Macroeconomics Unit 1 – Basic Economic Concepts – Flashcards
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Economics
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The science of scarcity and the study of choices
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Scarcity
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The condition in which our wants are greater than out limited resources
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Microeconomics
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The study of small economic units such as individuals, firms, and industries
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Macroeconomics
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The study of the large economy as a whole or in its basic subdivisions
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Positive Statement
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Based of facts. Avoids value of judgement (what is)
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Normative Statements
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Includes value judgements (what ought to be)
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Marginal
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Additional
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Marginal Analysis
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Involves making decisions based on the additional benefit vs. the additional cost
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Scarcity (Key Assumption #1)
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Society's wants are unlimited, but all resources are limited
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Trade Off (Key Assumption #2)
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Due to scarcity, choices must be made. Every choice has a trade off
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"Self-Interest" (Key Assumption #3)
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Everyone's goal is to make choices that maximize their satisfaction. Everyone acts in their own "self-interest"
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Marginal Costs and Marginal Benefits (Key Assumption #4)
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Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice.
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Models and Graphs (Key Assumption #5)
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Real-life situations can be explained and analyzed through simplified models and graphs
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Trade-offs
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all of the alternatives that we give up whenever we choose one course of action over others
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Opportunity Cost
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The most desirable alternative given up as a result of a decision
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Production Possibilities Curve (PPC)
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a model that shows alternative ways that an economy can use its scarce resources. Graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency
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Constant Opportunity Cost
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Resources are easily adaptable for producing either good. Results in a straight line PPC (Not common)
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Specialization
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When you focus on a specific good
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Adam Smith
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The Division of Labor - increased productivity and output
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Absolute Advantage
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Implies that a product can be produced more efficiently (i.e. with fewer inputs)
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Comparative Advantage
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If the opportunity cost of producing the good or service is lower for that individual than for other people
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Utility
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Satisfaction
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Allocate
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Distribute
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Scarcity vs. Shortage
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Scarcity occurs at all times for all goods. Shortage occurs when producers will not or cannot offer goods or services at current prices
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Price vs. Cost
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Price is the amount a buyer (consumer) pays. Cost is the amount a producer pays to create product
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Investment
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The money spent by Businesses to improve their production
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Goods vs. Services
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Goods are physical objects that satisfy needs and wants. Services are actions or activities that one person performs for another (teaching, cleaning, cooking)
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Consumer Goods
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Created for direct consumption
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Capital Goods
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Created for indirect consumption
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Land
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All natural resources that are used to produce goods and services
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Labor
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Any effort a person devotes to a task for which that person is paid
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Physical Capital
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Any human-made resource that is used to create other goods and services
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Human Capital
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Any skills of knowledge gained by a worker through education and experience
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Entrepreneurship
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ambitious leaders that combine the other factors of production to create goods and services
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Explicit Costs
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The traditional "out-of-pocket" costs of decision making
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Implicit Costs
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The opportunity costs such as a forgone time and forgone income
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Ceteris Paribus
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"All other things held constant"
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Substitutes
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Goods used in place of one another. If the price of one increases, the demand for the other will increases
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Complements
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Two goods that are bought and used together. If the price of one increases, the demand for the other will fall
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Normal Goods
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As income increases, demand increases. As income falls, demand falls
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Inferior Goods
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As income increases, demand falls. As income falls, demand increases
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Demand
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The different quantities of goods that consumers are willing and able to buy at different prices
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Law of Demand
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States that there is an inverse relationship between price and quantity demanded. As price falls, quantity demanded rises
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The Substitution Effect
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If the price goes up for a product, consumers buy less of that product and more of another substitute product
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The Income Effect
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If the price goes down for a product, the purchasing power increases for consumers - allowing them to purchase more
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The Law of Diminishing Marginal Utility
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As you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease.
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Supply
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The different quantities of a good that sellers are willing and able to sell (produce) at different prices
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Law of Supply
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States that there is a direct (or positive) relationship between price and quantity supplied. As price increases, the quantity producers make increases
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Subsidies
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Government payments that support a business or market. Can cause the supply of a good to increase
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Surplus
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The quantity demanded is less than the quantity supplied. During this, producers lower prices
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Shortage
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The quantity demanded is greater than the quantity supplied. During this, producers raise prices
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Free Market System
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Automatically pushes the price toward equilibrium
