Unit VII

Balance of Payments

• Measures of money inflows and outflows between the U.S. and the rest of the world
  
• Inflow = credit
• Outflow = debit
• Divided into 3 accounts
• Current Account
• Capital/Financial Account
• Official/Reserve Account

Double Entry Bookkeeping

• Every transaction in the balance of payments is recorded twice with standard accounting practive

Current Account

• Balance of trade/Net exports
• Exports of goods/services - import of goods/services
• Exports = credit
• Import = debit
• Net Foreign Income
• Income earned by U.S. owned foreign assets - income paid to foreign held U.S. assets
• Net Transfers
• Foreign aid  - debit to the current account

Capital/Financial Account

• Balance of capital ownership
• Includes the purchase of both real and financial assets
• Direct investment in the U.S. is a credit to the capital account
• Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account
• Purchase of foreign financial assets represents a debit to the capital account
• Purchase of domestic financial assets by foreigner represents a credit
• What causes these flows?
• Differences in rates of return on investment
• Ceteris Paribus, savings will flow toward higher returns

Relationship between Capital and Current Account

• Double entry bookkeeping
• Zero each other out

Official Reserves

• Foreign currency holding of the U.S. Fed
• 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 there is a balance of payments deficit the Fed depletes its reserves of foreign currency and credits the balance of payments

Credit vs. Debit

• Credit - addition to a nation's account
• Debit - subtractions to a nation's account

How to Calculate

1. Balance on trade
• Merchandise and service exports - merchandise and service imports
2. Trade deficit occurs when the balance on trade is negative
• imports > exports
3. Trade surplus when bot is positive
• exports > imports
4. Balance on current account
• Balance on trade + net investment income + transfer payments
5. Official Reserves
• Nationally change in CA + change in FA + change in official reserves = non zero

Foreign Exchange (FOREX)

• Buying and selling of currency
• The exchange rate is determined in the foreign currency markets
• Exchange rate is price of currency

Changes in Exchange Rates

• Exchange rates are a function of the supply and demand for currency
• An increase in the supply of a currency will decrease the exchange rate of a currency
• Decrease in supply of currency will increase exchange rate
• Increase in demand for currency, increase in e
• Decrease in demand for currency, decrease in e

Appreciation and Depreciation

• Appreciation - when e of currency increases
• Depreciation - when e of currency decreases

Exchange Rate Determinants

• Consumer's Taste
• Relative Income
• Relative Price level
• Speculation

Flexible Exchange Rate

• Set by market forces with little or no government intervention

Fixed Exchange Rate

• Determined by government policies

Absolute Advantage - Faster, more efficient

Comparative Advantage - Lower opportunity cost

• Same country can have absolute advantage in 2 products
• Can only have one comparative advantage in 1

Unit V & VI

From Short Run to Long Run

• When changes occur in the short run they result in either increased or decreased producer profits – not changes in wages paid
• In the long run increases in AD result in a higher price level, as in the short run, but as workers demand more money the AS curve shifts left to equate to production in the original output level, but now at a higher price
• In the long run, the AS curve is vertical at the natural rate of unemployment (NRU), or full employment (FE) level of output. Everyone who wants a job has one and no one is enticed into or out of the market

• Demand-pull inflation: results when an increase in demand shifts the AD curve to the right, temporarily increasing output while raising prices
• Cost-push inflation: results when an increase in input costs that shifts the AS curve to the left. In this case the price level increase is not in response to the increase in AD, but instead the cause of price level increasing

The Philips Curve

•  Relationship between unemployment and inflation
• The trade off between inflation and unemployment occurs over the short run
• Each point on the Philips curve corresponds to a different level of output.

