Economics 100, Roberta Greene Style

ECONOMICS 100, Mrs. Greene

economics- the social science that seeks to understand the choices that people make in using scarce resources to meet their wants. OR- the study of how best to allocate scarce resources among competing uses.

Important terms: social science, choices, cost/benefit, psychology, sociology

Economists use models, which are simplifications that represent the real world.

What do we want most? Why can't we have everything we want? Once our substantial needs are met, we start to want. We have UNLIMITED want and LIMITED resources. The rich almost always want more, never satisfied. Everyone struggles with this at times.

How future-oriented are you? This country?

Karl Marx tried to socialize everything in economics, or let the government have complete control of the  spending and output. Those countries that followed the Marxian system are behind in many ways including  technological progress.

*There is one specific mix of output that is optimal for a country.

2 branches of economics: Microeconomics and Macroeconomics

MICROECONOMICS: the branch of economics that studies the choices of individual units

MACROECONOMICS: large-scale phenomena, industry, inflation, unemployment, unemployment and economic growth. Aggregate behavior. Study as a whole.

Positive Economics- a branch of economic analysis that describes the way the economy actually works.

                (No feelings or opinions, objective data, gives the description using facts)

Normal Economics- makes prescriptions about the way the economy should work.

                (Feelings and opinions, subjective data, uses words like “ought” and “should”)

BASIC PRINCIPLES OF ECONOMICS

A.      Resources are scarce.

B.      The real cost of something is what you must give up (a.k.a. "opportunity costs").

C.      "How much?" A decision made at margin.

D.      People take advantage of opportunities to make themselves better off (a.k.a. "marginal analysis).

E.       Every country must confront the three basic questions of WHAT to produce, HOW to produce,  and FOR WHOM to produce. The answer involves social values and production capabilities.

F.       A country's resources should be used as efficiently as possible to achieve that society's goal. A production possibilities curve illustrates limits to output, factors of production and technology.

G.     Consumers send signals to producers about what mix of output we want and producers respond by assembling the factors of production to produce the desired output.

H.      Ones person's spending is another person's income.

I.        Government policies can change spending.

J.        Our values and spending habits can get out of line with the economy's productive capacity.

K.      Government intervention is an attempt to influence our choices and can sometimes influence our choices and can make things better or worse.

L.       Many of the HOW, WHAT, and FOR WHOM economic decisions can be answered by the market central planning or mixed system.

COSTS

Direct costs: single, highest forgone, alternative

                                versus

Indirect costs: decision maker

Marginal Analysis

Definition

The process of identifying the benefits and costs of different alternatives by examining the incremental effect on total revenue and total cost caused by a very small (just one unit) change in the output or input of each alternative. Marginal analysis supports decision-making based on marginal or incremental changes to resources instead of one based on totals or averages.

Read more: http://www.businessdictionary.com/definition/marginal-analysis.html#ixzz2A5tKupeO

COST VERSUS BENEFIT!

Do you do more? Or do less? Or how much more or less? Either or. You make a trade-off when you compare the costs with the benefits of doing something. Trade a little more for a little less.

A.      Scarcity and tradeoffs or opportunity costs -> why is the number reduced?

B.      Increasing opportunity costs-> use the cheapest resource first, like low-hanging fruit. More resources that might not be the best to produce an item or cost more to produce.

C.      Producers should want to produce on the Production Possibilities Curve -> efficiency.

D.      Economic growth pushes frontier (curve) forward. ^Factors of production, ^Labor, and     in Technology.

People usually take advantage of opportunities to make themselves better off.

*People respond to incentives.

incentives- anything that offers rewards to people who change their behavior.

3 principles underline economy-wide interactions:

1.       One person's spending is another person's income. The economy is linked and changes in spending behaviors have repercussions throughout the economy.

2.       Overall spending sometimes gets out of line with the economic productive capacity. The amount of goods and services people want to buy sometimes don't match the amount of goods and services the economy can produce.

