Economics

- Study of people and choices

- Learning this will make you a better decision-maker

Opportunity cost
- Represent the potential benefits an individual, investor, or
business misses out on when choosing one alternative over
another.
- The one you did not chose

Trade-off
- Any situation where making one choice means losing something
else, usually forgoing a benefit or opportunity
- The one you chose

Scarcity
- The tension between unlimited wants and needs
- Shortage
- Demand for a good or service is greater than the availability of
the good or service

Macroeconomics
- Study the economy as a whole; unemployment, interest rates,
government spending, and growth
- Answers the question: “Will unemployment rise if there is an
increase in taxes?” “Will there is an increase in money supply
boost output or just inflation?” “Will a slump in European
economies cause the US economy to slow down?”
CrashCourseEconomics
 - Macroeconomists are more airtime because they predict the
direction of the overall economy, and work with the media and
businesses and congress and Federal Reserve
- Types of Macroeconomics
- Fiscal Policy= changes in government expenditure and taxation.
- Monetary Policy= includes changes in the money supply, the rate
of interest, and the exchange rate, although some economists
treat changes in the exchange rate as a separate policy.
-Supply-side Policy= policies are designed to increase aggregate
supply and hence increase productive potential.

Microeconomics
- Study of consumers, workers, and firms interact to generate
outcomes in specific markets
- Study of individuals, households, and firms' behavior in decision
making and allocation of resources.
- Answers the question: “How many workers should we hire to
maximize the profit?” “If our main competitor releases their
product in May when is the best time to release ours?” “Which is
better at fighting climate change, a gas tax or increasing fuel
efficiency?” CrashCourseEconomics
- Not about predicting GDP (Gross Domestic Product) or measuring
unemployment
- Tries to determine decisions and resource allocation at an
individual level, as well as explain what happens when certain
conditions change. GetSmarter

Economic Systems
- Societies or governments organize and distribute available
resources, services, and goods across a geographic region or
country
- Regulate the factors of production, including land, capital, labor,
and physical resources.
 - Types of Economic Systems
- Traditional= customs, traditions, and beliefs are rich in
developing the goods and services for the area; traditions are the
center/focus. Allocation of resources is based on inheritance. Ex.
Inuit people in Alaska and Canada
- Command= production is publicly owned and economic activity is
controlled by a central authority that assigns quantitative
production goals and allots raw materials to productive
enterprises; government is the center/focus. Allocation of
resources is all decided by the government. Ex. China, North
Korea, Iran, Russia, and Cuba.
- Market= economic decisions and the pricing of goods and
services are guided by the interactions of a country's individual
citizens and businesses. A little intervention from the
government. Economic decision-making is done through voluntary
transactions according to the laws of supply and demand; focuses
on supply and demand. Allocated to their most productive use
through prices that are determined in markets. Ex. Singapore and
Hong Kong
-Mixed= economy is organized with some free-market elements
and some socialistic elements, which lie on a continuum somewhere
between pure capitalism and pure socialism. Maintains private
ownership and control of most of the means of production, but
often under government regulation; focuses on people with the
government. Decisions regarding resource distribution are
political. Ex. France and Germany.

KEY TAKEAWAYS
● Microeconomics studies individuals and business decisions, while
macroeconomics analyzes the decisions made by countries and
governments.
● Microeconomics focuses on supply and demand, and other forces
that determine price levels, making it a bottom-up approach.
 ● Macroeconomics takes a top-down approach and looks at the
economy as a whole, trying to determine its course and nature.
● Investors can use microeconomics in their investment decisions,
while macroeconomics is an analytical tool mainly used to craft
economic and fiscal policy. Investopedia
● Microeconomics is important as it focuses on the smaller or
individual aspects of the economy like workers, households, and
businesses. Macroeconomics, on the other hand, is important as it
studies the economy as a whole. It looks after the major aspects
of the economy such as GDP, unemployment rates, and inflation.
● Mixed economies socialize select industries that are deemed
essential or that produce public goods.
● A market economy gives entrepreneurs the freedom to pursue
profit by creating outputs that are more valuable than the inputs
they use up, and free to fail and go out of business if they do not.
● Economists broadly agree that market-oriented economies
produce better economic outcomes, but differ on the precise
balance between markets and central planning that is best for a
nation's long-term wellbeing.
● In a command economy, the central government dictates the level
of production of goods and controls their distribution and prices.
● Proponents of command economies argue government control
rather than the private enterprise can ensure the fair
distribution of goods and services.

