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Course of lectures ON DISCIPLINEСтр 1 из 16Следующая ⇒ Course of lectures ON DISCIPLINE «BASICS OF ECONOMIC THEORY» for non economic specialties Shymkent, 2015 UDC 330.8. (072) BBK 65.01ja73
V. Sherstyuk, G. Urazbaeva, A. Abishova. Course of lectures on discipline «Basics of economic theory».- Shymkent: South Kazakhstan State University named after M. Auezov, 2014.- 68 p.
The course of lectures contains all sections of discipline «Basicsof the economic theory». It is intended first of all for students of not economic specialities, teachers of economic disciplines and all others who are interested in theoretical bases of functioning of economy. The manual is intended for students non economic specialties
Reviewers:
The course of lectures is recommended to the edition by Educational-methodical advice UKGU named after M. Auezov, the report record № 4 of "17" January 2014
Introduction
The economic theory is the base on which are acquired knowledge and the skills necessary for the future experts for their professional work in conditions of the market are formed. Economic knowledge allow to predict development of objective, dynamical economic processes and to estimate a place of national economy in the world economy. For years of independence in Kazakhstan cardinal transformations to economic, political and social sphere are carried out. Practice testifies, that without a profound knowledge of bases of economy now it is impossible meaningly and competently, creatively to perceive the economic validity, to understand a public life, effectively to solve problems of economic practice. Modern realities demand approach of discipline of " the Basis of the economic theory» to solved problems and problems of economic development of the state. The aim of discipline - learn to student’s theoretical knowledge of evolution and laws of social and economic development of a society in various economic systems, and also about principles and motives of economic behavior of the person in conditions of the limited resources to form economic outlook and an active civic stand in realization state economic and social policy. Problems of discipline: 1. Development of the basic theoretical views which have been saved up in a scientific heritage on economic problems. 2. Application of knowledge of essence of economic events, laws of social and economic development of a society in various economic systems. 3. To generate knowledge of mechanisms of self-regulation of the market in conditions of the limited resources. 4. To expand representation about principles of state regulation of economy. 5. To form economic outlook and an active civic stand in realization state economic and social policy. The list of disciplines which precede studying of the given discipline: Philosophy, Political science, History of Kazakhstan The list of related subjects and their interrelation with the given discipline: Bases of the right, Ecology, Foreign language MODULE 1. BASICS AND PATTERNS OF FUNCTIONING OF THE ECONOMY
1. Nucleation and the basic stages of development of economic sciences.
Key words skills – умения, квалификация equipment – оборудование productivity - производительность definition – определение formulate – формулировать scarce resources – редкие (ограниченные) ресурсы commodity – товар distribute – распределять behaviour – поведение level – уровень methodology – методология generalization – обобщение quantitative – количественный household – условная семья economic model – экономическая модель deduction and induction – дедукция и индукция positive and normative statements – позитивные и нормативные утверждения simplify – упрощать purchase – покупать, покупка income – доход unit of a good – единица товара Sections of the economy: - Microeconomics - is taken as a basis for analyzing the smallest economic unit - the firm, association, etc. - Mezoekonomika studies the laws and the behavior of specific subsystems of the national economy (agriculture, military-industrial complex, regional economics, etc.) - Macroeconomics examines the economy as a whole, the objects of analysis are the income of society, unemployment, inflation, etc. - Megaekonomika studies the laws and behavior of the world economy as a whole. All sciences are careful to distinguish between two types of statements: statements about what is or was or will be – positive statements; and statements about what ought to be – normative statements. Thus, positive economics investigates the ways in which economic agents seek to achieve their goals. It deals with facts and is free from subjective opinions. For example, ‘ The unemployment rate is 7%’. Normative economics makes suggestions about the waysin which society’s goals might be more efficiently realized. For example, ‘The unemployment should be lowered’. Economic categories - the basic concepts of an economic science: work, the price, the goods, money, etc. The aim of economic theory is to define laws and essence of economic phenomena. Nature and essence of economic laws. a) Nature of economic laws. Economic phenomena and processes are subordinated to the objective laws, which are commonly called economic ones. They are of the objective character, i.e. they don’t depend on human will and consciousness, but at the same time they are not historically eternal, they change with the change of conditions of economic life. b) Essence of economic laws. Economic laws express the essence of phenomena and the level of their cognition by a person. They reflect stable, causal relationship between these phenomena or processes. They are typical and variable, that’s why they form a definite system of economic laws that correspond to this or that way of production. c) Classification of economic laws: - general – the laws, typical of all ways of production of all epochs; - special – the ones, typical of the ways of production of the same type; - specific – the laws, typical of definite ways of production with definite economic conditions. d) Functions of economic laws. The objective nature of economic laws presupposes not only the necessity, but also the possibility of taking into account their demands in economic practice. It allows to elaborate a scientific mechanism of regulation of social production and to use the knowledge of economic laws while decision-making. Thus, the functions of economic laws are: - to reflect the objective state of economy; - to anticipate the necessity and possibility to use them in economic practice; - to promote the elaboration of a scientific mechanism of social production management; - to use the knowledge of economic laws while decision-making.