3.       Government policies can change everything. Government uses spending, taxation, and quantity of money in circulation to have an impact on the economy.

*Everything is linked!

production possibilities curve- depicts the alternative combinations of goods and services that can be produced given the quality and quantity of the factors of production.

The Production Possibilities Curve= The Frontier

Anything in the curve is recession. Economy growth means pushing the curve outward, which includes more capital, labor, and immigration.

The curve assumes:

·         full employment -> available resources

·         fixed resources -> quantity and quality

·         fixed technology -> state of technology (the methods of production)

·         two goods -> only two goods can be focused on at a time (i.e. guns vs. butter)

Gross Domestic Product

GDP- the total value of final goods and services produced in a country during a given period of time.

total= aggregate      produced= production

GDP excludes:

·         intermediate goods

·         secondhand sales

·         illegal transactions

·         underground transactions

·         buying or selling securities

·         government transfer payments

·         private transfer payments

Real GDP- the inflation-adjusted value of GDP or the value of output measured in constant prices.

"Gross National Happiness"

·         economic development should consider the people's happiness

·         all decisions need to be well-balanced

In class we were shown a "Measure of Happiness" graph. It depicted multiple countries on a scatter plot graph that as the GDP grew, the level of happiness grew. In the curve on the graph the countries that had a higher GDP per capita had a higher level of happiness. The following aspects were shown:

·         the graph only shows what is possible

·         as technology increases, so does happiness

·         the happiness country was Denmark

·         the higher GDP countries could afford to be healthy, thereby possibly affecting the country's overall happiness

·         being rich is good, but it doesn't make you the happiest

International Comparisons

·         In 2009, the US economy produced nearly $15 trillion in output

·         With 5% of the world's population, the US economy produces over 20% of the entire world's output

·         The US economy is two and a half times larger than Japan's- the world's 3rd largest- and twelve times larger than Mexico

The Mix of Output

C+I+G+NX

C= Consumer Goods:

1.       Durable Goods- expected to last 3 years (cars, appliances)

2.       Non-durable Goods- bought frequently (clothes, food, gas)

3.       Services- largest and fastest growing component in consumption (over half of all consumer output consists of medical care, entertainment, and utilities)

I= Investment Goods- expenditures on (production of) new plant and equipment (capital) in a given time period

G= Government Services- local and federal law enforcement, teachers, etc...

XN= Net Exports:

·         Exports- goods and services sold to foreign buyers

·         Imports- goods and services purchased from foreign sources

factor mobility- our continuing ability to produce the goods and services that consumers demand also depends on our agility in reallocating resources from one industry to another.

FOR WHOM America Produces

·         Who gets which slice of the pie?

·         Will everyone get an equal slice?

·         Will some get a lot more than others?

·         What is the quantity versus the quality?

·         What are the prices that those resources could command in the market?

INCOME	TOTAL SPENDING	SALES TAX	SALES TAX PAID AS % OF INCOME
$10000	$12000	$1200	12%
$20000	$18000	$1800	9%
$50000	$40000	$4000	8%
$100000	$70000	$7000	7%

This chart depicts a regressive tax rate. The tax rate decreases as the income increases.

The graph demonstrates a progressive tax distribution on income that becomes regressive for top earners.

A progressive tax is a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay.

A regressive tax is a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate. In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income.

Locating Markets

·         a market is anywhere an economic exchange occurs

·         a market exists whenever and wherever an exchange takes place

Dollars and Exchange

·         some market transactions involve barter

·         barter is the direct exchange of one good for another without the use of money

·         bartering has limits as it requires a seller who wants whatever good is up for exchange

Supply and Demand

·         market transactions require 2 sides: supply and demand

demand- the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal).

supply- the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus.

demand curve- the graphical representation of the demand schedule; it shows how much of a good or service consumers want to buy at any given price.

Change in quantity demanded brought about by change in price.

The shift of the demand curve can be brought about by determinants. Determinants determine your action. Change in quantity demanded is by price and change in demand (shift of the curve) is by determinants.

