what is ECONOMICS ?

–
"a study of Man (and woman) in the ordinary business of life.
It enquires how he gets his income and how he uses it. Thus,
it is on the one side, the study of wealth and on the other
side and more important side, a part of the study of Man
(and woman)" - the study of scarcity and choices.
the 2 most important assumptions in economics: -1.people
have unlimited wants but limited resources. Scarcity: the
tension between infinite wants and finite resources. -
2.everything has a cost. and if these assumptions are true,
we need a way to analyze our choices and get the most from
our limited resources.=> and that's economics.

Incentives: A set of external(rather than intrinsic) motivators

that explain people's choices

SCARCITY is the tension between infinite wants and finite

resources.

Opportunity cost is a cost of production of good, measured in

losses in production of another good.

MACROECONOMICS is the study of production, employment,

prices, and policies on a nationwide scale.
it answers questions like: -> will unemployment rise if there's
an increase in taxes? -> will an increase in the money supply
boost output, or just increase inflation? -> will a slump in
European economies cause the U.S economy to slow down?

MICROECONOMICS is the study of how consumers, workers,

and firms interact to generate outcomes in specific markets.
-> how many workers should we hire to maximize profit? -> if
our main competitor releases their product in May, when is
the best time to release our product? -> which is better at
fighting climate change, a gas tax or increasing fuel
efficiency?

Specialization and Trade

division of labor made countries wealthy - Adam Smith

division makes each worker more productive, since each one
is focused on a thing they do best and they don't need to
spend time switching between the tasks.
Without specializations, if you want something - you have to
make it yourself.
So if you are good at producing something - specialize at it
and then trade with others.
The country that can produce more goods of one kind (per
time) than another country is having an absolute advantage
over another country in production of those goods.
Opportunity cost is a cost of production of good, measured in
losses in production of another good.
Country that can produce good with cheaper opportunity
cost, has comparative advantage over another country.
Individuals and countries should specialize in producing
things in which they have a comparative advantage and then
trade with other countries that specialize in something else.
This trade is mutually beneficial.
If there is one point where economists agree it's that
specialization and trade makes the world better off.
Self-sufficiency is inefficiency

Economic Systems and Macroeconomics

Two different economic systems: market economies and

planned economies.
In planned economy, government controls labor, land and
capital.
Communism is primarily defined by the lack of private
property.
Class-lessness is a symptom of having no private property.
There are no communist countries in the world.
Often socialism has some private property and some public
ownership.
Command economy is totally controlled by government.
In market economies, individuals control production to get
profit.
Invisible hand - the unintended social benefits resulting from
individual actions. "It's not from the benevolence of the
butcher, the brewer, or the baker, that we expect our dinner,
but from the regard to their own interest."
The mechanism of the invisible hand is that if you produce
unwanted or shoddy products, a competitor will produce
better more desirable products and put you out of business.
This results in businesses that produce the things that people
want/demand most, at lower prices.

Modern economies are neither completely free market nor

planned. There's a spectrum of government involvement.
Circular flow model. a. Modern economy is made above
households (individuals like him and you) and businesses.
Businesses sell goods and services to households in product
market. Households earn the money by selling labor to
businesses. d. Businesses pay for the resources on resource
market. f. Government also buys products and resources, i.e.
to buy cars from businesses and hire policemen to drive
them. e. Government gets the money from taxes, households
and businesses (and borrowing).
Supply and Demand:

