Crash Course Economics

average cost

the total cost divided by the number of output

adam smith

the wealth of nations, person serving self interest could help the common good, free trade

Keynes

theories of spending, government should get involved by using monetary and fiscal to increase output and decrease unemployment

vertical integration

when a company directly owns or controls its supply chain

hyperinflation

when a country experiences a monthly inflation rate of over 50% or around 13,000% annual inflation

default

when a debtor is unable to meet the legal obligation of debt repayment

oligopoly

when a few firms have a large majority of market share

perverse incentive

when a policy ends up having a negative effect, opposite of what is intended

efficiency wages

when employers might voluntarily offer higher than normal wages to increase worker productivity and retention

natural monopoly

when it is more cost effective to have one large producer rather than several smaller competing firms

price leadership

when one company charges its prices, and its competitors have to decide if theyre going to follow suit

moral hazard

when one person takes on more risk because someone else bears the burden of that risk

stagflation

when output slows down or stops at the same time that prices rise

price gouging

when sellers raise prices for essential items to a much higher level than is considered reasonable

equilibrium price

when supply=demand

more, fall, cheaper, rise

when the dollar depreciates foreign imports get ________ expensive which makes them ____________ and US exports to other countries gets ___________ which makes them ____________________

negative externalities

when the full cost of a product doesn't line up with the costs that manufacturers or consumers pay

price ceiling

when the government sets a maximum price for a specific good

monopsony

when there is only one company hiring and workers are relatively immobile

circular flow model

A ___________ is a diagram that is used to represent the monetary transactions in an economy

Commercial Bank

A bank that offers services to the general public and to companies

Business cycle

A cycle or series of cycles of economic expansion and contraction

Deflation

A decrease in the general price level of goods and services

Law of Supply

A fundamental principle of economic theory which states that, all else equal, an increase in price results in an increase in quantity supplied

Bubbles

A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset

Labor

A measure of the work done by human beings

Specialization

A method of production where a business or area focuses on the production of a limited scope of products or services in order to gain greater degrees of productive efficiency within the entire system of businesses or areas

Stimulus package

A package of tax rebates and incentives used by the governments of various countries to stimulate the economy

Market basket

A permanent set of goods and services that are bought and sold as staples in a functional economy

Law of Demand

All else being equal, as the price of a product increases (↑), quantity demanded falls (↓); likewise, as the price of a product decreases (↓), quantity demanded increases (↑).

Land

All naturally occurring resources whose supply is inherently fixed (ex. geographical locations, mineral deposits, forests, etc.)

Liquid Assets

An asset that can be converted into cash quickly and with minimal impact to the price received; no cash money but loans and mortgages

Mixed Economy

An economic system consisting of a mixture of either markets and economic planning, public ownership and private ownership, or free markets and economic interventionism

Command Economy

An economy in which production, investment, prices, and incomes are determined centrally by a government

Surplus

An excess of production or supply over demand

Inflation

An increase in a currency supply relative to the number of people using it, resulting in rising prices of goods and services over time

Cost Pull Inflation

Develops because the higher costs of production factors decreases in aggregate supply (the amount of total production) in the economy

productivity

Economists argue the main reason why some countries are rich is because of their _________.

GDP per capita

Economists often use _______ _______ _______ to measure a country's standard of living.

Contractionary fiscal policy

Enacted by a government to reduce the money supply and ultimately the spending in a country

Shortage

Excess demand - that is quantity demanded is greater than quantity supplied

Contractionary Monetary Policy

Expands the money supply more slowly than usual or even shrinks it

Net exports

Four components that make up GDP: 1. Consumer spending 2. Business spending 3. Government spending 4. ______ _______

GDP per capita

GDP of the country divided by its population

8

GDP per capita in the U.S. today is about _x higher than 100 years ago

Social security and medicare

Government spending is mostly

Real GDP

Gross Domestic Product adjusted for inflation

Nominal GDP

Gross Domestic Product not adjusted for inflation

Rich

High GDP = High standard of living = ____ country

picks goods than an average consumer would buy in a year(consumer basket) multiple times, takes a base year, divide basket cost of each year by the basket cost of the base year and multiply by 100=consumer price index

How is inflation calculated

tracking prices of a set amount of commonly purchased items(market basket) percent change of price overtime;

How is inflation measured?