Movements vs. Shifts

·         Changes in quantity demanded:

·         Movements along a given demand curve in response to changes in price

·         Changes in demand

·         Shifts of the demand curve due to changes in tastes, income, other goods, or expectations

Market Supply
-interacts with demand to determine the price that will be changed
-the total quantities of a good or service that sellers are willing and able to sell at alternative prices in a given time period.
-an expression of seller's intention

Determinants of Supply
-technology
-factor (or resource) costs
-other goods
-taxes and subsidies
-expectations
-number of sellers

Change in quantity supplied: change in price

Change in supply with determinants: no price change

Equilibrium

-only one price and quantity are compatible with the existing intention of both buyers and sellers
-the price at which the quantity of a good demanded in a given time period equals the quantity supplied

normal good- demand increases or decreases directly with income
inferior good- demand increases or decreases inversely with income

Equilibrium Price
-only one
-occurs at intersection of supply and demand
-market naturally moves towards this price

Market Clearing
-collective actions of Sellers and buyers create an equilibrium price
-the equilibrium price and quantity reflect a compromise
-no other compromise that yields a quantity demanded that us exactly equal to the quantity supplied

Remember Adam Smith and his "invisible hand" theory

Market Surplus
-the amount by which the quantity supplied exceeds the quantity demanded at a given price

Price ceilings have 3 predictable effects:
1. Increase quantity demanded
2. Decrease quantity supplied
3. Create a market shortage

Price floors have 3 predictable effects:
1. Increase quantity supplied
2. Decrease quantity demanded
3. They create a market surplus
Example: minimum wages and price supports these effects.

Government imposed price floor may create:
-a wrong mix of outputs
-increased tax burden
-an altered distribution of income

marginal utility- the change in total utility obtained by consuming one additional (marginal) unit odd a good or service

total utility- amount of satisfaction obtained from entire consumption of a product

*satisfaction* :-)

Patterns of Consumption
-consumption represents 2 out of every 3 dollars  of GDP
-about 70% of a household's budget is spent on housing, transportation, food, and health expenditures.
-"essential" items have changed from years ago.

Determinants of Demand
-what determines what we buy?
                -the sociopsychiatric explanation

The desire for goods and services arises from our needs for social acceptance (or envy), security, and ego gratification.

-Keeping up with the Joneses
-self preservation
-Expressions of affluence

economic explanation

-Prices and income are just as relevant to consumption decisions as more basic desires and preferences

Determinants of Demand

-tastes
-income
-expectations
-# of consumers
-other goods

Market demand: you must be willing and able!

Utility Theory

-the more satisfaction/pleasure = more they can charge!
-example: students who like butter--> buy high priced buttered popcorn than cheap non-buttered popcorn

utility- pleasure or satisfaction
 
total utility-amount of total satisfaction from the entire consumption of a product

Marginal utility = change in total utility/change in quantity
(measured in utils)

So long as marginal utility is increasing, total utility must be increasing.

Law of diminishing marginal utility

-the marginal utility of a good declines as more of it is consumed in a given time period.
-suppose a student who loves popcorn can eat all he/she wants for free.
-tastes good in the beginning and then you get sick of it

Law if Diminishing Marginal Utility

-as long as the marginal utility is positive, the consumer receives additional satisfaction and total utility increases
-additional quantities of a good yield increasingly smaller increments of satisfaction.

Midpoint formula

Back to the Utility Theory
an absolute measure of utility is not possible because the perception of satisfaction differs among individuals
-diminishing marginal utility is a common experience
-it is a sufficient basis for economic predictions of consumer behavior
--not prefect, but allows us to do some predictions

Price and Quantity

-many forces determine how much we are willing to buy
-economists focus on the relationship between price and quantity rather than trying to explain all the forces at once, ceteris paribus, assuming that all other things are equal

Law of Demand

-concepts of marginal utility and ceteris paribus explain the downward slope of the demand curve
-with given income, tastes, expectations, and prices of other goods and services, people are willing to buy additional quantities of a good only if its price falls
-the higher the marginal utility = the more you're willing to pay
-diminishing marginal utility explains why price must decrease in order for you to continue to buy a good or service

Price and marginal utility affect Demand Curve!

