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Economics (Microeconomics: Individual decision making. (Price Controls…
Economics
Microeconomics: Individual decision making.
Price Controls
Ceilings - result in shortage
Floors - Result in surplus
Reasons why things should/shouldn't be for sale
Negatives
Inequality/fairness
Valuing things in the wrong way
Perverse incentives
Exploitation/power unbalanced
Positives
Good practical outcomes - incentives, better behavior
Consent
Supply/Demand
Marginal Analysis - An examination of the additional benefits of an activity compared to the additional costs incurred by that same activity. Companies use this as a decision making tool to help them maximize their potential profits
Law of Supply - At higher prices, people choose to produce more and at lower prices, people choose to produce less
Supply Shifter
4.) Future expectations about prices
3.) Number of producers/sellers in an area
2.) Technological change
1.) Costs of production
Law of Demand - People choose to buy more at lower prices and choose to buy less at higher prices
Elasticity of Demand
4.) Time horizon
3.) Consumer's budget
2.) Necessity vs. luxury - addiction
1.) Lots of substitutes --> more elastic (and vice versa)
Calculation: Percentage change in quality demanded divided by the percentage change in price
If it's equal to 1, it's unit elasticity
Any number less than 1 has inelasticity
Any number greater than 1 has elasticity
Demand Shifter
6) Tastes and preferences (successful marketing campaigns)
5.) Consumer information
4.) Future expectations about price
3.) Price of other goods (complements and substitutes)
2.) A change in income (normal vs. inferior goods)
1.) A change in the population of available consumers
Production Possibility Curves
Factors or Production - What and how much should I produce?
Opportunity Cost - The loss of potential gain from other alternatives when one alternative is chosen
Entrepreneur - Brings all the factors together
3.) Capital - Tools of production
2.) Labor - Human effort
1.) Land - Natural Resources
Wants are unlimited - but the resources are limited
Scarcity forces us to make choices
Behavioral Economics
Nudging (Libertarian Paternalism) - Designing choice architecture to alter people's behavior in a predictable way, without forbidding any options or significantly changing their economic incentives
Paternalism - No choice, because that is what's best for you
Libertarianism - maximum freedom to choose
Choice architecture
The person who decides how choices will be aranged
A person/organization responsible for "organizing the context in which people make decisions"
Macroeconomics: The part concerned with large-scale factors.
Measuring the Health of the Economy
Sectors
The Primary Sector - The part that revolves around harvesting raw materials from the earth (farming, fishing, mining)
The Secondary Sector - Taking raw materials and making something (factories and manufacturing)
The Tertiary Sector - Focuses on moving, selling, and trading the products
The Underground Sector - All the illegal production of goods and services (drug dealing, prostitution, sports betting). Also includes legal production that doesn't pass through markets (babysitting)
3 Main Macro Measurements
Underemployment
Frictional - People between jobs
Structural - Your job disappears (economy is re-structuring)
Cyclical - Caused by a recession
GDP (Gross Domestic Product)
The total market value of all goods and services produced in a country over the period of one year.
GDP does not include...
Illegal Activities (drugs, prostitution)
Value of Non-market Activities (unpaid housework)
Secondary Sales (used cars from other years)
Financial Transactions (buying and selling stock)
Intermediate Goods/Services (ingredients for bigger product)
GDP = C + I + G + NX
C: Consumer spending
Services
Durable
Non-durable
I: Business Investment (spending
G: Government Spending
Doesn't include transfer payments
NX: Net Exports (Exports - Imports)
Prices (Consumer Price Index)
Recession (2 consecutive quarters of declining GDP)
Response to Recession
Fiscal Policy
Changes the way government taxes and spends money.
Done by congress and president
Monetary Policy
Changes the supply of money
Money is anything that society generally accepts as payment for a good or service
Fiat Money (nothing standing behind it (we agree on its worth)
Gold standard (opposite of Fiat Money)
Done by the federal reserve
The central bank of the US - controls money supply
7 governors decide how much money should be in the US
Want them thinking long term (14 years)
Nominated by President, conformed by Senate
Police/Supervise banks
Goals of the Fed:
1.) Maximum Employment
2.) Stabilize Prices (no inflation or deflation)
3.) Moderate long-term interest rates
Policy Tools of the Fed:
1.) Reserve Requirements
2.) Adjust Interest Rates (main tool)
3.) Open Market Operations - buying/selling treasuring bonds
"Boom and Bust cycle" (expansion and contraction that occurs repeatedly)
Paycheck Taxation
Gross pay - The amount of money before all the taxation and (mandatory/voluntary) deductions
Federal Tax - Goes to federal government
70% goes to military, social security, and medicare
FICA tax
Go specifiacally to social security and medicare
State Tax - 4.63% in Colorado
Net Pay - Price one is paid after all the deductions.