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| choice, limited resources versus unlimited wants, money and time |
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| one person makes decisions (absolutism) |
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| dictator called big shots and favored companies |
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| workers called the shots and made profits |
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| no absolute ruler, the government owns everything and calls the shots |
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| physcial and human resources, emphasizes individuals making choices about their resources as they see best. also called "market" or "price" system. based on incentives |
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| two incentives in capitalism |
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| business make moeny by giving consumers what they want, consumers reward who do and punishes businesses who dont |
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| resources get allocated by ________ |
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| business-making and selling products and services |
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| buyers, consumers purchasing products and services |
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| prices go up if they are need heavily |
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| prices of homes go down, therefore builders do not want to build |
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| nothing is free. benefits that are given up by not using resources in another way. Example: study versus play, sleep versus class |
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| goals of economics for the individual |
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| maximize happiness "utility." subjective as to what composes a person's utility function: resources, leisure, other persons utility, global goals |
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| why we buy more when price falls |
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| if buy at same price per unit for all units, then get a "bargain" on earlier units where wiling to pay more. ex. when price is $5, consumer surplus is $4 + $3 +$2 + $1 = $10 |
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| changing features of product so not same at all, dividing buyers into different groups (market segmentation) ex. home and car buying - unique price to each buyer |
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| 1st part: entrance fee. 2nd part: pay for number of units. ex. amusement parks, big-box stores |
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| cautions on comparing prices |
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| most prices involve trade-offs, the adage "too good to be true" is relevant. prices: same product characteristics, service contracts, delivery, warranties, pay now versus pay later. |
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| impact of income on how much we buy - "normal good" |
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Definition
| higher income person buys more at every price |
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| impact of income on how much we buy - "inferior good" |
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| higher income person buys less at every price (second hand clothes, fast food, used vehicles) |
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| products that you like to consumer together ex. bacon and eggs |
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| price of bacon up, eat less bacon AND eggs, price of bacon down, eat more bacon AND eggs |
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| product that can use in place of another ex. chicken and beef |
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| price of chicken up - eat less chicken and eat more beef. price of chicken down, eat more chicken and eat less beef |
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| importance of location to product price |
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| consumers are willing to pay more for products sold in more convenient locations ex. housing, gas more expensive at conveniently located stations |
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| easier to change, no risk of loss, possible short-run savings since dont pay for depreciation |
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| personal likes and dislikes. "i'll buy more ties than you at any price. you'll buy more flip flops than me at any price" roles of advertising, age, peers |
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| when information is time-consuming to acquire, or difficult to understand, buyers sometimes use a broke. broker collects the infor and analyzes for the buyer. |
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| using credit (borrowing) can increase your ability to spend today. effectively borrowing against future income. concern = ability to repay in future, will always pay more due to interest charges |
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| consider what you can buy with same money (opportunity cost), consider current and future costs (vehicle = purchasing price and annual operating costs) pay more now to save later? buy "off-peak" (out of season) to save. wait = price lower in future |
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| costs that you've paid and cant get back, irrelevant to future. ex. paid $200 for plane ticekts to washington to job interview; chance to have an interview here for a better job - do the interview ere and forget the $200 |
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| value of money depends on amount and when its paid or recieved. usually prices are higher in future and lower in past. so dollars in past are worth more, greater |
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| "Actual" dollar amounts, unadjusted for purchasing power |
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| dollar adjusted for purchasing power |
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| express dollars in their purchasing power of the current year (2014) ex. consumer price index - value of 100 in 1983, value of 218 today (2014) means takes $2.18 today to purchase what $1.00 bought in 1983 |
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| calculating purchasing power |
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| past dollars x (CPI (consumer price index) today/ CPI past year) amount. Russ earned $50,000 in 2000, what's the purchasing power today - in 2014- of that salary? |
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| why businesses hire worked - "derived demand" |
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Definition
| hire workers because it helps make product or services and earn profit for the business |
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| an input like machinery, technology, land |
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| why do workers earn different salaries? productive value |
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Definition
| businesses will pay worker up to the revenue the worker earns for the business ex. the more touchdowns tom brady scores, the more money he is paid. |
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| what determines your productive value |
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Definition
| education, experience, attitude, dedication to job, consistency or work, willingness to take risks, ability to adapt, size of market you reach. |
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| how many workers with certain skills are available for the job |
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| how many workers with those skills business want to hire |
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| low supply and high demand |
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| superstars in sports, entertainment, business - big audiences and limited number of people with talent and abilities |
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| high supply and low demand |
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| anyone can do the job, so low pay |
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| salary plus value of benefits (vacation time, sick time, retirement package, health care package) ex. nc teachers are near bottom of state on salary, but in middle of states on compensation. |
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| productivity improves - more valuable to the business |
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| often easier for business to train, monitor, and measure output. total output rises |
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| earnings vs leisure tradeoffs |
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| work more, more money. work more, less free time. studies show people earning more per house work more hours - because "cost" of their leisure (free time) is higher |
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| emerging "dumbbell labor marker |
