The tradeoff between national defense and funding consumer goods can be described as the tradeoff between ( ) and ( ).
Guns & Butter
( ) means society gets the most that it can from its scarce resources.
Efficiency
( ) means the benefits of those resources are distributed fairly among the members of society
Equity
The ( ) of an item is what you give up to obtain that item
opportunity cost
What would Antoine Griezmann ( ) have given up if he had decided to go to college?
Football player - many million dollars a year salary
People make decisions by comparing ( ) and ( ) at the margin
costs & benefits
Economists normally assume that people are ( ).
rational
A/An ( ) is something (such as the prospect of a punishment or reward) that induces a person to act.
incentive
A/An ( ) economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.
market
( ) can sometimes improve market outcomes.
Government
( ) is the study of how households and firms make decisions and how they interact in markets.
Microeconomics
Are following statements positive or normative?
12-1) "Lower inflation will raise the unemployment rate." (Positive / Normative)
12-2) "Governments should tax tobacco companies for the costs of treating smoking-related illnesses among the poor." (Positive / Normative)
12-1) Positive (describes and explains various economic phenomena - based on fact)
12-2) Normative (based in value judgments)
( ) shows the combination of output that the economy can possibly produce.
Production Possibilities Frontier
( ) is the ability to produce a good using fewer inputs than others.
Absolute advantage
( ) is the ability to produce a good at a lower opportunity cost
Comparative advantage
Describe the characteristics of "Market Economy"
Functions under the law of the demand and supply. It is characterized by:
- Self-interest/self love
- Private property
- Freedom of choice
- Limited government
- Competition
- Characterized by price: price is determined by supply and demand
Describe the characteristics of "Capitalism"
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. It is characterized by:
- Capital accumulation
- Private property and the recognition of property rights
- Predominance of wage labor
- Predominance of market logic - competitive markets, price system, voluntary exchange (prices and the distribution of goods and services are mainly determined by competition in goods and services)
- Rationality
Explain the roles of government in the capitalist economy.
In a capitalist economy some government regulation may occur. Household and firms interaction in markets act as if they are guided by an 'invisible' hand that leads them to desirable market outcomes. A free market system is based solely on demand and suplly and there is little or no government regulation.
Net export
When the total value of exports is greater than the total value of imports, an economy has a positive trade balance.
Conversely, when the total value of imports exceeds the total value of exports, the economy has a negative trade balance.
GNI/GNP (Gross National Income)
The total money produced by every resident of a given country, both foreign and not foreign
GDP deflator formula
Nominal GDP/Real GDP
Nominal GDP formula
Real GDP x GDP Deflator
Real GDP formula
Nominal GDP/GDP Deflator
growth rate
(present year - past year) / past year
The nation of wealth in economics includes:
- satisfaction of the needs as a driving force
- Use of resources as a means
Unlimited demands vs. scarce resources
- scarcity: society has limited resources (individuals and firms make decisions)
- Trade-offs: given scarce resources, individuals and firms trade off different alternatives
Production means include
- land (all natural resources), labour and capital
Wealth
a monetary measure which includes the sum of natural, human and physical assets
Notion of wealth (Land and the gold/new products)
Land: traditionally, people believed the wealth is from the land - until middle ages, the more land you owned, the richer
- Agrarianism (physiocracy)
Gold/new products: after the discovery of America (international trade)
- bullionism/mercantilism (commercial capitalism)
Bullionism
- defines wealth by the amount of precious metals owned; gold and silver
- derived during 16th century
Mercantilism
- An economic policy under which nations sought to increase their wealth and power by obtaining large amounts of gold and silver and by selling more goods than they bought
- it promotes imperialism, tariffs (import) and subsidies (export) on traded goods to achieve that goal
- 16-18th c.
Colbertism - a variant of mercantilism
- Created by Jean Baptiste Colbert - 17th c.
- Objectives; to improve the structure of taxes, to enhance the nation's wealth and to improve trade and industry
- to accumulate gold, a country always had to sell more goods abroad than it bought
Liberals
consider that global interest can be deducted from the sum of individual interests
ex. Adam Smith; the overall well-being of society is the result of the free play of individual interests.
- The economic system balance itself
Social democrats and Kaynesians perspective
Keynes: there is a 'chasm' between individual and collective behavior; the economic system does not balance itself. This therefor supports the relevance of the intervention of the state actor in the economy.