Price and Elasticity

-the price of consumers to a change in price is measured by the price elasticity of demand
-the price and elasticity is the percentage change in quantity demanded divided by the percentage change in price

Elastic versus Inelastic

-demand can be elastic, inelastic, or unitary elastic

Elastic, if the absolute value of E is greater than 1.

-consumer response is large relative to the change in price.

Inelastic if the absolute value of E is less than 1

-consumers are not very responsive to price changes

Unitary if the absolute value of E equals 1.

-the percentage change in quantity demanded is equal to the percentage change in price.

Price Elasticity and Total Revenue

-price elasticity explains why producers can't change the highest possible price
-higher prices may actually reduce total sales revenue
-total revenue equals price times quantity sold
-total revenue is defined as the total value of sales of a good or service
-a price cut decreases total revenue if demand is price elastic (lawn mowing)
-a price cut does not change total revenue if demand is unitary elastic

Why does it matter if demand is elastic, inelastic, or unitary?
-because this predicts how changes in the price of a good will affect the total sales revenue earned by producers from the sale of that good

-differences in prices elasticity are explained by several factors:
-whether the good is a necessity or luxury
-availability of substitutes
-price relative to income

Necessities versus Luxuries

-some goods are so critical to our everyday life that we regard them as necessities
-demand for necessities is relatively inelastic
-luxury good-something we'd like to have but aren't likely to buy unless our income jumps or the price declines sharply
-demand for luxury goods is relatively elastic

Availability of Substitutes

-the greater the availability of substitutes, the higher the price elasticity of demand
-the smaller the availability of substitutes, the lower the price elasticity of demand

Increase the number of substitutes and you yourself will be checking all of the prices.

Price relative to income

-if the price of a product is very high relative to the consumer's income, the demand will tend to be elastic
-if the price of a product is very low relative to the consumer's income, the demandwill tend to be inelastic

Substitute goods, complementary goods both increase demand prices.

Are wants created?

-advertising is not the only reason consumption is increased
-personality and social interaction dynamics have changed how much we consume

Supply-chapter 5

The producer's side of the story.

1. Basic activity of a firm is to use inputs to produce goods and services.

2. A firm's technology is the process it uses to turn input, such as the factors of production, into output of goods and services.

Technology processes

-skill of the manager
-training of the workers and morale (incentive/reward)
-capacity of the equipment
-arrangement of the equipment

Technology can be positive with positive outcomes or be negative.

What you want is more output with the same input! Or fewer input with same output.

Supply + Factors of Production

Efficiency

-efficiency means achieving the maximum output attainable from given inputs
-every point on the production function represents the most output that can be produced with a given number of workers
-producing any less means production is inefficient

Economics is what you live!

Marginal Physical Product

-it is the change in the total output associated with one additional unit of input

-a worker's productivity (MMP) depends in part on the amount of other resources in the production process

Law of Diminishing Returns

-the MMP of a variable input eventually declines or diminishes as more of it is employed with a given quantity of other fixed inputs
-the additional units of resources (inputs) are less valuable to the firm

Resource Constraints

-why a decline in MMP?
-MMP may initially increase due to specialization of labor
-as more labor is hired, each unit of labor has less capital and land to work with
-as a result, MMP begins to decline

Short Run vs. Long Run

-traditional accounting periods (short run up to a year and long run beyond that time) aren't always useful in economics
-short run is the period in which the quantity of some inputs can't be changed (fixed variables)

Fixed Costs

-costs of production that don't change with the rate of output
-fixed costs can't be avoided in the short run
-examples of fixed costs include pant, equipment, and property taxes

