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81 Cards in this Set

  • Front
  • Back
The following two facts provide the basic foundation
for the field of economics:
(1) Unlimited Wants
(2) Limited Economic Resources
Land or Natural Resources These are free gifts of the nature. The list includes:
A. Minerals. B. Forests. C. Oil Deposits. D. Water Resources.
Capital It includes
A. Tools and Machinery. B. Buildings.
C. Transportation. D. Construction.
Economic Resources
Land or Natural Resources, Labor or Human Resources and Capital
Implication 1.
Individuals and societies must make choices among limited resources.
(1) Choice for a single firm
(2) Choice for the entire society
(1) Choice for a single firm
Production Possibilities Frontier (PPF)
A Production Possibilities Frontier
shows the different combinations of two goods that a producer could efficiently produce, given the available resources and existing technology.
Any point inside the PPF can be achieved, but it is
not efficient.
Any point on the PPF can be achieved, and it is
efficient.
Any points outside the PPF
cannot be achieved.
How does PPF shift?
If the technology improves or the supplies of factors of production increase, the PPF shifts to the right (upward), raising the amount of each good that can be produced.
A military or ecological disaster might move the PPF inward and to the left.
A decrease in the unemployment rate
will not shift PPF to the right.
Increase in the capital or the discovery of previously unknown oil fields
will shift PPF to the right.
(2) Choice for the entire society
Production Possibilities Frontier for the entire economy
Implication 2.
A decision to have more of one thing means that we will have less of something else.
--- trade off
Opportunity Cost
The opportunity cost of any decision is the value of the next best alternative that the decision forces the decision maker to forgo.
Economics
is the study of how to allocate our limited resources efficiently toward producing goods and services.
An efficient economy
wastes none of its available resources and produces the maximum amount of output that its technology permits.
Based on how to allocate resources, here are two types of economies:
Planned Economy and Market Economy
Planned Economy
refers to an economic system that is under comprehensive control and regulation by a government (authority) in accordance with a plan of economic development.
Market Economy
is an economic system that production, distribution, pricing and so on are resolved by market forces.
Positive Economics
is the branch of economics that concerns the description and explanation of economic phenomena.
--- what is e.g. An increase in the tax of beer will raise its price.
Normative Economics
is the branch of economics that incorporate value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal.
--- what ought to be e.g. Taxed should be increased on beer because college students drink too much.
Economic Problems
(1) Unemployment.
(2) Inflation.
(3) Government Budget Deficit
(4) Trade Deficit.
(5) Unfair Income Distribution.
(6) Monopoly.
(7) Environmental Pollution.
Economic Problems
(1) Unemployment.
(2) Inflation.
(3) Government Budget Deficit
(4) Trade Deficit.
(5) Unfair Income Distribution.
(6) Monopoly.
(7) Environmental Pollution.
Economic Goals
(1) Full Employment
(2) Stable Prices
(3) Balanced Budget
(4) Balanced Trade
(5) Fair Income Distribution
(6) Many Firms (perfect competition
(7) Less Pollution
Microeconomics
is the study of an individual unit in the economy such as behavior of an individual market or an
individual person, etc. (Econ. 204)
Macroeconomics
is the study of economy as a whole (usually at country level). (Econ. 203)
A variable
is a piece of information that takes on different values at different times.
A model
consists of one or more relationship among variables.
Macro theory
involves construction of macro models that explain the behavior of economic variables.
(1) Demand for wheat
Inverse relation between price of wheat (P) and its quantity demanded (Qd).
(2) Supply of Wheat
Direct or positive relation between price of wheat and quantity supplied.
(3) The Wheat Model: Demand and Supply together
A. Tabular Model
B. Graphical Model
C. Mathematical Model
Equilibrium
Quantity Demanded = Quantity Supplied
Surplus
Quantity Demanded < Quantity Supplied
Shortage
Quantity Demanded > Quantity Supplied
Outline for Appendix
Demand versus Quantity demanded
Key points about supply versus quantity supplied
Quantity Demanded
is the amount of a good or a service that buyers are willing and able to purchase, other things being equal, over a specified period of time.
Demand
is a schedule or a curve showing the various amounts of a good or a service buyers are willing and able to buy at various possible prices, other things being equal, over a specified period of time.
Demand Curve
A line or a curve showing the relationship between price and quantity demanded

