Economics Cheat Sheet by evelana

positive analysis

descri­ptive, make a claim how the world is

compar­ative advantage

when comparing opport­unity costs of two producers, produce at lower cost than anyone else

trade-off

Best allocation of your resources in order to make better decisions.

model

Models are purposeful repres­ent­ations of (parts of) the economic system and simplify reality in order to improve our unders­tanding of it

microe­con­omics

the study of economics in an indivi­dual, group, or company level.

produc­tivity

the amount of goods and services produced from each hour of a workers’ life

market

a group of buyers and sellers of a particular good or service.

price taker

As sellers (and buyers) have no influence on the prices they are said to be price takers.

normal good

a good for which – ceteris paribus – an increase in income leads to an increase in demand.

substi­tutes

two goods for which an increase in the price of one leads to an increase in the demand for the other

law of supply

the quantity supplied of a good rises, if – ceteris paribus – the price of the good rises; the quantity supplied is positively related to the price supply schedule: the relati­onship between the price of a good and the quantity supplied shown in a table

individual demand curve

demand curve of an individual customer or firm

market demand curve

sum of the individual demand curves horizo­ntally to obtain the market demand curve

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

cross price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded for the first good divided by the percentage change in the price of the second good

inelastic

Inelastic is an economic term referring to the static quantity of a good or service when its price changes. Inelastic means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchan­ged.// Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

elastic demand

Demand for a good is said to be elastic if the quantity demanded responds substa­ntially to changes in the price

tax incidence

to the distri­bution of a tax burden. determined by the elasticity of the demand and the supply curve

willin­gness to pay

the maximum amount that a buyer will pay for the good

producer surplus

is the amount a seller is paid for a good minus the seller’s cost, and producer surpluses measure the benefit to sellers for partic­ipating in a market.

deadweight loss

The fall in total surplus that results when a tax (or some other policy) distorts a market outcome

equity

deal with the fair distri­bution of economic prosperity among members of society

regressive tax

high-i­ncome taxpayers pay a smaller fraction of their income than do low-income tax-payers

progre­ssive tax

high-i­ncome taxpayers pay a larger fraction of their income than do low-income tax-payers

positive extern­ality

arises when a person engages in an activity that positively (directly, not through market prices) influences the well-being of another person without this their person having to pay for the benefits received caused by the first persons activity

common resource

one person’s use of the common resource reduces other person’s ability to use it. not excludable but riva

abilit­y-t­o-pay principle

Taxes should be levied on people according to how well these people can carry the burden. The idea behind is that all people should carry an equal burden when it comes to contri­buting to govern­mental expenses. (Because of what is conceived as a burden also depends on one’s own income / wealth the abilit­y-t­o-pay principle does not imply a lump-sum tax.)

opport­unity cost

he cost of something is what you have to give up to get it.

profit

Profit = total revenue - total cost, in words it would be that the profit is the subtra­ction of total revenue with total costs

production function

relati­onship between quantity of inputs used to make a good and the quantity of output of that good

variable costs

costs that vary with the quantity of output produced

average fixed costs

fixed costs divided by the quantity of output

average total costs

total costs divided by the quantity of output. ATC(av­erage total costs) = TC(total costs)­/Q(­qua­ntity)

diseco­nomies of scale

the property whereby long-run average total cost rises as the quantity of output increases

monopoly

A firm is a monopoly if it is the sole seller of a product and if this product has no close substi­tutes.

cartel

A group of firms that agree to cooperate in such a way that the output of a particular good is restri­cted, and prices are driven up

price discri­min­ation

a business practice of selling the same good at different prices to different customers

game theory

The study of strategic decision making by intera­cting indivi­duals or firms. Best outcome is hard to reach when not cooper­ating with each other

Frictional unempl­oyment

the time period between job when a worker is searching for, or transi­tioning from one job to another

labour produc­tivity

(=conn­ect­ivity) -the amount of output a typical worker turns out in an hour

cyclical unempl­oyment

unempl­oyment due to recession // the portion of unempl­oyment that is attrib­utable to a decline in the economy‘s total produc­tion.

nominal GDP

Gross domestic product not adjusted for inflation

Production function

Shows how much output an economy can produce depending on a varying input (e.g. labour) for given other factors (e.g. capital, techno­logy).

an economy’s human capital

Human capital is the knowledge, education, training etc, possessed by an individual or popula­tion.

formal and informal instit­utions

Formal instit­utions are all the legal rules that restrict (or allow) economic and other type of develo­pment. This also includes rules and regula­tions to ensure legal compli­ance. Informal instit­utions are norms, and other “unwri­tten” rules that determine human behaviour.

Recess­ionary gap

The difference between real and potential GDP is called recess­ionary gap // A situation wherein the real GDP is lower than the potential GDP at the full employment level

income­-ex­pen­diture diagram

With the support of the income­-ex­pen­diture diagram we are now able to derive the aggregate demand curve

recession

when two successive quarters or six months show a decrease in real GDP

inflation

an increase in a currency supply relative to the number of people using it, resulting in rising prices of goods and services over time

Commodity money

This is an object in use as a medium of exchange but which also has a substa­ntial value in altern­ative (nonmo­netary) uses (e.g. cigare­ttes, cattle­,...)

fractional reserve banking

is a system under which bankers keep as reserves only a fraction of the funds they hold on deposit

central bank

An instit­ution that manages a country’s currency, alters money supply, and sets interest rates. It may also act as a lender of last resort to banks

Automatic stabil­isers

is a feature of the economy that reduces its sensit­ivity to shocks such as sharp increases or decreases in spending

budget surplus

an excess of tax revenue over government spending

structural budget defici­t/s­urplus

To seek a better measure of deficit or surplus, the concept of structural budget deficit or surplus has been developed. This hypoth­etical measure replaces both spending and taxes in the actual budget by estimates of how much the government would be spending and receiving (given current tax rates and expend­iture rules) if the economy were operating at some fixed, high-e­mpl­oyment level.

Currency apprec­iation

an increase in the value of a currency as measured by the amount of foreign currency it can buy

devalu­ation

(if a unit of a nation’s currency can buy fewer units of foreign currency)

balance of payments deficit

The balance of payments deficit is the amount by which the quantity supplied of a country’s currency (per year) exceeds the quantity demanded

foreign reserves

assets held by a central bank or other monetary authority, usually in various reserve curren­cies, mostly the United States dollar

flexible exchange rates

also known as floating exchange rates is when the equili­brium is set by supply and demand