Macroeconomics

I will get an A

Scarcity implies…

Choice

Ceteris paribas

Other things the same

Positive economics

Is or will statements

Normative economics

Ought statements

Production possibilities frontier

Graphical representation of possible outcomes of two products

Law of Demand

The lower the price, the higher the QUANTITY demanded is

Demand schedule

Table of relationshio between prices and quantity demand

A change in quality demand

A movement along the demand curve

Price and quantity demanded have a _____ relationship

Inverse

Land

Natural resources

Labor

All physical/mental activity devoted to producing goods

Capital

Tools, machinery, infrastructure, and knowledge used to produce goods

Entrepreneurial ability

Ability to combine resources to produce goods

Society's ability to produce goods is permanently reduced when

Resources are used too quickly

Scarcity

A condition that results from limited resources to satisfy unlimited wants

Relative scarcity

Comparison of scarcity between goods/services

Opportunity cost

Value of lost opportunity when you choose one activity over another

Marginal Benefit (MB)

Additional benefit associated w/ 1 more unit of activity

Marginal Cost (MC)

additional cost associated w/ 1 more unit of activity

Marginal Cost Formula

change in total cost/ change in quantity

Decreasing MB

the more a good is consumed, the lower MB gets

Example of MB

each additional hour spent studying instead of sleeping decreases MB

Increasing Marginal Cost

condition where additional costs associated w/ each successive unit of an activity increases

Marginal Decision

weighing MB and MC

Optimal Level of Output

MB=MC

Market Demand

Overall/Total Demand for a good/service/resource

Graphical Market Demand is represented by

the horizontal summation of all demand curves

When a nonprice determinant changes

the entire demand curve shifts

a shift in the demand curve suggests

a change in demand

increase in demand results in a

shift to the right

decrease in demand results in a

shift to the left

normal goods

as income rises, demand rises

inferior goods

as income rises, demand decreases

substitutes

goods consumed in place of each other

compliments

goods consumed together

when a substitute decreases

demand increases

when a compliment increases

demand increases

height of the demand curve represents

consumers’ willingness to pay for a unit of the good

consumer surpus

the difference between what a consumer is willing to pay and what they actually pay

the area below the demand curve and above price is

consumer surplus

Law of Supply

as prices rise, so does supply

as income decreases, the demand curve shifts right

inferior good

Diminishing Marginal Productivity

if atleast one input is fixed, the marginal productivity will fall

decrease in input results in

increase in supply

equilibrium price

price of when QD=QS

disequilibrium

shortages and surpluses

surplus

QD<QS

shortage

QD>QS

a good is more affordable

when the supply curve shifts right

when demand and supply move in the same direction

equilibrium price is INDETERMINANT

when demand and supply move in opposite directions

equilibrium quantity is indeterminant

when demand increases and supply decreases

equil. price increases

height of supply curve

cost of making additional units

producer surplus

difference between the price producers get for selling and the marginal cost for producing it

total surplus

consumer surplus + producer surplus

economic efficiency

no reallocation on goods that has benefits greater than cost

the area above the supply curve and below the price is

producer surplus

another name for total surplus

economic surplus or social welfare

deadweight loss

value of economic surplus lost when market can’t be adjusted to its competitive equilibrium

productive efficiency

producing output at lowest possible avg. total cost

allocative efficiency

producing goods that are most wanted by consumers

elastic demand

price elasticity of demand is greater than 1

inelastic demand

price elasticity of demand is less than 1

perfect inelastic demand

price elasticity of demand is 0

Unit elastic

price elasticity of demand is 1

own-price elasticity of demand

measure of how much quantity demand responds to prices

price elasticity demand of -1.25

if prices decrease by 10% QD increases by 12.5

elasticity

how responsive a variable is to a change

elasticity formula

percentage change of QD(or QS)/percentage change in price

elasticity ____ over time

increases

price controls

legal restrictions on prices

price cieling

max price

price floor

min price

if a price floor is placed above equilibrium price

a surplus occurs

if a surplus or shortage occurs, then the price is

binding

binding prices are

not efficient

if supply curve shifts left

prices rise

adam smith’s invisible hand

people pursuing their own self-interest results in benefits for everyone

market failure

individuals pursue rational self interest but result in inefficient

lack competition

when there is few firms, they may charge high prices

solution to lack of competition

antitrust laws, regulations

public goods are

nonrivalrous and nonexcludable

national defense is an example of a

public good

positive externaility

unpaid benefit enjoyed by a 3rd party not directly involved in the production/ consumption

private demand

demand for a good that only considers private benefits

social demand

demand for a good that reflects private and external benefits

social marginal beneit

full benefit to society of consuming an additional unit

negative externaility

uncompensated cost imposed on a 3rd party

private supply

supply of a good that only reflects private costs

social supply

supply of a good that reflects both private and social costs

private good

any good that is rivalrous and excludable

free rider problem

those who benefit from resources, public goods and common pool resources do not pay for them or under-pay

solution to free-rider problem

government tax revenues that provide public goods

information problems

if one or both sides of a transaction lack important information, some exchanges will not

solution to information problems

inspections, certifications, licensing, and records

public interest view of gov

a democratic government translates votes into effective beneficial policy action

public choice view of gov

gov is made up of rationally self-interest individuals and policies are the result of their decisions and the incentives they promise

voters are like

consumers

voters

vote for politicians who promise bundles of policies they like

rational ignorance

voters choose to be poorly informed about politics and policies