Private Methods - Simulation-study of phenomena on theoretical models - Extrapolation (forecasting) forecast of economic development based on identified trends, adjusted for future. - The balance, functional and other techniques. Economic policy is the activity of the state aimed at resolving economic problems and actuation their mechanisms. Economic policy issues today: - Economic liberty - Full employment - Economic growth - Price stability - Equitable taxation - Socio-economic guarantees - The optimal monetary policy - Environmental protection
Lecture 2. 1. The structure of social production. The phases of social reproduction: production, distribution, exchange and consumption. 2. Needs as a premise of production. Classification of needs. 3. Economic resources and factors of production. Classification of and characterization of resources. Key words Economic growth – экономический рост Employer – работодатель Employee – рабочий Employment – занятость Available – доступный Factors of production – факторы производства Input – вводимый ресурс Output – объем произведенной продукции, выпуск продукции Amount – количество labour – труд (фактор производства) Natural resources – природные ресурсы Capital – капитал Division of labor – разделение труда Entrepreneur – предприниматель Producer – производитель Consumer – потребитель Consumption – потребление Division of labor – разделение труда Distribution - распределение Exchange – обмен Increase – увеличивать, повышать Decrease – уменьшить, понижать Production – производство Reproduction – воспроизводство Needs – потребности Wants – желания Extended reproduction – расширенное воспроизводство Production possibility curve – кривая производственных возможностей Scarcity and choice – нехватка и выбор Satisfy – удовлетворять
Key words
wealth – богатство set laws – устанавливать законы govern – управлять property rights – права собственности variety – разнообразие command economy – командно-административная экономика market economy, or free enterprise, or laissez-faire – рыночная экономика mixed economy – смешанная экономика invisible– невидимый direction – направление, указание supply – поставлять, снабжать transmit – передавать adjust – регулировать equilibrium – равновесие law enforcement – обеспечение соблюдения законов fail – терпеть неудачу social security – социальное обеспечение justice – правосудие government intervention – государственное вмешательство market forces – рыночные силы (спрос и предложение) demand curve – кривая спроса supply curve – кривая предложения quantity – количество public good – общественный продукт subsidize export industries – субсидировать экспортные отрасли monetary policy – кредитно-денежная политика, монетарная политика fiscal policy – налоговая, фискальная, бюджетная политика Appropriation– присвоение, назначение, ассигнование Property – собственность Slaveholding–рабовладельческое хозяйство Denationalization - децентрализация Entrepreneurship - предпринимательство Key words Insularity - изолированность Free price – свободное ценообразование Law of value – закон стоимости (ценности) consumer behaviour – поведение потребителя satisfaction – удовлетворение utility – полезность total utility – общая полезность diminishing marginal utility – убывающая предельная полезность term – термин rank – ранжировать dimension – измерение indifference curve – кривая безразличия consumer’s preferences – потребительские предпочтения budget constraint – бюджетное ограничение budget line – бюджетная линия plot – наносить (точки), отмечать money unit – денежная единица tangent – касательный consumer equilibrium – равновесие потребителя
Market evolution
Market evolution takes place along with society development. The market formations has 3 periods: 1) XV – the beginning of XIX century – market of free competition creates. Smith said, that state played a part of night guard (that is, state didn’t absolutely interfere in market mechanism). That was a seller market, where the production conception dominated, the essence of which – to produce necessary commodities and satisfy the demand on them. Market should be considered as a complex category that includes the sphere of circulation, where the exchange of goods and services takes place and the system of money-commodity relations, formed in the process of exchange of goods and services at the existing system of production relations. Market is a system of economic relations between people who are involved in the processes of production, allocation, exchange and consumption. In a broader sense market is a set of social institutions within which a great number of specific types of exchanges take place, when these institutions assist