Mechanics of Foreign Exchange

The buying and selling of currency
Any transaction that occurs in the balance of payments necessitates foreign exchange
Exchange rate is determined in the foreign exchange
Exchange rate is the price of currency
Exchange rate are a function of the supply and demand for currency

• increase in supply, decrease exchange rate
• increase in demand, increase exchange

Appreciate and depreciation

• Appreciation of currency occurs when the exchange rate of that currency increase
• Depreciation of a currency occurs when the exchange rate of that currency decreases

Exchange rate Determinants

• Consumers tastes
• Relative income
• Relative price level
• Speculation

Unit 7

Specialization - individuals and countries can be made better off if they will produce in what they have a comparative advantage and then trade with others for whatever else they want/ need
Absolute and comparative advantage

• Absolute advantage the producer that can produce the most output OR requires the least amount of input
• Comparative advantage the producer with the lowest opportunity cost
• Countries should trade if they have a relatively lower opportunity cost
• An output problem presents the data as products produced given a set of resources
• An input problem presents the data as amount of resources needed to produce a fixed amount of output
• Identifying absolute advantage input problems change the scenario from who can produce a given amount of resources

Balance of trade: Exports + Imports
Balance of goods: good exports + services exports - goods imports + service imports
Balance on current account: Balance of goods: services + net investment + net transfers
Official Reserves: current account + capital account = 0

Unit 7

Balance and payment - measure of money inflows and outflows between the united states and the rest of the world

• Inflows are refereed as CREDITS
• Outflows are refereed to as DEBIT

The balance of payements is divided into 3 accounts

• current
• Capital/financial
• Official Reserves

Double entry bookkeeping - every transaction in the balance of payments is recorded twice in accordance with standard accounting practice

• Notice that 2 transactions affect each other. Theoretically the balance payments should always equal 0

Current Account

• Balance of trade or Net Exports
• Exports of goods/services - import of goods/services
• Exports create a credit to the balance of payments
• Imports opposite
• Net Foreign Income
• Income earned by US owned foreign assets income paid to foreign held US assets
• Net transfers (tend to be unilateral)
• Foreign Aid - a debit tot he current account

Capital/Financial account

• The balance of capital ownership
• Includes the purchase of both real and financial assets
• Direct investment in the U.S. is a credit tot he capital account
• Direct investment by US firms in a foreign country are debits to the capital account
• Purchase of foreign financial assets represents a debit tot he capital account
• Purchase of domestic financial assets by foreigners represents a credit assets by foreigners represents a credit to the capital account.

Relationship between current and capital account

• The current account and the capital account should 0 each other out
• If current account has a negative balance, then capital account should have positive balance

Official Reserve system

• The foreign currency holdings of the U.S. federal reserve system 
• When there is a balance of payments surplus the fed accumulates foreign currency and debits the balance of payments
• When there is a balance of payments deficit the fed depletes its reserves of foreign currency and credits the balance of payments
• Official reserves 0 out the balance of payment

Unit 6

• Stagflation- high inflation combined with high unemployment and stagnant demand in a countries economy
• Deflation - reduction of the general level of prices in an economy
• Disinflation - decrease in the rate of inflation, slowdown in the rate of increase of the general price level of goods and services.
• Inflation - general level of prices for goods purchasing power of currency is falling
• Causes of adverse supply side shock would be rising oil prices, bad weather and decline in productivity. This causes an unexpected increase in cost or disruption to production
• Demand pull inflation is the result of increase in total spending without any accompanied =
• Cost push inflation is the result of negative shocks to total production capacity. Increase unemployment and reduced production capacity
• Supply side economics focus on the expansion of the long run supply curve. Less government (taxes and spending)
• Economists call the knowledge and skills that make a worker productive a human capital.
• Major measure of economic growth is changes in real GDP per capita

The Phillips Curve

SRPC

• There is a trade off between inflation and unemployment
• Inverse relationship one increase others decrease
• Since wages are sticky inflation changes, moves the SRPC. (Short run Phillips curve)
• If inflation persist and the expected inflation rate increase then the entire SRPC moves upward
• Stagflation - unemployment and inflation spontaneously rise
• Supply shocks - rapid and significant increase in resource cost. Cost SRAS curve to shift
• If inflation expectations drop due to new tech or efficiency then the SRPC moves down