Fiscal policy

The way a government adjusts its spending levels and tax rates to monitor and influence a nation's economy

Debt Ceiling

Limit on the amount of national debt that can be issues by the U.S. Treasury

consumer spending, business spending, government spending, and net exports

Makes up GDP:

classical economics

Marshall supply and demand and marginal utility no government involved

spectrum

Modern economics are neither completely free market nor planned. There's a ______ of government involvement.

low

More money = ________ interest rates

human capital

One special type of capital is the worker's education, knowledge, and skills to produce things. This is called _________ _________.

economy; unemployment; stable

Policymakers have 3 economic goals: 1. Keep the _________ growing over time 2. Limit _____________ 3. Keep prices _______

Austerity

Raising taxes and cutting government spending to reduce debt

labor; money

There are two flows present within the model including flows of physical things (goods or ______) and flows of _____ (what pays for physical things).

Capital

Things you need to produce other things; includes machines, factories, infrastructure, etc.

Open Market Operations

This is when the federal reserve buys or sells short term government bonds

trade-offs

Thomas Sowell said, "There are no solutions. There are only _______-_______."

Demand Pull Inflation

Too much money chasing too few goods

Speculation

Trading a financial instrument involving high risk, in expectation of significant returns

Discouraged workers

Unemployed people that were looking for work but have given up

Structural unemployment

Unemployment caused by lack of demand for a worker's specific type of labor

Cyclical unemployment

Unemployment due to a recession

The Great Moderation

Refers to a period of economic stability starting the mid-1980s characterised by low inflation, positive economic growth, and the belief that the boom and bust cycle had been overcome

Multiplier effect

Refers to the increase in final income arising from any new injection of spending; the initial increase in government spending of 100$ might turn out to be 175$ worth of actual spending in the economy

CPI

Since we have to keep the market basket constant over time, a traditional _____ won't adjust for either new products or increases in product quality.

Expansionary fiscal policy

Stimulates the economy during or in anticipation of a business-cycle contraction

lenders, borrowers

Stock market is made of

inversely

The GDP growth rate and the unemployment rate are _________ related.

Debt

The accumulation of budget deficits

Voluntary exchange

The act of buyers and sellers freely and willingly engaging in market transactions

Budget Deficit

The amount by which a government's spending exceeds its income over a particular period of time

Inflationary Gap

The amount by which the actual gross domestic product exceeds potential full-employment GDP

Reserve Requirement

The amount of funds that a depository institution must hold in reserve against specified deposit liabilities

Excess Reserves

The amount of money that banks are free to loan out

Purchasing power

The amount of physical goods and services that can be bought by a given amount of money

Productivity

The effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input.

Equilibrium Quantity

The quantity demanded or supplied at the equilibrium price

Microeconomics

The study of how consumers, workers, and firms interact to generate outcomes in specific markets

deductible

a form of cost sharing where the patient is required to pay a specific amount before the insurance kicks in

subsidy

a government payment given to individuals organizations or businesses designed to offset costs to advance a specific public goal

subprime mortgage

a loan granted to individuals with poor credit histories

Macroeconomics

The study of production, employment, prices, and policies on a nationwide scale

Technology

The sum total of knowledge and information that society has acquired concerning the use of resources to produce goods and services.

Scarcity

The tension between unlimited human wants in a world of limited resources

comparative advantage

The theory of __________ __________ states that if countries specialize in producing goods where they have a lower opportunity cost - then there will be an increase in economic welfare.

Frictional unemployment

The time period between jobs when a worker is searching for or transitioning from one job to another

Invisible Hand

The unintended social benefits resulting from individual action

GDP (Gross Domestic Product)

The value of all final goods and services produced within a country's border in a specific period of time, usually a year

oligopoly

a marker that has a high barrier to entry, and is controlled by a few large companies(laptops, cars)

pure monopoly

a market controlled by one seller with a good or service that has no close subsitutes

monopolistic competition

a market with many producers and relatively low barriers' their products are similar but not identical (furniture or fast food)

financial system

a network of institutions markets and contracts that brings lenders and borrowers together

collusion

a secret agreement or cooperation especially for an illegal or deceitful purpose

progressive tax

a tax in which the tax rate increases as the taxable amount increases

financial instrument

a tradable asset of any kind

utils

a unit used to quantify satisfaction

productivity

ability to produce more output per worker per hour

wealth

accumulated assets, minus liabilities

Money

acts as a medium of exchange, store of value, unit of account

perfect competition

agricultural because many farmers, not a lot of control over price, and substitutes

luxury tax

an additional tax bill on expensive items not considered essential

financial institutions

an establishment that conducts financial transactions such as investments loans and deposits

inflation

an increase in a currency supply relative to the number of people using it, resulting in rising prices of goods and services over time

law of supply

an increase in price gives producers an incentive to produce more

public good

anything having the characteristics of non-exclusion and non-rivalry

substitution effect

as price rise consumers will replace more expensive items with less costly alternatives

law of diminishing marginal utility

as you consume additional amounts you'll eventually get less and less additional satisfaction

fixed costs

basic operating expenses of a business that cannot be avoided

comparative advantage

being able to produce at a lower cost than anyone else

malthusianism

belief that population growth is exponential while the growth of food is shrinking

absolute advantage

best at producing something

adding up budget deficits

calculate debt by

inflation

causes people to spend

new neoclassical synthesis

classical and keynsism economics

communism

classless economy

indirect tax

collected by a store and are paid by consumers

economies of scale

companies that produce more can utilize mass production techniques and spread out their fixed costs over many units