Variable Costs

-costs of production that change when the rate of output is altered
-any short run change in total costs is a result of changes in variable costs
-examples of variable costs include labor and materials

Economic vs. Accounting Costs

-economic costs need not conform to actual dollar costs--not just a dollar figure, opportunity costs!
-accountants often count dollar costs only and ignore any resource use that doesn't result in an explicit dollar cost.
-whereas accounting costs consider only those which are explicit, the economic costs consider both explicit and implicit costs

Economic Costs

-opportunity costs are counted by economists but not necessarily by accountants
-economic costs and accounting costs will diverge whenever any factor of production is not paid an explicit cost
-economists will always ask you to look for opportunity costs
-the essential economic question is how many resources are used in production

Accounting= Explicit only!
Economic = Explicit + Implicit!

implicit- opportunity costs, what you gave up to do what you do now
explicit- anything that would be payed by check

Market Structure: Competition
-number and relative size of firms in an industry
-must real-world firms fall along a spectrum that stretches from one extreme to another: powerless--> powerful
-"powerless" explains pure competition in terms of money
-5 types of market structure: perfect competition, monopolistic competition, oligopoly, duopoly, monopoly

Competitive Firm

-is one without market power
-it is not able to alter the market price of the good it produces
-it is a price taker
-it competes with many other firms selling homogenous products
-no brand image, so no market recognition
-one who's output is so small in relation to market volume that its output decisions have no perceptible impact on price
-pretty much faceless, cannot stand out above the rest as easily

Homogenous- no name brand

Competitive Market

-is one in which no buyer or seller has market power
-no single producer or consumer has any control over the price or quantity of the product
-best price for YOU

No Market Power

-the output of a lone perfectly competitive firm is so small relative to market supply that it has no significant effect on the total quantity or money in the market

Price Takers

-perfect competitive firm is a price taker
-an individual firm's output decisions do not affect the market price
-an individual firm must take the market price and do the best it can within those constraints

Market Demand versus Firm Demand

-we must distinguish between the market demand curve and the demand curve confronting a particular firm
-the market demand curve for a product is always down sloping

The Firm's Production Decision

-choosing a rate of output is a firm's production decision
-it is the selection of the short term rate of output (with existing plant and equipment)

Industry Entry and Exit

-to understand how competitive markets work, we focus on changes in equilibrium rather than static equilibrium
-the number of firms in a competitive industry is not fixed
-industry entry and exit is a driving force affecting market equilibrium

Entry

-additional firms will enter the industry when profits are plentiful
-economic profits attract firms
    -more firms enter the industry
    -the market supply curve shifts to     the right
    -the price decreases
-industry output increases and price falls when firms enter an industry

Tendency Toward Zero Economic Profits

-new firms continue to enter a competitive industry so long as profits exist

Exit

-firms exit the industry when profit opportunities look better elsewhere
-as firms exit the industry, the market supply curve shifts to the left

Long-Run Equilibrium

-in a long run competitive market equilibrium is where economic profit is eliminated.

- as long as it is easy for existing producers to expnd production or for new firms to enter an industry, economic profits will not last long

Key Points to Remember:

·         firm with no market power means it has no leverage

·         infinite number of buyers and sellers in Pure/Perfect Competition

·         price - taker is someone that has no ability to alter the price

·         compete with many without differentiation (a fish is still a fish)

·         freedom of entry and exit, doesn't cost as much to get in or out

·         each firm has a small market share(a drop in the bucket, won't even make a ripple)

·         lots and lots of substitutes

·         no collusion, meaning they won't come together to set the price, within this market

·         no brand names, imaging, or advertising

o    except the "Association" of the industry

o    they do this to help the firms

·         Independent, you will be on your own

·         you are faceless, you will not be popular in the market (you don't know who the farmer is down the street)

Monopolistic Competition

- a market structure in the imperfect competition category characterized by a large number of small firms selling products that are similar but not identical

examples: gas stations, clothing stores, mom and pop stores, convenience stores, restaurants, toothpaste, furniture, hotels, dry cleaners, barber shops, bars, specialty retail