Negative slope
A demand schedule
is a table showing how the quantity demanded of some product changes as the price of that product changes during a specific period of time, holding all other determinants of quantity demanded constant.
Determinants of Demand
Consumer incomes
Population
Consumer preference
Consumer incomes
Income goes up → Demand goes up
Population
Population increases → Demand goes up
Consumer preference
In favor of some good → Demand for that good goes up
Prices and availability of related goods
Prices of substitute goods for a specific good goes up
→ demand for the specific good goes up

Prices of goods that tend to consume together goes up
→ demand for the good decreases
Quantity Demanded
is a specific quantity corresponding to a particular price
Quantity Demanded refers to a point on a demand curve
Demand in Quantity Demanded versus Demand
is a range of quantities corresponding to various prices
Demand refers to an entire demand curve
Change in Quantity Demanded
Caused by a change in the price of the good
Movement along the demand curve
Change in Demand
Caused by a change in a determinant rather than the price of the good
Caused by a change in consumer incomes, preferences, population, price and availability of related goods, etc.
A shift in the demand curve, either to the left or right
Quantity Demanded
A specific quantity at a specific price
A specific point on a demand curve
Change due to own price – movement along the curve
Demand in Key points about demand versus quantity demanded
A range of quantities over various prices
An entire curve
Change not due to own price – shift of the entire curve
Quantity Supplied
A specific quantity at a specific price
A specific point on a supply curve
Change due to own price – movement along the curve
Supply
A range of quantities over various prices
An entire curve
Change not due to own price – shift of the entire curve
Size of the industry (positive relation with supply)
Technological Progress (Positive)
Prices of inputs (negative)
Prices of related outputs
Inflation
refers to a sustained increase in the average price level.
Growth
refers to an increase in total output (from Q0 to Q1).
Growth Rate
is the percent increase in total output.
Recession
refers to a period of time during which the total output of an economy declines.
Deflation
refers to a period during which price level declines.
Depression
A severe recession is called depression.
Stagflation
refers to a period within which inflation and recession coexist.
Demand-pull Inflation (Demand-side inflation)
Caused by the increase in AD in an economy that outpaces AS
Cost-push Inflation (Supply-side/shock inflation)
Caused by large increases in the cost of important goods or services where no suitable alternative is available (AS decreases)
e.g. oil crises of 1970s
Case 1 shows that if government wants to increase national output ( in order to reduce rate of unemployment), it should stimulate aggregate demand.
Inflation
Case 2 shows if government wants to fight inflation, it should discourage aggregate demand.
Recession
Case 4 shows to fight recession and inflation at the same time,
we should increase aggregate supply.
Government policies that are designed to increase or decrease aggregate demand are called
DEMAND MANAGEMENT POLICIES.
Labor Force
It is the number of people holding or looking for jobs.
Unemployment Rate =
# unemployed people
___________________

Labor force
Types of Unemployment
a. Frictional Unemployment (Between jobs)
b. Structural Unemployment (Due to high tech/less skill)
c. Cyclical Unemployment (Due to the downturn of the Economy)
Concept of Full Employment
(for US, about 5%-6% unemployment rate)
Costs of Unemployment:
(1) Costs to unemployed labor.
(2) Social costs.
(3) Economic Costs.
Inflation Decreases Purchasing Power
The purchasing power of a given sum of money is the volume of goods and services it can buy.
Gross Domestic Product (GDP)
is the sum of dollar value of all final goods and services produced in an economy over certain time period.
A. GDP05 vs. GDP04
GDP05 > GDP04. Quantities unchanged while prices change.
GDP06 vs. GDP04
GDP06 > GDP04. Quantities change while prices unchanged.
GDP07 vs. GDP04
GDP07 > GDP04. Both price and quantities change.
How can we measure GDP so that we can make sure that quantities changes is the only reason for GDP changes?
Choose one year as base year. Use base’s year’s price as all other years’ prices to compute real GDP.
Expenditure Approach to Measure GDP
(1) Durable goods for households
(2) Nondurable goods for households
(3) Services for households
(4) Housing construction
(5) Machinery, tools for firms
(6) Change in inventories
(7) Government purchase of goods and services
(8) Net Exports
Income Approach
(1) Wages, etc.
(2) Net Interest
(3) Rental Income
(4) Proprietor’s income
(5) Corporate Profits
(6) Indirect Business Taxes minus subsidies
(7) Depreciation
(8) Income paid to less income received other countries from other countries
Important Points about Price Index
(1) CPI uses old basket of goods, whereas GDP deflator uses current basket of goods.
(2) When old basket is used to construct a price index, most of the time we overestimate inflation.
(3) A concept very close to CPI known as Cost of Living Index is available geographically.