End of Week 1 Notes

Inflation
- The decline of purchasing power of a given currency over time can
be reflected in the increase of an average price level of a basket
 of selected goods and services in an economy over some period of
time.
- Can be contrasted with deflation, which occurs when the
purchasing power of money increases and prices decline.
Frictional Unemployment
- A result of voluntary employment transitions within an economy
- Naturally occurs, even in a growing, stable economy.
- Short-term unemployment
- Exists when the economy is strong.
Structural Unemployment
- Long-lasting unemployment comes about due to shifts in the
economy.
- Happens because though jobs are available, there’s a mismatch
between what companies need and what available workers offer.
- Last for decades and usually requires a radical change to reverse.
- Exists when the economy is strong.

Cyclical Unemployment
- Impact of economic recession or expansion on the total
unemployment rate.
- Generally rises during recessions and falls during economic
expansions and is a major focus of economic policy.
- One factor among many that contribute to total unemployment,
including seasonal, structural, frictional, and institutional factors.
- Exist when the economy is not strong.

Marxian Economics
- The School of economic thought is based on the work of
19th-century economist and philosopher Karl Marx.
- Focuses on the role of labor in the development of an economy
and is critical of the classical approach to wages and productivity
developed by Adam Smith.
Classical Economics
- Refers to the dominant school of thought for economics in the
18th and 19th centuries.
- Helped countries to migrate from monarchic rule to capitalistic
democracies with self-regulation.

Demand-Pull Inflation
- Upward pressure on prices that follows a shortage in supply, a
condition that economists describe as "too many dollars chasing
too few goods."
- When the demand is higher than the supply.
-
Cost-Push Inflation
- Occurs when overall prices increase (inflation) due to increases in
the cost of wages and raw materials.
- Can occur
- when higher costs of production decrease the aggregate supply
(the amount of total production) in the economy.
- When the cost of production rose, the price of the commodities
will rise as well.

Demand-Pull Inflation vs. Cost-Push Inflation

Cost-push inflation occurs when money is transferred from one
economic sector to another. Specifically, an increase in production
costs such as raw materials and wages inevitably is passed on to
consumers in the form of higher prices for finished goods.

Demand-pull and cost-push inflation move in practically the same way

but they work on different aspects of the system. Demand-pull
inflation demonstrates the causes of price increases. Cost-push
inflation shows how inflation, once it begins, is difficult to stop.

GDP (Gross Domestic Product)

- The total monetary or market value of all the finished goods and
services produced within a country’s borders in a specific time
period.
- Typically calculated annually, sometimes quarterly
- Provides an economic snapshot of a country, used to estimate the
size of an economy and growth rate.
- Can be calculated in three ways, using expenditures, production,
or incomes. It can be adjusted for inflation and population to
provide deeper insights.
- Represents the overall market value of all the goods and services
that were produced within the country

GNP (Gross National Product)

- Estimate of the total value of all the final products and services
turned out in a given period by the means of production owned by
a country's residents
- Commonly calculated by taking the sum of personal consumption
expenditures, private domestic investment, government
expenditure, net exports, and any income earned by residents
from overseas investments, minus income earned within the
domestic economy by foreign residents.

Net Exports
- Represent the difference between what a country exports minus
any imports of goods and services.

CPI (Consumer Price Index)

 - Measure that examines the weighted average of prices of a
basket of consumer goods and services, such as transportation,
food, and medical care.
- Most frequently used statistics for identifying periods of
inflation or deflation. It may be compared with the producer
price index (PPI), which instead of considering prices paid by
consumers looks at what businesses pay for inputs.1
- The most widely used measure of inflation

Consumer Basket (Basket of Goods)

- The fixed set of consumer products and services whose price is
evaluated on a regular basis, often monthly or annually.
- Used to track inflation in a specific market or country, so that if
the price of the basket of goods increases by 2% in a year,
inflation can thus be said to be 2%.
- Representative of the broader economy is adjusted periodically
to account for changes in consumer habits.
- Used primarily to calculate the consumer price index (CPI).

Human Development Index (HDI)

- Statistics developed and compiled by the United Nations to
measure various countries' levels of social and economic
development.
- Composed of four principal areas of interest: mean years of
schooling, expected years of schooling, life expectancy at birth,
and gross national income (GNI) per capita.
- Used to follow changes in development levels over time and to
compare the development levels of different countries.

