers are totaled, there is a difference between real and nominal o Real: Adjusted for inflation  Price indexes are used to adjust income and output data for the effects of inflation; measures the cost of purchasing a market basket of goods at the point

Intro to Economics

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in time relative to the cost of purchasing the same market basket during an earlier reference period. Consumer price Index GDP inflator Inflation: Inc

Exam Material  Chapters 3 & 4 in Gwartney  Definitions o Law of demand (Chapter 3) o Law of supply o Compliments o Substitutes o Surplus o Producer surplus o Opportunity cost of production o Economic deficiency o Elastic & Inelastic o Invisible hand principle o Resource market (Chapter 4) o Price ceiling & Floor o Dead weight & loss o Laugher curve o Subsidy o Tax incidence o Progress & Regressive Tax Essay questions  What is the difference between the movement along the supply or demand curve? What factors will cause a shift in supply and demand? (ch 3)  Explain the effects of a mandated price ceiling and Floor? (ch 4) Notes: 10.10 Instability in the growth of real GDP  The Hypothetical Business Cycle o Expansion, peak, contraction, and recessionary trough are the four phases  Labor Market Classifications o Employed - a person (16+) who is  Working for pay at least one hour per week  Self employed or  Working 15+ hrs or more without pay in family-operated enterprise o Unemployed - a person not currently employed who is  Actively seeking a job  Waiting to begin a job  On layoff, waiting to return to a previous job.

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Three types of unemployment o Structural Unemployment  Reflects an imperfect match of employee skills to skill requirements of the available jobs. o Cyclical Unemployment  Reflects the business cycle The concept of full employment o Full employment: Level of employment resulting when the rate of unemployment is normal, considering both frictional and functional The Concept of the natural rate of Employment

Notes 10/24 What is Money?  A medium of exchange: Money is an asset used to buy and sell goods and services.  A store of value: Money is an asset that allows people to transfer purchasing power from one period to another.  A unit of account: Money is a unit of measurement used by people to post prices and keep track of revenues and costs Why Money is Valuable  The main thing that makes money valuable is the same thing that generates value for other commodities: o The demand (for money) relative to its supply.  People demand money because it reduces the cost of exchange  If the purchasing power of money is to remain stable over time its supply must be limited. How is it measured?  Two basic measurements of the money supply are M1 & M2 o M1: Currency, checking deposits, traveler's checks o M2: M1, savings, time deposits, and money market mutual funds  Credit Cards vs. Money o Money is an asset o The use of a credit card is intended to be used as a loan o Credit card balances are a liability o Thus credit card purchases are not money The business of banking  The banking industry includes: commercial banks, savings & loans, and Credit unions  Banks are profit-seeking institutions: Banks accept deposits and use part of them to extend loans and make investments. Income from these activities is their major source of revenue  Banks play a central role in the capital market(loanable funds market) The Federal Reserve System

Exam # 3

Intro to Economics

Ch 7, 8, 9, & 13 Definitions: Gross domestic product -The Market value of final goods and services produced within a country during a specific time period, usually a year. Consumer price index - Measures the impact of price changes on the cost of a typical bundle of goods & services purchased by households Real Value(GDP) - Adjusted for inflation Nominal Values - Amount of GDP Before inflation Unemployment rate - Tends to rise during recessions, and declines as the economy moves into expansionary phases of the business cycle. *Unemployed - without a job Civilian labor force - Civilians (16yrs+) who are either employed or unemployed Central bank - The Federal Reserve created in 1913, responsible for the creation of a stable monetary climate for the entire U.S. Economy Bank reserves - Fractional reserve system where the banks are required to maintain only a fraction of their assets as reserves against their customers' deposits (required reserves) Federal open market committee - Focuses on the Fed's Target for the fed funds rates; made up of the Board of Governors, 5 Federal reserve bank presidents (alternating terms, New York Bank always represented) *Open market operations - Buying and selling of U.S. government securities (and other assets) in the open market Discount rates(13): interest rate the fed reserve will charge a bank that is borrowing from the fed reserve Federal funds rates (13): What banks charge each other for borrowing money Liquids assets *M1& M2 money supply M1- currency, checking deposits, and traveler's checks M2 - M1, savings, time deposits, and money market mutual funds Fascial and monetary policy Aggregate demand curve - Indicates the various quantities of domestically produced goods & services purchasers are willing to buy at different price levels. Aggregate supply curve - Short run/Long run: A period of time where prices change to unexpected levels causing households to modify their behaviors in response to price changes. Essay Questions (3):  three types of unemployment and the differences between them o Unemployed - A person not currently employed who is… Actively seeking a job, Waiting to begin a job, On layoff, waiting to return to a previous job o Types:  Frictional Unemployment: caused by Imperfect information  Occurs because employers are not aware of all available workers and their qualifications,  And Available workers are not fully aware of all the jobs being offered by employers  Structural unemployment:

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Reflects an imperfect match of employee skills to skill requirements of the available jobs.  Also reflects structural and demographic characteristics of the labor market.  Cyclical Unemployment:  Reflects business cycle conditions  When there is a general downturn in business activity, cyclical unemployment increases. Four key markets and explain their interconnection; o They coordinate the circular flow of income o Goods and Services Market coordinates the demand for and supply of domestic production  Businesses supply goods & services in exchange for sales revenue.  Households, investors, governments, and foreigners (net exports) demand goods o Resource Market coordinates actions of businesses demanding resources and households supplying them in exchange for income  Highly aggregated market where…  Business firms demand resources and,  Households supply labor and other resources in exchange for income o Loanable Funds Market brings net household savings & net inflow of foreign capital into balance with borrowing of businesses and governments.  Coordinates actions of borrowers and lenders o Foreign Exchange Market brings the purchases (imports) from foreigners into balance with the sales (exports plus net inflow of capital) to them.  Coordinates the actions of Americans who…  Demand foreign currency (in order to buy things abroad), and  Foreigners that supply foreign currencies in exchange for dollars (so they can buy things from Americans.) Explain what is money and how it is used (chapter 13) o A Medium of Exchange: Money is an Asset  Money is an asset used to buy & sell goods & services. o A store of Value  Money is an asset that allows people to transfer purchasing power form one period to another. o A unit of account:  Money is a unit of measurement used by people to post prices and keep track of revenues and costs.

Final Exam Questions 1. How has God worked through the history of Economics?  Protection of Private Property (10 Commandments)  Plagues on Egypt: Divine Retribution

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Role of Government God created within his Priests and each of the tribe positions. Peaceful settlement in the land. 2. My thoughts about macroeconomics: Is it a legit science or naw?  Growth in GDP?  Broken-window fallacy: looks like the economy is growing but everything is simply being destroyed....