Key terms and basic concepts of economics

Economics is the study of how people make choices to satisfy their wants

Macroeconomics The study of a national economy as a whole. Examines the aggregate behavior of the economy (i.e. how the actions of all the individuals and firms in the economy interact to produce a particular level of economic performance as a whole). Focuses on issues that affect the economy as a whole. Some of the most common focuses of macroeconomics include unemployment rates, the gross domestic product of an economy, and the effects of exports and imports. Ex.: Overall level of prices in the economy (how high or how low they are relative to prices last year) rather than the price of a particular good or service.

Microeconomics The study of economics at an individual, group or company level. Focuses on how decisions are made by individuals and firms and the consequences of those decisions Focuses on issues that affect individuals and companies. This could mean studying the supply and demand for a specific product, the production that an individual or business is capable of, or the effects of regulations on a business. Ex.: How much it would cost for a university or college to offer a new course ─ the cost of the instructor’s salary, the classroom facilities, the class materials, and so on. Having determined the cost, the school can then decide whether or not to offer the course by weighing the costs and benefits.

Macroeconomics vs. Microeconomics The next several slides looks more carefully at the difference between microeconomic and macroeconomic questions.

MICROECONOMIC QUESTIONSMACROECONOMIC QUESTIONS Go to business school or take a job?How many people are employed in the economy as a whole? What determines the salary offered by Citibank to Cherie Camajo, a new Columbia MBA? What determines the overall salary levels paid to workers in a given year? What determines the cost to a university or college of offering a new course? What determines the overall level of prices in the economy as a whole? What government policies should be adopted to make it easier for low-income students to attend college? What government policies should be adopted to promote full employment and growth in the economy as a whole? What determines whether Citibank opens a new office in Shanghai? What determines the overall trade in goods, services and financial assets between the US and the rest of the world?

Want vs. Need NEED Something you have to have, something you can't do without. A good example is food. If you don't eat, you won't survive for long. Many people have gone days without eating, but they eventually ate a lot of food. You might not need a whole lot of food, but you do need to eat. WANT Something you would like to have that is not absolutely necessary, but it would be a good thing to have. A good example is music. Now, some people might argue that music is a need because they think they can't do without it. But you don't need music to survive. You do need to eat.

Want vs. Need Example Your body has to have liquid to survive. Water is a good liquid to drink because it keeps you healthy. Milk and fruit juice are also good because they give you vitamins and minerals your body needs without giving you the fat and excess sugar found in cola. Still, cola tastes good. Drink a Pepsi or Coke or Mountain Dew or Sprite and you feel good because it tastes good. But you don’t need that cola to survive.

Supply and Demand SUPPLY How much of something is available. For example, if you have 9 baseball cards, then your supply of baseball cards is 9. If you have 6 apples, then your supply of apples is 6. DEMAND How much of something people want. For example, if 8 people want baseball cards, then the demand for baseball cards is 8. If 6 people want apples, then the demand for apples is 6.

Supply and Demand So we have supply, which is how much of something you have, and demand, which is how much of something people want. Put the two together, and you have supply and demand. Supply + Demand = Price

SCARCITY and CHOICES SCARCITY is how little of something is available. It forces us to make CHOICES, like how much of something to buy or how much money to spend on something. Scarcity is one of the most basic concepts of economics. SCARCITY relates to SUPPLY and DEMAND? SCARCITY is a measure of SUPPLY. For example, if strawberries are scarce, then the supply of strawberries is low. And if many people want to buy strawberries when none are available, then demand is high because of a low supply caused by scarcity.

Goods and Services GOODS Goods would be defined as anything that anyone wants or needs that they can touch or hold. Goods are tangible objects that satisfy people's wants or needs that may be purchased such as food, clothing, toys, furniture, and toothpaste. SERVICES Services would be the performance of any duties or work for another; helpful or professional activity. Services are actions, such as haircuts and car repair, which also satisfy people's wants and/or needs.

Goods, Services, and Marketing Economics is concerned with the production and distribution of goods and services. The distribution of goods and services is referred to as marketing. The marketing of goods and services can add almost as much to the cost as the actual manufacturing of the goods. Marketing a product refers to the advertising, and other efforts to promote a products sale.

Different kinds of goods Consumer Goods are those such as food and clothing that satisfy human wants or needs. Producer Goods are those such as raw materials and tools, used to make consumer goods. Capital Goods are those used in the production of commodities or producer goods such as machinery

Inflation Simply put, inflation is a rise in prices relative to money available. In other words, you can get less for your money than you used to be able to get. Here's an example: You buy a candy bar for 50 cents. A year later, you go to buy the same candy bar and it's 55 cents. You still have only 50 cents, but the price of the candy bar has gone up. We can say that inflation is at work. The price of that bar has been inflated.

Interdependence Interdependence occurs when people and countries depend on one another to provide each other's economic wants. A relationship between two or more people, regions, nations or other entities in which each is dependent on the other for necessary goods or services. The most obvious example is assembly line production. Each person on the line depends on others to do his or her specific part.

Economic Interdependence Economic Interdependence means that actions in one part of the country or world have an economic impact on what happens elsewhere. The participants in an Economic System are dependent on others for the products they cannot produce efficiently for themselves.

Factors of Production 4 Factors of Production- resources that are used to make all goods and services. 1. Land (natural)- All natural resources that are used to produce goods and services. 2. Labor (human)- Any effort a person devotes to a task for which that person is paid. 3. Capital- Any human-made resource that is used to create other goods and services. a. Physical Capital- all the tools, machines, and other equipment a business needs b. Human Capital- the skills and knowledge of a company’s workers 4. Entrepreneur- is a person who starts and manages a business. a. Come up with the ideas how to produce something people want to buy. b. Organize the land, labor, capital resources needed to produce the goods or services. c. Take the risk of investing money in the hope of making a profit.

Additional Economic Terms to Know Tariff - a tax on goods produced abroad and sold domestically Regressive tax - a tax for which higher income tax payers pay a smaller fraction of their income as tax than do lower income tax payers Progressive tax - a tax for which higher income taxpayers pay a larger portion of their income as tax than do lower income tax payers Exports - goods produced domestically and sold abroad Imports - goods produced abroad and sold domestically Import quota - a limit on the quantity of a good that can be produced abroad and sold domestically

Additional Economic Terms to Know Cost - the value of everything a seller must give up to produce a good Shortages- occur when producers will not or cannot offer goods or services at current prices (not the same as scarcity) Surplus - a situation in which quantity supplied is greater than quantity demanded Profit - total revenue minus total cost Monopoly - a firm that is the sole seller of a product without close substitutes Property rights - the ability of an individual to own and exercise control over scarce resources