Economics

The rule or management of resources, whether by an individual or a society.

The Economic Problem

We live in a world of scarcity. There isn’t enough to go around.

Each person must make choices and each choice has a trade off, known as opportunity cost.

The economic problem involves three basic questions: What goods and services should be produced? How? For whom?

How do we determine value?

Intrinsic Value Labor Theory of Value

Ricardo & Marx Subjectivist Value Theory

The Austrian School Objectivist Value Theory

Ayn Rand

Centrally Planned Economy

In a planned economy, the government decides what and how much should be produced.

Prices are set to what the authority thinks they should be.

This form of economics favors economic egalitarianism (economic equality).

Market Economy

In this economy, all decisions about price and production are made by people or businesses.

Prices will rise and fall based on supply and demand.

This form of economics favors legal egalitarianism (all are equal before law), but not other forms of equality.

Positive vs. Normative

Positive economics deals with what is. It is a statement which can be proved in a scientific (or quasi scientific) sense.

Normative economics deals with what should be and is thus subject to value judgments. These statements cannot be proved and represent the economic ideas which follow from an ideology.

Factors of Production

Land Labor Capital Entrepreneurship

Microeconomics

The law of demand – more of any particular good or service will be purchased as its price falls; less will be purchased as its price rises.

Price elasticity of demand – the percentage change in the quantity demanded divided by the percentage change in price.

Microeconomics

If a product is price inelastic (PED<1), then raising the price will raise profits because demand doesn’t fall much

If a product is unitary elastic (PED=1), then percentage change is price gives same percentage change in quantity.

If a product is price elastic (PED>1), then raising price will reduce quantity sold and profits.

Microeconomics

The law of demand – at higher prices, the quantities supplied will increase and vice versa, other things held constant.

Equilibrium – a condition of supply equaling demand so that the market clears at an existing price.

Disequilibrium – when either a surplus or shortage develops because demand does not equal supply at the going price.

Microeconomics

Cost Determinates of Supply Technology Wages and input prices for resources. Taxes or subsidies Prices of certain other (like) goods offered for

sale. Marginal Cost – the cost to produce an

additional item.

Supply and Demand Curves

Price Floor Price Ceiling

Division of Labor

Worker used to do whole job of production (i.e. blacksmith, carpenter, etc.)

Division of Labor splits job into specialized parts.

Several specialized workers can produce more than several general workers.

Law of Diminishing Returns

Diminishing Marginal Productivity – if all factors of productions are held constant except one, equal additions of that one factor will eventually increase output in decreasing increments.

Marginal Physical Product of Labor – the added input that occurs when one new worker is added to the production process while all others inputs are held fixed.

Microeconomics

Pure Competition – there are many sellers selling the same product, so no seller can set the price.

Pure Monopoly – one seller exists for a product and can set the price.

Price Searcher – seller which has some degree of monopoly power and can strongly influence price.

Macroeconomics

Aggregate Demand – total spending in all markets in the economy.

Aggregate Supply – total amount of all goods and services produced.

Macroeconomics

Inflation – general rise in the prices of goods and services. (This is common definition, not the real one)

Growth – increase in supply and demand for products and services.

Macroeconomics

Unemployment – When not all who want work can find it.

Underemployment – When you take a low paying job or a job in a different field just to try to bring in some money.

Macroeconomics

GNP – Gross National Product is the value of the final goods and services produced in the economy in a given period of time.

Does not count underground transactions and barter.

GDP – different accounting for profits from multinational corps.

Macroeconomics

CPI – Consumer Price Index measures inflation/deflation by using a basket of goods and services and valuing their price in the current economy.

Demand-Pull inflation – occurs when total demand exceeds total production

Cost-Push inflation – occurs when average prices increase do to increase in input costs (i.e. oil prices rise)

Real inflation – occurs when the government or banks issue more money.

Business Cycle

Recession – when GDP drops for 2 quarters. Layoffs occur.

Depression - State of the economy where there are large unemployment rates, a decline in annual income, and overproduction.

Business Cycle

Recovery – Demand starts to increase, businesses begin hiring.

Peak – Demand reaches its peak and then begins to slide into recession.

Business Cycle

The business cycle didn’t exist until we had paper currency.

If we used hard money (silver and gold) then this wouldn’t happen.

The recovery is caused by massive inputs of money into the economy and the recession is caused when the banks reduce the increase in money.

Government

The government spends money on goods and services (i.e. machine guns, roads, computers, senators, secretaries, etc.).

Expenditures + Transfers = Tax Rev + Debt Deficit Spending is when:

(Expenditures + Transfers) - Tax Rev > Zero Government then issues bonds which must be

repaid with interest.

As of 2002

What is money?

Used two ways an abstract accounting concept that

represents a claim on the general wealth of the trading community. (currency should not have intrinsic value)

a item which has intrinsic value which is used in barter for sake of convenience instead of using other items

What makes good money?

Item which has universally ascribed value (intrinsic value) Item should be a commodity

There is so much of the item that total amount of money cannot easily change. Reserve of commodity should be very large.

Legal Tender Laws

Gresham’s Law – bad money drives good money out of circulation

Legal Tender is some currency which doesn’t have intrinsic value so the threat of force makes you accept the currency.

Money Supply

M1 – total quantity of coins, legal tender paper currency, and checking accounts.

M2 – M1 plus savings account, small (less than $100,000) time deposit accounts, and small money market funds.

The Federal Reserve

The Fed prints money and buys U.S. securities with it. These securities are FRNs, non interest bearing paper notes.

Fed was given authority in 1913 by congress to be private monopoly on money in U.S.

Fractional Reserve Banking

When you deposit your money, the bank doesn’t hold it all. The bank only holds a fraction of your money in the vault.

Money Multiplier = 1 ÷ Faction reserve Req. If fractional Reserve is 10%, then the $1000 the

Fed injects, become $10,000.