Economics - Introduction PDF

**Economics** - **Study of how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants** - **Efficient allocation of scarce resources** - ***Oikos* -- house** - ***Nomos* -- management** **Marginal** - **Additional, extra used to describe a...

**Economics** - **Study of how we choose to use limited resources to obtain the maximum satisfaction of unlimited human wants** - **Efficient allocation of scarce resources** - ***Oikos* -- house** - ***Nomos* -- management** **Marginal** - **Additional, extra used to describe a change in economic variable.** **Scarcity** - **Limited resources** - **Not enough resources to meet everyone's needs and wants** **Needs** - **You can't leave without it** - ** something that is necessary to live and function** **Wants** - **things that a person would like to have but are not needed for survival.** - **Things that people will consume or use if their income were unlimited.** **Resources** - **Factors of production used to produce economic goods that people consume** **Land** - **This represents land and similar natural resources** - **Plants- renewable** - **Oil, fuel- exhaustible** **Labor** - **This represents human capital such as workers and employees who operates equipment and manufacture products** - **Could be mental or physical** **Blue- physical, architecture, engineering** **White-** mental **Capital** - **The buildings, equipment, and human skills used to produce goods and services** **Human Capital** - **skills, knowledge** **Entrepreneurial Ability** - **This referred to as enterprise** - **Land- rent** - **Labor- salary, wages** - **Capital- interest** - **Entrepreneurial Ability- Profit** **Free Lunch Principle** **Rational Self-Interest** - **Everyone tries to maximize the expected benefits achieved with a given cost or to maximize the expected cost of giving benefit** - Doing things that can make you attain the highest level of satisfaction - incremental, additional, or extra; used to describe a change in an economic variable **Opportunity Cost** - the benefit you give up because you choose to take one action in favor of another. - The most highly valued opportunity given up when making a choice - It cannot be easily assigned to monetary value **Microeconomics** - analyzes the market behavior of individual consumers and firms - deals with the performance, structure, behavior, and decision-making of an economy as a whole. A. **Circular Flow Model/ Diagram** - **Simplest description of how an economy function.** - **Describes movement of resources, goods, and services in the economy.** **Market** - **Where the sellers and buyers meet** B. **Production Possibility Frontier (PPF)/ Production Possibility Curve (PPC)** - **A simplified economic model which portrays scarcity, choice and opportunity cost.** - **Shows the different combinations of two goods that can be produced using the most efficient use of resources.** **Law of Increasing Opportunity Cost** - **States that as you increase production of one good, the opportunity cost to produce an additional good will increase.** - **Refers to the quantity of a commodity that consumer is able and willing to buy at each possible price** - **A measure of the relative satisfaction from, or desirability of consumption of economic goods.** - **Additional satisfaction a consumer gains from consuming one more unit of a good or service** - **The more you consume a good/service, the less satisfied you will be with each additional consumption** - **Quantity demanded increases when price falls, and quantity demanded decreases when price rises, other things held constant (ceteris paribus** - **₱** **↑= Q** **↓- ₱ ↓= Q↑ Negative relationship** **Demand Schedule** - **Table of price and quantity values of demand.** 1. **Income** - **Disposable Income** - **Refers to the net amount after taxes and other mandatory contributions have been deducted.** - **Descretionary Income** - **The amount of income a household has to invest, save, or spend after taxes and necessities are paid.** - **Income Effect** - **A change in demand of good or service, induced by a change in the consumer's discretionary income.** - **Normal Good** - **A good or service for which an increase (decrease) in income causes consumers to demand more (less) of the good.** - **Inferior Good** - **A good or service for which an increase (decrease) in income causes consumers to demand less (more) of the good.** 2. **Substitutes** - **Goods that meet the same requirements or fulfill the same needs as another good.** - **Substitution effect** - **When a good become more expensive, its alternative become relatively cheaper and generally more appealing.** - **Price A \^ = Quantity B \^** (as the price of good A increases, the demand for good B increases) 3. **Complementary Goods** - **Goods that are generally consumed or used together.** 4. **Consumer Expectations** - **When consumers anticipate the price of a particular product to rise, they will tend to buy more of that product now before the perceived or scheduled price increases.** 5. **Taste and Preferences** - Other considerations such as increased popularity, taste, and personal preferences influence the demand for a specific good. 6. **Number of Buyers** - Shows the direct relationship between price and quantity as it illustrates the linear characteristics of the law of supply.  **FORMULA: change in price / change in quantity** **Determinants of Supply** 1. **Technology** - More profitable by increasing their efficiency and reducing their cost of production. - Minimizing delays in production - Less cost, more output per unit of resource, and more profit 2. **Prices of other goods** 3. **Input Prices** 4. **Producers Expectations** 5. **Number of Sellers** 6. **Government Policies** **Market Equilibrium** - The point where consumer and supplier expectations meet - **Shortage --** Qd \> Qs - **Surplus --** Qd \< Qs **Economic System** - Refers to the different ways of managing a nation of available resources to answer three economic questions. **Basic Economic Problems** 1. **What to produce?** 2. **How to produce?** 3. **For whom to produce?** 1. **Free Market** - A system characterized by competition and a high level of private ownership. - The consumers determine what to produce based on their preferences - Laissez Faire System= "leave alone" - **Adam Smith** - Hongkong, Cambodia, US, Switzerland 2. **Centralized** - **Karl Marxx** - Characterized by the heavy involvement of the government in managing economy. - Combines the features of free market and centralized systems - All equal, no capitalist. 