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Economics Cheat Sheet (DRAFT) by

Academic Decathlon 2023

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Fundam­ental Economics Concepts

Economics is study of how indivi­duals make choices about how to allocate and distribute scarce resources (scarcity) and how they interact with each other.
Assume people make rational choices by comparing opport­unity costs and choosing greatest net benefit.
Opport­unity cost is what we give up by making an economical choice.
Trade should make everyone better off.
Positive economics uses analysis to describe and make predic­tions under certain contexts.
Normative economics uses analysis to evaluate merits of different contexts.
Pareto efficiency is when goods are maximally efficient, and any change will result in a negative outcome for somebody.
Main branches of economics are microe­con­omics (indiv­idual) and macroe­con­omics (society).
 

Microe­con­omics

Intera­ction of supply and demand is central topic.
A market is all the buyers and sellers of a particular good or service.
A perfectly compet­itive market includes: large number of buyers­/se­llers, all partic­ipants are informed of market price, and highly standa­rdized good/s­ervice.
Equili­brium occurs when no market partic­ipant has any reason to alter behavior (where supply and demand meet on the graph).
Demand curve shows quantity of a good/s­ervice that consumers are willin­g/able to purchase, and has a negative slope.
Position of demand curve depends on: income, prices of related goods, tastes, expect­ations, and number of buyers.
Supply curve shows quantity of a good/s­ervice that producers are willing to supply at each price, and has a positive slope.
Position of supply curve depends on technology used in produc­tion, prices of inputs used in produc­tion, expect­ations, and number of sellers.
Compet­itive market equili­brium maximizes total surplus (combined benefits) of market partic­ipants.
Elasticity provides an indepe­ndent measure of respon­siv­eness of supply and demand to price changes.
Government interv­entions include: setting price ceilin­gs/­price floors, imposing taxes on transa­ctions to raise revenue for essential services.
Trade makes people better off, generally, and intern­ational trade increases total surplus.
Firms supply goods/­ser­vices by combining: labor, capital, raw materials, and other inputs, while seeking to maximize profits.
Perfectly compet­itive markets aim for firms to make zero economic profits.
Imperfect markets include: monopoly (single supplier), oligopoly (small number of suppli­ers), and monopo­listic compet­ition (many suppliers of similar but differ­ent­iated products).
Imperfect compet­ition arises because of barriers to entry into the market.
Imperfect compet­ition causes lower equili­brium quantities and higher equili­brium price, causing total surplus to be lower than it would be in a compet­itive market.
Profits from imperfect compet­ition arise from new methods of produc­tion, new markets, and/or new goods/­ser­vices.
Market failures arise when breakdowns in private property system causes market outcomes to deviate from socially efficient outcome.
Extern­alities occur when important economic decisions occur outside of the market. Possible solutions include creating a market for those intera­ctions, and/or government regula­tion.
All goods/­ser­vices can be classified along two dimens­ions: extent rivalry in consum­ption, where consum­ption for one means less for another, and ease of exclud­abi­lity, where who controls the good. There are 4 categories of good/s­ervice: private goods, common resources, collective goods, and public goods.
Govern­ments are distin­guished from private organi­zations through their ability to enforce taxes and their monopoly on legitimate force.
Pork barrel politics and rent seeking are sources of ineffi­ciency of government programs, as everyone pays for them, but one area gains the benefit.
 

Macroe­con­omics

Macroe­con­omics is concerned with: (1) What determines long-run growth, and (2) what are the causes and conseq­uences of short-run fluctu­ations in economic activity, employ­ment, and inflation.
Total output of economy is measured using Gross Domestic Product (GDP), which is the market value of all final goods/­ser­vices produced within a country during a specified period of time.
In US, output has grown much faster than population since 1900 (40x vs 4x).
Business cycle is the altern­ation between recessions (distance between peak and trough) and expansions (distance between trough and peak).
Labor force is total of all indivi­duals who are either working or fit for work but unempl­oyed.
Unempl­oyment is catego­rized into three subtopics: 1)fric­tional (unemp­loyment by choice), 2) structural (techn­ology shift in industry), or cyclical (due to business cycle).
Consumer Price Index (CPI) and Gross Domestic Product Deflator are two measures of inflation (prices in economy are all increa­sing).
GDP is a measure of produc­tion, but at the level of the economy, production = expend­itures = income.
4 categories of expend­itures: 1) consum­ption, 2) invest­ment, 3) government purchases of goods/­ser­vices, and 4) net exports.
Labor produc­tivity depends on quantities of physical and human capital, natural resources, techno­logical unders­tan­ding, and politi­cal­/legal enviro­nment.
Savings is a term for income not spent on consuming goods/­ser­vices, while invest­ments is a term for purchase of new capital equipment.
Financial markets are the instit­utions through which indivi­duals who have money they want to save can supply these funds to persons or companies who wish to borrow money to invest.
In a closed market, savings must equal invest­ments. In an open economy, savings must equal invest­ments plus net capital outflows.
In financial markets, interest rate is adjusted to equate the supply of saving to the demand of saving.
Money serves the following functions: 1) medium of exchange, 2) unit of account, and 3) a store of value.
Monetary value is compared using M1 (liquid assets such as cash, checkable deposits, and traveler's checks) and M2 (not very liquid assets such as M1 plus saving­s/time deposits, certif­icates of deposits, and money market funds).
Federal Reserve is central bank of the US, was establ­ished in 1913, consists of 12 district banks located throughout the country and the Federal Reserve Board, located in Washin­gton, D.C.
The Federal Reserve controls the supply of money in the economy and acts as lender of last resort for the banking system.
Effects of increasing the supply of money: 1) short term effects include credit conditions and influence on the level of economic activity, and 2) long-term effects include changing prices but no real effect on the economy.
Output gap is used to analyze short-term variations in economic activity, and is calculated by the difference between actual output and potential output.
Economy's output is determined by its potential output, but is also determined by aggregate demand, as short-term prices influence demand outside of potential output values.
When potential output and actual output do not align, deviations cause them to equate. Monetary and fiscal policies are used to help the recovery from deviat­ions.
 

Economics of Technology and Innovation

"­Great Enrich­men­t" refers to periods of indust­ria­liz­ation since the 1800s indicated by advances in material living standards, connec­tedness through transp­ort­ation and inform­ation networks, and health­/sa­fety.
Primary drivers of indust­ria­liz­ation include technology revolu­tions - mechan­ization of factor­ies­/farms, materials for manufa­ctu­rin­g/c­ons­tru­ction, agricu­ltural produc­tivity, new sources of energy, powered transp­ort­ation, electronic commun­ica­tions, and better health through sanita­tion, vaccines, and antibi­otics.
US spends 2.5% GDP on research (largest supplier in the world), contri­buting to 1% annual growth in total factor produc­tivity, a common way to measure techno­logical progress. Estimates show that for every $1 spent on R&D, $3.60 is made in social value.
Private companies tend to underi­nvest, as they are worried compet­itive companies may benefit from inform­ation spillover. Business employ imperfect strategies to mitigate this - secrecy, intell­ectual property, lead time, and compli­mentary assets.
Innovation is also supported by government and non-profit invest­ments in scientific research.
Instit­utions are main factor connecting investors with invent­ions.