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Microeconomics

answer

the study of economic behavior and decision-making in small units, such as households and firms

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Macroeconomics

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the study of economic behavior and decisions in a nation's whole economy

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Economics

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the study of how people seek to meet their wants and needs by making choices ( the study of the social strategies people employ to get the things they want and need)

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Globalization

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the increasingly tight interconnection of producers, consumers, and financial systems around the world

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Scarcity

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the principle that limited amounts of goods and services are available to meet unlimited wants

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Goods

answer

the physical objects that someone produces

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Consumer goods

answer

products and services that satisfy human wants directly

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Capital goods

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products and services that are used to make other products and services, and do not directly satisfy human wants

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Services

answer

the actions or activities that one person performs for another

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Money

answer

anything that serves as a medium of exchange, a unit of account, and a store of value

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Commodity money

answer

objects that have value in and of themselves and that are also used as money

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Credit money ( "fiat money")

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objects that have value because the government has decreed that they are an acceptable means to pay debts

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M1 Money

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the portion of the money supply represented by currency and all checking deposits

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M2 Money

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the portion of the money supply represented by "near money" that can be easily liquidated, such as savings deposits, certificates of deposit, money market deposits, and money market mutual funds

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Liquidity

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the ability to be used as, or directly converted into, cash

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Commodification

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the act of assigning a monetary value to something

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Market

answer

any arrangement or social mechanism that allows buyers and sellers to exchange things

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Market Failure

answer

a situation in which the free market, operating on its own, does not distribute resources efficiently

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The central defining pattern of relationship for Western society

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the interrelationship between consumer, producer, and capitalist-investor

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Demand

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the desire to own something and the ability to pay for it

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Demand curve

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a graphic representation of a demand schedule

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Demand schedule

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a table that lists the quantity of a good a person will buy at various prices in the market

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Law of Demand

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consumers will buy more of a good when its price is lower and less when its price is higher

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Determinants of Demand

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factors other than price that determine the quantities demanded of a good or service

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Derived Demand

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the demand for a resource that depends on the demand for the products it helps to produce

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Elasticity of Demand

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a measure of how consumers respond to price changes

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Supply

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the amounts of goods and services available

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Supply curve

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a graph of the quantity supplied of a good suppliers will offer at various prices

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Supply schedule

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a chart that lists how much of a good a supplier will offer at various prices

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Law of Supply

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producers offer more of a good as its price increases and less as its price decreases

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Determinants of Supply

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factors other than price that determine the quantities supplied of a good or service

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Elasticity of Supply

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a measure of the way quantity supplied reacts to a change in price

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Shortage

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a situation in which consumers want more of a good or service than producers are willing to make available at a particular price

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Surplus

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when quantity supplied is more than quantity demanded (this represents a loss of profit for producers)

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Equilibrium Price

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the point at which the demand for a product or service is equal to the supply of that product or service ( the point on a graph where the supply curve and demand curve meet, or the lowest price at which the producer can profitably offer a product or service, and the highest price at which consumers are willing and able to buy the product or service)

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Circular Flow Diagram

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These flows are accompanied by reverse flows of money from firms to households and from households to firms.

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Firm

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an organization that uses resources to produce a product or service, which it then sells ( a business)

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Industry

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a group of firms that produce the same or similar products or services

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Factors of Production

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the resources that are used to make goods and services

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Factors of production

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includes land, labor, capital, and entrepreneurial ability

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Factor payments

answer

the income people receive in return for providing factors of production ( the payments a business pays to those who provide resources)

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Labor

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the effort people devote to tasks for which they are paid

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Law of Labor Supply

answer

as wages increase more people are willing to work so the supply of labor also increases ( as the price of labor increases the supply of labor also increases)

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Law of Labor Demand

answer

as wages decrease employers are willing to hire more workers so the demand for labor increases ( as the price of labor decreases the demand for labor increases)

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Equilibrium wage

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the wage rate, or price of labor services, that is set when the supply of workers meets the demand for workers in the labor market ( the highest wage that an employer is willing to pay, and the lowest wage that workers are willing to work for)

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Land

answer

all natural resources used to produce goods and services ( all of the resources that include the land itself along with anything in it, under it, or growing on it)

