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Economics (Microeconomics (Price Theory: Supply and Demand (Demand…
Economics
Microeconomics
Basics of Economics/Economic Thinking
Incentives
Negative Incentives: A punishment someone may get from doing something
Perverse Incentives: Encourages bad behavior on accident
Positive Incentives: A reward someone may get from doing something
Factors of Production
Labor: Human effort used to produce goods and services
Land: Natural resources before they are changed by human effort
Capital: Tools of production; goods used to produce other goods and services
Scarcity
Marginal Analysis: Examination of the additional benefits of an activity compared to the additional costs by doing that same activity
Diminishing Marginal Utility: First unit of consumption of a good or service yields more utility than the second (plus) units; declining satisfaction as consumption increases
Production Possibility Curve: Shows alternative ways to use productive resources; shows maximum output production possibilities
Opportunity Cost: What you give up for the other item; next best alternative
Price Theory: Supply and Demand
Normal Goods: Something someone will purchase that is needed, such as good
Inferior Goods: Something that someone will purchase as a luxury. Typically will directly correlate with the amount of income
Substitute Goods: A good that is purchased as a substitute for another, when one good is more expensive or not available
Supply Shifters
Costs of Production
Technological Change
Number of Producers/ Sellers in an area
Future Expectations about Prices
Complementary Goods: A good that is typically purchased alongside with another good
Demand Shifters
Change in Income
Change in the price of related goods
A change in the population of available consumers
Change in Expectations about Future Prices
Change in Consumer Information
Change in Tastes and Preferences
Price Elasticity of Demand: The change in demand based off the change in price
Surplus: The amount of product left over after production, excess amount left
Price Floors: The minimum price that it can be, typically shown as a surplus
Price Equilibrium: Where producers and consumers are good with the set price
Price Ceilings: The maximum price that it can be, but is shown as a shortage
Shortage: There is not enough produced under the demand for the product; there is a shortage in the supply
Demand
Law of Demand: At lower prices, people choose to buy more; at higher prices, people choose to buy less
20:80 Rule: 20% of customers make up 80% of sales
Supply
Law of Supply: At higher prices. people choose to produce more; at lower prices, people choose to produce less
Behavioral Economics/Nudge
Choice Architecture: A person/organization responsible for organizing the context in which people make decisions
Libertarianism: Belief that people should always be free to opt out of doing things if they choose to, especially if the outcome only affect the individual in question
Nudges: Designing choice architecture to alter people´s behavior in a predictable way, without forbidding any options or significantly change their economic incentives
Paternalism: Attempting to influence choices (or making choices for somebody) in order to make someone else better else
Practical Personal Financial Info
Sub-prime, Adjustable Rate Mortgage: For customers with poor credit score. Rates can change whenever which makes it very risky
Payday Loans: Short term loan of credit to pay when an individual cannot pay the full amount
Federal Tax: Taxes that are taken out which go to government funded things, such as military
Fixed-Rate Mortgage: The amount one pays in interest is constant, so it does not fluctuate
Net Pay: Your pay after taxes are taken out
Voluntary Deductions: Deductions from your paycheck that you choose to pay, such as contributing to your 401(k)
Gross Pay: Your pay before deductions
Mandatory Deductions: Deductions that require you to pay them, such as the federal tax, FICA taxes, state taxes
FICO Score: Your credit score, any number between 300 to 850, which determines how big of a credit risk you are
FICA Taxes: Mandatory taxes that take out a percentage for your Social Security and Medicare
Marginal Taxation: The percentage of tax applied to your income for each tax bracket in which you qualify
State Taxes: Taxes that are taken out which are contributed to your local government, which they can then spend on education
Macroeconomics
Recession and Responses to Recession
Monetary Policy
What it is: Change in money supplied by the government, often targeting an inflation rate
Contractionary: This is used to fight inflation and rising prices which will then prevent the economy from overheating. The government should prepare for the during peak GDP levels
Expansionary: this is used to fight recession and high unemployment. Spending is increased and taxes are lowered. The government is required to borrow money
Federal Reserve
Tools Used to control Money Supply
Open Market Operations: Involves the Federal Reserve buying and selling Treasury bonds
Paying Interest:: Banks are required to hold a certain amount in reserves, but they often keep more in reserves than required
Discount Rate: The discount rate is the interest rate that banks have to pay to borrow money
Reserve Requirement: The Federal Reserve determines how much banks keep in reserves
What it is: It is the central bank of America which controls money supply, and supervises all banks (Bank of Banks)
Dual Mandate: To maximize sustainable employment and to main stable prices
How it is organized: There are 7 members on the Board of Governors
Flat Money: A currency with nothing of value backing them up except for the fact that it is legal tender
Gold Standard: Each dollar is backed by gold. No country uses this anymore
Functions of Money: In spending, it is a unity of exchange. It is to measure or compare the value of something. To accumulate value, it is considered a store of value
Fractional Reserve Banking: Only a fraction of a bank deposits are back by cash. Usually a bank is required to keep 20% of all deposits in cash.
