Economics Overview: Factors and Models

Study Notes

Chapter 1: Factors of Production

The factors of production are labor, capital, and land.
Payments for these factors include wages for labor, rent for land, interest for capital, and profit.

Chapter 2: Economic Models

The "all other things equal" (ceteris paribus) assumption is fundamental in economic models.
Production possibility frontiers (PPFs) illustrate the trade-offs in a simplified economy producing only two goods.
The true cost of a good is the value of the next best alternative that must be sacrificed to produce it.

Chapter 3: Price and Quantity

A price increase leads to a rise in quantity supplied and a decrease in quantity demanded.
A price decrease leads to a decrease in quantity supplied and an increase in quantity demanded.
Movements along supply and demand curves represent changes in price and quantity.

Chapter 4: Rent Controls and Price Controls

Rent controls keep rental prices below equilibrium, creating shortages.
Price ceilings and floors set legal maximums and minimums, often causing inefficient allocation of resources and black markets.

Chapter 6: Economic Models

Classical models focus on self-correcting price levels, while Keynesian models consider the role of government intervention.

Chapter 7: Gross Domestic Product (GDP)

GDP measures the total value of goods and services produced in an economy.
GDP excludes intermediate goods, financial transactions, used goods, and household production to avoid double-counting.
Real GDP adjusts for inflation and is calculated by dividing nominal GDP by a price index, usually the GDP deflator or a price index based on a specific time period, and multiplying this by 100.
Measures of inflation and economic growth use real GDP or measures adjusted for inflation.
Per capita GDP provides an average measure of output per person in an economy.

Chapter 8: Unemployment

The unemployment rate is calculated as the number of unemployed individuals divided by the labor force, multiplied by 100.
Types of unemployment include frictional, cyclical, structural, and seasonal.

Chapter 9: Long-Run Growth

The Rule of 70 provides a method for estimating how long it will take for a variable like an economy's size to double, given its growth rate.
Factors of long-run growth include technology, human capital, resources, climate, government policy, health, geography, and high saving rates, and infrastructure.

Chapter 10: Open and Closed Economies

A closed economy is one that does not interact with other economies.
An open economy interacts with other economies through trade and financial flows.
Net exports (exports minus imports) are a component of aggregate demand considered in open economies, represented as 'NX'.

Chapter 11: Consumption Function

A consumption function shows the relationship between current disposable income and consumer spending.
The spending multiplier is the effect of a change in autonomous expenditure on the aggregate output. The calculations use MPC (marginal propensity to consume) and MPS (marginal propensity to save), which together must add up to 1.

Chapter 12: Aggregate Demand Curve

Factors that influence aggregate demand include expectations, wealth, the size of existing physical capital, and monetary and fiscal policies.

Chapter 13: Fiscal Policy Analysis

Fiscal policy involves government spending and taxation to influence economic conditions.
Discretionary spending is deliberate government spending decisions, while automatic stabilizers are policies that automatically respond as the economy changes.

Chapter 14: Aggregate Supply Curve

Long-run aggregate supply relies on productivity improvements and resource use. Short-run aggregate supply curve is influenced by commodity prices, expectations, and productivity.

Chapter 15: Money Supply and Functions

M1 is the narrowest measure of the money supply, consisting of currency and checkable deposits.
M2 includes M1 plus savings accounts, time deposits, and money market accounts.
The Federal Reserve (FED) plays a vital role in setting and adjusting monetary policy and related issues (e.g., supply of money, check clearing, bank regulation.)

Chapter 16: Inflation and Deflation

Inflation is general price increases, while deflation is general price decreases.
Inflation tax is the loss of purchasing power due to inflation.
Hyperinflation occurs when inflation rates reach very high levels.
Deflation can create issues if debt payments increase in real terms.

Chapter 5 - Comparative Advantage

Comparative advantage is an economy's ability to produce a good or service at a lower opportunity cost than other countries.
Tariffs act as barriers to free trade.