these transactions, adding them some structure. Types of competition. a) Competition can be intrabranch and interbranch: - Intrasectoral competition is a struggle between producers who are involved in one sphere of economy. It results in leveling of individual costs according to social or market cost which is the basis of market price. - Intersectoral competition is a struggle between firms and enterprises of different branches for maximum profit. The object of interbranch competition is a surplus product obtained as a result of re-allocation according to the cash flow from one branch to another. b) There are price, non-price and non-economic types of competition: - Price competition is a price manipulation in different markets, price decrease without any change of quality of goods, price discounts and discrimination in prices. - Non-price competition is competition by means of quality improvement, perfection of guarantee service and better organization of sales. - Non-economic competition means the use of secret agreements concerning sales market division, takeover of enterprises and industrial espionage etc. b) Methods of competition - first of all it is the improvement of quality of goods and services, fast renewal of assortment, design, guarantee giving, timely price reduction etc. a) Perfect competition market model, its characteristics. Definition: Perfect competition is competition characterized by a great number of producers-competitors and buyers-competitors and by a free access of producers to any type of activity. Its peculiar features are: - availability of many enterprises, producing homogeneous goods; - a small size of a producing enterprise in the respect of the market; - free access to the market; - buyers and producers’ adaptation to the existing prices and their being as price receivers. b) Imperfect competition market model, its characteristics. Competition at which at least one of the signs of perfect competition is violated is called imperfect competition. Definition: Imperfect competition is competition between large-scale, small and middle-sized companies. It is a struggle for the monopolization of sales markets, sources of raw materials, energy, state contracts obtaining, intellectual property possession etc. Its peculiar features are: - the establishment of monopoly high prices; - acquiring monopoly high profits on the basis of high prices. c) Submodels of imperfect competition market. It includes 3 market submodels: monopoly, oligopoly and monopolistic competition. - An extreme case is a pure monopoly when only one enterprise dominates in some branch. The defining moment at this is not a size of the enterprise, but its share of production and sales on the market. Being the only seller, monopoly suggests a unique production which doesn’t have any substitute. Monopoly is protected from indirect by high entrance barriers to the branch. It can be connected with the economy of scale, with natural monopoly when an enterprise (in the sphere of hydro- or gas provision) gets privileges from government. Monopoly defines prices. - Market structure in which a small number of sellers occupy a major position in some branch, and the entrance to the branch of new producers is limited by high barriers is called oligopoly. The characteristic feature of oligopoly is oligopoly connection: every enterprise-producer should take into account not only the interests of consumers but also the ones of other firms-producers of the market. The is the so called leadership in price determining, i.e. a secret agreement on prices. Oligopoly pricing is often done on the principle “expenditures plus”, when some definite per cent is added to average expenditures while price defining. - On the market of monopolistic competition a great number of producers are engaged in production and distribution of goods. Every enterprise is relatively small in volume of production and sales. An important characteristic of monopolistic competition is product differentiation both real and false one, that is done by means of advertising, the use of trade marks etc. As the production of every enterprise is unique in the eyes of consumers, such market tends to acquire the traits of monopoly. Monopolistic competition is based on the fact thatconsumers may have preferences for different brands; so producers can sell products at higher prices than equilibrium. However, the control over the market is limited: if a price is too high, consumers can buy a good from another producer. An oligopoly is a degree of competition when the market is dominated by a few large producers. Each firm is large enough to influence the price and entry of new firms is restricted.