LRPC

• Occurs at the natural rate of unemployment. It is represented by a vertical line. There is no trade off between unemployment and long run.
• Because the economy produces at the full employment output level
• If the natural rate of unemployment (NRU) changes the LRPC moves

NRU

• 3 types of unemployment
• Frictional
• Structional
• Seasonal

LRPC

• Increase in Un will shift LRPC to the right 
• Decrease in Un will shift LRPC tot he left
• Misery Index - combination of inflation and unemployment in any given year. Single diget misery is good.

Monetary Policy

Loan-able Funds Market

Is an interest rate of 50% good or bad?
Bad for borrowers but good for lenders
The loanable funds market is the private setor supply and demand of loans.

• This market brings together those who want to lend money and those who want to borrow.

This market shows the effect on REAL INTEREST RATE

Demand - inverse relationship between real interest rate and quantity loans demanded
Supply - Direct relationship between real interest rate and quantity loans supplied
This is NOT the same as the money market. (Supply is not vertical)

Tools of Monetary Policy and 3 Shifts of Money Supply

The Fed adjusting the money supply by changing any one of the following

1. Setting reserve requirements
2. Lending Money to Banks
• Discount rate
3. Open Market Operations
• Buying and selling bonds

The reserve requirement

• Only a small percent of your money is in the safe the rest  of your money has been loaned out. This is called "fractional reserve banking"
• The FED sets the amount that banks must hold. The reserve requirement is the percent of deposits that banks must hold in reserve.

Using Reserve requirement

• If there is a recession, what should the FED do to the reserve requirement?
• Decrease the reserve ratio
1. Banks hold less money and have more excess reserve.
2. Banks create more by loaning out excess
3. Money supply increases, interest rates decrease, AD goes up
• If there is inflation, what should the FED do to the reserve requirement?
1. Increase the reserve ratio
2. Banks hold more money and have less excess reserves
3. Banks create less money
4. Money supply decreases, interest rate increases, AD decreases

Open Market Operations

• Open market operations is when the FED buys or sells govt. bonds
• This is the most important and widely used monetary policy.
• If the FED buys bonds it takes bonds out of the economy and replaces them with money.
• If the FED sells bonds it takes the money and gives the security to teh investor.

The Discount rate

• There are many different interest rates, but they tend to all rise and fall together.
• The discount rate is the interest rate that the FED charger commercial banks for short term loans.

Federal Funds Rate

• The federal funds rate is the interest rate that banks charge one another for overnight loans as reserves.

Prime rate

• It is the interest rate that banks charge their most credit worthy customers.

Money Creation Formula

A single bank can create $ by the amount of it's excess reserves.
The banking system as a whole can create $ by a multiple of the excess reserves.
Money Multiplier = 1/RR
New vs. Existing $

• If the initial deposit in a bank comes from the FED or bank purchase of a bond or other money out of circulation, the deposit immediately increases the money supply
• The deposit then leads to further expansion of the money supply through the money creation process
• Total change in MS if initial deposit is new $ = deposit + $ created by banking system
• If a deposit in a bank is existing $ deposting the amount does not change the MS immediately because it is already counted
• Existing currency deposited into a checking account changes only the composition of the money supply from coins/ paper $ to checking account deposits
• Total change in the MS if deposit is existing $ banking system created money only

Money Market

Demanded for money has an inverse relationship between nominal interest rates and the quantity of money demanded.
Quantity demanded rate: increases of money. Quantity demanded: decrease

• QD decreases interest rates
• QD increases cash

Demanded for money

• Money demanded shift
1. Change in price level
2. Change in income
3. Change in taxation that affects investment
• Nominal interest rate (IR) on y-axis
• Quantity of money on x-axis

The money demanded curve slopes down and to the right because all else being equal, higher interest rates increase the opportunity cost of holding money, they're leading public to reduce quantity of money it demanded.

