Macroeconomics Terms Chapters 1-10

Scarcity
Limited resources and unlimited wants.

Economics
Study of how society manages its scarce resources.

Efficiency
The property of society getting the most from its scarce resources.

Equity
The property of distributing output fairly amonf society’s members.

Opportunity Cost
Whatever is given up to get something else.

Marginal Changes
Incremental adjustments to an existing plan.

Market Economy
An economic system where interaction of households and firms in markets determine the allocation of resources.

“Invisible Hand”
The principle that self-interested market participants may unknowingly maximize the welfare of the economy as a whole.

Market Failure
A situation in which the market fails to allocatre resources efficiently.

Externality
When one person’s actions have an impact on a bystander.

Market Power
The ability of an individual or group to substantially influence the maket prices.

Monopoly
The case in which there is only one seller in a market.

Productivity
The amount of goods and services produced per hour by a worker.

Inflation
An increase in the overall level of prices.

Philips Curve
The short-run tradeoff between inflation and unemployment.

Scientific Method
Objective development and testing of theories.

Economic Models
Simplifications of reality based on assumptions.

Circular-Flow Model
A diagram of the economy that shows the flow of goods and services, factors of production, and monetary payments between households and firms.

Factors of Production
Inputs such as land, labor, and capital.

Production Possibilities Frontier
A graph that shows the combinations of output the economy can possibly produce given the available factors of production and the available production technology.

Microeconomics
The study of households and firms make decisions and how they interact in markets.

Macroeconomics
The study of economy wide phenomena,

Positive Statements
Descriptions of the world as it is.

Normative Statements
Prescription for how the world ought to be.

Absolute Advantage
The comparison among producers of a good based on their productivity.

Comparative Advantage
The comparison among producers of a good based on their oppurtunity cost.

Gains from Trade
The increase in total production due to specialization allowed by trade.

Imports
Goods produced abroad and sold domestically.

Exports
Goods produced domestically and sold abroad.

Rational People
Make decisions by evaluating costs and benefits of marginal changes; think at the margin.

Incentive
A cost or benefit that motivates a decision or action by consumers, businesses, or other participants in the economy.

Property Rights
Some item of value does not have an owner with the legal authority to control it.

Business Cycle
Fluctuations in economic activity such as employment and production.

Market
A group of buyers and sellers of a particular good or service.

Competitive Market
A market with many buyers and sellers trading indentical products so that each buyer and seller is a price taker.

Quantity Demanded
The amount of a good that buyers are willing and able to purchase.

Law of Demand
The claim that, other things equal, the quantity demanded of a good falls when the price of the good rises.

Demand Schedule
A table that shows the relationship between the price of a good and the quantity demanded.

Demand Curve
A graph of the relationship between the price of a good and the quantity demanded.

Normal Good
A good for which, other things equal, an increase in income leads to an increase in demand.

Inferior Good
A good for which, other things equal, an increase in income leads to a decrease in demand.

Substitutes
Two goods for which an increase in the price of one leads to an increase in demand for the other.

Complements
Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Quantity Supplied
The amount of a good that sellers are willing and able to sell.

Law of Supply
The claim that, other things equal, the quantity supplied of a good rises when the price of the good rises.

Supply Schedule
A table that shows the relationship between the price of the good and the quantity supplied.

Supply Curve
A graph of the relationship between the price of a good and the quantity supplied.

Equilibrium
A situation in which supply and demand have been brought into balance.

Equilibrium Price
The price that balances supply and demand.

Equilibrium Quantity
The quantity supplied and the quantity demanded when the price has adjusted to balance supply and demand.

Surplus
A situation in which quantity supplied is greater than quantity demanded.

Shortage
A situation in which quantity demanded is greater than quantity supplied.

Law of Supply and Demand
The claim that the price of any good adjusts to bring the supply and demand for that good into balance.

Elasticity
A measure of the responsiveness of the quantity demaded or quantity supplied to one of its determinants.

Price Elasticity of Demand
A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Elastic
When the quantity demanded or supplied responds substantially to a change in one of its determinants.

Inelastic
When the quantity demanded or supplied responds only slightly to a change in one of its determinants.

Total Revenue
The amount paid by buyers and recieved by sellers of a good computes as P*Q.

Income Elasticity of Demand
A measure of how much the quantity demanded of a good responds to a change in consumers’ income.

Cross-Price Elasticity of Demand
A measure of how much the quantity demanded of one good responds to a change on the price of another good.

Price Elasticity of Demand
A measure of how much the quantity supplied of a good responds to a change om tje price of that good.

Price Ceiling
A legal maximum on the price at which a good can be sold.

Price Floor
A legal minimum on the price at which a good can be sold.

Tax Incidence
The study of who bears the burden of taxation.

Tax Wedge
The difference between what the buyer pays and the seller recieves after a tax has been imposed.

Welfare Economics
The study of how the allocation of resources affects economic well-being.

Willingness to Pay
The maximum amount that a buyer will pay for a good.

Consumer Surplus
A buyer’s willingness to pay minus the amount the buyer actually pays.

Cost
The value of everything a seller must give up to produce a good.

Producer Surplus
The amount a seller is paid for a good minus the seller’s cost.

Deadweight Loss
The reduction in total surplus that results from a tax.

Laffer Curve
A graph showing the relationship between the size of a tax and the tax revenue collected.

World Price
The price of a good that prevails in the world market for that good.

Price Takers
Market participants that cannot influence the price so they view the price as given.

Tariff
A tax on goods produced abroad and sold domestically (imports).

Gross Domestic Product (GDP)
The market value of all final goods and services produced within a country in a given period of time.

Consumption
Spending by households on goods and services, with the exception of purchases of new housing.

Government Purchases
Spending on goods and services by local, state, and federal governments.

Net Exports
The value of a nation’s exports minus the value of its imports, also called trade balance.

Nominal GDP
The production of goods and services valued at current prices.

Real GDP
The production of goods and services valued at a constant prices.

GDP Deflator
A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

Ceteris Paribus
A Latin phrase, translated as “other things being equal,” used as a reminder that all variables other than the ones being studied are assumed to be constant.