Market infrastructure. 1) Meaning of market infrastructure for economic relations. a) The formation of market infrastructure is necessary for any model of economy. For countries with transitive economy it is of great importance. I command economy separate branches of infrastructure were of secondary importance while others were not considered to be important at all. Major elements of modern market infrastructure are: - credit system, including banks; - exchanges (commodity, stock exchange, currency and real estate market); - auctions, fairs and other forms of organized outer-exchange mediation (brokers, dealers); - the system of regulation of population employment (state and private structures), labour markets; - issuing system; - depository system (national depository, independent owners and securities registrators); - consulting agencies; - clearing banks or firms; - trust companies; - innovative-informational centers, technoparks; - advertising business; - means of business communication; - rating agencies; - real estate business; - auditing companies; - civil firms and sponsor funds meant for the support of entrepreneurial activity. “Ideal “ marketing model includes such elements: 1. freedom of enterprise and full responsibility of the economic activity results. But “ strict budget limit “ functions, that is, each of the market subject operates only with own or borrowed funds (credit); 2. competition, absence of any kind of monopoly, which limits the ability of producers to influence on market price, and in that way distort the conditions of market competition; 3. absolute mobility of all kinds of the economic resources (material, financial, labour), that is, their transference from less effective to more effective branches, but for this reason developed market infrastructure is necessary (banks, exchange, distribution centers etc.); 4. autonomous activity of all market subjects; 5. freedom of price formation. Price – is the core of market mechanism (demand – price – supply). L. fon Chajek (German economist) wrote, that any deviation of free price formation (even with good intentions) led to the establishment of dictatorship; 6. full awareness of all market subjects about market condition (market conjecture, profit rate, the situation on labour market, financial market etc.); 7. stability of state financial system, openness to the foreign market, political stability of the country. Market function. The essence of market is revealed in the functions it fulfills. The most important ones are: 1. Self-regulation of production, which presupposes the sequence of production and consumption in the assortment structure as well as the maintenance of demand and supply equilibrium with respect to volume and price; The market answers on questions: what to make? For whom? How to make? The market is inconceivable without a competition (intrabranch and interbranch). 2. Stimulating function consisting in making the producers manufacture new production with the lowest costs per item and maximum profit. 3. Information. Through varying prices, rates the market gives participants of manufacture the information on socially necessary quantity, assortment and quality of the goods and services. 4. Intermediary. The market allows the seller and the buyer to find each other. 5. Definition of the price. The market recognizes only socially necessary expenses, only they will be paid by the buyer. 6. Sanifying. By means of a competition the market clears a social production of economically unstable, impractical facilities.
2. Law of supply and the supply curve. Non-price factors influencing to changes in supply. Factors affecting supply. Key words theory of demand – теория спроса quantity demanded – величина спроса income – доход preference – предпочтение law of demand – закон спроса consumer demand – потребительский спрос market demand – рыночный спрос slope down / up – иметь отрицательный / положительный уклон determinant – детерминанта, решающий фактор expectation – ожидание shift – смещаться, перемещаться, сдвигаться change in quantity demanded – изменение величины спроса change in demand – изменение спроса forecast – прогноз theory of supply – теория предложения quantity supplied – величина предложения output – объем произведенной продукции, выпуск продукции profit – прибыль revenue – доход, выручка costs – издержки, расходы marginal costs – предельные издержки marginal revenue – предельный доход market supply – рыночное предложение shortage – дефицит, нехватка surplus – избыток substitute good – товар-заменитель complementary good – товар-дополнение normal good – качественный товар inferior good – товар низкого качества signal – сигнал incentive – стимул respond – реагировать, отвечать Key words commercial enterprise – коммерческое предприятие sole proprietorship – индивидуальное предпринимательство raise money – добывать денежные средства (инвестиции) settle the debts – улаживать долги hire, employ – нанимать employer – работодатель employee – сотрудник, работник dissolve – ликвидировать retire – уходить в отставку, на пенсию bear the responsibility – нести ответственность retailing – розничная торговля maintenance – тех.