Long Run Philips Curve (LRPC)

• Occurs at the natural rate of unemployment (NRU)
• Represented by a  vertical line
• The natural rate and fewer worker benefits create a lower NRU
• The economy produces at the full employment output level
• The nominal wages of workers fully incorporate any changes in price level as wages adjust to inflation over the long-term

LRPC only shifts if the LRAS curve shifts

• Determinants for LRAS is the same for LRPC
• Increase in unemployment it will shift LRPC to the right
• Decreases in unemployment will cause LRPC to shift left

If natural rate if NRU changes, LRPC moves 

• 3 types of NRU
• Frictional, structural, seasonal

Short Run Philips Curve (SRPC)

• Assumed to be stable in the short run because the SRAS is stable
• Increase in AD causes the SRPC to shift up/left along the curve.
• Decrease in AD SRPC shits downward along the curve

Supply shocks – rapid and significant increases in resource costs which causes SRAS curve to shift, thus producing a corresponding shift in the SRPC

• Ex: price of oil

Misery index - combination of inflation and unemployment in any given year

• Single digit misery is good

Stagflation – occurs when high unemployment and high inflation occur at the same time

Disinflation – inflation decreases overtime

Supply-side Economics (Reagonomics)

• Support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payment (employment compensation or social securities) provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures
• Tend believe that the AS curve shifts to the right, thus creating the trickle down effect
• Believed the rich get their's first

Marginal Tax Rate

• Amount paid on the last dollar earned or on each additional dollar earned.
• Reducing marginal tax rates, supply side economists believe it will encoure more people to work longer, forgoing leisure time for extra income

Criticism of Laffer Curve

1. Where the economy is actually located on the curve is difficult to determine
2. Tax cuts also increase demand which can fuel inflation
3. Empirical evidence suggest that the impact of tax rates on inentives to work, invest, and save are small

Unit IV

Uses of Money

• Medium of exchange
• Unit of account
• Store of value

Types of Money

• Fiat money (because the government says so)
• Commodity money (goods)
• Representative money (is backed by precious metals)

Characteristics of Money

• Durability
• Portability
• Divisibility
• Uniformity
• Scarcity
• Acceptability

Money Supply

1. M1 Money
• Currency in circulation (coins, paper money, checkable deposits, traveler's check)
2. M2 Money
• M1 money, saving's accounts, money market accounts, deposits, deposits held by bank outside

Fractional Reserve Banking

• process by banks of holding a small portion of their deposits in reserve and loaning out the excess

1. Banks keep cash on hand
2. Banks must keep reserved deposits in their vaults at the Fed
3. Total Reserves - total funds held by a bank
• TR = RR + ER
4. Banks can lend only to the extent of their ER
5. Reserve ratio = required reserves / total reserves

• Significance of a Fraction Reserve System
• Banks can create more money by lending more than their reserves
• The amount, set by the Fed, is the Require Ratio
• RR gives the Fed control over how much money banks can create

Functions of the Federal Reserve Bank

1. Control the money supply through monetary policy
2. Issue paper money
3. Serve as a clearing house for checks
4. Regulate banking activities
5. Serve as a bank for bankers

Balance sheet - statement of assets and claims summarizing the financial position of a firm/bank at some point in time

• must balance at all times!

Assets

• Own
• Reserves (RR and ER)
• Loans to firms, consumers, and other banks
• Loans to the government
• Bank property

Liabilities

• Owe
• Claims of non-owners
• DD, CDs
• Loans from the Fed and other banks
• Shareholders equity

Reserve Requirement - ratio is 10% and is set by the Fed.

• 100% reserve banking has no impact on the size of money supply

In a fractional banking system, BANKS CREATE MONEY!