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Capital

answer

any human-made resource that is used to produce other goods and services

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Physical capital

answer

the human-made objects used to make goods and services

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Human capital

answer

the knowledge and skills a worker gains through training and experience

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Social capital

answer

the value created by social relationships ("connections") with expected returns

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Marginal Cost

answer

the extra (additional) cost of producing one more unit of an output; equal to the change in total cost divided by the change in output

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Marginal Benefit

answer

the extra (additional) benefit of consuming one more unit of some good or service; the change in total benefit when one more unit is consumed

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Marginal Analysis

answer

the comparison of marginal ("extra" or "additional") benefits and marginal costs, usually for decision-making ( the analysis one makes when deciding whether or not it is worth spending an additional unit of something in order to meet a desired goal)

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Marginal Resource Cost

answer

the amount the total cost of employing a resource increases when a firm employs one additional unit of a resource

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Marginal Revenue Product

answer

the change in a firm's total revenue (income) when it employs one additional unit of a resource; equal to the change in total revenue divided by the change in the quantity of the resource employed

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Marginal Revenue

answer

the change in total revenue that results from the sale of one additional unit of a firm's product; equal to the change in total revenue by the change in the quantity of the product sold

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MR = MC Rule

answer

the principle that a firm will maximize its profit (or minimize its losses) by producing the output at which marginal revenue and marginal cost are equal, provided product price is equal to or greater than average variable cost

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MRP = MRC Rule

answer

the principle that to maximize profit (or minimize losses), a firm should employ the quantity of a resource at which its marginal revenue product (MRP) is equal to its marginal resource cost (MRC), the latter being the wage rate in pure competition

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Law of Diminishing Returns

answer

the principle that as successive increments (units added) of a variable resource are added to a fixed resource, the marginal product of the variable resource will diminish (: diminishing marginal return of labor: a level of production at which the marginal product of labor decreases as the number of workers increases)

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Economic Costs

answer

the payments a firm must make, or the incomes it must provide, to attract the resources it needs away from alternative opportunities (see "Opportunity Cost")

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Explicit Costs

answer

the monetary payments a firm must make to outsiders in order to obtain a resource

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Implicit Costs

answer

the monetary income a firm sacrifices when it uses a resource it owns rather than supplying the resource in the market (: when a company uses a building it owns rather than renting it out to someone else for income)

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Opportunity Cost

answer

the value of a good, service, or time forgone to obtain something else (this applies to resource allocation as well)

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Trade-off

answer

the alternatives that we give up when we choose one course of action over another ( the "opportunity cost")

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Law of Increasing Costs

answer

an economic principle which states that as production shifts from making one good or service to another, more resources are needed to increase production of the second good or service

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Business Organization

answer

the ownership structure of a company Sole proprietorship: a business owned and managed by a single individual

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Partnership

answer

business organization owned by two or more persons who agree on a specific division of responsibilities and profits

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General partnership

answer

all partners share equally in the management responsibilities and legal liabilities of the company Limited partnership: only one partner needs to be a general partner ( only one partner needs to be a manager, although others can participate as well)

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Limited liability partnership

answer

all of the business owners are limited partners (none of them participate in the management of the company)

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Business Franchise

answer

a semi-independent business that pays fees to a parent company in return for the exclusive right to sell a certain product or service in a given area

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Corporation

answer

a legal entity or being, owned by individual stockholders, each of whom has limited liability for the firm's debts

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Stock

answer

a certificate of ownership in a corporation Dividend: the portion of corporate profits paid out to stockholders Liability: the legal obligation to pay debts Advantages of Corporations: Limited liability: restriction of the maximum loss to a pre-determined amount for the owners (stockholders) of a corporation

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The maximum loss

answer

the amount paid for a stock

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Ownership separate from management

answer

the only requirement of corporate ownership is the ability to purchase stocks; no special skills are needed to own a corporation

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Longevity

answer

because stocks are transferable a corporation can last longer than its founders

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Disadvantages of Corporations

answer

Double taxation: the corporation is taxed on its profits (corporate income tax) and the stockholders are taxed on the dividends they get paid (personal income tax)

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Loss of Control

answer

corporate managers and officers may take control and make decisions that benefit them rather than the stockholders (owners)

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Greater Regulation

answer

government has more regulations to govern how corporations are run

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Corporate charter

answer

a document registered with the government that defines the name of a corporation, its principal officers, management structure, method of raising money, and statement of purpose

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The corporate charter also gives corporations certain rights as individuals

answer

...