обслуживание partnership – товарищество accountancy – бухгалтерия real estate – недвижимость corporation, joint-stock company – корпорация, акционерное общество fraction – доля go bankrupt – обанкротиться Stock Exchange – фондовая биржа salary – оклад, зарплата CEO (chief executive officer) – топ-менеджер double taxation – двойное налогообложение mismanagement – неэффективное руководство state-owned corporation – государственное предприятие appoint – назначать (на должность) privatize and nationalize – приватизировать и национализировать private limited companies – закрытое акционерное общество public limited company – открытое акционерное общество forward or backward integration – интеграция «вверх» или «вниз» horizontal or vertical integration – горизонтальная или вертикальная интеграция expansion – расширение, укрупнение, рост merger – слияние takeover – поглощение acquisition – выкуп, приобретение limited liability – ограниченная ответственность shareholder (BE), stockholder (AE) – акционер bankruptcy – банкротство property – собственность profit – прибыль shares (of stock) – акции 1. Terms of business development. Kinds of entrepreneurship. Business is a commercial enterprise performing all those functions that govern the production, distribution, and sale of goods and services for the benefit of the buyer and the profit of the seller. The existing forms of business organization enable various branches of industry to adapt to changing conditions and to function more efficiently and profitably. The main three forms of business ownership are sole proprietorship, a partnership, and a corporation. Sole proprietorship is ownership of a business by a singleperson. The sole proprietor provides capital to run the business and makes all the decisions. He/she employs other people and is responsible for the success and for the failure of the business. It is the simplest and the oldest form of business ownership. Advantages: · It is relatively easy to start this type of business; · The owner has an incentive to run the firm efficiently as all the profits are his/hers; · It is a flexible type of business as the owner can quickly respond to changes in the market conditions. Disadvantages: · Unlimited liability – in case of bankruptcy the owner may lose all his property including his personal assets including a house/flat, a car, etc. that can be sold to settle the debts of the business; · A single owner is seldom able to invest as much capital as a partnership or a corporation can obtain; · Unless the owner has much personal wealth, the business may have difficulty borrowing money in critical times; · A sole proprietor may also have difficulty hiring and keeping good employees because the business will dissolve when the owner retires or dies. · The owner faces all the risks, and alone bears all the responsibility for the business. In many countries this type prevails in such sectors as farming, retailing, repair and maintenance work, personal services (e.g. hairdressing).But in terms of total employment, capital and output this type is relatively unimportant. A partnership is an association of two or more persons who have agreed to combine their financial assets, labor, property, and other resources as well as their abilities and who carry on a business jointly for the purpose of profit. The agreement the partners usually sign to form an association is known as a partnership contract and may include general policies, distribution of profits, responsibilities, etc. Advantages are similar to those of sole proprietorship: it iseasy to establish a partnership, and this is also a flexible form of business. It is usually easier for partnerships to obtain additional financing because the personal assets of the group are usually larger and the chances of success are higher. Disadvantages: · Unlimited liability of each partner for the debts of the business, i.e. complete financial responsibility for losses. · Partners who wish to retire may find it difficult to recover their investments without dissolving the partnership and ending the business. · Partnerships dominate in such professions as law, accountancy, medical services, real estate business and so on. · A business corporation (AE) is an organization created by law that allows people to associate together for the purpose of profit making. Corporations are also known as joint-stock companies (BE) because they are jointly owned by different persons who receive shares of stock in exchange for an investment of money in the company. Shares represent fractions of the company’s assets such as cash, equipment, real estate, manufactured goods, etc. · Though the corporation is more difficult and expensive to organise than other business forms, it has a number of advantages. Most business people form limited companies. In this case shareholders have the liability only for the amount of money they have invested. If the company goes bankrupt, their personal possessions are not in danger, i.e. they cannot be sold to pay the debts of the company (except in criminal cases). · Most companies begin as private limited companies as the founders invest their private capital (or borrow from banks). Successful, growing companies apply to one of the Stock Exchanges to become a public limited company. After that its shares are traded in different financial markets and anyone can buy shares at the market price. Advantages: • Limited liability – if the corporation goes bankrupt, shareholders can lose no more than they have invested. • Money to operate the business is obtained by the sale of stocks to the general public and this enables the corporation to exist independently of its owners. • The corporation finds it easier to borrow money from banks and it is also a successful means for attracting large amounts of capital and investing the latter in plants, modern equipment and expensive research. • Salaries large corporations can offer to managers and specialists are high, and that allows corporations to hire professional and talented CEOs and employees. Disadvantages: • A double taxation of profits: taxes are first paid on net income, and then shareholders pay taxes on their dividends; • Numerous financial reports must be sent to various federal regulatory agencies; • In large corporations shareholders have no real control over the business and as a consequence there is risk of mismanagement that may lead to bankruptcy. A state-owned corporation has no private shareholders. Government owns the business and appoints managers to run it. Profits are used for investments. If this type of business is inefficient, government may sell it, i.e. have it privatized (as it happened with some large state-owned companies in the UK in the 1980s). The purpose of this type is to run an industry which is important for the national economy. For example, such large nationalized industries in the UK as the Port of London (1909), and the BBC (1927). Another purpose of state-owned corporations is to provide important public services at a reasonable price. For example, the Tennessee Valley Authority in the USA is a federal corporation providing power and irrigation services, and flood control since the 1930s. Public interest requires organization and operation of business to be subject to governmental regulation. Government regulation, particularly in the USA, attempts to prevent the formation of monopolies that totally control a particular branch of industry such as steel, petroleum, or automobile production. CONDITIONS