2009 Recession
Mortgage Backed Security: Bank will loan borrowers money to purchase a home. Borrowers are required to pay monthly for the loan. It is good for people who do not have enough money to buy a home. It is very risky because rates can change and are difficult to pay off.
Credit Default Swap: The seller will compensate for the buyer will credit in an even where the buyer is in debt
Fiscal Policy
What it is: Change in the way the government taxes and spends. It changes the inflow of cash and overall spending. It can be used as a multiplier.
Expansionary Fiscal Policy: Used to fight recession, there is high unemployment. Spending is increased and taxes are lowered. The government is required to borrow
Marginal Propensity to Consume: How much is spent out of each extra dollar of income
Contractionary Fiscal Policy: Used to fight inflation and rising prices. It prevents the economy from overheating. The government should prepare for this during the peak GDP levels
Debt: What the government owes from borrowing.
Deficit: The differences from what the government spends versus what the government is taking in
Fiscal Policy Multipliers: The government changes taxes and spending to have a magnified effect on the overall economy
Differing Philosophies
Animal Spirits: The fear factor (fear fairy)
Paradox of Thrift: We hold onto our cash and do not take risks when we are afraid
Hayek: Believes that there should be government interference, and that the government should not be spending money it does not have
Fiscal and Monetary Sugar High: When the government puts too much money into the economy
Keynes: Believes that recession is caused by psychology, and markets must be steered by the governments
Business Cycle (Boom and Bust): Compromised of an expansion and a contraction
Contractionary Phase: The Real GDP goes in decline, and there is low spending
Expansionary Phase: The economy is growing faster than average, and there is high spending
Recession: An economic decline, usually from a negative GDP. Industrial activity is reduced.
Measuring the Health of the Economy
What is Economy: A system of production, consumption, distribution, of goods and services
Gross Domestic Product: Total market value of all goods and services produced in a country (during the period of a year)
GDP Equation: C+I+G+Nx
C: Consumer Spending
I: Business Investment
G: Government Production
Nx: Net Exports (import/export)
Not included: Illegal activities, value of non-market activities, secondary sales, financial transactions (stocks)
Unemployment
Frictional Unemployment: When you are between jobs
Structural Unemployment: The jobs are replaced by machines, the jobs no longer exist
Unemployment Rate: Calculated by the percentage of people who do not have a job but are looking for one. Should be around 4-6%
Cyclical Unemployment: Caused by a recesssion
Sectors of the Economy
Primary Sector: Activities revolve around getting raw materials from the eather
Secondary Sector: Processing raw materials into finished products of greater value
Tertiary Sector: Focus on moving, selling and trading
Underground Economy: All the illegal production of goods and services that does not pass through markets
Consumer Price Index: An index of variation of prices paid by consumers
Inflation: The dollar value decreases, and prices rise