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Horizontal Merger

answer

the combination of two or more firms competing in the same market with the same good or service

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Vertical Merger

answer

two or more firms involved in different stages of producing the same good service are merged together

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Conglomerate

answer

a business combination merging more than three businesses that produce unrelated products or services

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Multinational Corporations

answer

a large corporation that produces and sells its goods and services in more than one country

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Economic System

answer

a particular set of institutional arrangements and a coordinating mechanism for producing (and distributing) goods and services

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The Four Questions All Economic Systems Seek to Answer

answer

What goods and services will be produced? How will the goods and services be produced? Who will get the goods and services? How will the goods and services promote progress? Be prepared to write about how economic systems reveal social-cultural values

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Market Economy

answer

an economic system in which only the private decisions of consumers, resource suppliers, and firms determine how resources are allocated; also known as the "market system"

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Characteristics of Market Economy Private property

answer

most property is owned by individuals and firms and not the government

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Freedom of Enterprise and Freedom of Choice

answer

entrepreneurs can enter into whatever business they see fit, owners can dispose of property as they see fit, workers can enter into any type of employment for which they are qualified, consumers are free to buy whatever suits their needs and wants

question

Self-interest

answer

the primary motivating force in the market system

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Competition

answer

the presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market

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Market

answer

the social mechanism that allows buyers and sellers to come together to exchange goods and services for payment Profit Incentive: the motivation that drives innovation in technology and production methods

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Specialization

answer

use of resources to produce one or a few goods and services rather than the whole range of goods and services required by a society

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Use of money Active but limited government

answer

government involvement is limited to protecting private property rights, enforcing rules

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Command Economy (Centrally-planned Economy/Communism)

answer

a method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities

question

Socialism

answer

a range of economic and political systems based on the belief that wealth should be evenly distributed throughout society

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Mixed Economy

answer

a market-based economic system in which the government is involved to some extent (American Free Enterprise, the economic system used in the US)

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Private Goods

answer

a good or service that is individually consumed ( ) and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits ( )

question

Allocative Efficiency

answer

the apportionment of resources among firms and industries to obtain production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal

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Allocative efficiency

answer

an effect of the market

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Public Good

answer

a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who did not pay

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Nonrivalry (in consumption)

answer

one person's consumption of a good does not preclude consumption of the good by others

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Nonexcludability

answer

no effective way of excluding individuals from the benefit of the good once it comes into existence

question

Externality

answer

an economic side-effect of a good or service that generates benefits or costs to someone other than the person who to produces or consumes it (a third-party)

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Positive externality

answer

a positive side-effect of production affecting a third party

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Negative externality

answer

a negative side-effect, representing a "spill-over" cost of production that a third party ends up paying for in some way

question

Tax

answer

a required payment made to a local, state, or national government

question

Revenue

answer

the income received by governments from taxes and other nontax sources

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Tax Bases

answer

Individual income tax: a tax based on a person's earnings

question

Corporate income tax

answer

a tax based on a company's profits

question

Property tax

answer

a tax based on (the value of) real estate and other property

question

Sales tax

answer

a tax based on goods and services

question

Progressive tax

answer

a tax for which the percentage of income paid in taxes increases as income increases

question

Proportional tax:

answer

a tax for which the percentage of income paid in taxes remains the same at all income levels ( "flat rate tax")

question

Regressive tax:

answer

a tax for which the percentage of income paid in taxes decreases as income increases

question

Gross Domestic Product (GDP)

answer

the total market value of all produced annually within the borders of the United States, whether by US or foreign-supplied resources

question

Four Categories of Spending accounted for in GDP

answer

Personal Consumption Expenditures ( ) [ Consumer goods & services] Gross Private Domestic Investment ( ) [Business goods & services] Government Purchases ( ) [ Government goods & services] Net Exports ( ) [exports minus the imports] GDP = C + Ig + G + Xn (formula for calculating GDP) Categories of spending in GDP explained: Personal Consumption Expenditures: all expenditures by households on durable goods, nondurable goods, and consumer expenditures for services ( doctors, lawyers, mechanics)

