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50 Cards in this Set
- Front
- Back
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Economics
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the study of choice due to limited resources (scarcity)
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Opportunity Cost
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The value of the option given in favor of another (the next best alternative)
• What you give up –what you get = opportunity cost |
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Cost-Benefit Analysis
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Analysis of the potential benefits of an action vs. the potential costs
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Basic factors of production
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1) Natural resources
-land, water, oil, timber, etc. -Hawaii: underground aquifers, salt water, sun, geothermal on Big Island 2) Capital -machinery, technology, money, etc. 3) Labor -human resources -# of people! 4) Entrepreneurship -organization of the above three |
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Economic systems:
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Political/government policies for making those decisions
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3 basic economic questions:
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• What goods and services shall be produced?
• How shall they be produced? -In factories • For whom shall they be produced? -People in country? To be exported or used internally? |
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Traditional economies
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• Non-industrialized nations (usually in Africa and Asia)
• Subsistence economies (No national markets—lacking communication, transportation, infrastructure) |
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Command economies
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• Planned economies; decisions made by a central government (level of production, prices, employment, wages, etc.) e.g. Soviet Union, North Korea, Cuba
• Little or no private property |
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Market economies
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• Individuals and markets (buyers and sellers) determine economic choices (what, for whom, etc.); e.g. G-8: France, Germany, Italy, Japan, the United Kingdom, and the United States, Canada, Russia
• Private property • Privately owned means of production • "Free enterprise" |
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Mixed economies
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Most economies are a mixture of planned and mixed economies
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Consumer sovereignty
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-people vote with their dollars for what goods and services should be produced
• Production costs determine what gets produced: materials, labor, technology -AMERICA |
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Capitalism
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1) Private ownership of property
2) Freedom of opportunity to engage in business activities -"Invisible hand" (i.e. no government interference) -By individuals pursuing their own self-interests they in turn benefit all of society |
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Price System
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Price of goods based on buyers preferences
• Goods either exist in surplus or shortage • Price of labor—same principles apply • COMPETITION • COMMUNICATION (information) |
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Economies of scale
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• Increase in efficiency of production as the number of goods being produced increases
• Lower average cost per unit through increased production • Fixed costs are shared over an increased number of goods •Savings passed on to consumers (competitive advantage) Ex. -Costco! |
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Role of government
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• Protect property rights of consumers/producers
• Protect workers from being exploited • Protect consumer safety • Collective goods and services (national security, social security, etc.) • Natural monopolies • In contrast: free markets (laissez-faire) |
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Demand
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-the ability and willingness of people to consume goods and services
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Effect of price on quantity demanded (d)-all other factors remain unchanged
PRICE UP |
quantity demanded (d) down
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Effect of price on quantity demanded (d)-all other factors remain unchanged
PRICE DOWN |
quantity demanded (d) up
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Law of diminishing marginal utility
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• As more units are obtained, an individual obtains less additional value/utility/satisfaction from each additional unit. (first spam musubi versus the fifth one)
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Supply
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-the ability and willingness of sellers to make goods and services available for sell
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Effect of price on quantity supplied (s)-all other factors remain unchanged
PRICE UP |
quantity supplied (s) up (create surplus)
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Effect of price on quantity supplied (s)-all other factors remain unchanged
PRICE DOWN |
quantity supplied (s) down
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Incentives
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Any factor (financial or non-financial) that provides a motive for a particular course of action, or counts as a reason for preferring one choice to the alternatives
Ex. points, cash, longer warranty (ways that people get you to buy) |
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Market
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Potential buyers and sellers come together to exchange goods and services
Ex. farmers’ markets, stock exchange, gasoline in Honolulu, auto sales in US, crude oil sales |
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Equilibrium Price
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Intersection of quantity demanded (d) and quantity supplied (s)
-Where there is no shortage or surplus of product -Market adjusts itself to find spot (usually, unless there is government intervention) |
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What causes changes in demand?
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-changes in tastes, incomes
-availability of substitute or complementary items -political sentiments -population growth/decline |
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What causes changes in supply?
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-changes in production methods
-(technology) and costs -weather -politics |
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Price ceilings, implications?