Characteristics

-many producers and consumers in the market
-no business has total control over market price, but it's still a price maker
-the demand curve is a downward sloping demand curve

- consumers perceive that there are non-profit differences among the competitor's products

-usually within the vicinity of other competing stores so you have options and they can watch each other's prices--they need to know what each other has

-non-price differences are similar products, but have different features, such as quality, customer service, rewards and loyalty programs, type, style, reputation, appearance, location that tend to distinguish them from each other. The differences are not so great as to eliminate other goods as close substitutes

-each company has a monopoly on its brand image but must contend with competing brands and fierce competition

-behaves more like a monopoly than a perfect competition firm

-does not have as much price setting power as oligopoly or monopoly but can set price without fear of a pricing war

-cost of entry and exit is very low

-fosters advertising and the creation of brand name

-profits attract others but failure rate is high

-model explains the existence of many differential but successful companies

-demand is relatively elastic so the firm must depend on loyalty when they raise the price

- consumer is forced to collect and process information on a large number of different brands to be able to select the best

-no collusion

-independent

We watched a video on the history of commercial flights and how the process of deregulation lowered prices and now more people get to fly because of deregulation. In turn, we had to give up the many luxuries that accompanied the airline companies, such as PAN AMERICA. This deregulation allowed more competition, which helped to lower the price. Deregulation means open to competition.

·         today it's about 9 cents per mile to fly

·         "creative destruction" brought new jobs, but eliminated old ones

·         consumers will inconvenience customers to lower prices

Oligopoly

-a market structure in which a market or industry is dominated by a small number of sellers

-not small in size, just numbers

oligos = few, small, little

poly = to sell

-this is a common market form and all kinds of oligopoly have one thing in common: their behavior depends on the behavior of the other firms in the industry. they watch each other continuously!

-interdependent, meaning they watch each other

-advertising is very aggressive

-often see a 4:1 firm concentration ratio to explain that the industry is oligopolistic

-can have a large number of firms. the distinguishing feature is that a few of the firms are relatively large compared to the overall market

-an industry with 1,000 firms is considered oligopoly if the top 4-5 firms account for over 1/2 of the industry's input and the top 8 account for over 80%

-some firms produce identical products while others produce differentiated products

-examples of identical/homogenous/ standardized products or industries are: copper, lead, aluminum, steel, and petroleum

Differential Products

-examples tend to be those that focus on goods sold for personal consumption

-examples include autos, household detergents, cereal, cigarettes, sporting goods, beverages, and computers

-these industries tend to engage in considerable non-price competition supported by heavy advertising

-they want your loyalty!

-these firms are price makers but are also characterized by strategic behavior / mutual independence

-you will observe self-interested behavior where the firm has set a price and sales strategy but takes into account the reaction of other firms to any price change

Barriers to Entry

-firms in oligopoly gain and retain market control through significant barriers to entry

-most notable barriers are: exclusive resource ownership. such as the overseas company, OPEC, which does business through a cartel system and has a formal arrangement between producers that determine the price and output each is allowed to produce

-other barriers include: patents and copyrights, high startup costs

-economics of scale (reductions in unit costs that come about through increases in the size of plant and equipment)

-therefore, firms cannot easily enter the industry and so existing firms maintain greater market control

-might be only one barrier to a certain market

Concentration Levels

-0% means perfect competition or at the very least monopolistic competition

-100% means an extremely concentrated industry with the presence of a monopoly

-0% to 50% ranges from perfect competition to oligopoly

-50% to 80% means definite oligopoly

-80% to 100% oligopoly to monoploy

Monopoly

-a firm is one that produces the entire market supply of a particular good or service

- it is a price-setter, not a price-taker

-has no direct competitors

-has complete market power because it can alter the market price of a good or service

Monopoly Structure

-market power is the ability to alter the price of a good/service

- a monopoly is one firm that produces the entire market supply of a particular good/service

- since there is only one firm in a monopoly industry, the firm is the industry

- your interaction depends a lot on where you live

small town: grocer, barber, cable, utilities, gas station

large town: cable, utilities

If you're going to watch your favorite sports team play, what would you choose?