3. Financial position and income of the firm. Terms maximize the firm's profits. Key words inputs – вводимые ресурсы
output –объем произведенной продукции, выпуск продукции install – устанавливать
fixed factor – потоянный фактор variable factor – переменный фактор short run – краткосрочный период long run – долгосрочный период obtain – приобретать, принимать distinction – отличие
distinguish – различать
profit – прибыль
profitability – рентабельность
revenue – доход
opportunity costs – альтернативные издержки
explicit and implicit costs – явные и неявные издержки
marginal costs – предельные издержки
marginal revenue – предельный доход
average total costs – средние общие (валовые) издержки Key words
laissez-faire – свободная рыночная экономика contribution – вклад policy implications – политические выводы merchant – купец, торговец source of economic wealth – источник экономического богатства favorable balance of trade – положительный торговый баланс trade restrictions – торговые ограничения circumstance – обстоятельство benefit society – приносить пользу обществу outperform competitors – работать лучше конкурентов make a fortune – сделать состояние government intervention / interference – правительственное вмешательство government regulation – правительственное регулирование self-interest – личный интерес, корысть division of labour – разделение труда barriers to trade – торговые барьеры law of comparative advantage – закон сравнительных преимуществ abandon a policy of protection – отказаться от политики протекционизма labor theory of value – трудовая теория стоимости surplus value – прибавочная стоимость just economic order – справедливый экономический порядок negotiations – переговоры persist – упорствовать reverse the trend – переломить тенденцию externalities – экстерналии environmental pollution – загрязнение окружающей среды beneficial – благоприятный lay off – увольнять food stamps – продуктовые талоны (для мало обеспеченных) reduce poverty – снижать бедность inequality – неравенство money supply – денежное предложение, денежная масса budget deficit – бюджетный дефицит environmental issues – природоохранные вопросы AFTERWORD THE LITERATURE 1. Gregory Mankiw, Principles of Economics. 6nd ed. 2011.- p.890 2. Mankiw, NG Principles of Economics. 2nd ed. / Trans. from English. - St. Peter, 2006.- p.624 3. Joseph E. Stiglitz, Carl E. Walsh. Economics. 4th ed./ W.W.W.Norton&com. New York/London. 2005.-p.971. 4. Hoag, Arleen J., 1944–.Introductory economics / Arleen J. Hoag, John H. Hoag. -- 4th ed. 5. Vdovina Е.К. An Introduction to International Economics. Part I. Введение в мировую экономику. (на английском языке). Part 1.: Teaching manual for students of specialty 080102 "World Economy". St Petersburg Polytechnic University, 2007, p.135. 6. Gerge Reisman. Capitalism. A treatise on Economics. Jameson Books, Inc. Ottawa, Illinois. 1998. p.1102 7. K.R.Makkonell Ekonomics: principles, problems and a policy. In 2 т. Т. 1: the textbook / K.R.Makkonell, s.l.brju.-: 2008. - p.467. 8. Dr. v. Loganathan. Economic theory. higher secondary - second year tamilnadu textbook corporation college road, chennai - 600 006. Government of tamilnadu. First edition – 2007 p.267. 9. P.H.Collin. Dictionary of Economics over 3000 terms. A&C Black Publishers LTD. Clearly definded Jul. 2006. p.225.
GLOSSARY A Absolute Advantage is the ability of a country to produce a larger quantity of a good with the same amount of resources as another country. Aggregate means the sum total. Aggregate Demand is the total demand for output by consumers, business, and government at each price level. Aggregate Supply is the total amount of output produced at each price level. Allocate means to distribute, as in the case of scarce resources or scarce goods. Antitrust legislation is aimed at reducing monopoly power. Assumptions are the simplifying device. Automatic Stabilizers, such as unemployment compensation and the progressive income tax structure, tend to move the level of income toward the full employment level and help “smooth out” the business cycle. Average Fixed Cost (AFC) is the total fixed cost divided by the number of units produced. Average-Marginal Relation specifies that if the marginal is greater than the average, the average will rise; and if the marginal is less than the average, the average will fall. Average Total Cost (ATC) is total cost divided by the level of output. ATC is found by the following expression: ATC average total cost total cost TC quantity of output Q Average Variable Cost (AVC) is the total variable cost divided by the level of output. The expression for AVC follows: AVC average variable cost total variable cost TVC quantity of output Q B Balance of Payments is the sum of the current account and the capital account from the international payments account. If this sum is positive, there is a surplus balance of payments, and if negative, a deficit. Balance of Trade is the difference in the value of what we export and what we import. If the value of what we import is greater than the value of what we export, then there is a balance-of-trade deficit. When the value of our exports exceeds the value of our imports, there is a balance-of-trade surplus. Balanced Budget results when tax collections and government spending are equal. Barriers to Entry are factors that keep firms from entering the market when there are incentives for them to enter. Barter System is a method of trade