Required Reserve Ration

• % of DD that must be stored as federal reserve funds in the bank's account with Fed
• RRR determines the money multiplier ( 1 / reserve ratio)
• Increase in reserve ration, Decrease in rate of money creation = contractionary

Money Multiplier

• shows the impact of a change in demand deposits on loans and eventually the money supply
• indicates the total number of money created in the banking system by each $1 addition to the monetary base

4 Types of Multiple Deposit Expansion Questions

1. Calculate the initial change in ER
2. Calculate change in loans in a banking system
3. Calculate change in money supply
4. Calculate change in DD

Monetary Policy

1. OMO (open market operations) - buy/sell bonds (securities)
• preferred monetary tool because it is flexible
2. RR - amount the bank has to keep
3. Discount rate - interest charged by the Fed for overnight loans to commercial banks

Federal Fund Rate - interest charged by one commercial bank to another for overnight loans

Expansionary (MS increase / recession) 

• OMO - buy bonds from the public
• RR - decrease
• DR - decrease
• FFR - decrease

Contractionary (MS decrease / inflation)

• OMO - sell bonds
• RR - increase
• DR - increase
• FFR - increase

Loanable Funds Market

• Market where savers and borrowers exchange funds at the real rate of interest
• The demand for loanable funds/borrowing comes from households, firms, government, and the foreign sector
• Demand for loanable funds = supply of bonds
• Supply comes from households, firms, government, and foreign sector

Change in demand for LF

• More borrowing = more demand (shift right)
• Less borrowing = less demand (shift left)

Change in supply for LF

• More saving = more supply of LF (shift right)
• Less saving = less supply of LF (shift left)

Unit III

Aggregate Demand 

• Shows the amount of Real GDP that the private, public, and foreign sector collectively desire to purchase at each possible price level.

• Relationship between the price level and level of GDPr is inverse

3 Reasons AD is downward sloping

1. Real-Balances Effect
2. Interest-Rate Effect
3. Foreign Purchases Effect

Shifts in AD

• Change in C, Ig, G, or Xn
• Multiplier effect that produces a greater change than the original change in the 4 components
• Increase in AD, shift right
• Decrease in AD, shift left

Net Exports

• Exchange Rates (International value of U.S. dollar)
• Strong dollar = More imports and Less Exports = (AD shift left)
• Weak dollar = fewer imports and more exports = (AD shift right)

Relative Income

• Strong Foreign Economies = More Exports = AD shift right
• Weak Foreign Economies = Less Exports = AD shift left

Aggregate Supply

• The level of Real GDP that firms will produce at each price level

Long-Run v. Short-Run

• Long-Run
• Period of time where input prices are flexible and adjust to changes in the price-level
• In the long-run, the level of Real GDP is independent from price level
• Short-Run
• Period of time where input prices are sticky and do not adjust to changes in the price-level
• Real GDP is directly related to the price level

Long-Run Aggregate Supply (LRAS)

• marks the level of FE in the economy (same as the PPC)
• is always vertical at full employment

Changes in Short-Run Aggregate Supply (SRAS)

• increase in SRAS, shift to the right
• decrease, shift to the left
• the key to understanding shifts is per unit cost of production
• per-unit production cost = total input cost / total output

Determinants of SRAS 

• Input prices = land, labor, machinery, ETC.
• Productivity = technology

Ranges of Aggregate Supply (AS)

Keynesian Range

• Horizontal
• Followers believe in a horizontal AS curve because when the economy is below FE, AD shifts out
• Increase in GDPr, UE drops, price level is constant
• Demand creates its own supply

Intermediate Range

• AS is between the Classical and Keynesian Range
• AS shifts outward, price level and GDPr increases

Classical Range

• Vertical
• In the long run, AS curve is vertical because the only effects of an increase in AD is when we are already at FE
• Increase in price level
• Supply creates its own demand (Say's Law)