Bonds vs. Stocks

Bonds are loans

Stocks are owns

Bonds are loans, or IOU's, that represent debt that the government or corporation must repay to an investor. The bond holder has NO OWNERSHIP of the company.
Bonds

• First: if a corporation issues and then sells a bond
• If that corporation issues a 10K bond with a 10yr term and a 5% interest
• Interest rate: Decreases
• Bonds: Increases
• Interest Rates: Increases
• Bond: Decreases
• Nominal interest rate: 5%
• Stock owners can earn a profit in 2 ways
1. Dividends, which are portions of a corporations profits are paid to stockholders
2. A capital gain is earned when a stockholder sells stock for more than he or she paid for it.
3. A stock holder that sells stock at a lower price than the purchase price suffers a capital loss.

Unit 4 (MONEY)

What would happen if we had no money?

• The barter system: goods and services are traded directly. No money is exchanged.
• Money is anything that is generally accepted in payment for goods and services.
• Money not the same as wealth or income
• Wealth is the total collection of assets that store value
• Income is flow of earnings per unit of time

Money can be used as a

• Medium of exchange
• buy goods and services
• Unit of account
• measuring the value of goods and services
• Store of value

3 Types of money

1. Representative
• represents something of value
• IOU's 
2. Commodity
• Something that performs the function of money and has alternative uses
• Salt, Gold and silver
3. Fiat money
• serves as money but has no other important uses
• paper money
• coins

6 characteristics of money

1. Durability
2. Portability
3. Limited supply
4. Divisibility
5. Acceptability
6. Uniformity

3 Types of money

• Liquidity - money converted to cash
• M1 - Coins, currency, and check-able deposits.
• M2 - M1 plus savings deposits, time deposits and mutual funds below $100k.
• M3 - M2 plus time deposits above $100K

Purpose of Institutions

• Store $
• Save $
• Savings acct.
• Checking acct.
• CD
• Money market acct.
• Loans $
• Interest - prices paid for the use of borrowed money
• Principle - amount that you borrow

Types of financial intermediaries

• Commercial banks
• Credit Union
• Svaing and loans institutions
• Finance companies
• Fund companies

The financial system

• Assets - anything of monetary value owned by a person or business
• Financial - a paper claim that entities the buyer to future income from the seller
• Physical - a claim on a tangible object
• Liability - is what you owe
• There are 5 major financial assets: loans, stocks, bonds, loan backed securities and bank deposits.

Interest Rates and Inflation

• The time value of money - a dollar is worth more today than it is tomorrow. You are losing money every second you are not investing it.
• RIR - Real = nominal - expected inflation
• NIR - Nominal = Real + expected inflation
• RIR - intended return on an investment for lending. True cost of borrowing

Present vs. Future value

• Future value - if you invest money to someone, it will compound according to FV = PV (1+i)^t
• Present value - is the amount of money need to invest now, in order to get some amount in the future. PV= FV/(1+r)^n

Time Value of Money

• v=(1+r)^n X p
• v=future value of $
• p= present value of $
• r=real interest rate (non-inf) decimal
• n= years
• k= number of times interest is credited per year
• v=(1+r/k)^nk X p

Fiscal Policy

How does the government stabilizes the economy?

•  The government has 2 different tool boxes it can use
• Fiscal Policy - Actions by congress to stabilize the economy

Fiscal Policy

• Changes in the expanditures or tax revenues of the federal government
• Tools of fiscal policy: taxes - government can increase or decrease taxes. Spending - govt. can increase or decrease spending
• Fiscal policy is enacted to promote our nations economic goals: full employment, price stability, economic growth

Deficit, Surpluses and Debt

• Balanced budget: revenues = expenditures
• Budget deficit: Revenues < expenditures
• Budget surplus: Revenues > expenditures
• Government debt: Sum of all deficit - sum all surpluses
• Govt. must borrow money when it runs a budget deficit
• Govt. borrows from: individuals, corporations, financial institutions, foreign entities or govt.

Fiscal Policy two options

• Discretionary fiscal policy (action)
• Expansionary - think deficit
• Contractionary - think surplus
• Non - discretionary (no action)

3 types of taxes

• Progressive tax - takes a larger % of income from high income groups
• Proportional taxes - takes the same % of income from all income groups
• Regressive taxes - takes a larger % from low income groups.