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Definition
| high demand for highly talented and educated workers. high demand for "personal service" jobs (health care), technology replacing "middle skill" jobs, difficult for young men with limited skins |
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| limited supply to increase salary, more productive workers. make areas uncompetitive with non-union areas, movement of auto industry to the south. |
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| if above productive value of worker, will business be motivated to substitute technology and equipment? better option: earned income tax credit |
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| in short run can replace jobs (technological unemployment) but in long run can lower prices, improve life, and create new kinds of jobs. |
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| meant many US jobs gone to foreign countries, also foreign jobs to US (but not 1 for 1), benefit for US consumers - lower prices. re training of work force |
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| increases supply of workers, complements or substitutes with other workers. also means more talent and skills enter the economy, lower prices for consumers |
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Term
| gender differences in pay |
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Definition
| average salary differences mean nothing - must adjust for differences in education, experience, hours worked, etc. female pay has rising closer to male pay as education and job openings for women have expanded. females still hurt by time -off for child bearing. |
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Definition
| "traditional family" altered by changes in: household technology, ability to plan family size, attraction of females to labor force |
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| taking risks with your money to earn more than inflation. inflation erodes the purchasing power of your money. ex. inflation: 4%. need to earn more than 4% to have money grow in purchasing power. |
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| gains from investments usually quoted as a percent - percent gain on money invested. ex. earn $100 on investment of 1000, earn 10% |
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Term
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| subtract inflation rate to get "real interest rate" |
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| the big trade-off in investing - risk versus reward |
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| to earn higher reward, must take more risk in investing risk is chance of losing money. if want safety in investing, must accept lower reward. |
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| stocks, inflation wedges, cash, long term bonds |
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Term
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| technically a claim on the net assets of a company over long term, best performer of investments. very volatile - nothing guranteed - so high risk. watch individual stocks as well as market avg. |
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| investments that do best when inflation is rising. typically include real estate, precious metals, collectibles - all items with limited suppy (rare) |
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| not literally cash, but investments that can easily be converted to cash. money market funds, cd's, short-term bonds |
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Term
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Definition
| pay a fixed interest rate for a sepcificed time period, once lock-in the interest rate, if rates on her bonds drop, your bond increases in value. ex. you have a 10%, $1000 bond and get $100 interest. new rates are 5%, you still get 10% so your bond is now worth $2000 |
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| best when economy is growing with low inflation |
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| best when inflation is rising |
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| best when economy is entering recession |
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| best when economy is in a recession and interest rates are falling |
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| active management (investment strategy) |
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Definition
| move money between investments constantly seeking the best return |
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| passive management (investment strategy) |
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Definition
| allocate some money to all major investments and any more at major life stages ("buy and hold"; diversify) |
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| will the market always know more than the individual investor |
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Definition
| what is widely expected "baked in" to investment retursn even before the event happens. AKA only surprises. ex. expect economy to improve next year and gas and oil purchases to increase. stock values for oil company move up today. |
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| gauging an investment by its economic fundamentals |
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| ignoring fundamentals and investing on feeling |
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| if _________ dominates, can lead to "speculative bubbles", which ultimately burst. ex. residneital housing market |
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| a way of investing; not a type of investing; professional manager selects specific investments using money form many people. |
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| mutual fund focusing on a particular economic sector - many diversified holdings |
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| IRAs, 401k plans, municipal bonds. (IRA= individual retirement account) |
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| a way to handle risk of loss. principal of "pooled risk" - everyone faces chance of the loss, but no one knows who gets the loss. types: auto, health, house, disability, life |
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Term
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| higher premiums charged to people more likely to suffer losses. ex. for auto insurance: the young and inexperienced, with bad driving records, driving certain vehicles. for health insurance: older individuals, people with pre-existing conditions |
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Term
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| special insurance product for retirement. pays periodic amount to retiree for as long as person lives. |
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| interest rate earned, fees |
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| on long loans, tend to be higher than short term rates, on short loans. more can go wrong over a longer loan. normal yield curve |
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Term
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| rare situations where short rates are higher than long rates. signals pessimism about now and optimism about the future. grand predictor of an on-coming recession |
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| bringing the value of future dollars back to the present (now). present value will be less than future value (could invest now and grow to be larger in the future), used process called "discounting" |
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| invest now and grow to be larger in future |
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| present value = future value x (present value factor) (present value factor based on # of years in future and assumed) |
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| present value of loan payments |
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Definition
| using loan interest rate as discount rate is the loan amount. ex. borrow $200,000 at 5% interest and make 360 monthly paymens. monthly payment: $1073.64 |
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| discount rates chosen can be infuenced by individual preferences |
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Definition
people who live more for "today" choose higher discount rate. people who are more farsighted choose lower discount rate. the ver young and the very old- higher discount rate
individuals with limited prospects - higher discount rates |
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Definition
| earn einterest only on amount invested. 10% on $1000: $100 per year; after 30 years, have $4000 |
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| earn interest on amount invested and on interest earned. 10% on$1000 |
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| compound interest magnifies the benefit of investing early |
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Definition
| invest $1000 per year, earning 5% compounded annually, total at age 65. if began at 25: $120,780 |
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