Recessionary Gap - when equilibrium occurs below FE output

Inflationary Gap - when equilibrium occurs beyond FE output

Investment

• Money spent or expenditures on:
• New plants (factories)
• Capital equipment (machinery)
• Technology (hardware and software)
• New homes
• Inventories (goods sold by producers)
• Expected rates of return
• How does business make investment decisions?
• Cost/benefit 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 they undertake?
• Compare expected rate of return to interest cost
• expected return > interest cost = invest
• expected return < interest cost = don't invest
• Real (r %) v. Nominal (i %)
• Nominal is the observable rate of interest
• Real subtracts out inflation and is only known ex post facto
• Compute r%
• = nominal - inflation
• Real interest rate (r%) determines the cost of investment decision
• Investment Demand Curve (ID)
• Downward sloping
• Why?
• when interest rate are high, fewer investments are profitable
• when ir are low, investments are profitable
• Shifts in ID
• Cost of production
• Business taxes
• Technology changes
• Stock of capital
• Expectations
• Consumption and Savings
• Disposable income (DI)
• income after taxes
• net imcome
• Consumption
• Household spending
• Ability to consume is constrained by: amount of DI and propensity to save
• DI = 0 
• Dissaving
• Savings
• Household not spending
• Ability to save is constrained by: amount of DI and propensity to consume
• APS = average propensity to save
• APC = average propensity to consume
• APC + APS = 1
• APC > 1 dissaving
• MPC = marginal propensity to consume
• = change in consumption / change in DI
• MPS = marginal propensity to save
• = change in savings / change in DI
• MPS + MPC = 1

Determinants of C & S

• Wealth
• Expectations
• Household Debt
• Taxes

Spending Multiplier Effect

• an initial change in spending (C, Ig, G, Xn) causes a larger change in AD
• Multiplier - change in AD / change in spending
• 1 / MPS
• positive when increase in spending
• negative when decrease

Tax Multiplier

• when government taxes, the multiplier works in reverse
• money is leaving circular 
• Multiplier (negative) = - MPC / MPS

Fiscal Policy

• Expansionary and Contractionary policy
• Deficits and surplus
• Built in stability

Changes in expenditures or tax revenues of the federal government

2 tools of fiscal policy

1. Taxes - government can increase or decrease taxes
2. Spending - government can increase/decrease spending

Fiscal policy is enacted to promote our nation's economic goods = FE, price stability, economic growth

Deficits, Surpluses, Debt

• Balanced Budget
• Revenues = Expenditures
• Budget deficit
• Revenues < expenditures
• Budget surplus
• Revenues > expenditures
• Government debt
• sum of all deficits - sum of all surpluses
• Government must borrow money when it runs into a deficit
• Borrows from individuals, corporations, financial institutions, foreign entities/governments

2 options of fiscal policy

1. Discretionary Fiscal Policy (action)
1. Expansionary (deficit)
2. Contractionary (surplus)
2. Non-discretionary (no action)

Discretionary v. Automatic FP

Discretionary

• increasing/decreasing government spending/taxes in order to return the economy to FE
• involves policymakers

Automatic 

• UE compensation and marginal tax rates
• takes place without policymakers

Contractionary - policy designed to decrease AD

• strategy for controlling inflation
• decrease gov't spending/increase taxes

Expansionary - increase AD

• increasing GDP, combatting recession, reducing UE
• recession is countered with expansionary policy
• increase gov't spending/decrease taxes

Progressive Tax System

• Average tax rate (tax revenue/GDP) rises with GDP

Proportional Tax System

• Average tax rate remains constant as GDP changes

Regressive Tax System

• Average tax rate falls with GDP

The more progressive the tax system, the greater the economy's built-in stability

Unit II

Types of Economic Systems:
1. Command - Centrally planned, the government owns land and capital, and controls labor
       - Cuba (government controls every facet)
2. Traditional - Based on rituals, habits, and customs. Most decisions are made by the elder
       - Tribes
3. Free Market - People and firms act on their own best interest. Allows buyers and sellers to exchange goods and services
      - Hong Kong
4. Mixed - Government regulates businesses to protect the public's interest
      - U.S., Canada, Mexico

3 Economic questions every society must answer:

1. What goods and services should be produced?
2. How will these goods and services be produced?
3. Who will consume these goods and services?