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government imposed maximum levels on prices
-Usually imposed when prices rise much faster than incomes/wages -Implications: no incentive to suppliers to produce more ,leading to shortages and artificially high prices |
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Price floors, implications?
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government imposed minimum levels on prices
-e.g. farmers (might go bankrupt otherwise, default on loans, banks fail...) -Surplus-government buys it up, pays farmers not to farm (New Deal--AAA) -Oil? Gas? Will that inspire (or force) people to choose alternatives? |
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Elasticity of demand
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responsiveness of quantity demanded to a change in price
-Availability of substitutes, complements |
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Elasticity of supply
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responsiveness of quantity supplied to a change in price
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Macroeconomics
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the study of large economic systems (such as for a nation)
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Microeconomics
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the study of smaller scale aspects of an economy (e.g. price-cost relationships of a firm)
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GDP = Gross Domestic Product
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• Measure of a nation's total production within its borders (anything that $ can buy)
• Total dollar value of all goods and services produced by businesses and all levels of government in a year's time • Also referred to as total (or aggregate demand) supply |
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What GDP tells us
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• Shows growth in the economy (how much people spend, etc.)
• 2-3% growth is considered healthy -Too low (<2%) = unemployment -Too high (>4%) = inflation • "Recession" occurs after two quarters (six months) of negative growth |
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Total Demand = Aggregate Demand
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Consumer Spending + Investment (borrow money for payoff down the road) + Government Spending + Net Exports
AD = C + I + G + Nx |
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Consumer Spending (C)
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Goods and services purchased for personal use/consumption
• Largest of AD components (approx. 70%) |
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Consumer spending is affected by:
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• Income levels/growth (if you have a job, you'll buy stuff and the GDP will go up!)
• Consumer expectations/confidence (if you're confident you're going to have job, you'll buy tv! If you think you're going to get fired, then you won't.) • Taxes (amount of take-home pay) (if taxes are raised, less money to spend on tv. If taxes are lowered, more money to spend.) |
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Investments (I) (borrowing)
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Approx. 10-15% of AD
• Investment spending on capital goods (factories, machinery, tools, transportation infrastructure, buildings) • Paid for with borrowed money: dependent on interest rates (monetary policy) |
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Money Supply controlled by...?
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Federal Reserve
• Ben Bernanke + Board of Govs. |
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Monetary policy:
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The regulation of the money supply and interest rates by a central bank, such as the Federal Reserve Board in the U.S., in order to control inflation and stabilize currency.
-Monetary policy is one the two ways the government can impact the economy. -By impacting the effective cost of money, the Federal Reserve can affect the amount of money that is spent by consumers and businesses. • Raise/lower interests rates • "easy money," "tight money" policies |
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Government Spending (G)
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Approx. 10-15% of AD
• Spending by federal, state, and local governments • E.G. New Deal, national defense, TVA, social services, mass transit • Dependent on tax receipts • Outlays (spending) greater than receipts = budget deficits • Governments have to borrow (sell bonds) |
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Net Exports
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• The value of a country's total exports minus the value of its total imports (approx. 10%)
•US currently has a trade deficit of $60 billion/month (import more than exporting) • Oil, goods from China |
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Comparative advantage
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nations specializing in the production of goods/services which align best with their factors of production
• Saudi Arabia – oil; China – manufactured goods |
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Tariffs
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taxes on imports (like on oranges, Chilean growers pay taxes, pass onto consumers vs. a domestic grower who doesn't have to pay that tax)
• Protects domestic producers • Hurts consumers due to higher prices (inflation) |
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Inflation
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a general increase in prices and fall in the purchasing value of money
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Demand-pull inflation
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total spending in the economy rises more rapidly than the available supply of goods and services
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Cost-push inflation
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sellers raise their prices in an effort to pass increased production costs on to their customers
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Fiscal policy
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Deliberate use of the government's spending and taxing powers to accomplish desired economic objectives
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Monetary policy
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Involves deliberate changes in interest rates and the availability of loans by the Federal Reserve System
-more effective than fiscal policy as a tool for combating inflation |
