Economics

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economics

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the science that explains the choices we make and how those choices change as we cope with scarcity

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microeconomics

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study of operation of the components of the national economy, like individual firms, households, and consumers

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macroeconomics

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study of national and global economy and their total growth and fluctuations, as well as the government's affect on the economy

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opportunity cost

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the highest valued alternative forgone

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supply

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the amount of a commodity or service that people are ready to buy for a given price

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demand

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the amount of a commodity or service that people are ready to buy for a given price

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marginal cost/benefit

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we make choices in small steps or at the marginal choice; influenced by incentives

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ceteris paribus

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if all other relevant things are constant

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market vs command system

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the fact that when a command system (government) enters the economy, it disturbs the natural equilibrium of S + D (taxes, etc.)

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market failure

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sometimes government action is necessary to overcome market failure, ie. sellers controlling the market, externailities, public goods and services, and incomplete information

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externalities

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outside cost of an exchange between a buyer and seller

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aspects of pre-capitalist systems

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no private property, no market system, no choice of work, no caplitalist mindset, stability, no factors of production (land, labor, and capital)

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Circular flow diagram

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businesses send goods and services to households, households send labor to businesses, money flows between the two

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impoverished aristocrat

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caused by inflation and increased standard of living

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industrial revolution

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began with James Watt's invention of the steam engine; caused rising standards of living, bigger industrial application, more sophisticated businesses, and the division of labor

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democracy vs capitalism

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polotical dimension of economics; democracy doesnt always yield capitalism

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Laissez-faire/invisible hand

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idea of Adam Smith; self-regulation mechanism of capitalism; ideas of laissez-faire/invisible hand - competition, supply and demand, and entry and exit

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barriers to invisible hand

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non market methods (tradition), command intervention, externalities, and public goods

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Wealth of Nations

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book by Adam Smith

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Essay on the Principles of Population

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Essay by Thomas Malthus

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Malthusian Theory

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resources grow at constant rate, population at exponential rate

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Darwinism vs free market capitalism

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invisible hand and natural selection, invisible hand emerged from an evolutionary and unintended historical process, both ideas omit a designer, 4 misunderstandings concerning Laissez-Fiare economists and Social Darwinists: free market does not encompass all human relationships, moral values are necessary for the market to exists and function properly, what is the result of competition... misconception is that it is harsh and sacrifices common good for private gain, and lack of public wellfare does not necessarily mean that there is a Darwinist approach to the economy

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Das Capital

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book by Karl Marx

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Surplus Value

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the pitfall of capitalism, the gaining of money exploits the proletariat

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proletariat

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working lower class

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communism

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theory of Karl Marx that a revolution by the proletariats will push the economy into an "equal" society

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mixed economy

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theory generated by Keynes

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Great depression (causes)

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roaring 20s, buying on margin, WWI causing reperations which in turn hurt exports, and durable goods

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Buying on margin

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purchasing goods (like stocks) with borrowed money

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General Theory of Employment, Interest, and Money

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Book by Keynes, no self-regulation mechanism of capitalism

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proprietorship/partnership

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a business organization in which two or more individuals manage and operate the business

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corporation

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a legal ientity that is seperate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes

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GDP

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gross domestic products, C+I+G+(Ex-Im)

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Consumer goods

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goes to restore working strength and well being of households

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Investment goods

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replenishes the capital wealth of nations (physical investment goods and human capital)

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Government expenditures

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the one who foots the bill for the state is the government (consumptive services and investment goods)

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human capital

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like any other type of capital it can be invested in trhough education, training and enhanced benefits that may lead to an imporvement in the quality and level of production

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transfer payments

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mostly safety nets (not counted in GDP)

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value added

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value of firms production - value of intermediate goods

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GDP Flaws

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Nominal vs Read GDP, measurement of quality of service, blindness to ultimate use of production, income distribution

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capacity to spend

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income (salary), transfer payments, and augmeneted income

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time preference

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willingness to not spend moeny today in hopes to save, gain and spend more in the future

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investment capital

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businesses use this for long-term investments

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3-step effect of saving

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immediate - C goes down, secondary - frees up labor land and capital, final effect - I takes up land, labor, and capital whichc causes I to go up

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Recession

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2 or more consecutive quarters of falling GDP (occurs when one section of CIG doesnt pick up for a gap caused by other sector)

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crowding out

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expansion in one sector actually hunrts economy because it takes away money and resources from another sector that could be used mroe effectiently

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voluntary vs compulsory relinquishment

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voluntary = saving
compulsory = taxes

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reasons for government taxing

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provide law and order, and protection of property rights

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government spending to close demand gap

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idea by Keynes, if C or I has a gap in GDP, G must cover the gap, 2 Questions aboout G spending, where to spend (C or I) and how much to spend (possibly crowding out)