Competitive market and characteristics of perfectly competitive market
a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
Characteristics:
- the good being offered for sale are all the same
- the buyers and sellers are so numerous that non can influence the market price
Plato
According to Joseph Schumpeter, Plato was the first known advocate of a credit theory of money) ; said that collective ownership of resources was necessary for the common interest, avoiding the social divisiveness.
Aristotle
Mentioned private property, for common use; general nature of households and market exchanges ; there is an "art of acquisition (or wealth-getting)", which should be necessary and honorable (exchange on the retail trade for simple accumulation is dishonorable) ; Mentioned a principle of oikonomia ("household management" - oikonomos) and disapproved making money through a monopoly.
Thomas Aquinas
concept of a just price, which is necessary for the reproduction of the social order. Just price - just sufficient to cover the costs of production, including the maintenance of a worker and his family. He argued it was immoral for sellers to raise their prices. It is similar to long-run equilibrium concept in economics.
Adam Smith - classical/liberals economics
- Wrote "The Wealth of Nations" which explained the free enterprise system; pure capitalism with no regulations
- households and firms interaction in markets act as if they are guided by an 'invisible hand' that leads them to desirable market outcomes
"we address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but if their advantages"
Adam smith
Jean Baptise Say - classical/liberals economics
Say argued that there could never be a general deficiency of demand- "Supply induces demand".
David Ricardo - classical/liberals economics
Hvis et land har komparative (relative) fordele på begge områder, vil begge lande vinde ved handlen, fordi de kun producerer det de har relative fordele ved.
Forudsætninger for Smiths og Ricardos teori:
Der ses bort fra transportomkostninger
Kun en produtionsfaktor, nemlig arbejdskraft
Productions possibilities frontier
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
Centralized vs. decentralized economy
Centralized economy: economic system in which a central authority, such as a government, makes economic decisions regarding the manufacturing and the distribution of products
decentralized economy/market: real estate, transparency, lower transaction cost, less regulation
Rate of accumulation can be different
In the Boom: one investment leads to another, leading to a constantly expanding market, more employment and an increase in the standard of living for the majority of people
In the recession: the accumulation process is towards investment on specific sectors (military, real estate, luxury consumptions). So, income from value-adding production will decline and unemployment rate will increase
Factors of production defines by Karl Marx
1. Labor; work, especially har physical work
2. Subjects of labor; objects transformed by labor
3. Instruments of labor; tools, buildings and land used for production purposes and infrastructure like roads and communications network
Karls Marx - classical economics
Concentration and centralization to the richest capitalists.
Capitalism: defined as private ownership and control over the means of production, where the surplus product becomes a source of unearned income for its owners.
Socialism: defined as social ownership of the means of production so that the surplus product accrues to society at large.
The bourgeoisie, or the capitalist class - Karls Marx
is the class that owns the means of production and derives a passive income from their operation.
The proletariat, or working class - Karl Marx
comprises the majority of the population that lacks access to the means of production and are therefore induced to sell their labor power for a wage or salary to gain access to necessities, goods and services.
conspicuous consumption - Thorstein Veblen (capital accumulation)
- The role of leisure class, spending more money on goods than they are worth.
- The term originated during the Second Industrial Revolution when a nouveau rich social class emerged as a result of the accumulation of capital wealth
Cumulative causation - Thorstein Veblen (capital accumulation)
- The accumulation of wealth of leisure class implies privation at the lower class.
- He believed that inequality was natural.
perfect competition
a market structure in which a large number of firms all produce the same product (free entry undifferntiaed products)
monopolistic competition
a market structure in which many companies sell products that are similar but not identical (free entry, diffrentiated)
Oligopoly
A market structure in which a few large firms dominate a market (hard to entry, un/differentiated)
Monopoly
A market in which there are many buyers but only one seller. (no entry, unique)
Joseph Schumpeter
- He views capitalism as an evolutionary process of continuous innovation and creative destruction.
- he identified innovation as the critical dimension of economic change (due to both cyclical instability and economic growth)
- Creative destruction: the process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one
Capitalism; Marx vs. Schumpeter
Schumpeter agrees with Marx that capitalism will collapse and be replaced by socialism. But Schumpeter predicts a different way this will come about.