Markets: Institution or a mechanism, allowing buyers and sellers to make trades (borrowing or paying)

• Product Market - Buyer is usually a consumer and the seller is a firm
• Factor Market - Factor of productions (CELL)
• Most important is labor
• Buyer = firm; sellers = factor owner
• If firms/businesses demand resources = Factor Market
• Customers buying products = Products Market

Households - Person or group of people that share their income

Firms - Organization that produces goods and services for sell

Gross Domestic Product (GDP)

• Total value of all final goods and services produced within the country's borders within a given year
• Includes: All production or income earned within the U.S. by U.S. and foreign producers
• Excludes: Production outside of the U.S. even by Americans

Gross National Product (GNP)

• Total value of all final goods and services produced by Americans in a year
• Includes: Production or income earned by Americans anywhere in the world
• Excludes: Production by non-Americans even in the U.S.

 Calculating GDP

GDP = C + Ig + G + Xn

• C = Personal Consumption -  purchases of finished goods/services
• Consumption spending
• Ig = Gross Private Domestic Investment - Investment spending
• New factory equipment
• Construction of housing
• Factory equipment maintenance
• Unsold inventory of products built in a year
• G = Government Spending - gov't purchase of goods/services
• Xn = Net Exports (Exports - Imports)
• French company purchases one-year membership at Partypeople.com, U.S. based company

Items that DO NOT count in GDP

• Gifts or transfers (Scholarships)
• Stocks and bonds
• Unreported business activities (Cash tips to waiters)
• Illegal activities
• Financial transactions between banks
• Financial transactions between banks and businesses
• Intermediate goods (what you use to make a certain product)
• Non-market activities (Volunteering or baby sitting)

Expenditure Approach - Income generated from production of goods/services

• C + Ig + G + Xn

Income Approach - All income generated from production of final output

• W + R + I + P
• W = wages, R = rents, I = interests, P = profits

Both sides have to equal!

Net National Product (NNP) = GNP - Depreciation (consumption of fixed capital)

Net Domestic Product (NDP) = GDP - Depreciation

National Income (NI) - Income earned by American owned resources, whether here or abroad

1. NNP - Indirect Business Taxes (IBT)
2. CE (compensation of employees) + RI (rental income) + II (interest income) + CP (corporate profits) + PI (proprietor's income)
3. GDP - IBT - Depreciation - Net foreign factor payments

Disposable Personal Income (DPI) = NI - HT (household taxes) + GTP (government transferred payments)

Real GDP - Measures GDP in constant dollars, is adjusted for inflation, therefore it reverts to base year prices

Nominal GDP - Measures GDP in current prices, regardless of output

• P * Q = NGDP

GDP Deflate - Measure of the level of prices of all new domestically produced final goods/services in an economy

• (Nominal GDP / Real GDP) x 100

Inflation Rate - Rise in the general level of prices

• [(Price index in year 2 - Price index in year 1) / (PI in year 1)] x 100

Consumer Price Index (CPI) - Most widely used measure of the overall price level in the U.S.

• (Price of market basket in particular year / Price of same market in different year) x 100

Inflation - Rise in general price level (standard rate is 2-3%)

Deflation - Decline in general price level

Disinflation - Occurs when the inflation rate declines

Solving Inflation Problems

Inflation Rate = (current year - prior year) / prior year
Rule of 70 - How many years it will take to double inflation (70 / inflation rate)
Real Interest Rate (cost of borrowing/lending money that is adjusted for inflation
 = Nominal interest rate - inflation (unadjusted cost of borrowing and lending money)

Causes of Inflation

• Demand-pull: caused by an excess of demand over output that pulls prices upward
• Sources:
• Increases in government purchases
• Excessive increases in the money supply which creates a situation of hyper inflation (rapid rise/extremely high inflation rate)
• Rise in income as the economy approaches FE output (as workers earn more, demand increases)
• Cost-push: caused by a rise in per unit production due to increasing resource cost
• Sources:
• Supply shocks (dramatic rise in energy or raw material prices due to input shortages/growing demand for inputs)
• Price wage spiral (workers seek higher wages to offset rising consumer prices)

