Economics Chapter: Business Cycles and Growth

Business Cycle

• Trough: The lowest point in a business cycle, marking the end of a recession and the start of an expansion.

Choice

• Choice: A decision made by individuals due to limited resources (scarcity).

Comparative Advantage

• Concept: Countries should specialize in goods and services where they have the lowest opportunity cost of production compared to other goods and services.

Deflation

• Definition: A decrease in the average price level of goods and services in the economy.
• Impact: Encourages holding cash over investment in new production.
• Measurement: A negative annual percentage change in the aggregate price level.

Depression

• Definition: A severe recession characterized by high unemployment and economic downturn.

Economic Growth

• Definition: Increase in a nation's total output and sustained increase in employment.
• Sources: Rise in resources and advancements in technology.
• Effect on PPC: Shifts the PPC to the right. (Production Possibilities Curve)

Equilibrium

• Definition: The state where the quantity demanded equals the quantity supplied at a particular price.
• Importance: Marks agreement between consumers and producers concerning products or services.

Equilibrium Price

• Definition: The price at which the quantity demanded equals the quantity supplied.

Equilibrium Quantity

• Definition: The quantity demanded and supplied at the equilibrium price.

Expansions

• Definition: The phase in a business cycle where economic activity increases from a trough to a peak.
• Characteristics: Rising total output and increasing employment.

Inflation

• Definition: An increase in the average price level of goods and services.
• Measurement: A positive annual percentage change in the aggregate price level.

Labor Force

• Definition: All people who are actively seeking and available for employment.

Law of Demand

• Definition: As price decreases, quantity demanded increases (inverse relationship).

Law of Supply

• Definition: As price increases, quantity supplied increases (direct relationship).

Macroeconomics

• Focus: Large-scale economic choices and issues (national and international economies).

Microeconomics

• Focus: Choices made by individual economic units (households, businesses, individuals).

Normative Economics

• Nature: Involves opinions and value judgments about what "should" be.

Opportunity Cost

• Definition: The value of the next best alternative forgone when making a choice.

Price Ceiling

• Effect: Maximum legal price set below equilibrium price (creates shortages).

Price Floor

• Effect: Minimum legal price set above equilibrium price (creates surpluses).

Price Stability

• Definition: A desired state where the general price level does not fluctuate drastically.

Production Possibilities Frontier (PPF)

• Description: Shows the trade-offs an economy faces when producing two goods.
• Representation: Illustrates maximum output for one good given the production of another.

Recession

• Definition: A period of reduced economic activity with falling output and employment.

Resource

• Definition: Inputs used in the production process, including labor, raw materials, and machinery.

Scarcity

• Definition: The fundamental economic problem of unlimited wants exceeding limited resources.

Shifts of Curves vs. Movements Along Curves

• Movement along a curve: Price changes; quantity demanded/supplied changes.
• Shift of a curve: Non-price factors (supply/demand) change.

Shortage

• Definition: Occurs when the quantity demanded exceeds the quantity supplied at a given price.
• Remedies: Decreasing demand, increasing supply, or allowing the price to rise to equilibrium.

Specialization

• Definition: Focusing on producing a specific good or service to increase efficiency.

Supply and Demand Model

• Representation: A graphical representation of supply and demand showing equilibrium.

Surplus

• Definition: Occurs when the quantity supplied exceeds the quantity demanded at a given price.
• Remedies: Increasing demand, decreasing supply, or allowing the price to fall to equilibrium.

Trade

• Definition: Exchange of goods and services between parties.

Micro or Macro Examples

• Macro: Unemployment rate, tax policy, national income.
• Micro: Individual company decisions, commodity prices. Example: the price of cars is rising but car manufacturers are still in business.

Scarcity Definition

• Definition: Limited resources to meet unlimited consumer needs/wants.

Opportunity Cost (Mr. Duke)

• Definition: What Mr. Duke would have done had he not attended the opera.

Economic Measure of Labor Market

• Definition: Unemployment rate.

Real Wages

• Definition: Nominal wages adjusted for inflation.

Trade-off/Opportunity Cost (Rent/Concert)

• Example: Rent is a trade-off as purchasing tickets to a concert is an opportunity cost.

Technological Improvements (PPF)

• Effect: Shifts the PPF outward, representing economic growth.

Basic Economic Questions

• Questions: What to produce, how to produce, and for whom to produce.

Economic Systems

• Synonyms: Free enterprise, capitalism, free market
• Other economic systems: Command economies/socialism

Economic System Types

• Dominant worldwide: Mixed economic system

Supply Curve Shifts

• Causes: Input prices, related goods, technology, expectations, number of producers.

Demand Curve Shifts

• Causes: Related goods, income, tastes, expectations, number of consumers.

Nationalization vs. Privatization

• Nationalization: Government takes ownership of companies.
• Privatization: Government sells nationalized businesses back to the private sector.