Modules 1-4

Alternative between economic downturns (recessions) and economic upturns (expansions).

Business Cycle

Machinery, buildings, tools, manufacturing goods and services

Capital

Alternative to market economy, publicly owned and central authority makes production and consumption decisions. For example, the Soviet Union from 1917-1991.

Command Economy

Something every individual has in producing a good or service if the opportunity cost of producing the good or service is lower for that individual than for other people. - Basis for mutual gain

Comparative Advantage

An increase in recessions

Fall in expansions --> what?

People can get more of what they want through trade than they could if they tried to be self-sufficient. This increases output due to specialization: each person specializes in the task that they are good at performing. - The market allows people to specialize

Gains from trade?

Points farther below the PPC- the economy is not reaching its possibilities if it's not using all of its resources. Points closer to the PPC- as unemployment decreases, the economy moves closer to reaching its possibilities.

Greater employment is represented by ... on the PPC. Lower employment is represented by ... on the PPC.

By creating a simplified economy, simulations on the computer, graphs, equations, or by focusing on one change at a time.

How can economics be modeled?

People generally make decisions at the margin, meaning that they weigh the marginal benefit against the marginal cost of a decision.

How do people generally make decisions?

The PPC is concave (bowed outward), so with each additional unit of x-axis item produced, the opportunity cost in terms of y-value item production (indicated by the slope of the line) increases.

How do you know if a country's production possibilities curve exhibits increasing opportunity costs? Explain.

Opportunity lost= the financial or non financial cost of a choice not taken The slope of a straight-line production possibilities curve is equal to the opportunity cost, specifically the opportunity cost for that good measured on the horizontal axis in terms of good measure on the vertical axis.

How is Opportunity Cost depicted on a PPC?

Shift from on frontier to below it. A recession, which causes unemployment, is represented by a point below the PPC.

If the economy entered into a recession, the country would move from point C to which point? Explain. (see diagram on pg 23)

Makes prescriptions about the way the economy SHOULD work.

Normative Economics

The value of what you must give up.

Opportunity Cost

All other relevant factors remain unchanged. - Aka the Ceteris Parilous assumption - Important when building economic models

Other Things Equal Assumption

Quantity of goods and services produced. 1. During business cycles levels of output and unemployment move in opposite directions 2. Decrease in unemployment

Output 1. Relationship between output and unemployment during business cycles? 2. Growth in output by efforts of workers --> what?

Branch of economic analysis that describes the way the economy ACTUALLY works; description

Positive Economics

When the overall price level is changing only slowly if at all.

Price Stability

A model that helps economists think about the trade-offs every economy faces. - Illustrates the trade-offs facing an economy that produces only 2 goods. It shows the max quantity of one good that can be produced for each possible quantity of the other good produced.

Production Possibilities Curve

A model that helps economists about the choices every economy faces.

Production Possibility Curve

If an economy produces at a point on its production possibilities curve.

Productive Economy

Establishes ownership and grant people the right to trade goods and services with each other; an incentive to produce things to keep or trade; to optimize resources. For example, own lake property --> don't pollute

Property Rights

Period of economic downturns when output and employment rate are falling. They are followed by expansions.

Recession

Anything that can be used to produce something else.

Resources

Not sufficiently available to satisfy all ways society wants. Ex: oil, coal, clean air (increasingly), water People have to make choices

Scarce resource - Give examples

A) The opportunity cost for producing a bushel of wheat for Country A is 4 units of textiles. For Country B, the opportunity cost is 6 units of textiles. B) Country A has an absolute advantage in the production of wheat. C) Country B has the comparative advantage in textile production because it has a lower opportunity cost of producing textiles.

See FRQ 2 on page 31

A) Country A - 1/4 computers, Country B - 1 1/4 computers. B) Country B because Country B can produce more computers than Country A. C) Country A because Country A can produce more than corn at a lower opportunity cost than Country B. D) Country B will import corn as it has a comparative advantage in the production of computers and so will produce computers and import corn. E) The minimum that Country A will accept to import corn is 1/4 computers as that is its opportunity cost for producing corn.

See Graph on Page 31 A) Opportunity Cost of bushel of corn in each country? B) Which country has the absolute advantage in computer production? C) Which country has the comparative advantage in corn production. D) If each country specializes, what goods will Country B export? E) What is the minimum price Country A will accept to export corn to Country B?

Large math computer programs to assess how the proposed changes would affect different groups of people.

Tax Models

Indicate the rate at which one good can be exchanged for another.