Effects of Inflation

• Anticipated - expecting, waiting for inflation
• Increases nominal cost of borrowing while unexpected reduces the real cost of borrowing
• Unanticipated - has stronger effects because those expecting may be able to adjust their work/spending to avoid/lessen effects
• Wages and penchants may have cost of living adjustments (COLAS) built in to offset anticipated inflation
• Hurts those with fixed incomes, savers, and lenders
• Helps borrowers (debt repaid in cheaper dollars)

Unemployment

• Unemployment - failure to use available resources
• New entrants, laid off, fired, quit, rentrants
• Employed includes self-employment
• Not included in the labor force -
• Armed forces, homemakers, students, retirees, disabled people, discouraged workers, prisoners, and mental patients
• Unemployment rate = (# of unemployed / # of total labor force) x 100
• Standard unemployment rate = 4-6%
• Four types of unemployment
1. Frictional - temporary, transitional, short-term
• In between jobs/searching for job
• Graduates, fired/quit jobs
• Signals that new jobs are available
2. Cyclical - caused by the recession phase of the business cycle
• Deficient demand for goods/services
3. Structural - technological or long-term
• Automation - due to consumer taste, jobs may become obsolete
• Creative Destruction - New jobs are created, others are lost
4. Seasonal - weather related of seasonal jobs

Full Employment (FE) = Natural rate of unemployment (NRU)

• It is equal to structural and frictional unemployment
• Full employment does not mean zero unemployment

Okun's Law

• Describes how unemployment relates to a nation's GDP
• States that for every 1% unemployment above the NRU, a negative GDP gap of 2% will occur

Unequal Burdens of Unemployment

1. Rates are lower for white collar workers
2. Teenagers have the highest rates
3. Blacks have higher rates than whites
4. Rates for males and females are comparable

Unit I

This blog is going to be dedicated to all things macroeconomics, so if you are looking for a fun time, this is your place to be!

First of all, what in the world is economics?!

Based on dictionary.com economics is the branch of knowledge concerned with the production, consumption, and transfer of wealth.

In simple terms, it is supply and demand

Because economics is so important in our society, it is even split into two sub groups! Microeconomics and  Macroeconomics! Macroeconomics  is the study of the major components of the economy (international trade, inflation, wage laws, etc.) while Microeconomics is the study of how households and firms make decisions and how they interact in the marked (supply and demand, market structures, etc)

If you haven't guessed already, I will only be discussing the broader aspects, MACROECONOMICS!

When dealing with economics, there are two types, POSITIVE VS. NORMATIVE
Positive economics attempts to describe the world as is and is very descriptive in nature

• An example would be: Minimum wage laws cause unemployment

Normative economics are claims that attempt to prescribe how the world should be

• Example: The government should raise the minimum wage

It is also important to be able to distinguish between WANTS VS. NEEDS
Wants are desires, they are broader than needs while Needs are basic requirements for survival

• In our society, where so many are privileged, it is often difficult to discern between the two

The image above shows how many of us determine these two concepts!

*THE MOST FUNDAMENTAL ECONOMIC PROBLEM THAT A SOCIETY FACES*

Scarcity!!!! This is when one tries to satisfy unlimited wants with limited resources

• Example: gas, coal; essentially nonrenewable resources because you cannot make any more

But don't get this confused with Shortage, which is when quantity demanded is greater than quantity supplied.

• Example: laptops, foods; things that can be made more with time

GOODS VS. SERVICES
Goods

• Capital goods - items used in the creation of other goods (trucks, factory machines)
• Consumer goods - goods that are intended for final use
• Tangible commodities

Services

• Work that is performed for someone else

FOUR FACTORS OF PRODUCTION (This is important!)