Market - any place where buyers and sellers meet to

exchange goods and services.
Price signals - the information that markets generate to guide
the distribution of the resources. a. Businesses, and in
particular large corporations , are often villainized as greedy,
heartless institutions, that take advantage of consumers, but
if markets are transparent and buyers are free to choose,
then businesses will have a hard time making advantage of
people. 3) Supply and demand. a. When the price goes up -
people buy less, when the price goes down - people buy
more. b.When the price goes up - the farmer wants to
produce more, when the price goes down - the farmer wants
to produce less. c. When quantity supplied = quantity
demanded, we get equilibrium price of product. 4) Four
market behaviors a. Supply can decrease. b. Supply can
increase. c. Demand can increase. d. Demand can decrease.
Macroeconomics
Macroeconomics - the study of the entire economy as a
whole rather than individual markets. 2) In general policy
makers try to achieve three goals: a. Keep the economy
growing over time (gross domestic product - GDP) b. Limit
unemployment (unemployment rate) c. Keep prices stable
(inflation rate) 3) GDP is the value of all final goods and
services produced within a country's border in a specific
period of time, usually a year.
a. Transactions where nothing new was produced - don't
count as GDP. b. Also not including illegal activities. c.
Measured in dollars. d. Nominal GDP is GDP not adjusted for
inflation. e. Real GDP is GDP adjusted for inflation.
4) Recession - when two successful quarters, or six months,
show a decrease in real GDP. a. Depression - a severe
recession. 5) Unemployment rate is calculated by taking the
number of people that are unemployed and dividing by the
number of people in the labor force, times 100. a.
Discouraged workers - unemployed people that were looking
for work, but have given up. b. There are three types of
unemployment: - frictional unemployment - the time period
between jobs, when a worker is searching for, or
transitioning from one job to another. - structural
unemployment - unemployment caused by lack of demand
for a worker's specific type of labor. - cyclical unemployment
- unemployment due to recession. c. Natural rate of
unemployment - the lowest rate of unemployment that
economy can sustain over a long period. 6) 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.
Deflation - a decrease in general price level of goods and
services. economists believe deflation to be bad as falling
prices might discourage people from buying more as they
feel like the prices might plummet even further)
Business cycle → the rise and fall of inflation and deflation or
contractions and expansions -An economy has 4 components
that make up GDP, each representing groups that can
purchase things in the economy, which changes the speed of
the economy: Consumer spending (in USA, this account for
70% of GDP) Business spending (investment) Government
spending Net exports (some countries rely more on this) -
Governments can regulate economies (like cruise control) by
changing things up like decreasing taxes during recessions to
encourage consumption → which creates debt, which is good
or bad
Productivity and Growth

Why some countries have high GDP and others have

low( some countries are rich and other poor): a. Lack of
natural resources. b. Corrupt governments. 2. GDP per
capita(output per person) is used to tell how wealthy a
country is. 3. Countries with high GDP/capita have far less
infant mortality, poverty and preventable diseases. 4.
Productivity and growth: a. The more a worker produces, the
more a worker can earn. b. Economists argue that the main
reason that some countries are rich is because of
productiivty. c. Higher value produce also the growth effect.
d. Productivity is key, but there are limits. 5. People in poor
countries need food, water, plumbing, hospitals and
medicine, and all of those things are needed to get better
efficiency. 6. How much stuff is produced per person(can be
called GDP) 7. Factors of production effect the efficiency: a.
Land b. Workers c. Capital( and also workers education,
knowledge aka human capital) d. Technology: The sum total
of knowledge and information that society has acquired
concerning the use of resources to produce goods and
services. (Connectivity= productivity). Increasing Productivity
has resulted in increasing standards of living(globally and
historically).

Inflation and Bubbles

Purchasing power - the amount of physical goods and

services that can be bought by a given amount of money. a.
Consumer price index (CPI) - a statistical estimate constructed
using the prices of a sample of representative items whose
prices are collected periodically.
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. a. Demand pull inflation - too much
money chasing too few goods.
Bubbles - a market phenomenon characterized by surges in
asset prices to levels significantly above the fundamental
value of that asset. a. Speculation - trading a financial
instrument involving high risk, in expectation of significant
returns.
Fiscal Policy and Stimulus

