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Economics (Micro: How the behavior of the consumer and individual decision…

- - - - Utility Maximization: The maximum amount of something you can consume before your satisfaction diminishes.
      - Cost/Benefit analysis: Weighing the cost/benefit of a decision.
      - Law of Diminishing Marginal Utility: As consumption goes up, marginal utillity goes down.
      - Opportunity cost: The 2nd best opportunity you lose when you make a decision.
      - When deciding whether to engage in a behavior each additional time the marginal costs/benefits must be weighed.
    - - Positive: rewards/benefits
      - Negative: punishments/costs
      - Perverse: incentive that has an unintended/undesirable result- contrary to the interests of incentive creator.
    - - Land
      - Labor
      - Capital
  - - - 20:80 Rule: 20% of consumers consume 80% of a product.
      - The Law of Demand: As the price of a good increases, the amount demanded decreases. As the price decreases, the demand increases.
        
        Change in price of a complimentry good
        
        Change in expectation about future prices
        
        Change in income (normal vs. inferior goods)
        
        Change in consumer information
        
        Change in population of available customers
        
        Change in tastes/preferences
        
        Demand Shifters:
    - - Law of Supply: As prices increase, supply of a good increases because sellers and willing and able to priduce higher quantities.
        
        Costs of production
        
        Change in technology
        
        Number of producers in an area
        
        Future expectation about price
        
        Supply Shifters:
    - - Surplus: Not enough consumption for the amount of production.
      - Shortage: Supply of a good is too low for demand of the good
      - Market Equilibrium: There is neither a surplus or shortage
    - - Normal v. inferior Goods
        
        Normal: The demand curve shifts to the right as customer income increases. A good that people would buy more of if they won the lottery.
        
        Inferior: Demand curve shifts to the left as customer income increases.
      - Complimentry v. Substitute Goods
        
        Substitute: A good that can replace another very similar good if prices change. For example, if the price of movie tickets increases, customers might go to mini golf instead.
        
        Complimentry: Goods that are related but not interchangable. If one has a price shift the other might have a change in demand. For example, an increase in the price of plane tickets would lead to a decrease in demand for rental cars.
    - - Whether good is a luxery or necessity
      - How much of a consumer's income is spent on the good
      - Whether close substitutes are available
      - The time horizon in which the change is considored (more time = more elastic)
      - Determining Factors:
      - Equation: PED = quantity % change / price % change
      - Anything less than 1 = inelastic demand and anything more than 1 = elastic demand. A PED of 1 is considered unitary.
    - - Price Ceiling: A gov. mandated lower price. These create shortages.
      - Price Floor: A gov. mandated higher price. These create surpluses
- - - - Inflation: Increase in value of monetary currency. (should rise 2% every 6 months.
    - - Frictional: Short term and a natural part of the job search process. Good for the economy because it allows workers to move to jobs where they are more productive. This occurs when workers leave jobs but haven't found new ones yet.
      - Structural: Exists when shifts in the economy create a disconnect between skills workers have and skills needed by employers.
      - Cylical: Caused by the contraction phase of the buisness cycle; where demand for goods + services fall and buisnesses lay off many workers to cut costs.
    - - Secondary: manufacturing (taking raw materials and adding value)
      - Tertiary: moving, selling, and trading (includes banks, cleaning, fast food, etc)
      - Primary: harvesting raw materials (farming, mining, fishing, etc)
      - Underground: illegal production of goods + services (drugs, prostitution, sports betting, etc) and legal prodction of goods + services that isn't counted officially (ie; babysitting)
  - - - Expansionary Phase: period of time where the economy grows fast and GDP increases. The longest period was ten years from 1991-2001.
      - Contractionary Phase: real GDP declines
      - Recession: when the economy stays in the contractionary phase for 2 consecutive quarters or more.
    - - Expansionary Fiscal Policy: increasing spending and lowering taxes in order to combat recession + high unemployment
      - Contractionary Fiscal Policy: decreasing spending and raising taxes in order to combat inflation + prevent the economy from "overheating"
      - Multipliers: money spent by the govornment will multiply. Calculation: 1/1-MPC (example- if the MPC is .8 then 1/(1-.8) = 1/.2 = 5)
      - Marginal Propensity to Consume (MPC): The amount of money spent out of one extra dollar of income. Young people MPC is on average 1 (the extra dollar is spent). Middle aged MPC is around .85 (0.15 is saved). For efficient circulation of money the gov. should target groups with a high MPC (ie. unemployed or those with food stamps generally have high MPC).
      - Debt vs. Defecit: The defecit is the difference between what the federal gov. spends and what it brings in. Debt is what the gov. borrows to cover the defecit.
    - - Expansionary: is when a central bank uses its tools to stimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand.
      - Contractionary: 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
      - Fiat Money vs. Gold Standard: Flat money is currency with nothing to back it up other than the fact that it's a legal trading mechanism. Gold standard is a monetary system in which the currency is based on a fixed amount of gold. No country still operates on the gold standard, although most did at some point (all stopped by 1970).
      - Functions of Money: Currency is required to be durable, portable, standardized, and highly valued.
      - The Federal Reserve: America's "central bank" that controls the money supply, supervises all banks, and is independant from politics. It's comprised of 7 people who serve 14 year terms. The Fed tries to keep inflation at 2%. Banks can also borrow money from the Fed.
        
        "Dual Mandate" is the two main goals of the Fed. The first is to maximize sustainable employment and the second is to maintain stable prices (limit inflation- keep it at 2% rise)
        
        Reserve Requirement: the Fed determines how much money banks lock up in vaults. Low requirements = expansionary. Higher = contractionary.
        
        Discount Rate: is the interest rate that banks pay to borrow from the Fed. Low = expansionary and high = contractionary
        
        Open Market Operations: the Fed buys and sells treasury bonds (the the gov. borrows money). If the Fed buys bonds from current owners they are increasing money in circulation. If they sell the bonds it's a contractionary measure.
        
        Paying Interest on Excess Reserves: banks are paid interest (the Fed sets rates) for not loaning out money
      - Fractional Reserve Banking and the Money Supply: Only a certain portion of money can be backed by actual cash. On average banks are only required to keep 3% of deposits. In turn, deposits turn into loans and money in banks multiplies. The Fed has officially only printed 1.2 trillion, but banks have 14.1 trillion.
    - - Mortgage Backed Security: Stocks the govornment sold on mortgages. They were trustworthy until the banks loaned them to people who were unlikely to pay them back.
      - Credit Default Swap: An insurance policy that's like a bet against the default of a bond or loan.
    - - Keynes vs. Hayek: Keynes believes in gov. involvement to help get the economy out of a slump whie Hayek believes that you should let the economy play out.
      - Paradox of Thrift: An increase in savings leads to a decrease in spending which will lead to a decrease in gross output which leads to a decrease in savings.
      - "Animal Spirits:" The idea that when people hear the economy may fail they become afraid and stop spending, sending the economy into a slump while the confidence fairy arrives when people start to feel financially confident after a recession and begin to spend again.
      - Fiscal and Monetary "Super High:" An immediate boost in the economy as a result of a policy change can lead to careless spending which will worsen the economy.