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Microeconomics

answer

Study of how individuals choose to allocate the scarce resources available to them.

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Macroeconomics

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The study of how groups of individuals choose to allocate the scarce resources available to them.

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Aggregate

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"Total"

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Scarcity

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Lack of enough resources to satisfy all desired uses of those resources.

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Opportunity Cost

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The value to you of the next most desired good forgone to obtain some other higher good. What is given up to undertake a chosen activity. For example, instead of attending class, one could be working and making money.

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Factors of Production

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Resource inputs used in the production of goods and services. Includes Land, Labor, Capital, and Entrepreneurship.

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Land

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All natural resource.

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Labor

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Skills and abilities of all humans at work.

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Capital

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Goods produced for use in further production.

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Entrepreneurship

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The assembling of resources to produce new or improved products and technologies.

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Production Possibilities

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The various combinations of final goods and services that could be produced in a given time period with all available resources and technology.

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Law of Increasing Opportunity Cost

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Each time we give up one truck, we get less back in tank production.

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Production Possibilities Curve

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Summarizes hypothetical choices. Each point depicts an alternative mix of output that can be achieved. Illustrates scarce resources and opportunity cost.

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Three Economic Questions

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What to Produce, How to produce it, and for whom to produce.

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Invisible Hand

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The Market that decides how much of something is produced.

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Laissez-Faire

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The government doesn't involve itself in the market.

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Mixed Economy

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Combination of market signals and government directives to monitor economic outcomes

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Market Failure

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When the market mechanism fails to achieve the best possible outcomes.

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Government Failure

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When the government fails to improve market outcomes, or makes them worse.

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Normative Analysis

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Incorporates subjective judgments about what ought to be done.

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Positive Analysis

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Based on data; disregards judgments on what is "best".

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Ceteris Paribus

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The assumption of nothing else changing.

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Gross Domestic Product

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The total market value of all final goods and services produced within a nation's borders in a given time period.

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Per Capita GDP

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Dollar value of GDP divided by the country's population.

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Economic Growth

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Increase in output.

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Human Capital

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Skills of the workers.

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Capital Intensive

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Production Processes that use a high ratio of capital to labor inputs

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Productivity

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Output per unit of input

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Factor Mobility

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Agility to reallocate resources

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Technological Advance

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Increase workforce productivity and potential output.

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Outsourcing and trade

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Foreigners working for US companies

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Legal Framework

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Gives legitimacy to written contracts by establishing rules and enforcing provisions.

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Protecting the Environment

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To reduce external costs of production, the government limits air, water, and noise pollution.

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Monopoly

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Firm that produces the entire market supply of a particular good or service.

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Cause of Economic Growth

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Increased input, New technology, Trade, and Increasing resources.

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Components of GDP

answer

Personal Consumption Expeditures, Gross Private Domestic Investment, Net Exports of Goods and Services, and Government Consumption Expenditures.

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Personal Consumption Expenditures

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Citizen Purchases

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Gross Private Domestic Investment

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Business purchases

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Net exports of goods and services

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Selling to foreign consumers

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Government Consumption expenditures

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Government Spending

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Demand

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Quantity of goods people are willing and able to buy

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Complementary Goods

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Goods that are consumed together. Vodka and Cranberry Juice

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Substitute Goods

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Goods that can be used to the same purpose

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Inferior goods

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When income goes up, you consume less of it. Ramen Noodles.

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Determinates of Demand

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Price of the good, Price of other related goods, Price expected for the good, Income, Number or composition of people in the marketing region, and Tastes and preferences.

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Law of Demand

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If price increases, ceteris paribus, then quantity demand decreases.

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Supply

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Producers' ability to produce a product.

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Law of Supply

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If the price of a good increases, ceteris paribus, then quantity supplied increases

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Determinants of Supply

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Supplier input prices (resources used to produce the product), Technology, Number of suppliers, Government taxes (/ in supply), tarrifs (/ in supply), or subsidies (/ in supply), and Prices of other relate products in production (Complements or substitutes in production).

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Complements in Supply

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Goods that are naturally produced together (donuts and donut holes)

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Substitutes in Supply

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Goods that are produced in place of one another (parachutes OR parachute pants)

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Equilibrium

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When Quanitity demanded equals Quantity Supplied

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Optimal Mix of Output

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Most desirable combination of output attainable using existing resources, technology, and social values.

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Market Failure

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An imperfection in the market mechanism that prevents optimal outcomes.