without money where one good is directly exchanged for another. Break-even Points are the points of intersection between demand and the average total cost. Any production level between the two break-even points yields an economic profit. Business Cycles are more-or-less-regular fluctuations in the level of economic activity. These are the up and down phases that accompany the increases or decreases in gross domestic product. Each business cycle goes through four phases: peak, recession, trough, and recovery. C Capital is a man-made tool of production; it is a good that has been produced for use in the production of other goods. Capital is a scarce resource. Capital Account is the international account that records the flow of money from one country to another for the purpose of buying financial assets. Capitalism is an economic system where the individuals own and control the resources. Cartel is a group of firms acting as one - in effect a monopoly -to determine the profit maximizing level of output and price. Change in Demand is a shift of the whole demand curve and occurs when a determinant of demand changes. Change in Quantity Demanded is a movement along the demand curve and occurs when the price of the good changes. Change in Quantity Supplied is a movement along the supply curve and occurs when the price of the good changes. Change in Supply is a shift of the whole supply curve and occurs when a determinant of supply changes. Circular Flow is a macro model showing the flows of income and product between consumers and business. Classical Economists believe that the economy will always achieve equilibrium at full employment. Communism is an economic system identified by public - government - ownership of resources. Comparative Advantage means a country can produce a good with a lower opportunity cost than the opportunity cost for the same good in another country. Complements are goods such that if you purchase more (less) of one, you purchase more (less) of the other. Conclusion is drawn from a model and is a prediction of behavior. Consumer Price Index (CPI) records the percentage change in the price of a selected number of consumer goods compared to a base year. Consumption (C) is the purchase of goods and services by households. Consumption Function is the direct relation between income and consumption that tells the amount of consumption at each level of income. Cost-Push Inflation is a rise in the average price level due to an increase in production costs. Cost-push originates from the supply side of the economy. Crowding-Out Effect occurs when deficit spending by government increases interest rates and reduces investment. Currency is the portion of our money supply consisting of coins and Federal Reserve notes. Current Account is the international account that essentially records the value of what is sold to foreign countries, the exports, minus the value of what is bought from other countries, the imports. Cyclical Unemployment occurs when the economy slows down and there are more unemployed people than there are available jobs. D Deficit Budget occurs when government spends more than it collects in taxes. Definition gives a name to an idea. Deflation is a continued fall in the price level and an increase in the value of a dollar. Demand is a list or schedule of the quantities of a particular good that a buyer would be willing and able to buy at alternative prices. Demand-Pull Inflation is a rise in the average price level caused by excess demand at full employment. The excess demand increases the average level of prices, which is inflation. Determinants of Demand, including a change in taste for a good, a change in income, an expectation of a change in the price of a good, or a change in the price of a related good, are capable of shifting the demand curve. Determinants of Price Elasticity of Demand include whether the buyer views the good as a luxury or necessity, the availability of acceptable substitutes, and how large a part of the budget the purchase is for the buyer. Determinants of Supply are changes in nature, the cost of production, the price of other goods, and expectations of a change in price, all of which are capable of shifting the supply curve. Differentiated Product is one where the consumer can distinguish one firm’s output from another firm’s output. Discount Rate is the interest rate that banks pay on money borrowed from the Federal Reserve System. Disposable Income is income after taxes and can be either spent or saved by consumers. Disserving consumers are consuming more than they are making, either borrowing or spending past saving. Double Counting occurs when we count the value of the intermediate products as well as the value of the final product in GDP. E Easy Entry is the absence of entry barriers in a market. Easy entry results in more firms and less control over price; more barriers to entry result in fewer firms and more control over price. Economic Loss occurs when total cost exceeds total revenue. Economic Profit occurs when total revenue exceeds total cost. The revenue of the firm more than covers all opportunity cost. After paying the explicit cost and accounting for the implicit cost, the firm has revenue left over. This remaining revenue is economic profit. Economics is a social science that studies how society chooses to allocate its scarce resources, which have alternative uses, to provide goods and services for present and future consumption. Economic System is the process used by each society to allocate resources. Economies of Scale cause the average total cost to decline in the long run as the productive capacity of the firm increases and are a basis for natural monopoly. Efficient Allocation of Resources occurs when a good is produced at the lowest possible opportunity cost. This means as few of society’s scarce resources as possible are used up, leaving resources free to be used in the production of other goods. A firm produces efficiently at the level of output corresponding to the lowest point on the