Economics (Recession and Responses to Recession (Monetary Policy: Changes…
Basics of Economics/Economic Thinking
Scarcity: The idea that there are limited resources for all human wants and needs.
Marginal Analysis: An examination of the additional benefits of an activity compared to the additional costs made by that activity. Companies use marginal analysis as a decision making tool to help them maximize their profits.
Diminishing Marginal Utility: A person increasing consumption of a product while keeping consumption of other products constant decreases marginal utility.
Opportunity Cost: The loss of potential gain from other alternatives when one alternative is chosen.
Positive Incentives: Something that motivates or encourages someone to do something.
Negative Incentives: Something that threatens someone with a punishment if they don't do something.
Perverse Incentives: An incentive which has an unintended and undesirable result (unintended consequence).
Production Possibilities Frontiers: A graph with a curve that shows all maximum output possibilities for two curves.
Factors of Production
Land: Natural Recources
Labor: Human effort (labor) used to produce goods.
Capital: Tools of production (goods used to produce goods and services).
Micro vs. Macroeconomics
Microeconomics: The study of individuals, households and firms' behavior in decision making and distribution of resources. It generally applies to markets of goods and services and deals with individual and economic issues.
Macroeconomics: The branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation.
Price Theory: Supply and Demand
Law of Demand:The amount of money a consumer will pay for a product.
20:80 Rule: The idea that 20% of consumers make up 80% of the market spending.
Law of Supply:The amount of money a supplier will sell a product for. (Higher prices = more consumption).
Market Equilibrium: The price of a product suppliers/consumers are willing to pay/sell for a product.
Surplus: When the amount or quantity produced is greater than the demand for the good.
Shortage: When the good being produced has a greater demand than can be supplied.
Supply/ Demand Shifters
Number of sellers in the market: More sellers in an area will increase the supply for a good.
Cost of Production: Changes in price of inputs (Ex. Making cupcakes and the price of sugar goes up, less cupcakes will be made).
Utilizing cheap international labor: If production of a good is cheap, more will be supplied.
A Shortage of Inputs: If there is a shortage of inputs (oil supplies, bees), the cost of production will go up.
Government policy, including taxes and subsidies: The cost of production is greater with taxes. It is less with subsidies.
Technological Change: Improved technology can make production easier and faster, so more can be produced at each price. (Ex. assembly lines)
Future Expectations about Prices: If a supplier expects the price of their good to rise in the future, they may store some of today's supply to sell later at a higher price.
Change in income: The more money consumers make, the more the demand goes up.
Normal Goods: Goods consumers buy when they have more money.
Inferior Goods: Goods that are purchased when a consumer doesn't have a lot of money to spend.
Population of available consumers: The number of consumers in an area (ex. If population increases, demand increases.
Prices of other goods
Complementary goods: buying 2 things that go together (Ex. Peanut Butter and Jelly).
Substitute goods: Switching from one good to a less expensive good.
Future Expectations about price: An expected event that makes good cheaper in the future. (Ex. sales)
Consumer Info: The info a consumers knows about a good can change the demand for a good.
Tastes and Preferences: How popular a good is can change demand. (ex. popular trends).
Price Elasticity of Demand: The percentage change in quantity demanded in response to a change in price.
Elastic Demand: The good isn't needed, and the price will effect the demand. If your calculations equal less than 1, the good is inelastic.
Inelastic Demand: The good is needed. When the price changes, the demand stays the same. If your calculations equal a number more than 1, the good is elastic.
((q new - q old)/ q old)/(( p new - p old)/ p old)
Unit Elasticity: If your calculations equal exactly 1.
Governments Price Controls
Price Ceilings: The price charged for a product is more than the equilibrium price (This results in a shortage)
Price Floors: The lowest price a product can be sold at (this results in a surplus).
Practical Personal Financial Info
Gross pay:The amount of money you're paid before deductions.
Net Pay: The amount of money you end up with after taxes.
Federal Tax: The money that goes towards everything the Federal Gov. does. (Military, social security, medicare)
Marginal Tax Rates/ Brackets: As income rises, higher taxes are imposed. You are put into brackets for how much you will be taxed based upon your income.
State Tax (Colorado): The money that goes towards state school funding, sidewalks, etc. Colorado's flat rate is 4.63%
FICA taxes: The specific tax for social security and medicare.
FICO score: A type of credit score created by the Fair Isaac Corporation. Lenders use borrowers' FICO scores along with other details on borrowers' credit reports to assess credit risk and determine whether to extend credit.
Mandatory: Mandatory taxes you can't get out of. (Federal Tax, FICA Tax, etc).
Voluntary: Your chosen deductions
Payday loans: A small amount of money lent at a high rate of interest on the agreement that it will be repaid when the borrower receives their next paycheck. They are predatory because most people keep taking out payday loans to pay off their last one and they get into an endless cycle of dept.
