opportunity cost a decision is a value of the next best alternative that must be given up the kids of the decision (for example working instead of going to school) law of comparative advantage shows that even in extreme cases to nations can still benefit from trading and that each could gain as a result fiscal policy control over taxes and government spending monetary policy control over money and Interest rates closed economy an economy is considered relatively close if they constitute a small share factors of profuction, or inputs are the labor, machinery, buildings, and natural resources used to make outputs Gross domestic product (GDP) is a measure of the size of the economy – the total amount it produces in a year. Real GDP address this measure for changes in the producing power of money; that is, to correct for inflation mixed economy -is one with some public influence over the workings of free markets. There may also be some public ownership mixed in with private property Open economy an income is called relatively open if it exports and imports constitute a large share of its GDP outputs are the goods and services that consumers and others want to acquire progressive tax attacks is progressive if the ratio of taxes kinked arises as income rises recession is a period in which the total output of the economy falls transfer payments are sums of money to ensuring individuals receive as our a grant from the governance rather than as payment for services rendered input includes (2 things): 1. population (labor force) 2. quality of labor role of government - Acts as a referee - Acts business regulator - Acts income distributor - Acts as a consumer in the economy resources are the instruments provided by nature or by people that are used to create goods and services. optimal decision is one that best serves the objective of the decision-maker, whatever those objectives may be. It is selected by explicit or implicit comparison with the possible alternative choices. The term optimal does not mean that we, the observers or analysts approve or disapprove of the objective itself Production possibilities frontier: shows the different combinations of various goods, anyone of which a producer can turn out, given the available resources and existing technology Principle of increasing cost states that as the production other good expands, the opportunity cost of producing another unit generally increases production possiblity frontier Graph represent combinations of various goods/services they can be produced given that resources are limited 3 coordination tasks of any economy 1. efficiency 2. combinations 3. distributions how the market fosters efficien resource allocation (2) - Division of labor – specialization - Comparative advantage invisible hand is a phrase used by Adam Smith to describe how, by pursuing their own self interests, people in the market system are "led by an invisible hand" to promote the well-being of the community quantity demanded is the number of units of a good that consumers are willing and can afford to buy over a specified period of time demand schedule is a table showing how the quantity demanded for some product during a specified period of time changes as the price of that product changes, holding all other determinants of quantity demanded constant demand curve is a graphical depiction of a demand schedule. It shows how the quantity demanded for some product will change as the price that product changes. Specified period of time, holding all other determinants of quantity demanded constant supply schedule is a table showing how the quantity supplied of some product changes as the price of the product changes during a specified period of time, holding all other determinants of supplied constant supply curve is a graphical depiction of a supply schedule. Shows how the quantity supplied of a product will change as the price of that product changes during a specified period of time, holding all other determinants of quantity supplied constant Influences that can affect the supply curve (4) 1. size of industry 2. technological progress 3. prices of inputs 4. prices of related output supply-demand diagram graphs the supply and demand curves together. It also determines equally grim price and quantity shortage is an excess of quantity demanded over quantity supplied. When there is a shortage, buyers cannot purchase the quantities they desire at the current price surplus is it excess of quantity supplied over quantity demanded. When there is a surplus, sellers cannot sell the quantities they desire to supplied at the current price equilibrium is a situation in which there is no inherent forces that produce change. Changes away from an equilibrium position will occur only as a result of "outside events" that disturb the status quo law of supply and demand states that in the free market forces of supply and demand generally push the price for the level at which quantity supplied and quantity demanded are equal price ceiling a maximum that the price charged for a commodity cannot legally exceed price floor is a legal minimum below which the base charge for commodity is not permitted to fall Quantity demanded #of units of a good that consumers are willing and can afford to buy over a specified period of time demand curve shows how the quantity demanded change as the price changes during a specified period of time hold all other determinants of quantity demanded constant income effect when price goes up, real income decreases. = Consumers buy less = quantity demanded decreases situation effect when price a product increases = consumer buys last = quantity demanded decreases consequesnces of price floors (4): 1. Dead weight loss (DWL) to society 2. Consumers suffer because they have to pay higher price 3. Producers always benefit from this? No because of surplus => Maintain surplus => Increased inventory = costly 4. Price floor => Black-market Price ceilings consequences: (4) 1. DWL to society 2. Shortage 3. Producers receive lower price for every unit they sell black market increases aggregation means combining many individual market into one overall market aggregate demand curve shows the quantity of domestic price that is demanded at each possible value of the price level aggregate supply curve shows the quantity of domestic product that is supplied at each possible value of the price level inflation refers to a sustained increase in the general price level recession is a period of time during which the total output of economy declines Gross domestic product is the sum of the money values of all final goods and services produced in the domestic economy and sold on organized markets during a specified period of time usually a year nominal GDP is calculated by valuing all outputs at current prices real GDP: is calculated by valuing output of different years at common prices. Therefore, real GDP is a far better measure than nominal GDP of changes in total production intermediate good is a good purchase for resale or for use in producing another good deflation refers to a sustained decrease in the general price level stagflation is inflation that occurs while the economy is growing slowly ("stagnating") or in a recession monetary policy refers to actions taken by Federal Reserve to influence aggregate demand by changing interest rates Stabilization policy is the name given to the government programs designed to prevent or shorten recessions and to counteract inflation (that is, to stabilize prices) microeconomics small-scale economics single firm, single market, single individual aggregate demand shows the quantity of domestic product that is demanded at each possible value of price level - all factors are held constant Aggregates supplied - shows the quantity of domestic product is supplied at each possible price level - all other factors are held constant GDP total money value of all final goods and services produced in domestic economy and sold on organized markets during a Specific period of time, usually a year price level is the cost of a specific basket of goods and services GDP price level cost of a specific basket of goods and service. This basket includes fraction of all goods and services produced in the economy consumer price level cost of specific basket of goods and services. This basket includes fraction of goods and supply consummed by a typical household GDPprice indes cost of a specific basket of goods and services in some periods divided by the csot of the same basket