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Economics (Basics of Economics (Marginal Analysis: analyzing the factors…
Economics
Basics of Economics
Marginal Analysis: analyzing the factors from multiple groups on one effect
Diminishing Marginal Utility: As consumption increases, utility decreases
Opportunity Cost:the loss of potential gain from other alternatives when one alternative is chosen
Incentives: Methods to motivate workers to work harder, different kinds include bonuses and higher wages
Unintended consequences & perverse incentives: when you think something will lead to one outcome, but a negative one arises instead
Factors of Production
Scarcity: Low supply
Land: Tools a company has to produce something
Labor: The workforce a company has to produce something
Capital: Money a company has to produce something
Microeconomics: dealing with single factors
Macroeconomics: dealing with large scale factors
Product possibility frontier curves: A curve that compares two products with a curve
Behavioral Economics/Nudge
Choice architecture: pushing people in a way to make certain decisions
Libertarian paternalism: the possibility of institutions to affect people decisions
Nudges: Something that pushes someone to make a certain choice
Loss aversion bias: Humans prefer to avoid losses than gain finds
Status quo bias: people prefer for things to stay the same, no change is better than any change
Overconfidence/optimism bias: Person thinks they are smarter than other judgment
Humans vs. Econs
Econs: Always assume that people will make an uninfluenced decision
Humans: Don't always make the best uninfluenced decision
Availability heuristic: Mental shortcut to make final decision
Anchoring heuristic: Humans tendency to rely on first piece of evidence.
Price Theory: Supply and Demand
Demand: the quantity of goods or services consumers are willing to buy
Law of Demand: as price of good increases, demand will decrease
Normal v. inferior goods: an inferior good is one that only has costs opposed to its counter part
Complementary v. substitute goods: a good that can replace another good if it becomes too expensive
Price elasticity of demand: how much the demand for a product will change based off of its price
Supply: The amount of a product available to consumers
Law of Supply: As price of product increases, the production will too
Surplus: more product than consumers will buy
Shortage: When consumers buy all of a product and are still willing to buy more
Market equilibrium: The point at which the demand and supply are the same
Government price controls: When the government controls prices so that the product can still turn profit, corn
Price ceilings: maximum price for a good, set by government
Price floors: the minimum price for a good, set by government
Supply/demand shifters: The variables that change the slopes of supply and demand graphs
Practical Personal Financial Information
Gross Pay: amount of wages paid by employer
Net Pay: The amount of the wage one keeps after taxes
Tax: money required by the government
Federal Tax: Money paid to the federal government
FICA Tax: Federal tax for social security and medicare
Loans: borrowed sum of money to be paid back
Fixed-Rate Mortgage: Interest that doesn't increase over time
Sub-prime, adjustable rate mortgage: Loan issued to people with low credit scores, high chance of going up
Payday Loans: Small money loans lent at high interest
Consumer Financial Protection Bureau: Makes and uphold rules around financial markets
FICO Scores: A persons credit score
Measuring the Health of the Economy
Economy
Gross domestic product (GDP):total value of goods and services produced by a country in one year
GDP equation: consumption+investment+ government expenditure+net exports
Inflation: the rate at which the value of a currency decreases
Human Development Index: composite statistic of life expectancy, education, and income per capita indicators
Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items
Unemployment rate: percentage of people looking for a job without one
Frictional unemployment: unemployment in any economy from people moving from one job to another
Structural unemployment: unemployment due to structural change such as technology
Cyclical unemployment: The way unemployment patterns change in cycle
Sectors of the economy
Primary: industrial sector, farming
Secondary: Uses products of primary sector, finished good production
Tertiary: service sector, involved in selling to final consumer, store
Underground Economy: The black market, sales are untracked because they are illegal, drugs, weapons, slaves
Recession and Responses to Recession
Recession: business contraction that results in slowed economic growth
Business cycle: a cycle or series of cycles of economic expansion and contraction
Mortgage Backed Security
Cons: If a lot of people don't pay their loans your money goes by by
Pros: safe long term investment
Credit Default Swap: a bet on someone else's mortgage backed security
Ratings agencies: agencies which rate mortgage backed security packages
Fiscal policy approach: taxation and spending policy set up to counter economic cycles
Monetary policy: setting of interest rates
Keynes vs. Hayek: two economic theorists with opposing views
“Animal Spirits”: fear fairy and confidence fairy, lead to spending or saving money
Fiat money vs. gold standard: fiat money can be created, gold standard means that for every dollar, there is a dollar of gold
Fractional reserve banking & the money supply: where banks loan money out that is deposited on loan creating money
Federal Reserve: the federal banking authority in the US that performs the functions of a central bank and is used to implement the country's monetary policy
“dual mandate”: elected official serves in multiple termed positions at one time
Reserve requirement: The amount of vault cash and/or Federal Reserve deposits that a bank must legally keep to back outstanding deposits
Discount rate: minimum interest rate set by government
Open market operations: Market interventions by a central bank to manipulate liquidity levels by buying or selling short term securities