Comprehensive Economics: Supply, Demand, Growth, and Business Cycles

What does 'Ceteris Paribus' mean?

It means 'other things being equal' and is used to isolate one variable.

What is the decision rule in marginal analysis?

If Marginal Benefit (MB) > Marginal Cost (MC), do it; if MB = MC, it's optimal; if MC > MB, don't do it.

What is the basic economic problem?

Scarcity, which arises from unlimited wants and limited resources.

What is opportunity cost?

The next best alternative given up when making a choice.

What is the difference between microeconomics and macroeconomics?

Microeconomics studies individual markets, while macroeconomics studies the economy as a whole.

What is positive economics?

It deals with facts and objective statements that can be tested.

What is normative economics?

It deals with opinions and value judgments, often using words like 'should' or 'ought'.

What does a budget line represent?

All combinations of two goods that can be purchased with a fixed income.

What is a trade-off?

Giving up one thing to gain another.

What are the four categories of resources (factors of production)?

Land, Labor, Capital, and Entrepreneurship.

What does the Production Possibilities Model (PPF) illustrate?

The maximum combinations of two goods an economy can produce using all available resources efficiently.

What is the Law of Increasing Opportunity Costs?

As more of one good is produced, increasing amounts of another good must be sacrificed.

What is economic growth?

An increase in the economy's ability to produce goods and services, shifting the PPC outward.

What is the relationship between consumer goods and capital goods?

Producing more capital goods today leads to less consumption now but more economic growth later.

What defines a market?

Any place or system where buyers and sellers interact to exchange goods and services.

What is demand?

The amount of a good or service consumers are willing and able to purchase at various prices.

What does the Law of Demand state?

As price decreases, quantity demanded increases; as price increases, quantity demanded decreases.

What is a demand schedule?

A table showing quantities consumers will buy at different prices.

What is market demand?

The sum of all individual demand curves horizontally.

What causes a shift in the demand curve?

Changes in non-price determinants.

What is the income effect?

When lower prices increase purchasing power.

What is the substitution effect?

When consumers switch to relatively cheaper alternatives.

What is the significance of the PPC curve?

It shows efficiency, inefficiency, and growth in production.

What happens when resources are unemployed?

Production occurs inside the PPC, indicating less than potential output.

What is the role of specialization in international trade?

Countries benefit by producing goods they make efficiently and trading for others.

What is the concept of 'no free lunch' in economics?

Every choice involves a cost, highlighting the opportunity cost of decisions.

What happens to the demand curve when there is an increase in demand?

The curve shifts to the right.

What are the results of an increase in demand?

Higher equilibrium price and higher equilibrium quantity.

What happens to the demand curve when there is a decrease in demand?

The curve shifts to the left.

What are the results of a decrease in demand?

Lower equilibrium price and lower equilibrium quantity.

What is a determinant of demand related to consumer preferences?

Changes in consumer tastes.

How does the number of buyers affect demand?

More buyers increase demand; fewer buyers decrease demand.

What is the effect of income on normal goods?

Demand increases when income rises.

What is the effect of income on inferior goods?

Demand decreases when income rises.

What are substitute goods?

Products used in place of one another, e.g., Coke and Pepsi.

What happens to the demand for a substitute good if the price of the original good rises?

Demand for the substitute good increases.

What are complementary goods?

Products used together, e.g., cars and gasoline.

What happens to the demand for a complementary good if the price of the original good rises?

Demand for the complementary good decreases.

What is the definition of supply?

The amount producers are willing and able to sell at various prices during a specific period.

What does the law of supply state?

As price increases, quantity supplied increases.

What is a supply schedule?

A table showing quantities producers will sell at various prices.

What is market supply?

The sum of all individual producers' supply.

What happens to the supply curve when there is an increase in supply?

The curve shifts to the right.

What are the results of an increase in supply?

Lower equilibrium price and higher equilibrium quantity.

What is a determinant of supply related to production costs?

Resource prices.

How does improved technology affect supply?

Supply increases because production becomes more efficient.

What is market equilibrium?

Occurs when quantity demanded equals quantity supplied.

What is a shortage?

Occurs when quantity demanded is greater than quantity supplied.

What is a surplus?

Occurs when quantity supplied is greater than quantity demanded.

What is the effect of a price ceiling?

Creates shortages when set below equilibrium.

What is the effect of a price floor?

Creates surpluses when set above equilibrium.

