Economic Questions, Scarcity and Opportunity Cost

Economic Questions and Scarcity

• All economic questions focus on how to handle scarcity.
• Economic questions arise because people's wants exceed available resources.
• Economics studies how individuals, businesses, governments, and societies make choices to deal with scarcity.
• Scarcity refers to the situation where people's wants cannot be fully satisfied due to limited resources.

Microeconomics and Opportunity Cost

• Microeconomics is the study of decisions made by individual units within the economy.
• Opportunity cost is defined as the value of the next best alternative that is given up when making a choice.
• An example of a microeconomic topic is understanding why a consumer reduces their purchase of orange juice.
• Economic systems necessitate choices because resources are limited, while wants are unlimited.
• Economics is the social science analyzing choices made when dealing with scarcity.
• When an economy shifts production towards more houses and fewer typewriters, answers the "what" aspect of economic questions.

Gross Domestic Product (GDP)

• Gross Domestic Product (GDP) measures the total market value of all final goods and services produced within a country during a specific period.
• Intermediate goods are excluded from GDP calculations to avoid double counting.
• "Market value" in the GDP definition means valuing production at market prices.

Circular Flow Model

• The circular flow model illustrates that consumer goods and services produced by firms are sold in the goods market.
• The factor market is where firms purchase services of labor, land, and capital.
• Households supply factors of production that firms demand, while firms supply goods and services that households demand.
• Total output and total income are equal in the circular flow model.
• Aggregate production equals aggregate expenditure in the circular flow.
• GDP equals aggregate income
• Net investment equals gross investment minus depreciation.
• Collecting data on exports is necessary to measure GDP using the expenditure approach.

Measuring GDP: Income and Expenditure Approaches

• The two primary methods for measuring GDP include the income approach and the expenditure approach.
• GDP can be computed by summing up the total expenditures on consumption, investment, government expenditure, and net exports over a period of time.
• The expenditure approach calculates GDP by summing personal consumption expenditures, gross private investment, government expenditure on goods and services, and net exports.
• The expenditure approach involves adding consumption expenditure, gross private domestic investment, net exports of goods and services, and government expenditure on goods and services.
• Expenditure categories for GDP calculation are consumption expenditure, investment, government expenditure, and net exports.
• In the GDP equation (GDP = C + I + G + X - M), "G" represents local, state, and federal government expenditure on goods and services, excluding transfer payments.
• Unpaid household activities are excluded from the expenditure approach to GDP calculation.
• A Senator's monthly salary is not a component of the expenditure approach to measuring GDP.
• Personal consumption expenditures make up the largest component of GDP in the expenditure approach.
• Largest component of GDP is personal consumption expenditure.
• Net interest is not part of the expenditure approach to measuring GDP.
• To measure GDP using the expenditure approach you must collect data on exports.
• Aggregate expenditures include all of the following except purchases of intermediate goods
• Gross Domestic Product is equal to the sum of consumption expenditure, investment, net exports, and government expenditures on goods and services.
• Social Security payments are not a component of the expenditure approach to measuring U.S. GDP.
• The largest component in the expenditure approach to GDP is personal consumption expenditures.
• Positive GDP growth likely occurred when personal consumption and gross private domestic investment increased, government expenditure decreased, and exports grew more than imports.
• Consumption expenditure refers to payments by households for goods and services.
• Personal consumption expenditures include household spending on goods and services produced both domestically and internationally.
• Vacation expenses are included in personal consumption expenditures.
• New housing is not included in personal consumption expenditures.

Income Approach to Measuring GDP

• The income approach sums compensation of employees, rental income, corporate profits, net interest, proprietors' income, indirect taxes paid, and depreciation, subtracting subsidies.
• Proprietors' income is considered in the incomes approach to measuring GDP.
• The income approach determines production cost, adjusting it to equal market value.
• The five income categories used are employee compensation, net interest, rental income, corporate profits, and proprietor's income.
• GDP equals compensation of employees + net interest + rental income + depreciation + corporate profits + proprietors' income + indirect taxes - subsidies.
• Wages and salaries are a component of the incomes approach to GDP.
• The income approach calculates GDP by summing compensation of employees, proprietors' income, net interest, rental income, and corporate profits.
• Investment is not included in the income approach.

Labor Force and Working-Age Population

• The working-age population includes individuals over 16 who are not institutionalized.
• People in prison are not part of the working-age population.
• The working-age population includes individuals aged 16 and older, excluding those in jail or institutional care, while labor force includes employed and unemployed individuals.
• The labor force encompasses both employed and unemployed workers.
• The unemployment rate is calculated as the number of unemployed workers divided by the labor force, multiplied by 100.
• Structural unemployment is related to technology changes.

Employment-to-Population Ratio

• The percentage of the working-age population with jobs is known as the employment-to-population ratio.
• The labor force participation rate is the labor force divided by the working-age population.
• Frictional unemployment represents the normal level of unemployment as workers transition between jobs with their existing skills.
• The unemployment rate is the number of unemployed divided by the labor force, then multiplied by 100.
• The unemployment rate is calculated as the number of unemployed divided by the labor force, multiplied by 100.
• The unemployment rate is the number of unemployed divided by the labor force, multiplied by 100.
• Labor market statistic that tends to rise during recessions and fall during expansions is the unemployment rate.
• The U-3 unemployment rate decreases when workers leave the labor force.
• If discouraged workers begin seeking employment again, there is an increase to the U-3 unemployment rate
• When economic part-time workers transition to full-time jobs, there is no change to the U-3 unemployment rate.

Economic Growth

• Economic growth is assessed through changes in real GDP.
• The Rule of 70 estimates the doubling time of a variable.
• The aggregate production function illustrates how real GDP changes with labor.
• When moving along the aggregate production function, labor is not held constant.
• The demand for labor curve illustrates the relationship between labor employed by a firm.
• The demand for labor curve is downward sloping.
• Quantity of labor supplied increases as real wage rate increases.
• In conditions of labor market equilibrium, a rightward shift of the labor supply curve results in surplus of labor at the original equilibrium wage rate
• Full employment happens at the equilibrium in the labor market, when actual GDP equals potential GDP.
• Percentage growth in real GDP per person measures the increase of real GDP per person.
• When a nation's population grows by 2 percent and its GDP grows by 5 percent, real GDP per person increases.
• Population increases are the limiting factor in the growth process in classical growth theory.
• Classical growth theory states that growth in real GDP per person is temporary.

Growth Theories: Neoclassical vs. New

• Neoclassical growth theory attributes economic growth to technological change.
• According to neoclassical growth theory, technological change leads to economic growth.
• Neoclassical growth theory assumes that technological progress is a purely chance event.
• New growth theory assumes that knowledge does not experience diminishing returns.
• A key feature of the new growth theory is the assumption of no diminishing returns to knowledge
• A higher saving rate leads to faster growth.
• If the saving rate increases, a country's growth rate of real GDP per hour of labor increases and capital per hour of labor increases.
• Encouraging free trade leads to faster growth for a country.

Economic questions address how to handle scarcity when people's wants exceed available resources. Microeconomics studies decisions by individuals within the economy. Opportunity cost is the value of the next best alternative given up when making a choice. Economics analyzes choices made when dealing with scarcity.