Contractionary Fiscal Policy

• Decrease govt. spending
• tax increases
• Combinations of the two

Expansionary Fiscal Policy

• Increase govt. spending
• decrease taxes on consumers
• Combinations of the two

Automatic or Built in stabilizers

• Anything that increases the govt. budget deficit during a recession and increase it's budget surplus during inflation without requiring explicit action by policy makers

Non-discretionary fiscal policy

• Corporate dividends
• social security
• veterans benefit

Transfer payments

• welfare checks
• food stamps
• unemployment checks

Expansionary is reduced with DI but recession reduce drops

Fun with MPC and MPS

MPC + MPS = 1
The spending multiplier effect

• An initial change in spending causing a larger change in aggregate spending, or agggregate demand (AD)
• Multiplier = Change in AD/Chnage in spending = AD/ C, I, G, Xn
• Why? expenditures and income flow continuously which sets off a spending ^ in the economy.

Calculating spending multiplier

• 1/1-MPC pr 1/MPS
• Multiplier is + when increase in spending but - when decrease in spending

Calculating tax multiplier

• When the government texes, the multiplier work in reverse.
• Money leaving circular flow
• Tax mulitplier = MPC/ 1- MPC or -MPC/MPS
• If there is a taxcut, then the multiplier is +, more money in circular flow

Why prices tend to be sticky

• Menu cost
• Fear of price wars
• Wage contracts
• Minimum wage
• Moral effort and productivity

Output level low, unemployment increase, GDP decrease and there is a recession.
Upward sloping, output expands as total increase
Firms cant respond in increase in demand by increase output.

What is Investment?

Money spent or expenditures on: New plants, Capital equipment, technology, new homes, inventories.
Expected rates of return

• How does business make investment decisions?
• Cost/Benifit Analysis
• How does business determine the benefits?
• Expected rate of return
• How does business count the cost?
• Interest costs
• How does business determine the amount of investment?

Real vs. Nominal

• Nominal is the observable rate of interest. Real subtracts out inflation and is only known ex post facto.
• r% = i% - pi%
• real interest rate (r%) determines the cost

Investment Demand Curve (ID)

• Downward sloping

Shifts in Investment Demand

• Cost of production, business taxes, technological change, stock of capital and expectations.

Aggregate Supply

• The level of Real GDP that firms will produce at each price level (PL)
• Long run- time where input prices are completely flexible. Always be vertical.
• Short run - time where input prices are sticky and not adjust to change in price level. Determinants.
• (LRAS) long run aggregate supply marks the level of full employment in the economy (analogous to PPC)
• Input prices are sticky in short run the SRAS is upward sloping.
• Increase in SRAS is seen as a shift to the right
• Decrease in SRAS is seen as a shift to the left
• They key to understanding shifts in SRAS is per unit cost of production
• Per unit production cost = total input/ total output

Determinants of SRAS

• Input prices, productivity, legal institutional environment.
• Input prices - made or sold in U.S. Wages, cost of capital, raw materials. Strung $ = lower foreign weaker $ = higher foreign. Market Power - monopolies and cartels that control resources control the price of those resources. Increase in resources price = SRAS <- decrease in resources  price = SRAS ->
• Productivity = output/inputs. More productivity = lower unit production cost = SRAS -> Lower = higher production cost = SRAS <-
• legal institutional environment - taxes and subsides is taxes on business increase per unit cost = SRAS <- subsides to business reduce per unit production cost = SRAS -> Govt regulation creates a cost of compliance = SRAS <- Deregulation reduces compliance costs = SRAS ->

Macroeconomics

Aggregate Demand Curve

• Ad is demanded by consumers, businesses, government, and foreign countries.
• Talks about total. Determinants will be different.
• Changes in price level cause they move along the curve not a shift of the curve.

Aggregate Demand (AD)

• Relationship between the price level and the level of real GDP is inverse.
• 3 reasons why AD is going down
1. Higher prices reduce purchasing power of $. This decreases the quantity of expenditure. Wealth Effect.
2. As price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment. Interest - Rate effect.
3. When U.S. price level rises, foreign buyers purchase fewer U.S. goods and Americans buy more foreign goods. Exports fall and imports rise causing real GDP demanded to fall. Foreign Trade effect.