Go see the game, or watch it on t.v., internet? There is a monopoly in each one.

What are the prices in these monopolies? It depends on location.

-monopolists don't charge the highest price possible. Why?

monopoly = industry

-the firm's demand curve is identical to the market demand curve for the product.

VOCABULARY

economics- the social science that seeks to understand the choices that people make in using scarce resources to meet their wants. OR- the study of how best to allocate scarce resources among competing uses.

opportunity cost- the sacrifice of the next best thing or alternative choice.

factors of production- resources of land, labor, capital, and entrepreneurship.

scarcity- a situation where our desires for goods and services exceed our capacity to produce them.

production possibilities- the alternative combinations of goods and services in a given time period with all the available resources and technology.

market failure- the market does not produce the best possible mix of output.

externality- a cost imposed on innocent third parties.

individual choice- the decision of an individual of what to do, which necessarily involves a decision of what not to do.

microeconomics- the branch of economics that studies the choices of individual units

macroeconomics- large-scale phenomena, industry, inflation, unemployment, unemployment and economic growth. Aggregate behavior. Study as a whole.

positive economics- a branch of economic analysis that describes the way the economy actually works.

                (No feelings or opinions, objective data, gives the description using facts)

normal economics- makes prescriptions about the way the economy should work.

                (Feelings and opinions, subjective data, uses words like “ought” and “should”)

incentives- anything that offers rewards to people who change their behavior.

recession-what we are not spending the economy has ability to produce.

inflation- too much spending.

production possibilities curve- a curve in a graph that depicts the alternative combinations of goods and services that can be produced given the quality and quantity of the factors of production.

factor mobility- our continuing ability to produce the goods and services that consumers demand also depends on our agility in reallocating resources from our industry to another.

human development index- average achievement in three basic dimensions of human development: a long, healthy life; knowledge; and a decent standard of living.

gender equality index- a composite measure reflecting inequality in achievements between men and women in three dimensions: reproductive health, empowerment, and the labor market. (a smaller percentage is better)

education index- based on the mean years of schooling of adults and the expected years of schooling of children.

life expectancy at birth index- number of years a newborn infant could expect to live if prevailing patterns of age specific mortality rates at the time of birth stats the same throughout the infant's life.

income-  the amount of money a household earns in one year.

progressive tax- a tax by which the tax rate increases as the taxable base amount increases. "Progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate. It can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or lifetime. Progressive taxes attempt to reduce the tax incidence of people with a lower ability-to-pay, as they shift the incidence increasingly to those with a higher ability-to-pay.

regressive tax- a tax imposed in such a manner that the tax rate decreases as the amount subject to taxation increases. "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate. In terms of individual income and wealth, a regressive tax imposes a greater burden (relative to resources) on the poor than on the rich — there is an inverse relationship between the tax rate and the taxpayer's ability to pay as measured by assets, consumption, or income.

demand- the ability and willingness to buy specific quantities of a good at alternative prices in a given time period, ceteris paribus (other things being equal).

supply- the ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus.

demand curve- the graphical representation of the demand schedule; it shows how much of a good or service consumers want to buy at any given price.

marginal analysis- the process of identifying the benefits and costs of different alternatives by examining the incremental effect on total revenue and total cost caused by a very small (just one unit) change in the output or input of each alternative. Marginal analysis supports decision-making based on marginal or incremental changes to resources instead of one based on totals or averages.

normal good- demand increases or decreases directly with income

inferior good- demand increases or decreases inversely with income

marginal utility- the change in total utility obtained by consuming one additional (marginal) unit odd a good or service

total utility- amount of satisfaction obtained from entire consumption of a product