Principles of Economics - Week 1 (Introduction)

A measure of the overall price level based on production. It's calculated as 100 times the ratio of nominal GDP to real GDP.

A measure of the overall price level based on consumption. It's calculated by comparing the cost of a fixed basket of goods and services over time.

The total amount of money in circulation within an economy. It can be measured in various ways, from narrow money (M0, M1) to broad money (M2, M3, M4).

A sustained increase in the overall price level of an economy. It's the opposite of deflation, which is a decrease in the price level.

The percentage change in the price level from one period to another. It's often measured using the CPI or the GDP deflator.

The difference in the basket of goods used to calculate inflation - Quantity changes every year for the GDP Deflator, but stays fixed for the CPI.

The GDP Deflator includes prices of capital goods, while the CPI does not.

The CPI doesn't include the prices of imported consumer goods, while the GDP Deflator does.

A situation where the aggregate supply curve shifts to the right due to factors like lower production costs or increased productivity.

A situation where the aggregate supply curve shifts to the left, typically due to increased costs of production or disruptions in supply chains.

A situation where the aggregate demand curve shifts to the right, due to factors like increased consumer spending, investment, or government spending.

A situation where the aggregate demand curve shifts to the left, typically due to decreased consumer spending, investment, or government spending.

The short-run aggregate supply curve slopes upward, showing that as the price level increases, firms are willing to produce more output.

Prices that firms do not adjust quickly to changes in demand or costs. Firms may choose to keep prices fixed for a certain period of time.

The aggregate supply curve in the long run is vertical, indicating that output is determined by factors like technology, capital, and labor force, not by the price level.

The state of the economy where the aggregate supply and demand curves intersect, determining the equilibrium price level and output.

Monetary policy tools used by central banks to stimulate the economy following the 2008 financial crisis. They involved large-scale asset purchases financed by creating new money through quantitative easing, as well as communication of intentions to maintain low interest rates for extended periods.

A monetary policy strategy focusing on controlling inflation by setting a specific target rate. The central bank adjusts the money supply to ensure that inflation stays within the target range.

The rate of interest offered by commercial banks, including the effects of inflation.

The nominal interest rate adjusted to remove the impact of inflation. It reflects the true cost of borrowing or the real return on savings.

The equation that links nominal interest rate (i), real interest rate (r), and inflation (π): r = i - π.

The severe global economic downturn that began in 1929 and lasted until the late 1930s. It was characterized by widespread unemployment, business failures, and a dramatic decline in economic activity.

The view that the Great Depression was caused by a decrease in aggregate demand, leading to a downward spiral of economic activity.

The view that the Great Depression was triggered by a contraction of the money supply, disrupting credit markets and causing a decline in economic activity.

A theory that posits a direct relationship between the quantity of money in circulation and the general price level. It suggests that changes in the money supply lead to proportional changes in prices.

The idea that economic variables can be categorized as either nominal or real, with nominal variables affected by the money supply and real variables staying independent of it.

The idea that changes in the money supply have no long-term impact on real economic variables like output or employment.

A measure of how many times, on average, a unit of money is used to purchase goods and services in a period.

The costs associated with reducing money balances due to inflation, as people try to minimize the purchasing power loss caused by rising prices.

The costs firms incur to adjust prices in response to inflation. This includes updating menus, price tags, and other price-related information.

Costs from inflation that distort relative prices, leading to inefficient allocation of resources. This can arise as firms adjust prices at different speeds, creating a mismatch in price signals.

Costs arising when inflation impacts tax systems, creating distortions in the intended burdens and benefits of taxation.

A persistent level of unemployment that exists in the economy even when it's at its potential output level. It represents a mismatch between the available labor and the jobs that are available.

Unemployment caused by a mismatch between the skills of workers and the skills required by the available jobs. This often happens due to technological advancements, changes in industry, or geographical factors.

Unemployment that occurs due to insufficient demand in the economy. When overall demand for goods and services is low, businesses reduce production and lay off workers.

The rate at which employed workers lose their jobs. This can be due to various reasons like company restructuring, economic downturn, or even personal choices.

The rate at which unemployed workers find new jobs. It reflects how quickly the labor market can absorb unemployed workers.

The tendency for wages to be sticky or inflexible, meaning they don't adjust quickly to changes in supply and demand for labor. This can lead to unemployment, as wages may not fall to a level where the supply and demand for labor are equal.

The idea that employers sometimes pay their workers higher wages than the market equilibrium to improve worker productivity and reduce turnover. This contributes to wage rigidity.

Unemployment is generally considered bad because it leads to lost income for workers, reduced economic output, and increased social costs. However, the impact of unemployment depends on its type. Cyclical unemployment is generally worse, as it reflects a weakness in overall economic activity. Structural unemployment, while bad for the individuals affected, can also be a sign of economic progress and change.

Production function shows the relationship between inputs (capital and labor) and output. It can be expressed as a general function Q = F(K,L), or a specific form like Q = 10K + 5L, where K represents capital and L represents labor.

The average product of labor (APL) measures the average output produced per unit of labor. It is calculated by dividing total output by the total amount of labor used.

Marginal product of labor (MPL) measures the additional output produced by employing one more unit of labor, keeping other inputs constant. It is calculated as the change in output divided by the change in labor.

Diminishing marginal product (DMP) occurs when the additional output generated by each additional unit of input (labor, in this case) decreases as more and more inputs are added, assuming other inputs are fixed. So, the more workers you hire, the less each new worker adds to total output. Think of it like packing a car - the first few boxes are easy to fit, but each additional box gets harder to squeeze in, making the car more crowded.

An isoquant is a curve that represents all combinations of capital and labor which produce the same level of output. Think of it like a menu of different ingredients that can be combined to make the same amount of the same dish - it shows the flexibility firms have in using different combinations of inputs.

The Marginal Rate of Technical Substitution (MRTS) represents the rate at which one input (labor) can be substituted for another (capital) while keeping output constant. It is the absolute value of the slope of the isoquant. It tells you how much capital you can reduce if you hire one more worker, without changing the total output.

Returns to Scale (RTS) describes how output changes proportionally as all inputs are increased simultaneously. There are three types: Constant returns to scale (increasing inputs by X results in increasing output by X), increasing RTS (increasing inputs by X results in increasing output by more than X), and decreasing RTS (increasing inputs by X results in increasing output by less than X).

The price of labor is called the wage, and the price of capital is called the rental rate. These are often treated as homogenous (the same) in simple models of producer behavior.