Chapter 8: Economics Outline

·         Supply and demand

o   Economics studies how society allocates the limited resources of the earth to the needs of humans. Supply and demand are the forces at work.

o   Equilibrium – the market price allows the quantity supplied to equal the quantity demanded.

·         Microeconomics

o   The supply and demand equation of individuals, families, companies and industries.

§  Opportunity costs

·         Cost of the decision to produce or not produce

§  Marginal utility

·         Usefulness of having an additional unit of product

§  Marginal revenue and cost

·         Revenue and cost from marginal production (adding “just one more”)

·         When marginal revenue is equal to marginal cost, you should not make the deal.

·         Elasticity

o   If consumers are sensitive to price changes, their demand is elastic.

o   When consumers are not sensitive to prices, economists call their demand inelastic.

o   To quantify elasticity, an elasticity coefficient is used:

§  Elasticity of quantity demanded = % change in quantity demanded / % change in price

§  Elasticity of total revenue = % change in total revenue / % change in price

§  Greater than 1 is considered elastic

·         Market structures

o   Monopoly – one seller with a unique product

§  Strong brand, innovation, special design, legal/regulation, patent/copyright

o   Oligopoly – only a few sellers

o   Monopolistic competition – many sellers but products are somewhat different

o   Pure competition – many sellers selling equivalent products.

·         Macroeconomics

o   Inflation

§  A little inflation it creates jobs because it promotes spending money today.

o   Monetary policy tools

§  Discount rate versus Prime Rate versus Consumer rate

·         Discount rate – borrowing rate between banks

·         Prime rate – lowest lending rate to most trustworthy consumers

·         Consumer rate – range of rates paid by consumers from prime rate to much more

§  Government securities (Treasury bonds)

§  Reserve requirement

·         How much banks must reserve to guarantee their accounts

·         Keynesian and Monetarist theory

       o   John Maynard Keynes felt that judicious and timely government intervention could have a stabilizing and beneficia effect on the economy.
       o   Milton Friedman believed in the power of the market to heal itself and that government regulation had done more harm than good.

·         Gross National Product (GNP) accounting

       o   GNP - total market value of all final goods and services produced by an economy in a year.      

       §  Changes in GNP are used as a measure of the health of an economy.

       §  Real GNP is GNP adjusted for inflation, nominal GNP is unadjusted.

International macroeconomics

       o   Balance of payment accounting - cash flow statement for a nation
       o   Country analysis:
       §  Analyze past performance
       §  Identify the country's strategy
       §  Analyze the country's context
       §  Make a prediction based on 1, 2, and 3.