1. Land - natural resources
2. Labor - Work exerted
3. Capital
• Physical: Human made objects used to create other goods (buildings, tools)
• Human: Knowledge and skill a worker gains through education and experience
4. Entrepreneurship - risk-taking, innovative

Production Possibilities Graph (PPG)

What are PPGs? They are graphs that show alternative ways  to use resources
Other could be referred to as:

• Production Possibilities Curve (PPC)
• Production Possibilities Frontier (PPF)

Here is a look of what one looks like!

As you take a look at the graphs, it is important to realize what they describe. Some important terms to become familiarized are:

Opportunity cost: The most desirable alternative given up by making a decision

Productive efficiency: Producing goods at the lowest cost, allocating resources efficiently, full employment of resources

• Represented by any point on the curve

Allocative efficiency: Combination of the most desired products of society or those in chanrge of economic decisions

Now that we have those terms down, let's talk about the graphs!

They are concave down based on the 4 assumptions of:

1. Fixed technology
2. Fixed resources
3. Full employment and production efficiency
4. 2 products are being considered

When the PPC shifts:

• To the right (outside PPC)
• Technological advancement, discover new resources, trade, economic growth
• To the left (inside the PPC)
• Decrease in labor, work field, education; Permanent lost of productive capacity (war, taxes, government regulation)
• Along the PPC
• Ceteris Paribus: everything remains constant

Demand and Supply

Demand

• Quantities that people are willing and able to buy at various prices

The Law of Demand - Inverse relationship between price and quantity demanded

This graph shows that inverse relationship

Causes of "change in demand"

1. Change in number of buyers
2. Change in buyer's taste
3. Change in income
• Inferior/Normal
4. Change in price of related goods
• Substitute/Complementary
5. Change in expectation

Supply

• Quantities that producers or suppliers are wiling and able to produce/sell at various prices

Law of Supply - Direct relationship between price and quantity

This graph shows the direct relationship

Causes of "change in supply"

1. Change in technology
2. Change in weather
3. Change in resources/factor prices
4. Change in taxes/subsidies
5. Change in number of suppliers
6. Change in expectations

Elasticity

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

• Elastic Demand - demand that is very sensitive to a change in price (Always > 1)
• Soda, candy, steak, etc.
• Inelastic Demand - demand that is not sensitive to a change in price (Always < 1)
• Milk, salt, gas, etc.
• Unitary Elastic - Always = 1

How to calculate Elasticity:

1. (New quantity - Old quantity) / (Old quantity) = % change in quantity demanded
2. (New price - Old Price) / (Old price) = % change in price
3. PED = (% change in quantity) / (% change in price)

Production Costs

Total Revenue = Price * Quantity

• The total amount of money a firm receives from selling goods and services

Fixed Costs - cost that does not change no matter what is produced (salary, mortgage, etc.)

Variable Costs - cost that fluctuates or changes depending upon how much is produced (water bill)

Marginal Cost/Revenue - cost of producing one additional unit of good

• New Total Revenue - Old Total Revenue

Total Cost= fixed cost + variable cost

Other important computations you need to know!

• AFC = TFC / Q (Average Fixed Cost  = Total Fixed Cost / Quantity)
• AVC = TVC / Q (Average Variable Cost = Total Variable Cost / Quantity)
• ATC = TC / Q (Average Total Cost = Total Cost / Quantity)
• ATC = AFC + AVC (Average Total Cost = Average Fixed Cost + Average Variable Cost)

Another important concept to economics is price floors and price ceilings!
The picture below indicates how each is affected by supply and demand, equilibrium being the point in which both lines meet.

Cycle Graphs

These next types of graphs demonstrate how the economy fluctuates through time.

- The average cycle is 6 years

- Recessions last about 14 months

- The bulk of the cycle is the growth stage

- Peak and trough are meaningless because we never know when we are in one until it's over

- If a recession loses more than 10% of real GDP, hen it is a depression

- Trough means end of a recession

One business cycle is TROUGH to TROUGH