Shifts in Aggregate Demand (AD)

• Two parts to a shift in AD
• A change in C, Ig, G, and Xn
• A multiplier effect that produces a greater change than the original change in the 4 components.
• Increase in AD=AD ->
• Decrease in AD=AD<-

Determinants of AD

• Consumption
• Gross Private Investment
• Government Spending
• Net Exports

Change in consumer spending

• Consumer wealth
• Consumer expectations
• Households indebtedness
• Taxes

Change in investment spending

• Real interest rates
• Future business expectations 
• Productivity and Technology
• Business Taxes

Change in government spending

• War
• Health care
• Defense

Change in Net Exports

• Exchange rates
• National income compared to abroad

AD = GDP =C+Ig+G+Xn

"if the US get a cold, Canada gets pneumonia"

Government Spending

• More govt. spending (AD ->)
• Less govt. spending (AD<-)

Disposable Income (DI)

• Income after taxes or net

2 Choices

• Consume or save
• With disposable income, households can consume or save.

Consumption

• Household spending
• The ability to consume is constrained by amount of disposable income or the propensity to save

APC=C/DI=%DI that is spent

Household consume if DI=0

• Dissaving or Autonomous consumption

Saving

• Household not spending
• Ability to save is constrained by amount of disposable income and propensity to consume
• Households save if DI=0
• NO
• APS=S/DI=%D that is not spent

APC & APS

• APC+APS=1
• 1=APC=APS

MPC and MPS

• Marginal propensity to consume
• C/DI
• % of every extra dollar earned that is spent
• S/DI
• %of every extra dollar earned that is saved
• MPC+MPS=1
• 1-MPC=MPS
• 1-MPS=MPC

Determinants of C&S

• Wealth
• Increase
• Decrease

Formulas

• GNP: GDP + Net Foreign Factor Payment
• Gross Investment: Net investment - Depreciation
• Net National Product: GNP - Deprecation 
• Net Domestic Product: GDP - Deprecation
• Disposable Personal Income: National income - Personal taxes + govt. transfer payments
• Trade: Govt. purchases of goods and services + Transfer payments - Govt. tax and fee collection.
• Budget: Govt. purchases of goods and services + Transfer payments + Govt. tax and fee collection
• National income: Compensation employee + corporate profits + interest income + rental income + proprietors income
• GDP: Consumption + Gross private domestic + Govt. spending + Net Exports.
• Income: Wages + Rents + Interest + Profits and Proprietor income
• Rule of 70: 70 / annual rate of inflation
• Real interest rate: Nominal interest rate - Expected inflation rate. Base price x Units of output current year
• Ideal inflation rate: Current price index - base year price index / base year price index x 100
• Nominal: Price per unit x Units of Output
• Inflation: CPI current year - CPI base year x 100. New - Old / Old x 100
• Unemployment: Unemployment / Labor force (unemployment and employment) x100

Unemployment

• Labor force
• Number of people classified as employed or unemployed

• Unemployment
• Percentage of people in the labor force who wants a job but are not working.

• Employed
• Temporary leave from work, part-time employment, and one hour of each month.

• Unemployment
• Kids, full time students, retirees, military personal, stay at home moms and dads, mental institution, incarcerated people, and discourage workers
• Formula: Unemployed rate = Number of unemployed / number in labor force (unemployed and employed) x 100

• Standard unemployment rate is 4-5%
• 4 types of unemployment

1. Frictional Unemployment
1. "temporarily unemployed" or being between jobs
2. Or looking for a better job
3. High School looking for a job
2. Seasonal Unemployment 
1. Unemployment which is due to time of year and the nature of the job
2. Jobs will come back
3. Lifeguard, Santa Claus impersonator
3. Structural Unemployment
1. Changes in the structure of the labor force maybe some skills obselete.
2. Workers learn new skills to get a job.
4. Cyclical Unemployment
1. Unemployment that results from economics downturns (recessions)
2. Demand for goods and services falls demand for labor falls and workers are fired.

