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| Microeconomics | “One of the major parts of economics, looks at how individuals and small organizations act and make decisions” |
| Elasticity | How one variable changes in response to another |
| Price Elasticity of Demand | = (% of change in the quantity demanded)/(% Change in the price) Example: 10%/50% or 2 |
| If price elasticity is greater than 1 | The demand is considered elastic meaning there will be a greater change in quantity demanded than the percentage change in price therefore a higher price will cause lower revenues and a lower price can increase revenues |
| If price elasticity is less than one | The demand is considered inelastic and a percentage change in price corresponds to a smaller percentage change in demanded quantity therefore a higher price equals higher revenue |
| If price elasticity is equal to one | Means price changes won’t affect revenue |
| Scarcity | Refers to how there are limited resources for unlimited wants in people |
| Equilibrium | Refers to when there are balanced economic forces |
| Opportunity costs | What a company gives up by choosing a different path |
| Comparative advantage | Opportunity costs help determine which party as the |
| Supply | Defined as how much of good or service the market has to offer to buyers |
| Law of supply | “States that the higher the price of a good, the more of it the producers are willing to make” |
| Demand | How much of a good or service buyers want |
| Law of Demand | “Shows that the higher the price, the lower the demand” |
| Microeconomics assumes | “Rational behavior, Individuals possess preferences, ppl will get as much as they can for their money” |
| Adam Smith | (1723-1790) a Scottish philosopher who is known as modern economics founder and created classical economics Invisible hand |
| Invisible hand | Supply and demand will come together if the market is left to its own devices |
| The Wealth of Nations | “Book published in 1776, written by Adam Smith describes self-regulation” |
| Circular flow economic model | Shows a simplified way of how money and products make their way through the economy makes two distinct markets |
| Goods and services markets | Shows the finished product moving from the firms to the market and then to the households while money moves from the households to the market to the firms |
| Factors of production market | Move from the households to the market and to the firms |
| Factors influencing economic change | “Individual wants, production of goods, competition, scarcity and consumption” |
| Supply and Deman | Affect the price of goods |
| Price | Where supply equals demand on the demand curve |
| If demand goes up and supply stays the same | Prices will rise because people will be competing for the same amount of products |
| If demand goes down and supply stays the same | The price will go down because fewer people will want it |
| If supply goes up and demand stays the same | The price will go down and there will be more products for the same demand |
| If supply does down and demand stays the same | The price will go up because there will be fewer products for the same demand |
| Marginal benefits | “The utility or satisfaction an individual gets from one more unit of a service or good, it is “How Much” a customer will pay for that extra unit” |
| Marginal costs | Describe how much it costs to make one more unit of something |
| Marginal utility | Refers to the satisfaction a consumer will get from one more unit and this can be positive or negative |
| Law of diminishing returns | “Refers to the fact that, as there is an increase in a factor of production, eventually the per unit output of that factor will go down” |
| Perfect competition | All companies make products that are exactly the same |
| Monopolistic competition | “Characterized by a market with many different producers that sell similar, although not identical, products” |
| Oligopoly | “Occurs when there are only a small amount of businesses supplying a certain product, meaning there is very limited competition” |
| Monopoly | Occurs when one company is the only provider of a product |
| Effects of competition | Competition affects the behavior of individual firms |
| Competitive strategies | Used by businesses to gain a competitive advantage |
| Cost leadership | A company charges less for the product to attract more customers |
| Penetration pricing | A business offers a low cost initially to get customers and then slowly raises it |
| Economy pricing | Strives to offer the lowest cost through the most basic items |
| Skimming | “Initial price is high, but then it goes down to compete” |
| Bundle pricing | A variety of products are offered together |
| Differentiation | Company tries to produce a unique product |
| 4 main Factors of production | “Land, labor, capital, and entrepreneurship” |
| Land | Encompasses the natural resources used in the production of goods and services |
| Labor | Encompasses all human resources such as the workers in businesses with the exception of the entrepreneur |
| Entrepreneur | Factor of production because it is his idea that will make the business happen |
| Capital | “The money used to purchase the resources necessary for the business or the large physical assets utilized in production such as vehicles, buildings, and equipment” |