3. **Mixed** - **John Meynard Keynes** - Combines the features of free market and centralized systems - Government can implement policies to promote business and at the same time can impose sanctions to penalize industries. - USA, Europe 4. **Traditional** - Based on traditions and practices held over the years - Society uses barter as form of exchange - They only produce what they only need to survive - Goal planned, fresh production. **Macroeconomic Goals of a Country** A. **Economic Growth** B. **Full Employment** C. **Price Stability** A. **Economic Growth** - Typically measured through GDP - is the market value of all final goods and services within produced within a country in a given period of time. **Excluded in GDP** 1. **Intermediate Goods** - Goods inside the final goods don't count 2. **Nonproduction Transactions** - Goods/ services that were not produced/provided in the current year. 3. **Non-Market & Illegal Activities** - Illegal goods/services **Formula for calculating GDP** **Expenditure Approach** - Add up all the spending on final goods and services produced in given year. **Y= C + I + G + (X-M)** **C=** consumption expenditure (household bills, education) **I=** investment expenditure (capital goods, buildings, plant) **G=** government expenditure (taxes used in infrastructure) **X=** exports of economic goods **M=** import of economic goods **Real GPD** - Is GDP adjusted for inflation is expressed at base year prices **Nominal GDP** - Is GDP measured in current prices. (does not account inflation from year o year) **Business Cycle** - Characterized by the upward and downward trend of GDP observed over a period of time. 1. **Recovery/Expansion --** the phase of the business cycle where real gross domestic product (real GDP) grows, moving from a trough to a peak. - Upward slope - Boom -- period of strong economic expansion (2-3 years) 2. Peak -- the highest point of a business cycle - Start of recession 3. Contraction/Recession -- decline in economic activity - Downward slope - Depression -- prolonged period of recession **(2-3 years)** 4. **Trough --** lower point of recession 5. **Trend Line --** average growth of economy **Inflationary Gap** **-** represents the point in the business cycle when the economy expands as consumers purchase more goods and services. **Recessionary Gap** - occurs when a country\'s real GDP is lower than its GDP at full employment. B. **Full Employment** **Unemployment** - Workers that are actively looking for a job but aren't working **Cyclical Unemployment** - Upward and downward movement in the business cycle led to unemployment **Underemployed** **-** the job is not in line with your degree C. **Price Stability** **Inflation** - Rising general level of prices and it reduces the purchasing power of money **Deflation** - Falling of prices which increases the purchasing power of money. **Hyperinflation** - Is a very high and typically accelerating inflation. **Tools used to Influence a nation's economic activity** 1. **Fiscal Policy** - Government actions to influence economy through taxing and spending policies - ** based on ideas from British economist John Maynard Keynes.** **Expansionary Fiscal Policy** - Lower tax, increase spending **Contractionary Fiscal Policy** - Raises taxes, cut spending to reduce inflation 2. **Monetary Policy** - Circulate in economy interest rate - Manipulating interest - Tools used by a nations central bank to control the overall money supply and promote economic growth. **Expansionary** - Increases the supply of money in an economy **Contractionary** - Decreasing spending or raising taxes - The total final output of goods and services produced by the country's economy within the country's territory by residents and nonresidents. - Total domestic and foreign output claimed by residents of a country, consisting of gross domestic product GDP, plus factor incomes earned by foreign residents, minus income earned in domestic economy by nonresidents. **National Factor Income from Abroad (NFIA)** - A financial metric that reflects the difference between a country's earnings from overseas investments, such as profits from foreign-owned businesses assets, and the payments it makes to foreign investors **FORMULA:** Income earned from abroad by resident- income of non-residents in domestic territory -- -- -- -- -- -- **The World Bank** - An organization that provides development funds to developing counties in the form of interest-bearing loans, grants, and technical assistance. **John Maynard Keynes** - Classified countries as low-income country, low-middle income country, upper-middle income country, high income country. **Purchasing Power Parity** - Calculation of GDP using a common set of international prices for all goods and services, to provide more accurate comparisons of living standards. **Big Mac Index** - Used to measure purchasing power parity (PPP) between nations, using the price of a McDonald's Big Mac as the benchmark **Balassa-Samuelson Effect (Bella Balassa & Paul Samuelson)** - Explains the difference in prices and incomes across countries as a result of difference in productivity **Human Development Index (HDI)** - Measure national socioeconomic development based on combining measures of education, health, and adjusted real income per capita. **3 Dimensions** 1. **Long and healthy life** (life expectancy) 2. **Knowledge** (expected years of schooling, mean) 3. **Decent Standard of Living** (GNI per Capita) **FORMULA'S:** **Life Expectancy Index** **= actual value-minimum value** **Maximum value- minimum value** **GNI/ Income Index= ln(actual)-ln(minimum)** **ln(maximum)- ln(minimum)** **Mean Years of Schooling Index (MYSI)** **= mean years of schooling** **15** **Expected Years of Schooling Index (EYSI)** **= expected years of schooling** **18** **EDUCATION INDEX (EI) = MYSI + EYSI** **2** **HDI =** 𝟑√𝑳𝑬𝑰 𝒙 𝑬𝑰 𝒙 𝑰𝑰 **\ 0.5 -- 0.7 =** medium **LIMITATIONS OF USING HDI** - Doesn't encompass all aspects as human development is much broader concept - Lack of inclusivity - Potential for misinterpretation **GENDER DEVELOPMENT INDEX (GDI)** - Addresses gender-gaps in life expectancy, education, and incomes - Introduced in 1955 by United Nations Development Program (UNDP) -- -- -- -- -- -- -- -- **Absolute Deviation from Gender** **= 100% l GDI-1 l** **GDI Groups** **G1:** 2.5% or less **G2:** more than 2.5%-5% **G3:** more than 5%-7.5% **G4:** more than 7.5%- 1