What is Economics?

Unit 1 – What is Economics?

Unit 1 – What is Economics?

Unit 1 - What is Economics?Basic

Economic Questions

What, how, for whom to produce

Command Economy

GOVERNMENT answers the

basic questions

Market Economy

WE answer basic questions

WE own the factors of

production

Unit 1 – What is Economics?

Adam Smith & the invisible hand• We are all rationale

humans who act in our OWN SELF INTEREST

• Our decisions help make the economy efficient

Supply and Demand

Unit 2 – Supply and Demand Law of Demand - ↑ P, ↓ Q-d // ↓ P, ↑ Q-d

Shifts in Demand Curve (entire curve left or right) Consumer income Consumer taste Price of complement goods & substitute goods

Movement ALONG the Demand Curve Change in PRICE of a product

Unit 2 – Supply and Demand Law of Supply - ↑ P, ↑ Q-s // ↓ P, ↓ Q-s

Shifts in Supply Curve (entire curve left or right) Technology Number of Sellers Cost of inputs Future expectations …

Movement ALONG the Supply Curve Change in PRICE of a product

Unit 2 – Supply and Demand Demand Elasticity – how responsive will you be to the change in

the price of a product?

ELASTIC DEMAND – “stretchy” – very responsive Examples?

LUXURY GOODS – things you don’t have to have right now…

INELASTIC DEMAND – “not stretchy” – buying habits unchanged Examples?

MILK – things you must have for survival

Law of Diminishing Marginal Utility Donut / Candy simulation

Unit 2 – Supply and Demand Be able to analyze the following on a S & D Graph

Equilibrium (price and quantity), Shortages, Surpluses Shifts in supply curve (upward sloping curve)

INCREASE = Rightward shift DECREASE = Leftward shift

Shifts in demand curve (downward sloping curve) INCREASE = Rightward shift DECREASE = Leftward Shift

MOVEMENT along curves (due to a change in PRICE)

Unit 2 – Supply and Demand Government Intervention – prevents our market

systems from going back to equilibrium Price Ceilings- major drawbacks? Price Floors- major drawbacks?

Business Organization and Investment

Unit 3 – Business Organizations & Investment

Stock - issued by corporations to obtain funds for growth

Reading Stock Quotations 52 week high and low closing price = next day’s opening price

Bonds – “borrowing money” from the people Government Bonds = SAFEST form of investment

Unit 3 – Business Organizations & Investment

Types of Business Organizations Sole Proprietorship

Easiest to form Most Common

Corporation Largest sales volume Limited Liability Other characteristics?

Entrepreneurship – starting your own business VERY RISKY but can be very rewarding too!

Unit 3 – Business Organizations & Investment

Monopoly:“Mono” – one Sole producer /seller of a good or service

The Macroeconomy

Unit 4 - Macroeconomy

GDP

• Preferred by economists because it measures what is produced WITHIN OUR BORDERS with our domestic resources

Real GDP v. Nominal GDP

• Real – measured in “constant dollars’ • Not distorted by inflation• Allows us to determine how much production changes overtime

• Nominal – measured in “current dollars’• Distorted by inflation

Unit 4 - MacroeconomyConsumer Price

Index (CPI)

Types of Inflation

MAIN CONSEQUENCE of

INFLATION

• Market basket of goods/services WE typically buy• Used to measure inflation

(changes in price level overtime)

• Demand – pull • Wage-price spiral

• Hurts your purchasing power … what you can buy with a dollar• Ex – Inflation rate of 15%, salary

increase of 5% … you lose purchasing power

Unit 4 - MacroeconomyPhases of the Business Cycle

• Expansion = increasing GDP• Recession = declining GDP for 2+ quarters• Peak = GDP at its highest • greatest level of production & employment

• Trough = GDP at its lowest

Index of Leading Indicators – predicts changes in the business cycle 12-15 months in advance• Ex – turns up 12-15 months before EXPANSION• Ex – turns down 12-15 months before RECESSION

Managing theNation’s economy

Unit 5 – Managing the Nation’s Economy

Taxes Progressive – increased tax rate as income rises

Income tax - % paid in tax rises as you make more money Regressive – decreased tax rate as income rises

Sales Tax - % paid in tax will be greater for those with lower incomes

Proportional – same tax rate regardless of income All pay 15% tax

Ability-to-Pay Principle: those with “the ability to pay” the tax should be the ones who pay it

Unit 5 – Managing the Nation’s Economy

Deficit Spending – government spends more than it is receiving in revenue PROBLEM – contributes to the inflationary spiral

Crowding-Out Effect – deficit spending by the government “crowds” other corporations out of the market Government sells bonds (loans) to finance the deficit + we are

more likely to buy their bonds because they are safer We stop buying corporate bonds + corporations are “crowded-

out” of the market.

Unit 5 - Managing our Nation’s Economy

Aggregate Supply / Aggregate Demand Curves Y-axis Price Level X-axis GDP Shifts in the curve tell us about P-O-E in our economy

Price, Output, Employment

Fiscal Policy – changes in G & T to shift AD To fight “inflation” = decrease AD = causes unemployment

ACTION: ↓ G & ↑ T

To fight “unemployment” = increase AD = causes inflation ACTION: ↑ G & ↓ T

Unit 5 – Managing the Nation’s Economy

Supply-Side Policy – “best of both worlds” TAX CUTS to increase Aggregate Supply! Action: ↑ in AS (rightward shift)

↑ in PL (fights inflation) ↑ in GDP (fights unemployment)

Unit 5 – Managing the Nation’s Economy

Money M1 – money as a medium of exchange - cash, checks,

debit M2 – money as a store of value – M1 + savings accounts

Fractional Reserve Banking – banks must keep a “fraction” of all deposits in reserves (RR = 10%) The rest goes into ER – can be loaned out / used in

OMO

Unit 5 – Managing the Nation’s Economy

Most important function of the Federal Reserve: Controlling Money Supply

Loose MP – stimulates the economy (↓ IR, ↑ MS) When interest rates go down, the quantity-demanded of

loans will increase because it is less costly to borrow*interest rates represent the cost of borrowing

Tight MP – slows the economy (↑ IR, ↓ MS) When interest rates go up, the quantity-demanded of loans

will decrease because it is too costly to borrow

Unit 5 – Managing the Nation’s Economy

Using Tight and Loose MP, the Fed can control money supply in four ways – each way will help achieve the goals of increasing/decreasing MS & IR

↓ FFR, ↓ DR, ↓ RR, Fed buying bonds = ↓ IR and ↑ MS When the fed “buys bonds”, more money goes into the banks

ER + allows them to make more loans…thus, money supply expands

↑ FFR, ↑ DR, ↑ RR, Fed selling bonds = ↑ IR and ↓ MS When the fed “sells bonds”, less money is in the banks ER

because they used that money to buy the bonds…thus, money supply contracts

Unit 5- Managing Our Nation’s Economy