• Frictional + Structural = NPU (4-5%) - full employment
• Full employment means NO cyclical employment

• Okun's law
• Unemployment rises 1 percent above the natural rate, GDP falls by above 2%

 

Inflation

Purchasing Power - Amount of goods and services that money buys. Ex. $2 dollars $1 in 1986

• General rising level of prices
• It reduces the "purchasing power" of money

1. Government prints too much money (The quantity theory)
2. Demand Pull inflation  (too many dollars chasing too few goods)
1. Demand pulls up prices!!! Demand increases but supply stays the same. The result is a shortage driving prices up.
3. Cost Push inflation (higher production costs increase prices) Ex. Gas during Hurricane Katrina.

• Ideal inflation rate: 2-3% Recession: decreases 2%

Formula: current year price index - base year price index /  base year price index X 100

• The Rule of 70
• Used to calculate the number of years it will take for the price level to double at any given rate of inflation.
• Formula: 70 / annual rate of inflation

• Deflation and Disinflation
• Deflation - decline in the general price level
• Disinflation - occurs when the inflation rate itself declines.

• Real interest rates
• It is the percentage increase in purchasing power that a borrower pays to the lender. (adjust for inflation)
• Formula: nominal interest rate - expected inflation

• Nominal interest rates
• Percentage increase in money that the borrower pays back to the lenders not adjusting for inflation.

Real GDP vs. Nominal GDP

• Nominal - It is the value of output produced in current prices. Can increase from year to year. If either output or price increase.
• Current prices
• Price x Quantity(output)

• Real - Value of output produced in constant base year prices. Adjusted for inflation.
• Price x Quantity(output)
• Can increase from year to year only if output increases.
• Trying to measure economic growth.

• In the base year nominal and real GDP will be equal.
• Years after the base year nominal GDP will exceed real GDP.
• Years before base year real GDP will exceed nominal GDP.
• GDP Deflator
• Price index used to adjust from nominal to real GDP
• Nominal / Real x 100
• Consumer Price Index (CPI)
• Measures inflation by tracking changes in the price of market basket of goals (get several items)
• Price of market basket in current year / Price of market basket in base year x 100

Included and Excluded GDP

• Final goods and services
• Does not include intermediate goods (inputs used to produce goods)
• Avoid doubling counting
• Used or second hand sells (includes double count)
• Gifts or transfer payments (public or private)

• Social Security, Unemployment compensation, scholarships
• Stocks and Bonds. No production.
• Unreported business transaction (Ex. tips) 
• Illegal activity (black market or underground activity)
• Non-market activity (volunteering or family work)

GDP and GNP

• Business - organization producers goods and services.
• Household - person or group of people that show income
• Represents transactions - in an economy by flows around a circle.

Gross Domestic Product (GDP)

• Total value of all final goods and services produced within a countries boarders within a given year.
•  Includes: All production and income earned within the U.S. and foreign users. It excludes production outside of U.S. even by Americans.

1. C- Consumption:67% of U.S. economy purchase of finished goods and services.
2. Ig- Gross Private Domestic Investment: Deals with factory equipment, construction of housing, unsold inventory built within that year and factory equipment maintenance. 18% of economy.
3. G- Government Spending: 17% of economy.
4. Xn- Net Exports: (exports - imports) -2% of economy.

Gross National Production (GNP)

• Total value of all final goods and services produced by Americans in a given year.
• Includes: Production or income earned by Americans anywhere in the world.
• Does not include production by non-Americans even in the U.S.

Formula
 C + Ig + G + Xn = GDP

Supply and Demand

Elasticity of Demand is a measure of how consumers react to a change in price.

• Elastic
• Demand is very sensitive to a change in price.
• Product is not a necessity and there are available substitutes.
• Example: Soda, Steaks and Fur coats.
• E > 1

• Inelastic
• Demand not very sensitive to a change in price.
• Product is a necessity
• Few or no substitutes
• Customers buy no matter what.
• Example: Insulin and Gas.
• I < 1 

•  Unitary Elastic
• Perfect society and economy
• U = 1

1.  Step 1: Quantity = New quantity - Old quantity/Old quantity
2. Step 2: Price = New price - Old price/Old price
3. Step 3: PED = Percentage △ in quantity/Percentage △ in price
4. Total Revenue (TR) - total amount of money a firm receives from selling goods and services. Price x Quantity

• Equilibrium - It is the point where the supply curve and demand curve intersect
• Excess demand - It occurs when quantity demanded is greater than quantity supply, results in a shortage.
• Shortage - Consumers cannot get quantities of items they desire.

