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Three factors of production

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Land Labor Capital

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Land

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natural resources such as trees,water, or minerals

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Labor

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mental and physical labor such as autoworkers or scientists

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Capital

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factories, machines (producers goods), and money

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Production possibilities curve

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shows the tradeoff between spending projects or production of one good to another

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What does a shift on the PPC graph signify?

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economic growth or decline

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assumptions of ppc

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resources are fully employed production takes place over a specific time period the resource inputs, in both quantity and quality, used to produce the goods are fixed over this time period thechnology doesnt change over this time period

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how does the ppc graph shift

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a change in the amount of productive resources in the economy a change in technology and productivity

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Tradeoff

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there is a scarce amount of resources available in an economy, so decision need to be made in order to maximize those resources

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absolute advantage

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the amount of labor hours over the cost it will take to produce a product

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comparative advantage

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both nations trading would benefit from trading products if they specialized in items that have a lower opportunity cost to produce

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opportunity cost formula

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the other good divided by the good you are calculating opportunity cost for

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demand

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the willingness and ability for consumers to pay for goods and services

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law of demand

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as prices go up, the demand goes down as prices go down, demand goes up

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Factors that shift the demand curve

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T: tastes R: related goods/prices I: income B: # of buyers E: price expectations

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Supply

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the quantity of goods that producers will supply at various prices

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law of supply

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as prices go up, the quality supplied will increase as prices go down, the quality supplied will decrease

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factors that influence the supply curve to shift

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R: resources (cost and availability) O: other goods prices T: taxes, subsidies, and government regulations T: technology/ productivity E: expectations of producer N: # of firms in the market

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law of taxes on the supply curve

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Higher taxes increases costs and reduce supply Lower taxes decrease the cost of production and increase the supply

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equilibrium

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the point where the supply curve and the demand curve intersect

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normal goods

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products for which the demand increases when the income of people increases. products for which the demand decreases when the income of people decreases

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inferior goods

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products that decrease in demand, even when the income of people rises

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Indeterminate shift

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when both the supply and demand curve move simultaneously

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price ceiling

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a government policy which sets the legal MAXIMUM PRICE that may be charged for that good, which causes a shortage in the good

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Price floor

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a government policy that sets the legal MINIMUM PRICE that may be charged for a good, which leads to a surplus of that good

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unemployment

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those that are in the civilian labor force who are looking for work but cannot find a job

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unemployment rate formula

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unemployment divided by workforce multiplied by 100

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underemployed

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has a job, but will work part time or below their skill level

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discouraged workers

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those that have given up looking for jobs

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overemployment

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those that are working two jobs or over 40 hours per week

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Types of employment

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underemployed, discouraged workers, overemployed

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types of employment

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frictional, seasonal unemployment, structural unemployment, cyclical unemployment

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Frictional unemployment

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temporary unemployed workers that are moving from one job to the next

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seasonal unemployment

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employed for a specific season and are now unemployed

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structural unemployment

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unemployment due to the decline of industries so that these workers possess render useless for employment

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cyclical unemployment

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unemployment due to job loss causes by recession

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natural rate of employment

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excludes cyclical unemployment and includes frictional and structural unemployment

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Full rate of employment

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when everyone has a job, shifts the supply curve to the right. which causes inflationary gap

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inflation

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a short term rise in prices of a specific commodity

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deflation

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a short term decreases in prices of a specific commodity

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consumer price index

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the government uses the consumer price index to measure the change in basic consumer prices over time using the price of essential commodities

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consumer price index formula

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current prices divided by base prices multiplied by 100

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inflation rate formula

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CPI-100

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anticipated inflation

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rate of inflation that consumers, the government and business believe will occur

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unanticipated inflation

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causes problems as prices rise or decline more than expected. Helps debtors and hurt banks and other money lenders

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nominal interest rate

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the price of borrowing money in current dollars

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real interest rate formula

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nominal interest rate minus anticipates rate of inflation

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GDP

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C+I+G+net exports

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GDP deflator

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nominal GDP divided by Real GDP multiplied 100

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Gross domestic income formula

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wages+ profits + rents

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Say's Law

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supply creates its own demand. producing goods generates the demand to purchase other goods

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expansion cycle

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occurs when the gdp grows, unemployment falls and prices tends to rise

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contraction cycle

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occurs when the gdp falls , unemployment rises and prices often falls

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aggregate demand

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gdp increased aggregate demand leads to demand pull inflation decrease in aggregate demand leads to a lower price level

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Long run aggregate supply

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represents an economy where all inputs are used to full efficiency

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open economy effect

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if the price level goes up out net exports drop. if our price level drops then our exports increase. change in prices leads to a change in real gdp

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unemployment under the classical model

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unemployment would cause wage rates to fall where unemployed workers will be hired under the classical model people aren't allowed to be unemployed for long periods of time the model will eventually shift towards full employment once more.

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aggregate demand and rgdp under keynesian view

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rgdp relies on aggregate demand rgdp and price level arent related in a recession increase spending can increase output without raising prices increasing govt. spending will increase the net exports, consumption, and investment.

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how the aggregate supply curve increases `

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discovery of raw materials increased competition reduced trade barriers reduced business regulation decreased business tax reduction to the input price

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MPC formula

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Difference in real consumption divide by difference in real disposable income

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MPS formula

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Difference in real savings divide by difference in real disposable income

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MPC

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The ratio of change in equilibrium level of real national income to the change in autonomous expenditures

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Multiplier formula

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1 over the MPS

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When interest rates are low...

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Investments increases

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When interest rates are high...

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Investments decrease

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If business sense that there inventory is short then...

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They will hire in order to increase production increase RGDP

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If consumers decrease the purchase of a good...

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Then firms will slow down production which leads to decrease RGDP

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Net export formula

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Exports subtracted by imports

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Trade surpluses

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Exports more than imports. Leads to an increase in RGDP

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Trade deficits

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Imports more than exports. Would lead to a decrease in RGDP

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Fiscal policy

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The attempt by the government to meet specific economic goals such as increasing GDP, lower inflation, and lower unemployment

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Fiscal policy characteristics

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Increasing or decreasing in taxes and spending by congress

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Main tools of fiscal policy

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Taxation and government spending

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Expansionary fiscal policy

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Increase government spending and cut taxes

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Contractionary fiscal policy

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Cut government spending increase taxes

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Tax multiplier formula

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MPC over MPS

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What the tax multiplier does

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Tax cuts and government spending increase aggregate demand during a recession

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Automatic stabilizers

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Unemployment compensation allows the government to provide income to maintain consumption Progressive tax policy allows for a decrease in government taxes in recessions

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