scarcity principle

• resources are limited
• our wants exceed resources to meet these wants

• the study of how society allocates scarce resources

• the study of how small units allocate scarce resources
• Ex: firm, industry, household

• the study of the entire economy as a whole in allocation of scarce resources

a rise in overall prices

an action should be taken if the extra benefits of the action are at least as great as the extra costs from the action

extra benefits > extra costs

a cost that is beyond recovery at the moment a decision must be made

should be ignored in cost-benefit decision making

an objective analysis aimed at determining economic consequenses of a policy

not whether the change is desirable or not

includes a conclusion of whether or not the policty sould be implemented

based on personal values

total income

population

Gross Domestic Product

GDP

the total market value of all final goods & services produced in 1 time period by the whole economy

average income = GDP per person = GDP/POP

used goods

not included in GDP because they are a transfer of assets.

they do not represent a contribution to goods and services that are produced in a given time period

contribute to GDP

intermediate goods are used to make final goods.

if both were counted, the value of inputs would be counted twice.

durable intermediate goods that are produced and then used to make other goods, but are not used up in one time period.

because they are not fully used up in 1 period they are incluced in GDP

usually market prices (values from transactions)

used to compute GDP

illegal prostitution, drug purchases, barter to avoid taxes

not included in GDP

Y=C+I+G+NX

final goods and services bought by households to satisfy current wants and needs 

nondurable goods

durable goods

services

2/3 of the economy 

goods bought for future  use

Net Exports (NX)

Exports(EX)-Imports(IM)

income-spending

increases during recession

decreases during expansions

cyclical___________

the percentage of the labor force unemployed

U/L*100

the number of people employed(E) plus the number of people unemployed but seeking work(U)

L=E+U

the share of the population in the labor force

L/Pop*100

output per worker

Y/L

Standard of Living

 indicators of well-being

output per person(y) =Y/POP

due to

higher skills

higher capital goods

higher technology

the skills emboddied in workers

innate ability

education

training

general learning experience

Plant & equipment

buildings and machines and tools for workers

change in Y

change in K

the change in output from an additional unit of capital

P($/unit)*MPk

the marginal benefit of capital in dollars

tends to increase with early development

tends to decrease with later development

abscense of private property rights

instead the government forced state owned enterprises to invest and produce certain goods and services

prices were fixed by the state

law & stable inflation

long run growth

avoiding recession & unsustainable expansions

law unemployment