Fixed-Rate Mortgage: A mortgage loan where the interest rate remains the same through the term of the loan, as opposed to loans where the interest rates can fluctuate.
Sup-prime, adjustable rate mortgage: A loan that is offered to borrowers with impaired credit records. The higher interest rate is intended to compensate the lender for accepting the greater risk in lending to such borrowers.
Consumer Financial Protection Bureau: An agency that promotes fairness for mortgages, credit cards, and other consumer financial products and services.
Choice Architecture: The design of different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision-making.
Libertarian Paternalism: Making it easy for people to go their own way and making it easy for people to exercise their freedom.
Nudges: Designing choice architecture to alter people's behavior in a predictable way, without forbidding any options or significantly changing their economic incentives. Nudges aren't mandates.
Anchoring Heuristic: Using something you already know as an "anchor" and adjusting it in the direction you think is appropriate (Ex. guessing city sizes by comparing them to the city you live in).
Availability Heuristic: When you assess the likelihood of risks by asking how readily examples come to mind. If people can easily think of relevant examples they are more likely to be frightened and concerned than if they don't. (Ex. natural disasters)
Loss Aversion Bias: The idea that losing something makes you twice as miserable as gaining the same thing that makes you happy.
Status Quo Bias: The idea that people have a more general tendency to stick with their current situation.
Humans vs. Econs: The idea that economists will weigh the costs and benefits of a situation but humans act on what they want at that time.
Overconfidence/optimism bias: The idea that something bad is more likely to happen to someone else, and it is very unlikely it would happen to you.
Measuring the Health of the Economy
Economy: The system of production, consumption, and distribution of goods and services in a particular geographic region.
The Primary Sector:
The secondary sector:
The tertiary sector:
The underground economy:
Gross Domestic Product (GDP): The total market value of all goods and services produced in a country over the period of the year.
Included: Consumer spending, business investment spending, government spending, exports/imports.
Not included: Illegal activities, non-market activities, secondary sales, transactions that are purely financial, intermediate goods and services.
Human Development Index (HDI): A statistic of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development.
Inflation: A general increase in prices and fall in the purchasing value of money.
Consumer Price Index: A measurement of the variation in prices paid by typical consumers for retail goods and other items.
Unemployment Rate= #of unemployed persons/ labor force
Frictional Unemployment: Being in between jobs (college).
Structural Unemployment: No more need for a specific job (secretary).
Cyclical Unemployment: Unemployment caused by a recession (boom to bust).
Sectors of the Economy
The Primary Sector: Activities revolve around harvesting raw materials in the economy (mining, fishing, farming).
The Secondary Sector: Taking raw materials and turning them into a greater value (assembly lines).
The Tertiary Sector: Taking goods and moving them from point A to point B (selling products, banks, fast food, carpet cleaning).
The Underground Economy: Illegal production of goods and services (drug dealing, prostitution).
Recession and Responses to Recession
Recession: A period of temporary economic decline during which trade and industrial activity are reduced (generally identified by a fall in GDP in two successive quarters).
Business Cycle: A process of economic expansion and contraction that occurs repeatedly.
Mortgage Backed Security: A type of asset-backed security that is secured by a mortgage or collection of mortgages
Credit Default Swap: A financial contract where a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds
Ratings Agencies: Company's that assign credit ratings, which rate a debtor's ability to pay back debt by making timely interest payments and the likelihood of default.
Fiscal Policy: Changes to the way government taxes and spends money (congress and the president do this). With changes to this policy, GDP changes with it.
Monetary Policy: Changes to the supply of money (The Federal Reserve does this).
Contractionary: a form of economic policy used to fight inflation which involves decreasing the money supply in order to increase the cost of borrowing which in turn decreases GDP and dampens inflation.
Expansionary: A policy by monetary authorities to expand money supply and boost economic activity, mainly by keeping interest rates low to encourage borrowing by companies, individuals and banks.
Keynes vs. Hayek
Keynes believed that recession is caused by the "animal spirits" (the fear fairy) and the logic of the paradox thrift (we hold onto our money and don't take risks).
Fiat Money vs. Gold Standard
Fiat Money: The currency used has nothing standing behind them except the fact that they are legal tender (not gold or silver).
Gold Standard: The money was backed by gold or a combination of gold and silver.
Fractional Reserve & The Money Supply: The practice where a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank.
The Federal Reserve: The central bank of the United States. It controls the money supply and supervises all the depository institutions in the country (banks, savings and loans, credit unions, etc.)
Dual Mandate (goals of the Fed): The Fed's goals are maximum employment, stable prices (no inflation or deflation), and moderate long term interest rates.
Reserve Requirement: A central bank regulation employed by most of the world's central banks that sets the minimum amount of reserves that must be held by a commercial bank.
Discount Rate: The interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility.
Open Market Operations: The Government buying and selling treasury bonds in the open market in order to expand or contract the amount of money in the banking system.