What does the rationing function of prices do?

Allocates scarce goods by signaling consumers and producers.

What is GDP?

The total market value of all final goods and services produced within a country in one year.

What is the difference between final goods and intermediate goods?

Final goods are bought by consumers; intermediate goods are used to make other products.

What are transfer payments?

Payments excluded from GDP because they do not involve new production.

What is government spending on goods and services called?

Government Purchases (G)

Give three examples of government purchases.

Roads, police salaries, military equipment.

What is the formula for net exports?

Net Exports = Exports - Imports.

What is included in the income approach to calculate GDP?

Wages, rent, interest, and profits.

What does NDP stand for?

Net Domestic Product.

How is NDP calculated?

NDP = GDP - Depreciation.

What is disposable income?

Money left after taxes that can be spent.

What is nominal GDP?

GDP calculated using current prices, including inflation.

What is real GDP?

GDP calculated using base-year prices, excluding inflation.

What does the GDP price index measure?

It measures inflation.

What is GDP per capita?

GDP divided by the population, used to compare standards of living.

What is the Rule of 70?

A formula to estimate the doubling time of economic growth: 70 divided by the growth rate.

What are the determinants of economic growth?

Natural resources, human resources, capital goods, technology, demand factor, and efficiency factor.

What is value added in GDP calculation?

The selling price minus the cost of inputs.

What is NOT included in GDP?

Transfer payments, financial transactions, and used goods.

What is the expenditure approach to GDP?

GDP = C + I + G + (Xn), where C is consumption, I is investment, G is government purchases, and Xn is net exports.

What is personal income?

Income households receive before taxes.

What is the difference between nominal and real GDP?

Nominal GDP uses current prices, while real GDP uses base-year prices.

What are the four phases of the business cycle?

Peak, recession, trough, and expansion.

What characterizes a recession?

A significant decline in economic activity lasting at least six months.

What is the role of the National Bureau of Economic Research (NBER)?

To officially determine when recessions begin and end.

What causes business cycles?

Economic shocks such as financial crises, pandemics, and wars.

What are sticky prices and sticky wages?

The phenomenon where businesses do not lower wages or prices immediately during recessions.

What is productivity?

Output per worker, which is crucial for economic growth.

What factors can increase productivity?

Technology, education, capital, and economies of scale.

What does the production possibilities curve (PPC) represent?

The maximum output possibilities for two goods given available resources.

What happens to production during a recession?

Businesses often reduce production, lay off workers, or delay hiring.

What are durable goods?

Goods that usually last three years or more, such as cars and refrigerators.

Why do consumers postpone buying durable goods during recessions?

Because durable goods are expensive.

What are nondurable goods?

Goods people purchase regularly, such as food and clothing.

What is included in the labor force?

People who are employed or unemployed and actively looking for work.

Who is excluded from the labor force?

Individuals under age 16, retirees, full-time students not looking for work, stay-at-home parents not seeking employment, discouraged workers, and institutionalized individuals.

How is the unemployment rate calculated?

Unemployment Rate = (Unemployed / Labor Force) × 100.

What defines someone as unemployed?

They have no job, are available to work, and have actively searched for a job within the last four weeks.

What is frictional unemployment?

Temporary unemployment while changing jobs, such as a college graduate searching for their first job.

What causes structural unemployment?

When workers' skills no longer match available jobs due to factors like new technology or automation.

What is cyclical unemployment?

Unemployment that occurs due to recessions, as businesses lay off workers when demand for goods and services falls.

What is the natural rate of unemployment?

The typical level of unemployment consisting of frictional and structural unemployment, usually between 4% and 6%.

What does full employment mean?

An economy that only has frictional and structural unemployment, with no cyclical unemployment.

What is the GDP gap?

The difference between potential GDP and actual GDP, often caused by high unemployment.

What is Okun's Law?

It states that every 1% increase in cyclical unemployment results in approximately a 2% GDP gap.

How does high unemployment affect the Production Possibilities Curve (PPC)?

It causes the economy to produce inside the PPC, indicating inefficiency.

Which groups often experience higher unemployment rates?

Teenagers, less educated workers, African Americans, and Hispanics.

What are some noneconomic costs of unemployment?

Stress, depression, family problems, poverty, crime, political instability, loss of job skills, and lower self-confidence.

What is inflation?

A general increase in prices over time, leading to a decrease in purchasing power.