Ricardo

comparative advantage(two countries can benefit from trade)

profit maximizing rule

continue to produce as long as the marginal revenue of the last unit produced is great or equal to the marginal cost

variable costs

costs that vary depending on a company's production volume

marginal benefit curve

demand curve is also the

derived dmand

demand of labor depends on the demand for the products a business sells

supply side economics

deregulation and cutting corporate taxes

access, cost, quality

effectiveness of healthcare

Austrian school of economics

focuses on the concept of opportunity cost; economic performance is optimized when there is limited government interference(liberalism and laissez-faire) hayek

single payer system

free healthcare where the government is doing most of the paying

public charities

get bigger portions o their support from the general public and the government

planned economy

government controls productions seen in communism and socialism

price controls

government setting prices

patent

grants an inventor exclusive rights to profit from a specific product or process

marginal analysis

how individuals, businesses, and governments make decisions; explains the behavior of consumers and pricing strategies of business

exchange rate

how much your currency is worth when you trade it for another country's currency

below cost pricing

idea that a business can drive out competitors by charging lower prices even at a short term loss

technological unemployment

job is taken over by machines

bounded rationality

limits on time, information and abilities might prevent people from seeking out the best possible outcome

Engels and marx

looked at classes and history is explained by the conflict between workers and property owners, communism(collective ownership)

demand for cash, electricity use, and subtracting total income of a county from total expenditure

measure the underground economy by looking at

normal profit

minimum level of economic profit a company needs to stay in business

borrowers

need money to make a profit

governments

need to borrow money because they are spending more than they are bringing in

private foundations

non-profit organizations that are typically controlled by a small group of people and get most of their support from donors and investment money

price, quanitiy, up to down, down to up

on the supply and demand graph __________ is on vertical, _________ is on horizontal, demand goes ______ to ___________ supply goes _________ to ___________________

monopoly

one large company that produces product with very few substitutes and has a lot of control over prices

sherman act

outlaws monopolys

direct taxes

paid directly by a person or organization to the government body that imposed the taxes(property, income)

free riders

people who benefit with out paying

lenders

people with money who need to turn it into more money

protectionism

placing high tariffs on imports and limiting the number of foreign goods to protect local businessess

market based policies

policies designed to manipulate markets prices and incentives to correct market failures(taxes) more beneficial because makes money

monetarism

price stability, money supply should increase slowly

premimus

private healthcare has

taxpayers

public healthcare has

austerity

raising taxes and cutting government spending to reduce debt

indirect relationship

real GDP and unemployment have an

balance of payments

records all international transactions(made up of current account and financial account)

financial account

records the purchase and sale of financial assets like stocks and bonds

current account

records the sale and purchase of goods and services, investment income earned abroad, and other transfers like donations and foreign aids

accounting profit

revenue minus explicit costs(traditional out of pocket costs of running a business)

economic profit

revenue minus explict costs and implicit costs (indirect opportunity costs)

regulatory policies

rules established by government decree

proportional taxes

same percentage income for all taxpayers regardless of how much they make

price floor

sets a minimum price

permit markets

setting a limit on how much firms can pollute and allowing those firms to buy and sell pollution permits(cap and trade)

production possibilities frontier

shows different combinations of two goods being produced using all resources efficiently (inside)- inefficient (on)-efficient (outside)-impossible

elasticity

shows how sensitive quantity is to change a price, gas is not because theres no substitution

externalizes

situations when there's an external cost or external benefit that accrue to other people or society as a whole

contractionary monetary policy

slowing down the economy by decreasing the money supply so interest rates will go up and there will be less borrowing and spending