Recessionary gap - a situation wherein the real GDP is lower

than potential GDP at the full employment level. 2)
Inflationary gap - the amount by which the actual gross
domestic product (GDP) exceeds potential full-employment
GDP. 3) Macroeconomics - the study of the entire economy
as a whole rather than individual markets. 4) Fiscal policy -
the way a government adjusts its spending levels and tax
rates to monitor and influence a nation's economy. a.
Expansionary Fiscal Policy - stimulates the economy during or
anticipation of a business-cycle contraction. b.
Contractionary Fiscal Policy - enacted by a government to
reduce the money supply and ultimately the spending in a
country. c. Classical theories assumed that the economy will
fix itself in a long run, and that government intervention will,
at best, lead to unintended consequences and, at worst,
cause massive inflation and debt. 5) Deficit spending - the
government spends more money than it collects in tax
revenue. a. Crowding out - where increased public sector
spending replaces, or drives down, private sector spending.

Keynesian economists maintain that crowding out is only a

problem if economy operates at full capacity, where all
workers are employed and we're producing as much as we
can. 6) Austerity - raising taxes and cutting government
spending to reduce debt. In crisis of 2008 was main policy of
EU, which led to worse results than deficit spending policy in
US. 7) Multiplier effect - the initial increase in government
spending of 100$ might turn out to be 175$ worth of actual
spending in the economy. a. When the economy is booming,
multiplier is close to 1x. b. When economy is in recession, the
multiplier is around 2x. c. Spending on infrastructure, and aid
to state & local governments , also seems to have fairly high
multiplier, about 1.5. But general cuts to payroll and income
taxes seems to have a multiplier of about 1:. If the
government cuts 100$ in taxes, the economy is going to grow
by about 100$.

Deficits & Debts

Budget deficit - the amount by which a government's

spending exceeds it's income over a particular period of time.
a. Debt - the accumulation of budget deficits. b. In the same
way our GDP grows every year, due to population growth
and productivity increases. And our ability to sustain debt
grows along with our income. 2) "Default"- the investors who
loaned the government money lose billions and the
government loses all credibility, and it causes massive
recession. 3) Debt ceiling - limit on the amount of national
debt that can be issued by US Treasury.
Monetary Policy and the Federal Reserve

Most Central Banks have two jobs: - they regulate and

oversee the nation's commercial banks by making sure that
banks have enough money in reserve to avoid bank runs. -
they conduct monetary policy which is increasing or
decreasing the money supply to speed up or slow down the
overall economy. 2) Interest rate - the price of borrowing
money. a. When interest rates are low, borrowers will find it
easier to pay back loans so they will borrow more and spend
more. When interest rates are high, borrowers borrow less
and spend less. b. Expansionary monetary policy - when
central bank wants to speed up the economy, it will increase
the money supply, which will decrease interest rates and lead
to more borrowing and spending. c. Contractionary monetary
policy - when central bank wants to slow down the economy,
they decrease the money supply. Less money available will
increase interest rates and decrease borrowing and spending.
3) Liquid assets - an asset that can be converted into cash
quickly and with minimal impact to the price received. 4)
Open market operations - this is when the federal reserve
buys or sells short term government bonds. 5) Quantitative
easing (Q.E.) - when central banks buy longer term assets
from banks. 6) Monetary policy - changing money supply to
speed up or slow down economy.
Money and Finance

Money serve three main purposes: - Medium of exchange. It

is generally accepted for payment for goods and services. -
Store of value. Money can be stored. - Unit of account.
Money is standartized metric that helps us measure value of
things. 2) Financial system. a. Lenders b. Borrowers c.
Governments d. Capital - the machinery, tools and factories
owned by a business and used in production. e. Financial
system is a network of institutions, markets and contracts
that brings lenders and borrowers together. f. Debt - if you
get a loan from the bank, you are obligated to pay back the
amount you borrowed plus the amount of interest. g. Equity -
the difference between the value of the assets/ interest and
the cost of liabilities of something owned. h. Financial
instrument - a tradeable asset of any kind. i. Financial
institution - an establishment that conducts financial
transactions such as investments, loans and deposits. j.
Financial markets with instruments like stocks and bonds,
allow borrowers to crowdsource the money they need to
borrow. They raise their capital from lots of investors, and
spread the risk around.