Economics- study of how people make choices given that resources are scarceDecisions are rational1.People respond to incentives2.Optimal decisions are made at the margin (implies additional)3.In Making Choices:Society must choose what goods and services will be produced1.How goods and servicies will be produced2.Who's going to receive goods and services3.Because of scarcity of resourcesCentrally Planned economy- government decides how resources will be allocated1.Market Economy- Firms decide how to produce, firms produce, market decides who gets products.2.U.S is a Modern Mixed economy- mostly a Market economy but the government plays a significant role in allocation of resources.3.A Society's decision about the type of market system determines who, how, and what to produce.Positive- concerned with what is1.Normative- concerned with what ought to be2.Normative vs. Positive Economics.Microeconomics- the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices1.Macroeconomics- the study of the economy as a whole, including topics such as inflation,, unemployment, and economic growth.2.Microeconomics vs. Macroeconomics1 EconomicsSunday, September 30, 201210:57 AM Test 1 Page 1-illustrates tradeoffs, opportunity cost-factors of production- land, capital, labor On the curve is efficient- full employment of obtainable resources •Moving on the curve left to right gives you gain in opportunity cost- increases as production of one output expands•PPF (Production Possibilities Frontier)- a curve showing the maximum attainable combination of two products that may be produced with available resources and current technology.Increase in Resource Base = Economic Growth and PPF shifts right1.Decrease in Resource Base = Economic Decline and PFF Shifts left 2.Shifts in PPFEconomic Growth- the ability of the economy to increase the production of goods and services.The Market SystemMarket- a group of buyers and sellers of a good or services and the institution or arrangement by which they come together to tradeProduct Market- a market for goods, such as computers, or services, such as medical treatmentFactor Market- a market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.Capital- physical capital, such as computers and machine tools, that is used to produce other goods•Labor- all types of work, from part time to senior managers•Natural Resources- land, water, oil, ores, and other raw materials•Entrepreneurial- the ability of an entrepreneur (someone who operates a business) to bring together the rest of the factors of production to produce and sell goods and services•Factors of Production- the inputs used to make goods and servicesCircular Flow of IncomeHouseholds- consist of all the individuals in a home, suppliers of factors of production especially labor.2 Tradeoffs, Comparitive Advantage, and the Market SystemSunday, September 30, 201211:27 AM Test 1 Page 2especially labor.Firms- suppliers of goods and servicesBasic circular flow of the economy- total expenditures = total income = total outputCircular Flow Diagram- a model that illustrates how participants in markets are linkedCeteris Paribus ("all else equal")- the requirement that when analyzing the relationship between two variables, all other variables are held constant Test 1 Page 3Counts only final goods or services, not intermediate•New goods, current production•Measured using market values not quantities•GDP- market value of all final goods and services produced in a nation during a period of time, usually one year.GDP roughly equals (=) total income = total output = total expenditureHouseholds spend everything they earn on goods/services1.Households supply factors of production2.Firms spend all their revenue on resources3.Basic Circular Flow Assumptions (closed economy)Business Cycle- Alternating periods of economic expansion and recession(open economy) Savings1.Taxes2.Imports3.Leakages to spending flowInvestments1.Consumption2.Government purchases3.Net exports4.Injections to the spending flowCALCULATING GDPExpenditure ApproachGDP=C+I+G+NX Accounts for 70.5% of GDPConsumption (C) -spending by households on goods and services, not including spending on new housesInvestment (I) -spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new housesGovernment Purchases (G) -spending by federal, state, and local governments on goods and servicesNet Exports (NX) -exports minus importsIncome Approach-add up all the incomes earned in exchange for the factors of productionWages+Savings+Rent+Profits+Indirect Business Taxes=National Income+Depreciation8 GDP (gross domestic product)Sunday, September 30, 20122:52 PM Test 1 Page 4Depreciation- firms set aside funds to repair/replace worn out capital goods used in productionDisposable Personal Income Tells how much households have to spend and save after taxes and transfersReal vs. Nominal GDP Product approach Nominal GDP- uses prices and quantities of the current yearReal GDP- uses quantities of current year but PRICES OF BASE YEARGDP DEFLATORNominal GDP/Real GDP% Change in GDP Deflator = % of inflation Test 1 Page 5r = REAL INTERESTi = INTERESTU = UNEMPLOYMENT60,000 households○Each member 16YO+ is asked, "are you employed"○Employed- worked last week○Unemployed- looking for work in the last 4 weeks○A person not looking for work and unemployed is not counted as unemployed, they are discouraged workers○Labor Force- employed and unemployed and looking for work○ ○ ○ ○Calculating unemployment, U.S. Department of Labor takes household survey•In a vibrant Market-Based Economy jobs are being created and destroyed all the time because of changes in consumer tasks, technological process, and success and failures of entrepreneurship•UNEMPLOYMENTTypes of UnemploymentFrictional (short-term)- reflects the normal search time by workers who are changing jobs, initially entering labor force, or seasonally employed1.Structural- caused by a persistent mismatch of skills of workers and the requirements of jobs2.Cyclical- caused by a lack of jobs, during a recession