Economics of study and people the study of wealth and man

Opportunity cost: Whatever you sacrifice to do something(the cost outweights the

benefits). Resources used for something isnt used for something else. U.S military
resouresc could be going to something else.
Scarsity: Infinite wants and finite resources.
Incentives: External factors that are motivators to peoples choices. These are
important to get the right outcomes. Sometimes money isnt the best incentive.
Macroeconomics studies the economy on a large scale.
MIcroecnomics the interaction of employeers and consumers to generate outcomes
in specific markets
Specialization: When you spzeliaze ina stopic, specialization makes people more
productive
Adam smith- trade makes them better of
Production Possibilities Frontier- understanding the tradeofs when producing two
goods. Resources are limited. This understanding can be applied to more and more
goods. Inside the curve is inefficient, on the curve is efficient, outside the curve is
impossible.
Countries should trade where they have a comparative advantage. If they trade
with some other country with another specialization then its a mutual beneficial.
Specialization and trade makes world better of
Communism no private property
Socialism there is some private property and economic planning
Both systems have a government agency deciding what to produce, how to produce
it and who gets it
Command economy is an economy fully controlled by the government to every
detail
Free market(capitalist)- government has laissez faire attitude. individuals own
factories and business.
Invisible hand- Unintended social benefits from individual actions. E.g Individuals
want good cars, hence car manufactuers must make good products. They meet
societies needs by also meeting their own self needs.
If there is no consumer desire for product or business then resources arent wasted
on it. It gives incentive to produce good products at higher efficiency.
There is no complete free market, there is always some sort of government
involvement. There is a spectrium and it can range from Command economy- to
very free market. E.g North Korea vs New Zealand. The rest are mixed markets.

Circular flow model

Resource market is how individuals make money, Produce market is how buisnesses
make money. Individuals sell their time and labour to businesses to make money
and buy products and give money to buisnesses. Government takes money from
buisnsesss and individuals and borrows and gives it back buy purchasing products
and labor e.g police cars and police officiers.
Opportunity cost must always be looked at, for countries mainly analyzed by
elected officials for countries ecnomies
Market any place where buyers and sellers meet to exchange goods and services.
Buyers value the product more than the money and the sellers value the money
more than the goods. This is called voluntary exchange as both parties are happy.
Vluntary exchange is found almost everywhere in our economy.
Price signals: the information markets generate to guide the distribution of
resrouces.
Buisnesses are forced to make products that make the consumer better of so that
they are better of.
Every dollar made indicates how a product should be made and what products to be
made.
Supply and demand
Surplus: having too much of something, when sellers have high price but no one
wants to buy
Shortage: prices are low, but sellers dont have incentive to sell
Supply = Demand is called equilibrium point
External factors can change the supply and demand curve thus changing
equilibrium price and quantity
Four market behaviours
-supply can increase or decrease
Demand can increase or decrease
Goal for macroeconomics: keep economy growing over time, limit unemployment
and keep prices stable
GDP: value of all goods and services produced within a countries border typically
within a year

Nominal GDP: not adjusted for inflation

Real GDP: adjusted for inflation
Recession: two successive quarters or 6 months of continuous decrease in GDP
Depression: A severe Recession
Unemployment rate = unemployed/people in labor force * 100
Discouraged workers: unemployed people who have given up
Frictional Unemployment: People transitioning between jobs
Structural unemployment: NO demand for such a job
Cyclical Unemployment: Unemployment due to a recession. Goal is to avoid this
Natrual rate of unemployment: is lowest unemployment rate without cyclical
unemployment
Inflation: AN increase in currency supply relative to number of people using it
resulting in higher prices.
Deflation: Decrease in prices
Contraction when economy is going too slow
Consumer spending, business spending, government spending and exports all efect
conomy
GDP: The GDP divided by the population, to determine how welthy a country is
High productivity is a factor that can explain richer countries and why people have
more money and why they can buy more
Factors of production: land, labor, capital-infrastructure, human capital
Technology is the sum total of information and knowledge that society has acquired
concerning the use of goods and services
Connectivity= productivity. Compuers and internet today allows increase in
productivity
Purchasing Power = The amount of goods and services that can be bought with a
given amount of money
Increasing prices reduces purchasing power and is similar to cutting wages
Inflation: increase in currency supply relative to people using it thus resulting in
rising prices in goods and services
Bubbles: A market phenomenon where prices of assets goes up considerably
compared to its fundamental value

Consumer basket: taking a look at all the typical things a consumer might buy that
year and anazling prices
Consumer price index: uses the basket method to determine a statistical estimate
Real=adjusted for inflation
Nominal= not adjusted
Reasons for inflation
Demand Pull inflation-too much money chasing too few goods
Cost push inflation- cost to make goods is too much