 

• Price ceiling - When the government puts a legal limit on how high the price of a product can be. Rent control.
• Excess Supply - Quantity supply > Quantity demanded this results in a surplus where producers have inventories that people can't get rid of.

 

• Price floor - lowest legal price a commodity can be sold at. Used by government to prevent from prices from being too low. 

If you need more info:
http://www.investopedia.com/university/economics/economics3.asp

Production Possibilities Graph (PPG)

• The line on the PPG is known as the frontier or the curve. 

• Production Possibilities Curve (PPC)
• When producing at the frontier efficiency occurs.
• When producing beneath the frontier under utilization is occurring.

• Production Possibilities Frontier (PPF)
• Efficiency - using resources in such a way as to maximize production of goods and services efficiency increases profits.
• Undervaluation - It is the opposite of efficiency is using fewer resources than an economy is capable of using.
• leads to a decrease in profits.

• 2 Types of Efficiency 
• Productive - Products are being produced in the least costly way. This is any point ON the production possibilities curve.
• Allocative - The products being produced are the ones most desired by society. This optimal point on the PPC depends on the desires of society.

• The law of increasing opportunity cost
• When resources are shifted from making one good or service to another the cost of producing the second item increases.

 3 Types of movement occur within PPC

 

Point B - attainable and efficient inside the curve

Point D - attainable and inefficient. Recession under utilization. Famine unemployment/underemployment of resources.

Point E - unattainable using current resources. Technology and Economic growth

• 4 Key Assumptions

1. Only 2 goods can be produced
2. Full employment outside points of resources
3. Fixed resources (factors of production)
4. Fixed technology

If you need more info:
http://study.com/academy/lesson/production-possibilities-curve-definition-examples.html

Basic Concepts of Economics

• Macroeconomics vs. Microeconomics

• Macroeconomics - Study of economy as a whole
• Examples: International trade, inflation and minimum wage flaws.

•  Microeconomics - Study of individual or specific units of economy
• Examples: Households affect economy and Income taxes.

• Positive economics vs. Normative economics 
• Positive - Claims that attempt to describe the world as is. Very descriptive to nature and it collects/presents facts.
• Negative - Claims that attempt to prescribe how the world should be. Opinion based, what outta be should be.

• Needs vs. Wants
• Needs - Basic requirements for survival.
• Examples: Food, water and basic things

• Wants - Desires. Things you don't need for survival, can live without.

• Scarcity vs. Shortage
• Scarcity - Fundamental economic problem facing all societies. How to satisfy unlimited wants with limited resources.
• Shortage - Quantity demanded is greater than quantity supply.
• Quantity demand is when they don't have any of the items left.

• Goods vs. Services
• Goods - Tangible commodities. Something you can physically touch is tangible.
• Capital goods: items used in the creation of other goods
• Consumer goods: goods that are intended for final use by the consumer.

• Services - Work performed for someone.
• Examples: Barber shop, concert and education

• Factors of Production

1. Land - Natural resources
2. Labor - Work exerted
3. Capital - Human Capital and Physical Capital
4. Entrepreneurship - Human Capital: People acquire skills and knowledge through experience and education. Physical Capital: Machinery, tools, money and equipment. Entrepreneurship: They are risk takers and are innovative.

•   Trade-offs - It is an alternative that we sacrifice when we make a decision.
• Opportunity cost - The most desirable alternative given up as a result of a decision.
• Guns or Butter - I is a phrase but refers to the trade offs that nations face when choosing whether to produce more or less military or consumer goods.
• Things at the Margins - This is whether we are deciding whether to add or subtract an additional unit of some source.

If you need more info:
http://campus.greenmtn.edu/faculty/gregbrown/sc310/sc310nt1.html