Macroeconomics Exam 1 (CH 1, 2, 3) – Flashcards
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Economics
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the study of how people, individually and collectively, manage resources
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Microeconomics
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the study of how individuals and firms manage resources
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Macroeconomics
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the study of the economy on a regional, national, or international scale
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Rational Behavior
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making choices to achieve goals in the most effective way possible
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Scarcity
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the condition of wanting more than we can get with available resources
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Opportunity Cost
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the value of what you have to give up in order to get something; the value of your next-best alternative
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Marginal Decision Making
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comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices
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Sunk Costs
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costs that have already been incurred and cannot be recovered or refunded
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Incentive
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something that causes people to behave in a certain way by changing the trade-offs they face
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Efficiency
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use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society
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Correlation
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a consistently observed relationship between two events or variables
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Positively Correlated
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If both events or variables tend to occur at the same time or move in the same direction
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Negatively Correlated
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If one event or variable increases while a related event or variable decreases
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Causation
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a relationship between two events in which one brings about the other
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Circular Flow Model
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represents a basic economy
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Positive Statement
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a factual claim about how the world actually works Ex. A nuclear weapon with the explosive power of 10 kilotons of TNT will have a fallout radius of up to 6 miles.
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Normative Statement
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a claim about how the world should be (an opinion) Ex. The United States was right to use nuclear weapons in World War II.
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Model
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* A simplified representation of the important parts of a complicated situation *Show how people, firms, and governments make decisions about managing resources, and how their decisions interact
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Production Possibilities Frontier (PPF)
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A line or curve that shows all the possible combinations of two outputs that can be produced using all available resources
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Efficient Points
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combinations of production possibilities that squeeze the most output possible from all available resources
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Absolute Advantage
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the ability to produce more of a good or service than others can with a given amount of resources
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Comparative Advantage
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the ability to produce a good or service at a lower opportunity cost than others
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Specialization
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spending all of your time producing a particular good
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Gains from trade
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the improvement in outcomes that occurs when producers specialize and exchange goods and services
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Market Economy
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an economy in which private individuals, rather than a centralized planning authority, make the decisions
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Market
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*buyers and sellers who trade a particular good or service *located locally, globally, or virtually
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Competitive Market
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market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service
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4 Characteristics of perfectly competitive market
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1. Standardized good 2. Full information 3. No transaction costs 4. Participants are price takers
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Standardized good
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a good for which any two units have the same features and are interchangeable
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Full Information
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marker participants know everything about the price and features of the good
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No Transaction Costs
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there is no cost to participation in exchanges in the market
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Participants are Price Takers
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neither buyers nor sellers have the power to affect the market price
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Transaction Costs
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the costs incurred by buyer and seller in agreeing to and executing a sale of goods or services
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Price Taker
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a buyer or seller who cannot affect the marker price
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Quantity Demanded
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the amount of a particular good that buyers will purchase at a given price during a specified period
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Law of Demand
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a fundamental characteristic of demand which states that, all else equal, quantity demanded rises as price falls
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Demand Schedule
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a table that shows the quantities of a particular good or service that consumers will purchase (demand) at various prices
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Demand Curve
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a graph that shows the quantities of a particular good or service that consumers will demand at various prices
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Shifts in Demand Curve
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*When demand increases, demand curve shifts right (all good things shift right) *When demand decreases, demand curve shifts left (all bad things shift left)
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Shifts vs. Movements
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*If non-price determinant changes, then demand curve SHIFTS *If the price decreases, then the quantity demanded increases and there is MOVEMENT along the demand curve
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5 most important non-price determinants of demand
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1. Preferences 2. Number of buyers 3. Incomes 4. Expectations 5. Price of related goods
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Consumer Preferences
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the personal likes and dislikes that make buyers more or less inclined to purchase a good
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Substitutes
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goods that serve a similar-enough purpose that a consumer might purchase one in place of the other (Ex. Purchasing salmon because they're out of trout)
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Complements
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goods that are consumed together, so that purchasing one will make consumers more likely to purchase the other (Ex. Peanut butter ; jelly)
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Normal Goods
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goods for which demand increases as income increases
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Inferior Goods
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goods for which demand decreases as income increases
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Quantity Supplied
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the amount of a particular good or service that producers will offer for sale at a given price during a specified period
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Law of Supply
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a fundamental characteristic of supply which states that, all else equal, quantity supplied rises as price rises
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Supply Schedule
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a table that shows the quantities of a particular good or service that producers will supply at various prices
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Supply Curve
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a graph that shows the quantities of a particular good or service that producers will supply at various prices
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5 Determinants of supply
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1. Technology 2. Number of producers 3. Price of inputs 4. Expectations 5. Price of related goods
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Shifts in the supply curve
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*When supply increases, the supply curve shifts right *When supply decreases, the supply curve shifts left
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Equilibrium
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the situation in a market when the quantity supplied equals the quantity demanded; graphically, this convergence happens where the demand curve intersects the supply curve
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Equilibrium Price
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the price at which the quantity supplied equals the quantity demanded
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Equilibrium Quantity
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the quantity that is supplied and demanded at the equilibrium price
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Surplus (Excess Supply)
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a situation in which the quantity of a good that is supplied is higher than the quantity demanded
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Shortage (Excess Demand)
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a situation in which the quantity of a good that is demanded is higher than the quantity supplied
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Shifts in Demand (Graph)
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Marginal Cost
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change in the total cost that arises when the quantity produced is incremented by one unit
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Free Trade
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international trade left to its natural course without tariffs, quotas, or other restrictions
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Economic Analysis
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A systematic approach to determining the optimum use of scarce resources, involving comparison of two or more alternatives in achieving a specific objective under the given assumptions and constraints.