question

Gross Private Domestic Investment

answer

expenditures for newly produced capital goods (such as plant and equipment) and for additions to inventories

question

Government Purchases

answer

government expenditures on final goods, services, and publicly owned capital

question

Net Exports

answer

exports (final goods and services) minus imports

question

Nominal GDP

answer

Gross Domestic Product measured in terms of the price level at the time of measurement (unadjusted GDP)

question

Real GDP

answer

Gross Domestic Product measured in terms of the price level in a base period (adjusted GDP)

question

Limitations of GDP

answer

Nonmarket activities: consumers making their own products or performing their own services rather than paying for them

question

Underground Economy

answer

illegal economic activities such as the drug trade, black market transactions, "under the table" payments not reported to the government

question

Negative externalities

answer

Unintended economic side-effects are often not reflected in GDP, yet they still affect the economy because someone has to pay for them

question

Negative externalities are not accounted for

answer

...

question

Economic Growth

answer

a steady, long-term increase in real GDP (3% is the minimum required for the economy to be considered healthy)

question

Aggregate Supply

answer

the total amount of goods and services in the economy available at all possible price levels

question

Aggregate Demand

answer

the amount of goods and services in the economy that will be purchased at all possible levels

question

Price Level

answer

the average of all prices in the economy

question

Business Cycle

answer

a period of macroeconomic expansion followed by one of macroeconomic contraction, known as "economic fluctuations

question

" Expansion

answer

a period of economic growth measured by a rise in GDP (characterized by plentiful jobs, falling unemployment rates, and businesses prospering)

question

Economic Growth

answer

a steady, long-term increase in real GDP

question

Peak

answer

the height of an economic expansion, when real GDP stops rising

question

Contraction

answer

a period of economic decline marked by falling real GDP

question

Trough

answer

the lowest point of an economic contraction, when real GDP stops falling ( when the economy has "bottomed out"

question

Recession

answer

a prolonged economic contraction (defined when real GDP falls for two consecutive quarters, or a minimum of 6 months)

question

Depression

answer

a recession that is especially long and severe

question

Stagflation

answer

a decline in real GDP combined with a rise in price level (inflation) Factors affecting business cycles: Business Investing: business expansion, capital investment, increased production lead to increased GDP

question

Interest rates & credit

answer

since most consumers and businesses rely on credit to buy big items, lower interest rates encourage consumer spending and business investing

question

Consumer expectations

answer

Consumers fear potential loss of jobs Businesses expect a drop in demand for their products, which prompts them to stop investing in capital and labor

question

Self-fulfilling prophecy

answer

consumer fears can actually lead to the thing they fear; the media reporting can also make people afraid, stop spending, and make the contraction happen

question

External Shocks

answer

unexpected situations in which events don't meet expectations Demand shocks: unexpected changes in the demand for goods and services Supply shocks: unexpected changes in the supply of goods and services

question

Unemployment rate

answer

the percentage of the labor force unemployed Frictional Unemployment: unemployment that is associated with people searching for jobs or waiting to take jobs in the near future

question

Cyclical Unemployment

answer

unemployment that is associated with the necessary phase of a business cycle

question

Potential output

answer

the level of real GDP that would occur if there was full employment

question

Full employment

answer

the situation in which the unemployment rate is equal to the full-employment unemployment rate and where frictional and structural employment occur but not cyclical unemployment (and the real GDP of the economy equals potential output)

question

Inflation

answer

a rise in the general level of prices in an economy ( a rise in price level)

question

Demand pull inflation

answer

increases in the price level (inflation) caused by excessive spending (consumption)

question

Cost-push inflation

answer

increases in the price level (inflation) caused by sharp rises in the cost of key resources (chain reaction effect)

question

Nominal income

answer

the number of dollars received as wages, rent, interest, and profit (unadjusted income)

question

Real income

answer

the purchasing power of nominal income; the amount of goods and services that nominal income can buy

question

Deflation

answer

a decline in the general level of prices in the economy

question

Labor force

answer

Persons 16 years and older who are not in institutions and who are either employed or unemployed and seeking work

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