average total cost curve. Elastic Demand occurs if the coefficient of elasticity is greater than one. This means that buyers are relatively responsive to a change in the price of the good. Entrepreneurship is the organizational force that combines the other factors of production — land, labor, and capital — and transforms them into the desired output. Entrepreneurship is a scarce resource. Equation of Exchange says that the money supply times the velocity of circulation equals price times output, or MV = PQ. Equilibrium is a balance of forces. Equilibrium Point occurs at the intersection of the market supply and the market demand curves. Excess Reserves are any reserves that a bank has over and above its required reserves. A bank is free to make loans with its excess reserves. Exchange Rate is the price of one currency in terms of another. Expectations Inflation occurs when people expect prices to rise and act upon the expectation by buying more. Prices will rise as a result. Expenditure Approach to gross domestic product is the sum of all spending by consumers, business, government, and net exports. Explicit Costs are the money costs of producing the product. Externalities occur when the cost to society of production differs from the cost to the producer. F Fallacy of Composition is an error in thinking that assumes that the behavior of the whole is the same as the behavior of its parts. Fiscal Policy is the use of the federal budget as an economic tool to stabilize the economy. Fixed Factors of production are the inputs that cannot be increased during the short-run productive process. Fractional Reserve System requires that banks hold a percentage of their deposits as reserves. Free Good is a good with zero opportunity cost, which means that you can have all you want without giving up anything else. Frictional Unemployment includes those people in the process of relocating from one job to another. Full Employment is defined at some level of unemployment. The exact percentage of unemployment that marks full employment is open to debate. G GDP Price Deflator is a special price index used to convert money GDP into real GDP. Good is anything that satisfies a want. Government Spending (G) is the total expenditure by government. Gross Domestic Product (GDP) is the total dollar value of all final goods and services produced within a nation’s border during a year. H Hyperinflation is an accelerating increase in the average price level. I Implicit Costs are the opportunity costs of owner-owned resources which are used in production, and for which no money is paid. Income is the money society earns through productive processes. The payments to resource owners are rent, wages, interest, and profit and are the returns to land, labor, capital, and entrepreneurship. Income Approach to GDP is found by adding all income received by the resource owners. Income Effect of a change in price measures the change in consumption of a good because of the change in purchasing power when the price changed. Income Multiplier means that any initial change in spending results in a greater change to total income. The income multiplier is the reciprocal of the marginal propensity to save. Inelastic Demand occurs if the coefficient of elasticity is less than one. This means that buyers are not so responsive to a change in the price of a good. Inferior Good is a good for which demand decreases as income increases. Inflation is a continued rise in the average level of prices. Investment (I) represents business spending for capital goods plus inventories. Business is the only sector of the economy that invests in the economic sense. K Keynesian Economists believe that the economy can be fine tuned using the fiscal and monetary tools. Kinked Demand is a model of oligopolistic behavior. L Labor is human effort, both physical and mental. Labor is a scarce resource. Labor Force consists of those employed and those unemployed but looking for work. Laissez-Faire is the classical attitude that the government should leave the macro economy alone. Land is land itself and anything that grows on it or can be taken from it – the “natural resources.” Land is a scarce resource. Law of Demand states that there is an inverse relationship between the price of a good and the quantity demanded of that good. Law of Diminishing Returns states that as an increasing amount of a variable factor is added to a fixed factor, the marginal product of the variable factor will eventually fall. Law of Increasing Costs states that as society obtains an extra unit of one good, ever-increasing amounts of the other good must be sacrificed. Law of Supply states that a direct relation exists between the price of a good and quantity supplied of that good. Long Run is a period of time in which all inputs to the productive process are variable. M Macroeconomics (macro) is the study of the economy as a whole. Marginal Cost (MC) is the change in total cost as one more unit of output is produced. It is the additional or extra cost of producing another unit. The expression for marginal cost follows: MC marginal cost change in total cost TC change in quantity of output Q Marginal Input Cost (MIC) is the change in total cost due to the hiring of another unit of a variable input. Marginal Product (MP) is the change in total product as one more unit of variable input is added to a productive process. Marginal Profit is the change in total profit when one more unit is produced and sold. Marginal Propensity to Consume (MPC) is the amount by which consumption changes when income changes by one dollar. The expression for MPC follows: MPC marginal propensity to consume change in consumption C change in income Y Marginal Propensity to Save (MPS) is the change in saving when income changes by one dollar. The expression for MPS follows: MPS marginal propensity to save change in saving S change in income Y Marginal Revenue (MR) is the change in total revenue as one more unit is produced and sold. 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