Terms of Trade

The study of macroeconomics and development of policy to prevent future depressions.

The Great Depression led to...

A. Produce only one good (specified) point is on axis

This production possibilities curve shows the trade-off betweenconsumer goods and capital goods. Since capital goods are aresource, an increase in the production of capital goods todaywill increase the economy's production possibilities in thefuture. Therefore, all other things equal (ceteris paribus),producing at which point today will result in the largest outward shift of the PPC in the future?

Provide goods and services and receive goods and services in return (in a market economy).

Trade

When you give something in order to have something else. Use production possibility curve model to look at trade off

Trade Off

True. "A technological change that allows Tom to catch more fish for any amount of coconuts gathered results in a change in his production possibilities curve. This is illustrated in the accompanying graph. The new production possibilities curve is represented by the line labeled"Tom's new PPC," and the original production possibilities curve is represented by the line labeled "Tom's original PPC." Since the maximum quantity of coconuts that Tom can gather is the same as before, the new production possibilities curve intersects the vertical axis at the same point as the old curve. But since the maximum possible quantity of fish is now greater than before, the new curve intersects the horizontal axis to the right of the old curve."

True or false? A technological change that allows Tom to catch more fish relative to any amount of coconuts gathered results in a change in his production possibilities curve?

FALSE. "An increase in the resources available to Tom for use in producing coconuts and fish changes his production possibilities curve by shifting it outward, because he can now produce more fish and coconuts than before."

True or false? An increase in the amount of resources available to Tom for use in producing coconuts and fish does not change his production possibilities curve.

False. "Production efficiency is achieved at points along a production possibilities curve, but every point inside a PPC is inefficient because more of either good could be produced without producing less of the other. Points outside the PPC are simply unobtainable."

True or false? Points inside a production possibilities curve are efficient and points outside a production possibilities curve are inefficient?

Lack of crucial raw materials, lack of consumer for goods, lack of incentives (rewards of punishment that motivates choices), market economy can charge more when storage --> profit --> financial incentives for producers --> no more storage.

Why do command economies fail?

1. 11 2. 11 months 3. 58 months 4. 5 years 8 months (beginning of a recession to beginning of the next)

1. How many recessions were in the US since WWII? 2. Avg length of recession? 3. Avg expansion? 4. Avg business cycle?

Tax models, simplified economy

2 types of models used by economists?

Points on the line/frontier

Which point(s) on a graph represent efficiency in production?

Something an individual has in producing a good or service if they can make more of it with a given amount of time and resources. Having an absolute advantage is not the same thing as having a comparative advantage.

Absolute Advantage

Economy's total production of goods and services for a given time period. - Falls during recessions and increases during expansions.

Aggregate Output - How does it change during recessions and expansions?

If an economy produces at the point along its production possibilities curve that makes consumers as well off as possible.

Allocative efficiency

Sustained aggregate output over time (total production)

An increase in productive capacity --> what?

From on the curve to under it.

An increase in unemployment could be represented by a movement from point... (description)

Everyone is a comparative advantage in something, everyone has a comparative disadvantage in something, so everyone can benefit from trade.

As long as people have different opportunity costs...

Inflation= overall rising price level - "A change in price of a few goods changes the opportunity cost of purchasing those goods but doesn't constitute inflation" (page 13).

Define inflation and explain why increasing the price of donuts doesn't mean inflation is occurring.

A falling overall price level - The $ costs more --> hold onto cash --> invest in new factories --> deepen recession

Deflation - What happens to cash/ the issue with deflation?

Very deep and prolonged downturn.

Depression

Increase in the max amount of goods and services an economy can produce.

Economic Growth

Economic measures that summarizes data across many different markets. Ex: unemployment rate, inflation

Economic aggregates

- Potential output - Economic growth - Read GDP when there has been no change in the economy's potential output.

Economic growth is an increase in the economy's _____ _____. Changes in real GDP output do NOT necessarily indicate... What do temporary fluctuations in economic conditions often alter?

CAN 1. And increase in the resources used to produce goods and services: labor, land, capital, and entrepreneurship. 2. Technology: The technical means for producing goods and services.

Economic growth means an increase in what the economy _____ produce. What two things can cause the production possibilities curve to shift outward?

The study of scarcity and choices. It involves individual choice.

Economics

System for coordinating a society's productive and consumptive activities; choices.

Economy

Both productive and allocative efficiency. To be efficient, an economy must produce as much of each good as it can, given the production of other goods, and also must produce the mix of goods that people want to consume.