Expansionary monetary policy

speeding up the economy by increasing money supply which will decrease interest rates and lead to more borrowing and spending

allocative efficiency

state of the economy in which production represents consumer preferences; central planners are less likely to be ___________

equity

stocks are ________________

Economics

study of scarcity and choices

marginal cost curve

supply curve is also the

Darwin

survival of the fittest; giving to the poor is morally wrong

progressive taxes

tax system in which individuals pay more in taxes as they make more income

regressive taxes

taxes that are applied across the board, meaning they hit-lower income individuals harder

horizontal integration

the act of buying companies that produce similar products

marginal cost

the additional cost of producing another unit

marginal revenue

the additional revenue earned from selling another unit

net exports

the annual difference between a country's exports and imports

equity

the difference between the value of the assests/interest and the cost of the liablilities of something owned

tragedy of the commons

the idea that common goods that everyone has access to are often misused and exploited

non-rivalry

the idea that one person's consumption of the good doesn't ruin it for others

loss aversion

the idea that people strongly want to avoid losing

productive efficiency

the idea that products are being made at the lowest possible cost

signalling

the idea that some students have shown that they are smart and hard working

non-exclusion

the idea that you cannot exclude people that don't pay

capital

the machinery, tools, and factories owned by a business and used in production

poverty threshold

the minimum level of income deemed adequate in a particular country

remittances

the money that migrants and immigrans send to their home country

price discrimination

the practice of charging different consumers different prices for exactly the same product

deregulation

the process of removing or reducing state regulations

securitization

the process of taking an illiquid asset and transforming it into a security

Incentives

A set of external (rather than intrinsic) motivators that explain people's choices

Depression

A severe recession

Recessionary Gap

A situation wherein the real GDP is lower than the potential GDP at the full employment level

Consumer Price Index

A statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically

Free Market Economy

A system in which the prices for goods and services are set freely by consent between vendors and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority

Quantitative Easing

An unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply

inflation

Analysts and policymakers use average price changes in a market basket as the primary gauge of ___________

Market

Any place where buyers and sellers meet to exchange goods and services

Unemployment rate

Calculated by taking the number of people that are unemployed and diving by the number of people in the labor force, times 100

regulate; oversee; bank runs

Central Bank's First Job: They ________ and ________ the nation's commercial banks by making sure that banks have enough money in reserve to avoid ________ ________.

monetary policy; increasing; decreasing; slow down

Central Bank's Second Job: Conduct ________ ________ which is ________ or ________ the money supply to speed up or ________ ________ the overall economy.

Fiscal Policy

Changing government spending or taxes

Monetary Policy

Changing the money supply

increasing; incomes

In the U.S. the GDP per capita has been _______ increasing for decades, but median family _______ haven't changed much at all.

Federal Open Market Committee

In the US, deciding how many bonds to buy or sell is done by the ________ ________ ________ ________.

Expansionary Monetary Policy

Increases the total supply of money in the economy more rapidly than usual

decreased

Inflation is also caused by a ___________ availability of a good like oil

Trade-off

Involves a sacrifice that must be made to get a certain product or experience

high

Less money = ________ interest rates

1.Changing the reserve requirement(decreasing it will increase the money supply) 2. Changing discount rate(interest rate it charges banks) decreasing the discount rate will increase the money supply 3. Open market operations- federal reserve buys or sells short term government bonds(if government buys bonds, increases banks liquidity and increases money supply)(fed issues more bonds- banks will have less liquidity and less money supply)

The fed can change money by:

Deficit spending

The government spending more money than it collects in tax revenue

Price signals

The information that markets generate to guide the distribution of resources

Natural rate of unemployment

The lowest rate of unemployment that an economy can sustain over a long period

Discount Rate

The minimum interest rate set by the Federal Reserve for lending to other banks

productivity

The more connectivity, the more ____________.

Inflation rate

The percent change in the price of that "market basket" over time.

Fractional-reserve banking

The practice whereby a bank accepts deposits, makes loans or investments, and holds reserves that are a fraction of its deposit liabilities

Equilibrium Price

The price at which the quantity of a product offered is equal to the quantity of the product in demand

Interest Rate

The price of borrowing money

Land, labor, and capital

What are the factors of production?

No income, no job, no assets

What does NINJA stand for?

Opportunity Cost

Whatever you give up to do something

high; less; less

When interest rates are ________, borrowers borrow ________ and spend ________.

low; more; more

When interest rates are ________, borrowers will find it easier to pay back loans so they will borrow ________ and spend ________.

Recession

When two successive quarters, or six months, show a decrease in GDP

Crowding out

Where increased public sector spending replaces, or drives down, private sector spending

Inflation

_______ is either caused by consumers bidding up the price of stuff or producers raising prices and producing less because there's an increase in production cost

Real; nominal

_______ means that a price from the past has been adjusted for inflation. ______ means that a price from the past hasn't been adjusted for inflation

Default

________ occurs when a debtor is unable to meet the legal obligation of debt repayment.

bonds

__________ are debt instruments

stocks

______________ are equity instruments

positive externality

a benefit that is enjoyed by a third party as a result of an economic transition (education)

nudge theory

a concept which argues that nudges encourage people to act a certain way without actually changing their choices

sunk cost

a cost that has already been paid and cannot be recovered