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International Trade

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trade among two different nations

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2 perspectives of international trade

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Nationalists - favors domestic
Economist- favors efficient production and allocation of goods internationally

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barriers to trade

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embargos, tariffs, and subsidies

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comparative advantage

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assumes 2 countries, 2 products, no money, and using full capacity of resources; if one country has a lower relative price of a good then it has a comparative advantage

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absolute advantage

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in production of 2 goods, if one country can produce more of both

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Relative price

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ratio of price of 2 goods

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passive consumption

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consumption is passive becasue it is driven by economy, not vice versa

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Reasons for investment volatility

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the decision process (a greater time period involved than C), business cycles are long and unsteady, technological breakthroughs

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Stock market and investment sector

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3 direct effects: the market serves as a barometer; ease of issuing new stocks and bonds - in prosperous times; acquisitions usually occur when market is low- GDP negatively affected

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Transformational Growth

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caused by technology; pushes out the prodctuion possibilities frontier; growth can be, however controlled with interest rates, taxes, and government spending

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Debt and deficit Spending

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government spending more money that it takes in with taxes

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public debts

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government borrows from and spends from the same entity (repays old bonds with new ones)

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power to print money (2 effects)

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can cause inflation if government uses power when strapped for cash; privodes credit-worthiness ( anyone who buys a governemnt bond is guaranteed it will be paid off)

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Government deficit issues

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problems of national budgeting (crowding out/infaltion), complications with owing debt abroad, what happens if interest on debts strains taxing power

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effectiveness of government spending

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to be effective the government must divide itself into sub sectors including aspects of both C and I

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transitional unenployment

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a teacher in an international school might end his contract in one school and be starting at another school at the end of the long summer vacation. for eight weeks they may not be working. this sort of unemployment is called transitional unemployment

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Monetizing the debt

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to convert government debt from interest bearing securities into money; although both the securities and the money are considered government debt, the latter can be used to purchase goods and services; thus, monetizing the debt is considered and inflationary process and, although it may temporarily depress interest rates, it is likely to result in higher interest rates and lower bond prices in the long run

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demand manager

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liberal view; idea that the government should take responsibility for creating the volume and demand we need to get up to a satisfctory level of performance

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greenmail

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an anti-takeover manuever in which the target firm purchases the raider's stock at a price above that available to stockholders

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Offsetting downward pressure on price (3 ways)

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re-skill and reeducate; government spending into research and development infastructure, international laws aimed at humane labor standards

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municipal bonds

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an often tax-exempt bond issued by a city, country, state, or other government for financing of public projects

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IPO

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initial public offering

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corporate raiding

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buying a company that is not in great shape and then selling all the parts of the company

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Index funds

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a mutual fund that keeps a portfolio of stocks designed to match the performance of a stock market or one of its sectors as measured by an index of selected stocks

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load

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fee or commission charged to an investor when buying or redeeming shares in a mutual fund

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infaltion

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the substantial rising of the amount of dollars in a country, in turn makes the dollar less valuable

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Roots of inflation (3)

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the economy going from depression prone to inflation prone; the rise in public spending (C); and the rise of private powers

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cartel

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a group of companies or others that work together to alter prices (like OPEC)

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ratchet tendency

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after WWII the tendency of companies to raise wages when times are good, but to do nothing when times are bad

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Depression prone -> Inflation Prone

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the way the US has gone (example- in 1873 the coal carted caused a depression, in 1973 OPEC caused an inflation)

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income distribution

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the amount of income that is present based on the economic tiers of lower, middle, and high class

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marginal productivity

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the idea that what one earns equals ones contribution to society

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poverty trap

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the idea that people are poor because they dont have the skills to be productive and they dont have the funds to obtain those skills

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rate of return (of investments)

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a persons worth is not equal to his marginal productivity, but the value of the niche has has setup for himself

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factor price equalization

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wages in countries with cheaper resources will be cheaper

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effects of multinationalists

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multinationals cause the hostage situation, which is the idea that multinationalists are held hostage by the countries they spread to, and in turn, the countries are held hostage by international competition

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globalization

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process of bettering the connectivity and interdependence of the world's markets and businesses

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foreign direct investment

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investment in productive assets by a company

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monetarism

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theory by Milton Freidman that thought that money should be expanded by an unchanging, fixed rate geared at long-term growth

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NIC

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newly indsutrialized country, a country like China and India where factor price equalization is prevalent

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causes and effects of globalization

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causes - technology caused the globalization boom, which in turn cased more competition, which finally caused lower prices for the consumer

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Multinationals

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corporations that spread out to other parts of the world

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GNP

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gross national product; total value of all gods and services that are produced by domestic firms, either at home or abroad

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OPEC

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oil cartel in the 70s that made prices too high and caused inflation