Economics Cheat Sheet

Economics - The efficient use of scarce resources in bad conditions. Good - Anything that gives a person satisfaction or utility. Bad – Something that gives a person disutility. Accounting Cost – The amount that is costs to do something. (Costs = Explicit Costs + Implicit Cost) Environmental Cost – The cost that a decision, good or service has the environment. (The intended and unintended use of cost) Scarcity – When the condition of our wants are greater than the limited resources available to satisfy those wants. Opportunity Cost – The next best thing you could be doing. The cost of the one activity or accounting cost over another. Finding an efficient way to use your cost. (More of a good thing compared to less of a good thing) Producer and Seller – Making the profit and /or taking the best thing to sell to the customer. Buyer – Buying the next best thing; trying to get the best or more out of the cost or accounting cost. Margins MR (Marginal Revenue) MC = MR MC (Marginal Cost) Marginal Cost – Additional costs; the costs connected to the consuming an additional unit of a good or undertaking one more unit of an activity. Decisions at the margin – Decision making characterized by the weighing the additional (marginal) benefits of a change against the additional (marginal) costs of a change with respect to the current conditions. Exchange (Trade) – The process of giving up one thing for another. aggregate markets. (the goods or services market or the entire economy) P roducti on Possibility Frontier (PPF) – This represents possible combinations of two goods that can be produced in a certain period of time under the condition of a given state of technology and fully employed resources. A concave – outward curve – This shows increasing opportunity costs, goods and services that an economy may produce using the best source of resources. Constant Opportunity Costs – Straight-line constant opportunity costs. Trades and Terms of Trade – Trade helps allocate the price of goods. Cost of trade (the process of giving up something) How, What, When and Where to produce? Market – Place where customers and buyers trade with sellers in a marketplace, the stock market or the internet. Demand - Captures what consumers bring into the marketplace. Money and the ability to buy something. How much someone will pay for a product or service. Law of Demand – The lower the price, the higher the quantity demanded. The higher the price, the lower the quantity demanded. (P = a – bq) b = slope Demand Function – Price advertising, competitors, price of substitute, income and interest rate. Law of Increasing Opportunity Costs – When more of a good is produced, the opportunity costs of producing that good increase. Ceteris Paribus – Everything remains the same or stays constant. Income change – Inferior good – I q Less demand shifts left I q More demand shifts right Normal good – I q Comparative advantage – The situation where someone can I q produce a good at a lower opportunity cost than someone else can Normal Good – A good the demand for which rises (falls) as income rises (falls). Inferior good – A good the demand for which falls (rises) as income rises (falls). Neutral good – A good the demand for which does not change as income rises or falls. Substitutes – Two goods that satisfy similar needs or desires. If 2 goods are substitutes, the demand for one rises as the price of the other rises (or the demand for one falls as the price of the other falls). Complements – 2 goods that are used jointly in consumption. If the 2 goods are complements, the demand for one rises as the price of the other rises (or the demand for one falls as the price of the other falls). Law of diminishing marginal utility – The marginal utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases. Supply and demand theory – Law of Supply – As the price of a good rises, the quantity supplied of the good falls, ceteris paribus. P = a + bQ Q = √ (P1, CR, Reg, + Rules and Tax, . . .) Increase in supply is a rightward shift in the supply curve. Decrease in supply leftward shift in the supply curve. Market equilibrium - The price quantity combination from which there is no tendency for buyers or sellers to move away. The intersection point of the supply and demand curves. Subsidy – A monetary payment by

government to a producer of a good or service. Government doesn’t let the price move up or down so they buy all the extra surplus. This is used in a price ceiling or price floor rule. (Increase in the supply is the surplus leaving the producer or slowing down the production would decrease the surplus. Suppliers are the gainers in the production of milk (consumer good). Income distribution effect and Efficiency are different. The government can tweek with the prices all they want but it won’t effect many consumers because it is a consumer good (normal good). Comparative Status – Comparing different equilibrium points. Economic Stability – Price Stability and Interest Stability. Economic Growth – GDP going up. Full Employment and Balance of Payments – No Debts (government) and (imports and exports). Price Level – Ways to measure it: CPI, PPI and GDP Deflator. Price Index – Nominal Value vs. Real Value. Nominal Value in a small economy in a Base year. GDP – Year 1 = (10x4) + (8x5) + (5x7) = (115) Year 2 = (8x6) + (10x7) + (4x10) = (158) Year 3 = (10x7) + (10x11) + (4x6) = (226).