Key Economic Concepts: Micro, Macro, and Market Dynamics

Key Economic Concepts

Assumptions: Scenarios are taken as certain without testing them. Model: Partner assumptions and develop theories. Microeconomics: This branch of economics studies the behavior of individual entities (market, household). Macroeconomics: This is the behavior of the economy in general (unemployment, inflation). Positive Economics: Explains and analyzes the causes of economic behavior. Normative Economics: What should be. Factors of Production: Factors of production (goods or services) and primary products that are consumed. FP: Land, Labor, Capital and raw materials.Shortage: Limitation of resources. Economic good: A limited range.

Opportunity Cost: When we decide to use a resource in one way and not another. PPF: Maximum production quantity that an economy can achieve. -> growth. Slope of PPF: Marginal rate of transformation: MRT = -ΔY / ΔX (to replace Y by X) Replace X by Y 1/MRT = -ΔX / ΔY Constant Opportunity Cost: a straight line.

Market equilibrium: The market is cleared. Competitive Market: Maximum efficiency. Efficiency: Market failures, imperfect competition, tax information, externalities (costs or benefits imposed without being reflected in the market + or -), public good (excludable - rival: private, non-rival: natural. Non-exclusive monopoly - rival: common resource, non-rival public good.) Equity: Transfer taxes (income tax, VAT, tax havens)

Substitution effect: When we substitute something, Price increases. Income effect: Price increases, when something we-rent. Substitute Good: Price of substitute increases, quantity demanded also increases. Complementary Good: Consumed jointly. Demand: Increases to the right. Occurs because: Income increases, Price of substitute increases, Price of complementary decreases, Population increases, tastes change, other factors change. Decreases to the left. Supply (S): Increases to the right, decreases to the left. Increases because: Cost decreases, Price increases, better technology, related good price increases, more producers, changes in expectations.

Demand increases: to the right, Price equilibrium increases, Quantity equilibrium increases. Demand decreases: to the left, Price equilibrium decreases, Quantity equilibrium decreases.

Supply increases: to the right, Price equilibrium decreases, Quantity equilibrium increases. Supply decreases: to the left, Price equilibrium increases, Quantity equilibrium decreases.

Price elasticity of demand: %Δ Quantity demanded / %Δ Price =

> 1 Elastic, < 1 Inelastic, = 1 Unitary

GDP: Market value of all final goods and services produced within a country during a given time period. It is calculated as:

Expenditure Approach: GDP = C + I + G + (X-M)

C = household consumption of goods. I = business investment. G = public administration spending. X = exports. M = imports.

Income Approach: GDP = W + B

W = wage remuneration, B = profits, all income from capital

Value Added Approach: GDP = VAA + VAI + VAs

VAA = Value-added agriculture, VAI = industry, VAs = Services

Inputs: raw materials, outputs: products

Nominal GDP: Year 1 x Q1 x Q2 ... Year 2

Real GDP: Year 1 x Q2 x Q1 Year 1 ...

Inflation: Deflator = Nominal GDP / Real GDP · 100

CPI = (cost of the basket in year t) / (cost of the base year basket) · 100