Speculation: Trading a financial instrument in the risk for significant returns

Recessionary Gap: A situation wherin the real GDP is lower than the potential GDP
at full employment
Inflationary gap: When real GDP exceeds the full employment GDP
Fiscal Policy: Way government adjusts spending levels to monitor and influence a
nations economy. Esentially if a ecnonomy is going to slow it can speed it up and if
its going to fast slow it down.
Expansionary Fiscal Policy: Stimulates the economy during or in anticipation of a
business- cycle contraction. Increasing government spending can increase income
for many types of workers in turn increasing spending and boosting ecnomy. Cutting
taxes also increases disposable income for consumers.
Contractionary Fiscal Policy: is opposite to expansionary and cuts spending
Classic theory is economy will fix itself and government at best lead to unintended
consequences and worst lead to massive debt and inflation.
The modern theory: we can fix economy ourselves with govnerment spending
because in long run economy may fix itself but we are dead
Deficit Spending: Spending more money than they get form taxes
Crowding Out: Increased public sector spending decreases private sector spending
Austerity: Cutting debt by increasing taxes and reducing spending
Deficit: Amount by which government spends more than it is bringing in
Debt: Accumulatiion of deficits
Debt Ceiling: Cap on how much U.S Treasury will allow to borrow
Monetary Policy: To speed up or slow down money to speed up or slow down
economy

Interest rate: When borrowing money is used to gain xtra money for inflation as well
as to make a profit
When central banks increase money supply, banks can increase loans and low
interest rate thus having more expenditures in ecnonomy by consumers and
buisnsess. If u lower money supply higher interest rates and less spending. These
are called Expnasionary or Contractionary monetary policy.
Liquid Assets: An asset that can easily be converted into cash quickly, and with a
minimal impact to the price received.
Fractional reserve banking is what happens in most banks, when people deposit
money most is loaned out.
Reserve Requirement: is how much money legally a bank is required to keep in
reserve
Increasing money supply can be down by decreasing the discount rate, the interest
rate banks borrown money from central bank. This means banks can pay back
people. Increasing the discount rate reduces money supply.
Open market operations: When Federal Reserve buys or sells short term
government bonds.

Money serve three main purposes:

- Medium of exchange. It is generally accepted for payment for goods and services.
- Store of value. Money can be stored.
- Unit of account.
Money is standartized metric that helps us measure value of things.
2) Financial system. a. Lenders b. Borrowers c. Governments d. Capital - the machinery, tools and
factories owned by a business and used in production.
e. Financial system is a network of institutions, markets and contracts that brings lenders and borrowers
together.
f. Debt - if you get a loan from the bank, you are obligated to pay back the amount you borrowed plus the
amount of interest.
g. Equity - the difference between the value of the assets/ interest and the cost of liabilities of something
owned.
h. Financial instrument - a tradeable asset of any kind. i. Financial institution - an establishment that
conducts financial transactions such as investments, loans and deposits.
j. Financial markets with instruments like stocks and bonds, allow borrowers to crowdsource the money
they need to borrow. They raise their capital from lots of investors, and spread the risk around.

Subrpime mortgages: mortages to bad credit individuals

Mortgage backed securities and cdos seemed even better investment after
increasing housing prices due to lax mortgage practice
Pervasive incentive: the incentive caused negative results
Moral hazard: one person takes more risk because someone else burdens that risk
Hyperinflation: more than 50% inflation in one month or 13000% annually.
The number of times a dollar is spent the velocity of money, when people spend
their money as quickly as they get it that increases
velocity or pushes inflation faster.
Liquidity Trap: People expect lower prices, and since no one buys, prices lower
weakening economy.
Stagflation: when ouput slows down or stops or stagnates at the same time prices
rise
Classical economics: pure capitalism
Chicago school of economics: government intervention should ber educed
Trickle down economics: Cutting taxes to large corporations mainly
Moneterism: slowly and steadily increase monetary flow for steady growth
New neoclassical synthesis: combination of keynsian economics, monetarism and
classical economics
Net exports: Diference between exports and imports
Trade surplus: You are exporting more,
Trade deficit: You are importing more
Protectionism: Having high tarrifs and limiting forgein goods
Exchange rate: How much your currency is worth when you trade with another
currency
Current account: records the sale and purchase of goods and services, investment
income donations etc.
Countries can buy other currency, to keep their currency depreciated.
Financial Account: records the purchase and sale of financial assets like stocks and
bonds
Marginal Analysis: if something creates more marginal revenue than cost, it is
pursued
Utility: Satisfaction consumers get from something
Law of decreasing satisfaction: Eventually satisfaction of a product or utility will go
down

Productive efficiency: products are made at the lowest cost

Allocative Efficiency: State of economy in which production represents consumer
preferences.
Price signals: Price indicates what consumers value
Price Gouging: Well prices are increased due to scarcity of reasources for example
Predatory pricing: price products even at a loss for a shrot time to drive out
competitiors