| Diminishing returns | “Refers to the concept that, as one factor of input is increased while all others stay constant, eventually the marginal or incremental output will start to decrease” |
| Economies of scale | “The volume of output increases, it costs less per unit to produce it” |
| Economies of scope | When it is cheaper to produce a range of products rather than just one |
| Macroeconomics | A major part of economics looks at the entire economy looking at structure performance and behavior of an economy and devising models that look for the reasons behind national income fluctuations and factors behind economic growth as well as national economic policies that often come from macroeconomic model forecasts |
| Economic indicators | Statistics that provide information about economic activity |
| Aggregate supply and demand | Refers to the price level for the country as a whole and the total goods and services made by suppliers in the country |
| Deflation | When the general price of goods and services go down |
| Inflation | When the general price of goods and services goes up |
| Fiscal policy | The government’s use of spending and taxing to influence the economy |
| Monetary policy | Leads to growth or slowing of the economy but it is done through the federal reserve |
| Progressive tax | Tax policy in America where people earning lower incomes pay a lower percentage of taxes |
| Regressive tax | Those who make less pay a higher percentage |
| Proportional or flat tax | Everyone pays the same percentage no matter what they make |
| John Maynard Keynes | (1883-1946) an economist who helped create modern macroeconomics He promoted government financial intervention to calm the results of the expansion and contraction phases of the business cycle |
| Milton Friedman | Though people consumed an amount based on permanent income and advocated free markets thinking government intervention should be reduced |
| Monetarism | A theory surrounding the government controlling the quantity of money in a market |
| Major economic systems | “Traditional, market, command, and mixed” |
| Traditional market system | “Based on tradition, make products because of customers, beliefs, etc” |
| Supply-side economics | Known as “Reaganomics” and is the trickle-down policy |
| Reaganomics/Trickle-down policy | States that giving tax cuts for entrepreneurs and investors will allow them to invest more an give economic benefits to everyone through a trickle-down idea |
| 3 pillars of Reaganomics | “Regulatory policy, tax policy and monetary policy, asserting that supply is the most vital element to economic growth” |
| Command economic system | One in which the government controls a great deal of the economic system |
| Market economic system | “Like a free market, organizations are run by the people and they shape the market, not the government” |
| Mixed economic system | “Command and market system are combined, very common and can vary in the combination” |
| Free Market | “Does a lot, but the government will control some things such as preventing monopolies” |
| Closed economy | “One that is wholly self-sufficient, no international trading of any kind, no exporting and no importing” |
| Open economy | “Opposite of closed, people and businesses may export and import goods and services as well as exchange technology” |
| Capitalist economy | Allows for private ownership and a free market and let supply and demand drive the market |
| Communism | “Everything is owned communally, and the point is to eliminate the gap between the wealthy and the poor with everyone owning everything” |
| Socialism | Most of the production is run through the government for the benefit of all |
| Business cycle | “Describes the changes in the economy including production, trade and the economy in general” |
| Expansion | “A time when production and pricing are being increased, interest rates and unemployment are low and the GDP is higher” |
| Contraction | Production and the GDP are going down while unemployment is going up |
| Trough | When production and GDP reach their lowest point |
| Inflation | The increase in prices that leads to a lowering of dollar value as time passes |
| Hyperinflation | “Occurs when inflation is extremely high, very rare and can be disastrous for the economy” |
| Stagflation | When high inflation occurs at the same time as stagnation in the economy |
| Demand-pull inflation | “Occurs when demand is increasing at a higher rate than supply, so prices go up” |
| Cost-push inflation | Companies have higher costs and increase prices so their profit margins do not go down |
| Anticipated inflation | “Not usually a big deal, but unanticipated inflation can hurt the economy” |
| Unemployment | Occurs when people are actively looking for work but are unable to find it |
| Structural unemployment | Occurs when the labor market has inefficiencies |
| Frictional unemployment | Happens when a worker is moving between jobs |
| Cyclical unemployment | Due to contractions in the economy |
| Seasonal unemployment | Expected because of the time of year |
| Gross national product | Comprised of the market value of everything produced by a nation’s citizens in a one-year period |
| GNP calculation | “Calculated by taking the market value of the production in a country, adding the market value of goods and services produced by the people of that country in foreign areas and subtracting the value of items produced by foreigners” |