KEY TAKEAWAYS
● Marx claimed there are two major flaws in capitalism that lead to
exploitation: the chaotic nature of the free market and surplus
labor.
● Marx argued that the specialization of the labor force, coupled
with a growing population, pushes wages down, adding that the
value placed on goods and services does not accurately account
for the true cost of labor.
● Eventually, he predicted that capitalism will lead more people to
get relegated to worker status, sparking a revolution and
production being turned over to the state.
● Classical economic theory was developed shortly after the birth
of western capitalism. It refers to the dominant school of
thought for economics in the 18th and 19th centuries.
● Adam Smith’s 1776 release of the Wealth of Nations highlights
some of the most prominent developments in classical economics.
● Theories to explain value, price, supply, demand, and distribution,
was the focus of classical economics.
● Classical economics was eventually replaced with more updated
ideas, such as Keynesian economics, which called for more
government intervention.
● Cyclical unemployment is one factor among many that contribute
to total unemployment, including seasonal, structural, frictional,
and institutional factors.
● Technology tends to exacerbate structural unemployment,
marginalizing certain workers and rendering particular jobs, such
as manufacturing, obsolete.
● When demand surpasses supply, higher prices are the result. This
is demand-pull inflation.
● A low unemployment rate is unquestionably good in general, but it
can cause inflation because more people have more disposable
income.
● Increased government spending is good for the economy, too, but
it can lead to scarcity in some goods and inflation will follow.
● Since the demand for goods hasn't changed, the price increases
from production are passed onto consumers creating cost-push
inflation.
● Though it has limitations, GDP is a key tool to guide
policy-makers, investors, and businesses in strategic
decision-making.
● GNP measures the output of a country's residents regardless of
the location of the actual underlying economic activity.1
● Income from overseas investments by a country's residents
counts in GNP, and foreign investment within a country's borders
does not. This is in contrast to GDP which measures economic
output and income based on location rather than nationality.1
● GNP and GDP can have different values, and a large difference
between a country's GNP and GDP can suggest a great deal of
integration into the global economy.
● The CPI statistics cover a variety of individuals with different
incomes, including retirees, but does not include certain
populations, such as patients of mental hospitals.
● The CPI is composed of the Consumer Price Index for Urban
Wage Earners and Clerical Workers (CPI-W) and the Consumer
Price Index for All Urban Consumers (CPI-U).
● A basket of goods is a constant set of general goods produced in
an economy whose prices are tracked over time.
● The basket is used to measure inflation over time, such as with
the consumer price index (CPI).
● The items in the basket are updated and changed periodically to
keep up with current consumer habits in order to best represent
the broader economy.
● The HDI is a measurement system used by the United Nations to
evaluate the level of individual human development in each
country.
● The HDI uses components such as average annual income and
educational expectations to rank and compare countries.
 ● The HDI has been criticized by social advocates for not
representing a broad enough measure of the quality of life and by
economists for providing little additional useful information
beyond simpler measures of the economic standard of living.
● Inflation is the rate at which the value of a currency is falling
and, consequently, the general level of prices for goods and
services is rising.
● Inflation is sometimes classified into three types: Demand-Pull
inflation, Cost-Push inflation, and Built-In inflation.
● The most commonly used inflation indexes are the Consumer Price
Index (CPI) and the Wholesale Price Index (WPI).
● Inflation can be viewed positively or negatively depending on the
individual viewpoint and rate of change.
● Those with tangible assets, like property or stocked commodities,
may like to see some inflation as that raises the value of their
assets.

End of Week 2 Notes

Free Market
- Based on supply and demand with little or no government control.

Fiscal Policy
- Use of the government spending and tax policies to influence the
economic state of a country, mostly on the macroeconomic state
of the country (ex. demand of goods and services, inflation,
economic growth, unemployment, underemployment, etc…)
- The government adjusts its spending and taxes to monitor and
influence the country’s economy.

Monetary Policy
 - Equipment of the country’s central bank (Ex. For the Philippines it
is called BSP or Bangko Sentral ng Pilipinas)
- Promoting sustainable economic development by controlling all of
the money supply in the country

KEY TAKEAWAYS
● A free market is one where voluntary exchange and the laws of
supply and demand provide the sole basis for the economic
system, without government intervention.
● A key feature of free markets is the absence of coerced
(forced) transactions or conditions on transactions.
● While no pure free-market economies actually exist, and all
markets are in some ways constrained, economists who measure
the degree of freedom in markets have found a generally positive
relationship between free markets and measures of economic
well-being.
● Fiscal policy is largely based on ideas from John Maynard Keynes,
who argued governments could stabilize the business cycle and
regulate economic output.
● During a recession, the government may employ expansionary
fiscal policy by lowering tax rates to increase aggregate demand
and fuel economic growth.
● In the face of mounting inflation and other expansionary
symptoms, a government may pursue a contractionary fiscal
policy.
● Monetary policy is a set of actions that can be undertaken by a
nation's central bank to control the overall money supply and
achieve sustainable economic growth.
● Monetary policy can be broadly classified as either expansionary
or contractionary.
● Some of the available tools include revising interest rates up or
down, directly lending cash to banks, and changing bank reserve
requirements.
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