GDP (Gross Domestic Product)

GDP: the total value of final goods and services that are produced within a country’s borders

In  a given year

Includes: all production or income earned within the U.S. by U.S. and foreign producer. It excludes production outside of the U.S. even by Americans

GNP: (gross national Product): It is the total of all goods and services that are produced by Americans in a given year.

Includes: production or income earned by Americans anywhere in the world. It excludes production by non-americans even in the United States.

GDP= C + Ig + G +Xn

C=Consumption - finals good and services that are being produced (67% of the economy)

Ig: Gross Private Domestic Investment (17% of the economy)

Ex: construction of new houses, factory equipment, factory equipment maintenance, and unsold inventory that products are built in a year.

G: Government spending( 18% of the economy)

Ex: school buses, highways, guns

Xn: net exports (Exports-imports) (-2% of the economy)

GDP

Excluded:  

• Intermediate goods - avoid double or multiple counting
• Used or second-hand goods -avoid double counting
• Unreported business activities -tips
• Stocks and bonds
• Non-market activity
• Illegal activity Ex: prostitution
• Gifts or Transfer Payments (Public or Private) Ex: scholarships, social securities, unemployment

Stock & Bonds: purely financial transaction (there’s no production; just investments)

Circular Flow

Circular Flow - Represents the transactions in an economy by flows around a circle.

2 Economic Actors:

1. Household - Person or a group of people who share their income

2. Firm or Business - Organization that produces goods and services for sale.

Factor Market: FOP (Factors of Production)

Product Market: Goods & Services

Willy Rest In Peace = Wages, Rents, Interest, Profit.

Elasticity of Demand

What causes a “change in demand”?

• Change in Income:

1. Normal goods - as income increases, demands increase
2. Inferior goods - as income increases, demand for goods increase

• Elastic demand:
• demand that is sensitive to a change in $$
• A product, not a necessity
• available substitute
• ex: steak, fur coat
• e > 1
• Inelastic demand
• demand that is not sensitive to a change in $$
• product = necessity
• few to no substitutes
• ex: gas, insulin
• e < 1
• Unitary elastic
• e = 1

Step 1: Quantity

• new quantity - old quantity

    old quantity

Step 2: Price

• new $$ - old $$

old $$

Step 3: PED

• % change in quantity

       % change in $$

P x Q = Total revenue

• Total amount of $$ a firm receives from selling goods & services

Marginal Revenue

• Additional income from selling an additional limit
• New Total Cost - Old Total Cost = Marginal Cost

Equilibrium:

The point in which the supply curve intersects with the demand curve

Excess Demand:

occurs when quantity demanded is greater than quantity supplied.

(result in a shortage-consumers can't get the quantities of items that they want )

Price Ceiling:

when the government puts a legal limit on high the price of a product  

(found under the point of equilibrium) Price Ceiling -> creates shortage

Ex: Rent Control

Excess Supply:

occurs when quantity supplied is greater than quantity demanded

(result in a surplus-producers have inventory that they can’t get rid of)

Price floor:

the lowest legal price a commodity can be sold at. (found above the point of equilibrium)

Ex: Minimum Wage

Factors of Production

Factors of Production

1. Land:natural resources
2. Labor: work exerted
3. Capital:
1. Human Capital: when people acquire skills and knowledge through experience and education
2. Physical Capital: consist of money, tools, buildings, equipment, and machinery
4. Entrepreneurship: risk-taker, innovative

• Trade offs: an alternative that we sacrifice that we make a decision (Scarcity leads to Tradeoffs)
• Opportunity Cost: the most desirable alternative given up as a result of a decision
• Guns or Butter: refers to tradeoffs that the governments make when choosing whether to produce more or less military or consumer goods
• Thinking at the Margins: deciding whether to add or subtract one additional unit of some resource
• Production Possibilities Graph (PPG): graph that shows alternative ways to use an economy's resources

     Curve (PPC)       

     Frontier (PPF)

• Efficiency: using resources in such a way to maximize the production of goods and services (increases profits)
• Underutilization: (opposite of efficiency) using fewer resources than an economy is capable of using. (leads to a decrease in profit)

4 key Assumptions (PPG):

1. Only 2 goods can be produced
2. Full employment of resources
3. Fixed Resources (factors of production)
4. Fixed Technology

      

Basic Concepts of Economics

Macroeconomics vs Microeconomics

Macroeconomics: it is the study of the economy as a whole (looking at the bigger picture) ex: minimum wage, world trade

Microeconomics: it is the study of individual or specific units of the economy (how households and firms make decisions and how they interact in markets) analogy: looking at trees but not the forest.

Positive economics vs Normative economics

Positive economics: it is an attempt to describe the world as is. (very descriptive and collects and presents facts)

Normative economics: it attempts to prescribe how the world should be (opinion based).

Needs vs Wants

Needs: basic requirements for survival

Wants: desires

Scarcity vs Shortage

Scarcity: most fundamental economic problem facing all societies. (unlimited wants with limited resources) (permanent)

Shortage: quantity demanded exceeds quantity supplied (temporary)

Goods vs Services

Goods: tangible commodities (can be bought, sold, traded, and produced)

• Capital goods: items that are used in the creation of other goods
• Consumer goods: are intended for final use by the consumer

Services: work that is performed for someone

Here's a simple video on Macroeconomics vs Microeconomics: