Principles of Macroeconomics Chapters 1-4 – Flashcards
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Economics
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The social science that deals with the analysis of material problems and how societies allocate scarce resources to satisfy human wants
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Macroeconomics
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The study of aggregated economic activity such as the forces that determine the level of income and employment in a society
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Microeconomics
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the study of disaggregated economic activities, or how a market economy allocates resources through prices
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Independent Variable
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In a set of relationships, this is the variable that changes first
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Dependent Variable
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In a set of relationships, the variable whose value depends on the value of the independent variable
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Inverse
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the relationship between independent and dependent variables is inverse if the dependent variable changes in the opposite direction from the independent variable
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Direct
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the relationship between the independent variable and the dependent variable is direct if the dependent variable changes in the same direction as the independent variable
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Normative Economics
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Consists of making judgments about what should be
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Positive Economics
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Consists of determining what is
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Market System
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A set of means through which buyer-seller exchanges are made
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Invisible Hand Argument
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The idea that self-interest based voluntary exchanges can make all those involved in the exchanges better off
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Resources
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The inputs that are used to make consumer and producer goods
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Scarcity
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The relationship between limited resources and unlimited wants which results in the inability to satisfy all human wants for goods and services
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Free Goods
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Those in such abundant supply relative to demand that they have zero prices
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(Scarcity)
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1) What shall be produced 2) How shall goods be produced 3) for whom shall output be produced
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Production-Possibilities Function
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Shows the combinations of goods that a society's resources can produce at full employment in a particular period of time (using the best technology)
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Employment
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the condition in which a resource is used to produce commodities or services
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Unemployment
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The condition in which a resource is unable to find a use to produce economic goods
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Underemployment
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the condition in which some units of resources are not employed in their most productive uses
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Opportunity Cost
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What is given up of other goods in order to produce more of one particular good
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Increasing Opportunity Cost
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The assumption that as a nation chooses to produce more of one good, it must (ultimately) give up increasing amounts of the other good
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Marginal Rate of Transformation
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the rate at which one good is traded off for another
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Diminishing Marginal Rate of Transformation
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The rate at which one good may be traded off or transformed into another ultimately decreases. In other words, the real opportunity cost ultimately rises
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Economic Institutions
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the social arrangements through which economic decisions are made
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Property Rights
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Rights of ownership to use, to transfer, and to benefit from the employment of factors of production
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Economic Development
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the long-term process by which the material well-being of a society's people is increased
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Pure Economic Determinism
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The assumption that the actions of people are mere reactions to changing economic reality or opportunities.
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Entrepreneurship
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The ability to organize the resources into producing units
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Incremental Capital-Output Ratio
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The ratio of the additional capital to additional output
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Human Capital
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consists of improvement in the skills and knowledge of people
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Interdependency
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A situation in which economic actions depend on each other
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Complementary Investment
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One that increases the productivity of other investments
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Capital-Intensive processes
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those processes that use relativity more capital than labor or land
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Labor-Intensive Processes
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those that use relatively more labor than capital or land
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Outsourcing
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A term that refers to the substitution of less expensive factors of production including skilled labor available in developing nations
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Price Rivalry
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The contest in which sellers watch what prices others charge and then react to those prices
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Competition
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the market form in which no buyer or seller has influence over the price at which the product is sold
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Demand
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A set of relationships showing the quantities of a good that consumers will buy at each of several prices within a specific period of time
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Complements
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Products used in conjunction with each other
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Substitutes
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Products that may be consumed in place of each other
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Ceteris Paribus
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The "Other Things Being Equal" assumption that involves holding other factors constant while permitting a key variable to change
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Demand Schedule
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Indicates the quantity demanded at each of several prices
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Demand Curve
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represents that schedule when plotted on a two dimensional graph
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Law of Demand
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Consumers buy more of a product at (relatively) low prices than at (relatively) high prices (ceteris paribus)
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Substitution Effect
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The change in quantity demanded of a good as its relative price changes and it becomes relatively less or more expensive leading to its substitution
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Income-Inferior Goods
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Goods whose consumption decreases when income increases
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Change in Quantity Demanded
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A movement along a good's demand curve that can be caused only by a change in the price of that good
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Change in Demand
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A shift of a good's demand curve that may be caused by a change in any factor other than the price of that good
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Market Demand
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the quantity demanded by all consumers in a market at each of several prices
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Supply
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A set of relationships showing the quantities of a product that a firm or all firms will offer for sale at each of several prices within a specific period of time
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Law of Supply
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A firm will offer more for sale at (relatively) higher prices than at (relatively) lower prices
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Supply Curve
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Represents a firm's or industry's supply schedule plotted on a two dimensional graph
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Changes in Quantity Supplied
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Movements along a supply curve that are caused only by changes in the price of that product
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Changes in Supply
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Shifts in a supply curve that may be caused by changes in any factor affecting supply other than a change in the price of that good
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Equilibrium price
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The price at which quantity demanded equals quantity supplied. It is a market-clearing price
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Excess Demand
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the amount consumers are unable to obtain of a good at a non-equilibrium price
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Excess Supply
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the quantity of a good firms are unable to sell at a non-equilibrium price
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Closed Economy
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An economy that does not trade with other economies. One in which all economic activity is domestic
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Factor Market
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Those markets in which the supply of and demand for factors of production interact to determine wages and other factor prices
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Product Markets
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Markets in which the flows of goos and services are established and in which the prices of goods and services are determined
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Functional Distribuiton of Income
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The distribution of income that shows how each factor of production derives income according to its economic functions
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Lorenz Curve
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The difference between the actual distribution of income and a perfectly proportional distribution as shown graphically
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Sole Proprietorship
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A business firm owned by one individual who has full responsibility for it
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Partnership
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A form of business organization in which two or more individuals combine to operate an enterprise
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Corporations
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Business fins whose existence and function is apart from that of their owners
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Limited Liability
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In a corporation, the fact that individual owners are responsible only for the value of their shares purchased and not other debts
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Bonds
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Debt instruments issued by corporations
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Preferred Stock
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Stock issued by a corporation that has no voting rights but has a preferred right to dividend payments
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Common Stock
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Stock issued by a corporation that has voting rights but no preference in the distribution of dividends
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Double Taxation
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the fact that a corporation pays taxes on its gross earnings and its shareholders pay taxes again when corporate earnings are distributed as dividends
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Multinational Corporations
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those that buy resources as well as produce and sell products in many countries and throughout parts of the world
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Benefits-Recieved Principle
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That argument that tax payments should be commensurate with the benefits received from government services
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Ability-to-Pay Principle
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The argument that, as people's incomes grow, they can afford to pay a larger part of their incomes in taxes
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Tax rate
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The percentage of income paid in taxes
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Progressive tax
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A tax in which the rate increases as income increases
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Regressive tax
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a tax in which the rate decreases as income increases
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Proportional tax
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A tax in which the rate remains constants as income changes
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Open Economy
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One whose levels of income and product depend on both domestic and feign economic activities
