Principles Of Macroeconomics (for Exam 1) Test Questions – Flashcards
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Economics
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The study of how individuals and societies choose to use the scarce resources that nature and previous generation have provided.
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Opportunity cost
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cost in terms of foregone alternatives
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marginalism
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the process of analyzing the additional or incremental costs or benefits arising from a choice or decision
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Sunk costs
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costs that cannot be avoided, regardless of what is done in the future, because they have already been incurred
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efficient market
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A market in which profit opportunities are eliminated almost instantaneously.
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4 goals of studying economics
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1. To learn a way of thinking. 2. To understand society. 3. To understand global affairs 4. To be an informed citizen.
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Microeconomics
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the branch of economics that studies the economy of consumers or households or individual firms
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Macroeconomics
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the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
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Positive economics
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An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
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Normative Economics
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Judgments about "what ought to be" in economic matters.
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Descriptive economics
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The compilation of data that describe phenomena and facts
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Economic theory
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A statement or set of related statements about cause and effect, action and reaction
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Model
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A formal statement of a theory, usually a mathematical statement with two or more variables.
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Ockham's razor
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The principle that irrelevant detail should be cut away.
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(Ceteris Paribus) All else equal
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A device where two variables are analyzed while all the other variables stay the same.
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Post hoc, ergo propter hoc
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"after this (in time), therefor because of this." the fallacy that states: if event A happens before event B, it is not necessarily true that A caused B.
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fallacy of composition
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The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or whole.
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Empirical economics
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the collection and use of data to test economic theories
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efficiency
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An efficient economy is one that produces what people want at the least possible cost.
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economic growth
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an increase in the total output of an economy
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stability
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a condition in which national output is growing steadily, with low inflation and full employment of resources
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Capital
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Things that are produced and then used to make goods and services.
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production
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transforming resources into goods and services.
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Inputs (resources)
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Anything provided by nature that can be used to make output.
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outputs
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goods and services of value to households
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the three basic questions
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1. What gets produced? (resources) 2. How is it produced? (producers) 3. Who gets what is produced? (households)
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Theory of comparative advantage
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Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.
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absolute advantage
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the ability to produce a good using fewer inputs than another producer
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comparative advantage
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the ability to produce a good at a lower opportunity cost than another producer
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ppf
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Production Possibility Frontier. Inefficiency is when the point is below the curve. The curve goes farther out with increasing technology or resources (economic growth).
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investment
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the process of using resources to produce new capital.
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marginal rate of transformation (MRT)
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The slope of the ppf
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command economy
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a system in which the central government makes all economic decisions
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laissez-faire economy
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"allow them to do." an economy where individuals pursue their own interests without regulation.
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consumer sovereignty
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the power of consumers to decide what gets produced
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free enterprise
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the freedom of private businesses to operate competitively for profit with minimal government regulation
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markets: product, factor, labor, capital, land
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product: the markets where goods are exchanged. factor: resources are exchanged labor: households supply labor for wages capital: input market where households give funds in exchange of future profit. land: land for rent
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quantity demanded
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the amount of a good or service that a consumer is willing and able to purchase at a given price
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demand curve
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graph demonstrating the quantity demanded. 1. they have a negative slope. 2. they intersect the X axis because of time limitations. 3. they intersect the Y axis because of financial limitations.
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law of demand
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consumers buy more of a good when its price decreases and less when its price increases
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wealth (net worth)
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The total value of what a household owns minus what it owes.
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normal and inferior goods
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inferior goods - demand falls when income rises normal goods - demand rises when income rises and vise versa
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complementary goods
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goods that are used together with others, usually demanded together. Price of one good goes up, demand for other goes down (gas/motor oil, tuition/textbooks)
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substitute goods
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Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
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change in demand curve
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movement - change in quantity demanded (price) shift - change in demand (income, preferences)
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market demand
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the demand by all the consumers of a given good or service
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equilibrium
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the condition that exists when quantity supplied equals quantity demanded.
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price rationing
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the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.
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consumer surplus
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The difference between the maximum amount a person is willing to pay for a good and its current market price.
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Producer surplus
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the difference between the current market price and the full cost of production for the firm
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deadweight loss
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the net loss of producer and consumer surplus from underproduction or overproduction.
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inflation
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an increase in the overall price level
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deflation
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a decrease in the overall price level
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dividends
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Earnings distributed to stockholders
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fiscal policy
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a government policy for dealing with the budget (especially with taxation and borrowing)
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stagflation
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a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
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labor force
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employed + unemployed
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population
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labor force + not in labor force
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unemployment rate
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unemployed / (employed + unemployed)
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labor force participation rate
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labor force / population
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discouraged worker
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a person who wants a job but has given up looking
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frictional unemployment
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unemployment that occurs when people take time to find a job
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structural unemployment
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unemployment that occurs when workers' skills do not match the jobs that are available
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natural unemployment
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the normal unemployment: frictional + structural unemployment
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cyclical unemployment
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the extra unemployment brought about by periods of recession
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CPI (consumer price index)
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A price index computed each month by the BLS using a "market basket" showing what consumers purchase monthly.
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PPI (producer price index)
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measures of prices that producers receive for products
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real interest rate
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the difference between the interest rate on a loan and the inflation rate.
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productivity growth
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the growth rate of output per worker
