Economic

• Excludability


  The property of a good whereby a person can be prevented from using it
• Rivalry


  The property of a good whereby one person's use diminishes other people's use
• Four types of goods

  • Private Goods
  • Public Goods
  • Common Resources
  • Natural Monopolies
• Common Resources


  • Fish in the ocean
  • The environment
  • Congested nontoll roads
• Natural Monopolies


  • Cable TV
• Cost-benefit analysis


  In order to decide whether to provide a public good or not, the total benefits of all those who use the good must be compared to the costs of providing and maintaining the public good
• A cost-benefit analysis would be used to estimate the total costs and benefits of the project to society as a whole
• It is difficult to do because of the absence of prices needed to estimate social benefits and resource costs
• The value of life, the consumer's time, and aesthetics are difficult to assess
• Free-rider problem


  A free-rider is a person who receives the benefit of a good but avoids paying for it
• The free-rider problem prevents private markets from supplying public goods
• Solution to free-rider problem

  1. The government can decide to provide the public good if the total benefits exceed the costs

  2. The government can make everyone better off by providing the public good and paying for it with tax revenue
• Tragedy of the commons


  Common resources tend to be used excessively when individuals are not charged for their usage
• Governments tend to try to limit the use of common resources
• Microeconomics


  The study of how individual households and firms make decisions and how they interact with one another in markets
• Macroeconomics


  The study of the economy as a whole
• Macroeconomics answers questions like

  • Why is average income high in some countries and low in others?
  • Why do prices rise rapidly in some time periods while they are more stable in others?
  • Why do production and employment expand in some years and contract in others?
• For an economy as a whole, income must equal expenditure
• Circular-Flow Diagram


  • Flow of inputs and outputs
  • Flow of dollars
• Gross Domestic Product (GDP)


  A measure of the income and expenditures of an economy
• GDP


  The market value of all final goods and services produced within a country in a given period of time
• What's not counted in GDP

  • Most items that are produced and consumed at home and that never enter the marketplace
  • Items produced and sold illicitly, such as illegal drugs
• How to find GDP

  GDP (Y) = C + I + G + NX
• Nominal GDP


  Values the production of goods and services at current prices
• Real GDP


  Values the production of goods and services at constant prices
• GDP deflator


  Tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced
• GDP


  • The best single measure of the economic well-being of a society
  • GDP per person tells us the income and expenditure of the average person in the economy
  • Higher GDP per person indicates a higher standard of living
  • GDP is not a perfect measure of the happiness or quality of life
• Things not included in GDP

  • The value of leisure
  • The value of a clean environment
  • The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work
• Gross National Happiness
• Money


  The set of assets in an economy that people regularly use to buy goods and services from other people
• Liquidity


  The ease with which an asset can be converted into the economy's medium of exchange
• Commodity money


  Takes the form of a commodity with intrinsic value (e.g. gold, silver, cigarettes)
• Fiat money


  Used as money because of government decree, does not have intrinsic value (e.g. coins, currency, check deposits)
• Monetary policy


  Conducted by the central bank
• Federal Reserve (Fed)


  • Regulates banks to ensure they follow federal laws
  • Acts as a banker's bank, making loans to banks and as a lender of last resort
  • Conducts monetary policy by controlling the money supply
• Money supply


  The quantity of money available in the economy
• What the central bank can do

  1. Open-market operations

  2. Changing the reserve requirement

  3. Changing the discount rate
• Open-market operations


  To increase money supply, buy government bonds from public

  To decrease money supply, sell government bonds to public
• Changing the reserve requirement

  Increasing reserve requirement decreases money supply

  Decreasing reserve requirement increases money supply
• Changing the discount rate

  Increasing discount rate decreases money supply

  Decreasing discount rate increases money supply