Efficiency for the economy as a whole requires...

If there is no way to make anyone better off without making at least one person worse off.

Efficient

The number of people currently working for pay in the economy.

Employment

Risk taking, innovation, organization of resources for production

Entrepreneurship

Recoveries; period of economic upturns when output and employment are rising.

Expansions

Shortage of item because of desire --> Charge more --> Profit --> Incentive to make more --> No shortage --> Shortage of item

Explain the cycle of a market economy when it comes to shortage of an item because of desire.

Expansion: - aka recoveries - periods of economic upturns when output and employment are rising. Economic Growth: - increasing max amount of goods and services an economy can produce.

Explain the difference between expansion and economic growth.

A) The US has an absolute advantage in producing automobiles as it takes fewer Americans to produce a car in one day. The US also has an absolute advantage in the production of washing machines as it requires fewer Americans to make a washing machine in a day. B) Italy has the comparative advantage in the production of cars as its opportunity cost for producing cars is lower than the US. The US has a comparative advantage in the production of washing machines. C) The greatest gains from trade is realized when each country specializes in the good for which it has a comparative advantage (the US in washing machines and Italy in cars).

In Italy, an automobile can be produced by 8 workers in one day and a washing machine by 3 workers in one day. In the United States, an automobile can be pro- duced by 6 workers in one day, and a washing machine by 2 workers in one day. a. Which country has an absolute advantage in the production of automobiles? In washing machines? b. Which country has a comparative advantage in the production of washing machines? In automobiles? c. What type of specialization results in the greatest gains from trade between the two countries?

Recessions- shaded "boxes" Employment rate- zig zag line

In a chart depicting unemployment rate and business cycle, how are recessions and employment rate shown?

Decisions by people about what to do and what not to do. For example, choosing what to buy at a store.

Individual Choice

A rising overall price - Because cash looses value

Inflation - Why does it discourage people from holding onto cash?

Effort of workers

Labor

Sum of employment and unemployment

Labor Force

Nature items, timber, H2O, minerals

Land

Bigger picture; overall ups and downs of economy; how the government can use economic policy to minimize the damage they cause. It focuses on economic aggregates.

Macroeconomics

Long

Macroeconomics traces _____-term trends.

Study of costs and benefits of doing a little more vs a little less of an activity.

Marginal Analysis

What the US has; the decisions of individual produces and consumers largely determine what, how, and for whom to produce, with little government involvement in decisions.

Market Economy

Study of how individuals households and firms make decisions and how those decisions interact.

Microeconomics

Simplified representation used to better understand a real-life situation.

Model

The number of people actively looking for work but are not currently employed.

Unemployment

Percentage of labor force that is unemployed.

Unemployment Rate

Self-interest to achieve happiness.

Utility

Resources

We make choices because _____ are scarce.

Overall behaviors, overall and general prices of econ and high/low compared to last year rather than a specific good. - How many people are employed in the economy as a whole this year. - What determines the overall salary levels paid to workers in a given year.

What are macro questions?

1. Should I go to college or get a job after HS? 2. What determines the salary that citibank offers to a new college grad?

What are micro questions?

1. Land 2. Labor 3. Capital 4. Entrepreneurship

What are the four types of resources?

1. Tariffs and import quota usually reduce general economic welfare available. 2. A ceiling on rents decrease quantity and quality of housing

What are two general agreements among economists?

1. On a value-added tax (national sales tax, main source of government revenue in European countries) - Some want to replace the income tax with a value-added tax. Others say a value-added tax would fall more heavily on people with low incomes. 2. On economic analysis - On simplifying assumptions of reality disagreement.

What are two major disagreements economists have?

People are discouraged from holding on to cash.

What is a result of inflation?

Recession --> Unemployment --> Decreased Production --> Decreased Income --> Lower Standards of Living

What is caused by recessions? Use the following words to explain the cycle. - recession, lower standard of living, production decreases, unemployment, income

Economic Growth

What provides a long-term increase in the productive capacity of an economy?

- Positive economics - Normative Economics - Normative Economics- no right answer

What type of economic analysis has right/wrong answers? What does not? What type do economists disagree on most often?

a. capital b. land

What type of resource? a. bulldozer b. river

E. All of the above

Which of the following might allow this economy to move frompoint B to point F? (from on the curve to over extended) a. more workers b. discovery of new resources c. building new factories d. technological advances e. all of the above