Marx predicted that capitalism would be overthrown by a violent proletarian revolution, which actually occurred in the least capitalist countries
Schumpeter believed that capitalism would gradually weaken by itself and eventually collapse.
Fordism
System of standardized mass production on the assembly line. - ford extended Taylor's methods from individual labor to the collective worker.
managerial capitalism
A market economy in which the dominant businesses are large firms run by salaried managers, not smaller firms run by owner-entrepreneurs
Financial Capitalism
characterized by pools, trusts, holding companies, and the interpenetration of banking, insurance, and industrial interests - production for niche rather than mass markets
Neoliberalism
an economic and political worldview that sees the free market as the main mechanism for ensuring economic growth, with a severely restricted role for government - dont believe in Keynes perspective
Inflation rate
the percentage change in the price level from one period to the next
Consumer price index (CPI) - definition
- a measure of the overall cost of the goods and services bought by a typical consumer
- CPI measures the price of this basket of goods and services relative to the price of the same basket in some base year
Consumer price index (CPI) - formula
CPI = (Price of basket of goods and services in current year / Price of basket in base year) * 100
Inflation Rate formula
(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100
Amount in today's dollars - formula
amount in year T dollars x (price level today/price level in year T)
Amount in today's dollars example;
Was his salary of $80,000 in 1931 high or low compared to the salaries of today's players?
Let's apply this formula to Ruth's salary. Government statistics show a CPI of 15.2 for 1931 and 237 for 2015. Thus, the overall level of prices has risen by a factor of 15.6
Salary in 2015 dollars = salary in 1931 x (price level in 2015/price level 1931)
Salary in 2015 dollars = 80.000 x (237/15,2) = 1.247.368
His salary in 1931 was therefor low
diminishing marginal returns
a level of production in which the marginal product of labor decreases as the number of workers increases
Marginal product of labor (MPL)
The extra output the firm can produce using an additional unit of "labor" (holding other inputs fixed):
MPL= F(K,L+1) -F(K,L)
4 stages of economic cycles
1. Depression - economic crisis
2. Recovery - expansion (growth)
3. Boom - (højkonjunktur)
4. Shump - (lavkonjunktur - deceleration)
4 wave cycle
Kitchin cycle (inventory, e.g. pork cycle); 3-5
Juglar cycle (fixed investment); 7-11
Kuznets swing (infrastructural investment); 15-25
Kondratiev wave (technological basis); 45-60
Real GDP definition
GDP adjusted for inflation.
Value of goods and services measured using a 'constant set of prices' - faste priser
GDP per capita definition
a country's GDP divided by population
GDP (PPP) definition
GDP based on purchasing power parity. How much you can get for your money - currency value
Nominal GDP definition
GDP measured in current prices - løbende priser
Central importance of investment
Extensive growth is limited in the short term - for more reliable growth, long term investment/capital expenditure is needed
Jean-Baptiste Say - Determinants of effective growth - In Keynesian Perspective
- In classical economics, Jean-Baptiste Say claimed that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is the source of demand
"Supply Creates its own Demand"(In Keynes' formulation)
Keynesian perspective - Determinants of effective growth
- what is important in the economy is "aggregate demand". "Demand Creates its own Supply." - Enough effective demand is important for the economic growth.
- According to Keynes, effective demand may not be sufficient to achieve full employment, due to unemployment and workers without income to produce unsold goods
Effective demand - Keynes
Effective demand: the demand for a product or service which occurs when purchasers are constrained in a different market.
Weak demand; unplanned accumulation of inventories - ↓ production and income, ↑ unemployment. -
Strong demand; unplanned reduction of inventories - ↑ production, employment, and incomes. If entrepreneurs consider such trends sustainable, investments increase, improving potential levels of production.
Effective demand is the point of equilibrium where aggregate demand = aggregate supply.
multiplier effect - Keynes
A factor of proportionality that measures how much an endogenous variable changes in response to a change in some exogenous variable.
ex. In Keynesian economics; ↑ government expenditure - ↑ effective demand - ↑ National Income.
Technological Progress and Solow model - Robert Solow and Trevor Swan in 1956
An economic model of long-run economic growth through capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress
- Both shifts in saving and in population growth cause only level effects in the long-run.
- Only technological growth will allow a sustainable growth.