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Sources of Market Failure

answer

Public goods, Externalities, Market Power, and Inequality

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Private Good

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A good whose consumption by one person excludes consumption by others (most goods and services)

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Public Good

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A good or service whose consumption by one person does not exclude consumption of others (roads, parks, national defense, a lighthouse, snow removal, etc.)

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Free-Rider Dilemma

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The communal nature of public goods may cause some consumers to try for a free ride

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Free Rider

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An individual who reaps direct benefits from someone else's purchast of a public good

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Externality

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A two-party transaction occurs, but there are costs or benefits borne by a third party.

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Negative Externality

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Third parties are hurt.

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Positive Externality

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3rd Party benefits because of a market transaction

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Market Power

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Ability of a firm to manipulate the price of a good in the market.

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Income Distribution

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Provides a minimum amount of ment goods.

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Ment good

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Good that society believes everyone is entitled to some minimal quantity of (food, clothing, shelter)

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Nominal GDP

answer

Value of final output produced in a given period, measure in the prices of that period (current prices)

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Real GDP

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Value of final output produced in a given period, adjusted for changing prices

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Real GDP

answer

Nominal GDP in year t / Price Index

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Price Index

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100 + Percentage change / 100

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Recession

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When real GDP is falling for two consecutive quarters

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GDP Components

answer

C + I + G + (X-M) Consumption Expenditure, Investment expenditure, government expenditure, exports and imports.

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Consumption

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Goods and services consumed by households

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Investment

answer

Factory machinery and equipment produced

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Government Spending

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Resources purchased by the public sector

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Net Exports

answer

Value of exports minus value of imports

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Imports

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Made in foreign lands and purchased in the US

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Exports

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Produced in US and sold in foreign lands

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Nonmarket Activities

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GDP measures exclude most goods and services produced but not sold in the market

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Labor Force

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All persons age 16+ who are either employed or actively seeking work. Does not include prisoners, mental patients, and the institutionalized

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Out of Labor Force

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Anyone not applying for jobs (college students, retired, discouraged workers, etc.)

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Discouraged workers

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People who have given up on finding a job

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Unemployed

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People applying for jobs, but who currently do not have a job

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Employed

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Have to have been paid for at least one hour in the past month

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Okun's Law

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A 1% increase in unemployment results in a 2% decrease in GDP.

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Unemployment Rate

answer

Number of unemployed people / Labor Force

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Seasonal Unemployment

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Unemployment due to seasonal changes in employment (Farm workers, construction workers, lifeguards, etc.)

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Structural Unemployment

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Unemployment caused by mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs (shorthand writers, assembly line workers, etc.)

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Cyclical Unemployment

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Unemployment caused by a decline in economic activity.

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Frictional Unemployment

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Brief periods of unemployment experienced by people moving between jobs or into the labor market.

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Full Employment

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The lowest unemployment rate compatible with price stability; zero cyclical unemployment. Both frictional and structural unemployment still exist

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Natural Rate of Unemployment

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Long-term rate of unemployment determined by structural forces in labor and product markets

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Human Costs of Unemployment

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Loss of income, Loss of confidence, Social Stress, Declining health.

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Measurement Problems with Unemployment

answer

Does not include the discouraged workers, does not measure underemployed, does not measure the quality of work, does not measure skill level associated with work.

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Inflation

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Increase in the average level of prices, not a change in any specific price of a good

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Consumer's Basket of Goods

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Housing, Transportation, Food, Clothing, Insurance and pensions, Healthcare, Entertainment, Miscellaneous

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Relative price

answer

Price of one good compared to hte price of other goods

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Consumer Price Index

answer

CPI nes - CPI original / CPI original

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Computing the CPI

answer

CPI in current year / CPI in base year = Basket price in current year / Basket price in base year

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Inflation Rate

answer

(CPI new - CPI old / CPI old) x 100

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Nominal Income

answer

Amount of money income received in a given time period measured in current dollars

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Real Income

answer

Income in constant dollars; nominal income adjusted for inflation.

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Money Illusion

answer

Using nominal dollars rather than real dollars to gauge in one's income or wealth.

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Price Effects

answer

Those who buy products that are increasing in price the fastest end up worse off. Those who sell products that are increasing in price the fastest end up better off.

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Income Effects

answer

People with nominal income rising more slowly than inflation end up worse off. People with nominal incomes rising faster than inflation end up better off.

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Wealth Effects

answer

Those who own assets that are declining in real value end up worse off. Those who own assets that are increasing in real value end up better off.

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Demand-Pull Inflation

answer

Results from excessive pressure to buy on the demand side of the economy.

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Cost-Push Inflation

answer

Due to higher production costs putting pressure on suppliers to push up prices.

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