| Gross domestic product | “Describes the value of goods and services produced within a country, typically annually Gives an idea of whether a recession is occurring and what the results of an economic policy are Can affect the stock market and will often signal other things such as unemployment and wages” |
| GDP Calculation | “Calculated by adding consumer spending (private consumption) within a country, spending by the government, capital spending, and net exports (exports minus imports)” |
| Consumer price index (CPI) | Looks at the weighted mean of prices of a basket of goods or services to see how the price changes |
| CPI Calculation | “price changes for each item are averages, and the items are weighted based on how important they are” |
| CPI | CPI = item price x price in base year x (current CPI/base-year CPI) |
| Producer price index (PPI) | “Calculates the mean difference in selling prices domestic producers get over a period of time The areas of production it considers are commodity-based, industry based, and stage-of-processing-based companies PPI is often used because it can help predict the CPI” |
| Index of leading economic indicators | Used to forecast the economy in future months |
| Rate of Unemployment | “To calculate unemployment, the government administers a survey every month called the current population survey (CPS)” |
| Inflation | How much goods and services increase in price as time changes |
| Inflation formula | Inflation = ((current year price index,base year price index) x 100)/base year price index) |
| Federal reserve System | “Formed in 1913, the US’s central banking system, works to keep employment up, keep prices stable, and moderate interest rates in the long term” |
| Interest rate | The percentage of interest charged by a lender to a borrower |
| Fixed interest rate | “Stays the same for the length of the loan, while a variable interest rate can vary as the market rates change” |
| APR | “Annual percentage rate, the percentage of interest for a loan based annually, often used for credit cards and makes it easier to compare various credit cards to each other” |
| Prime rate | “The benchmark rate of interest, which banks often use when calculating rates for loans” |
| Teaser rate | “A special, limited time rate that is offered to attract people” |
| Triangular trade system | “A system that ran from the late 1500s to the early 1800s Connected Africa, the American colonies and the Caribbean ad consisted of slaves, crops and manufactured goods” |
| Opportunity costs | What a producer gives up by choosing a different option |
| Comparative advantage | Given to the party with the lowest opportunity cost |
| Quotas | Put a restriction on the amount of imports |
| Tariffs | Are taxes that apply to goods that are imported |
| Voluntary export restraints | Self-applied rules that restrict what a country can export to another country |
| Embargoes | Occur when a country restricts trade with a specific foreign country |
| If the dollar is weak, | it has less purchasing power and becomes more expensive to import from foreign countries |
| As prices increase | Consumers spend less, fuel costs tend to go up |
| Benefit of the weak dollar | “That a trade deficit could decrease and domestic job growth can occur, especially in industries like manufacturing” |
| Strong dollar | “Foreign goods cost less, so importing may increase while exporting or domestically produced items go down Prices can go down as well” |
| Strong economy | “Will have a strong dollar, but sometimes a weaker dollar is best” |
| Balances of trade | The differential between a nation’s imports and exports and can influence international trade |
| Balance of payments | A compilation of economic transactions of a nation and the global companies with which it trades |
| GATT | “General Agreement on Tariffs and Trade, a treaty that was formed after World War II to help the economy Strives to lower obstacles to global trade such as quotas, tariffs, and subsidies” |
| NAFTA | “North American Free Trade Agreement, became active in 1994 and has had a profound effect on trade ever since Agreement was signed by the US, Mexico and Canada” |
| NAAEC | North American Agreement on Environmental Cooperation was formed to address environmental concerns which developed as a result of the NAFTA agreement |
| WTO | “World Trade Organization, started in 1995, an international organization related to trade rules between different countries” |
| IMF | “International Monetary Fund, part of the UN and promotes economic stability in 188 member countries Strives for international growth by giving advice in policies” |
| World Bank | “Works to reduce poverty by loaning money to developing countries for capital programs. This international financial organization is part of the UN and promotes foreign investment, international trade, and capital investment” |
| International business | “Often conducted through licensing, International licensing occurs when one business makes an agreement with another, giving special permission to make the product in a foreign country” |
| Contract manufacturing | “A popular method of entering a foreign market With contract manufacturing, the company designs the product but then hires another company to manufacture and ship it” |
| Ways to conduct international business | “Joint ventures, strategic alliances, foreign subsidiaries” |
| Ethnocentrism | Occurs when a people believe that they and their culture are superior to those of others |
