Principles of Macroeconomics: Supply, Demand, and Elasticity

Circular Flow Diagram

Explains the economy by showing how money and goods flow between households and firms.

Production Possibilities Frontier

Illustrates aggregate production and shows the maximum feasible amount of two goods that can be produced with available resources.

Allocative Efficiency

Occurs when resources are distributed in a way that maximizes the total benefit received by all members of society.

Productive Efficiency

Achieved when goods are produced at the lowest possible cost.

Opportunity Cost

The value of the next best alternative that is forgone when making a decision.

Shifts in Production Possibilities Frontier

Caused by changes in resources, technology, or economic conditions.

Economist as Policy Adviser

When an economist provides recommendations based on economic theories and data.

Economist as Scientist

When an economist analyzes data and develops theories to understand economic phenomena.

Disagreement Among Economists

Arises from differences in assumptions, interpretations of data, or theoretical perspectives.

Calculating Slopes

The rate of change of one variable in relation to another.

Establishing Causality

Determining whether a change in one variable directly causes a change in another variable.

Scientific Method

A systematic approach to developing and testing theories about how the world works.

Natural Experiments

Historical events that can be analyzed to understand economic principles.

Macroeconomic Models

Quantitative models used to simulate economic scenarios and test theories.

Role of Assumptions

To simplify complex realities and aid in understanding economic questions.

Economic Models

Simplified descriptions of complex realities, often represented by diagrams and equations.

Revision of Economic Models

Economic models are subject to change as new data and theories emerge.

Data Collection in Economics

The process of gathering information to verify or refute economic theories.

Theories in Economics

Conceptual frameworks developed to explain economic behaviors and relationships.

Essence of Science

The scientific method, which involves observation, theory development, and further observation.

Complex World Simplification

Using assumptions to make complex economic concepts easier to understand.

Different Assumptions

Economists use various assumptions based on the questions they are addressing.

Time Horizons in Economics

Different time frames that can affect economic analysis and assumptions.

Circular-flow diagram

Visual model of the economy that shows how dollars and goods/services flow through markets among households and firms.

Firms

Entities that produce goods and services (outputs) and use factors of production (inputs).

Households

Entities that own factors of production (labor, capital) and consume goods and services.

Markets for goods and services

Markets where households are buyers and firms are sellers.

Markets for factors of production

Markets where households are sellers and firms are buyers.

Production possibilities frontier (PPF)

A graph that shows the various combinations of outputs that the economy can possibly produce with the available factors of production and production technology.

Combinations of output

Different quantities of goods that can be produced, such as cars and computers, as represented on the production possibilities frontier.

Feasible output combinations

Any point on or beneath the production possibilities frontier curve.

Infeasible output combinations

Points outside the production possibilities frontier that are not possible given the economy's resources.

Slope of the production possibilities frontier

Measures the opportunity cost of a car in terms of computers.

Efficient outcomes

Points on the production possibilities frontier where the economy is utilizing all its available resources.

Trade-off

The situation where producing more of one good results in producing less of another good.

Example of trade-off

Moving from point A to point B, society produces 100 more cars at the expense of producing 200 fewer computers.

Opportunity cost of 100 cars

200 computers.

Opportunity cost of each car

2 computers, which equals the slope of the production possibilities frontier.

Inputs

Factors of production used by firms to produce outputs.

Outputs

Goods and services produced by firms.

Households and firms interaction

Occurs in two types of markets: for goods and services, and for factors of production.

Visual representation of economy

The circular-flow diagram serves as a schematic representation of the organization of the economy.

Flow of dollars

Represented by the outer set of arrows in the circular-flow diagram.

Flow of inputs and outputs

Represented by the inner set of arrows in the circular-flow diagram.

Production technology

The methods and processes used to produce goods and services.

Resources

The factors available to an economy for production, which limit output combinations.

Inefficient Outcomes

Points inside PPF are inefficient.

Point D

Economy is producing less than it could from the resources it has available.

Elimination of Inefficiency

If source of the inefficiency is eliminated, economy can increase its production of both goods.

Point F

80 airplanes and 4,000 tons of soybeans; not possible.

Point G

30 airplanes and 2,500 tons of soybeans; possible but not efficient (can produce more).

Technological Advance

Enables the economy to produce more computers for any given number of cars.

Outward Shift of PPF

Occurs when technological advances allow for increased production capabilities.

Economists as Scientists

Economists explain the causes of economic events.

Economists as Policy Advisers

Economists recommend policies to improve economic outcomes.

Positive Statements

Descriptive claims about how the world is; can be confirmed or refuted by evidence.

Example of Positive Statement

"Minimum-wage laws cause unemployment."

Normative Statements

Prescriptive claims about how the world ought to be; involves values as well as facts.

Example of Normative Statement

"The government should raise the minimum wage."

Council of Economic Advisers

Advises the president and writes the annual Economic Report of the President.

Office of Management and Budget

One of the economic advisory offices in Washington.

Department of the Treasury

One of the economic advisory offices in Washington.

Department of Labor

One of the economic advisory offices in Washington.

Department of Justice

One of the economic advisory offices in Washington.

Congressional Budget Office

One of the economic advisory offices in Washington.

The Federal Reserve

One of the economic advisory offices in Washington.

Active Learning 1

Graph the PPF and analyze possible combinations of goods.

Point A

0 airplanes and 5,000 tons of soybeans.

Point B

20 airplanes and 4,000 tons of soybeans.

Point C

50 airplanes and 2,500 tons of soybeans.

Point E

100 airplanes and 0 tons of soybeans.

Economic Advisers

Individuals who provide the president with economic advice.

Communication Advisers

Individuals who assist the president with communication strategies.

Press Advisers

Individuals who manage the president's interactions with the media.

Legislative Affairs Advisers

Individuals who help the president navigate legislative processes.

Political Advisers

Individuals who provide political strategy and advice to the president.

Business Cycles

Fluctuations in economic activity characterized by periods of economic expansion and contraction.

Supply Shocks

Unexpected events that affect the supply side of the economy.

Demand Shocks

Unexpected events that affect the demand side of the economy.

Labor Supply Elasticity

A measure of how much the quantity of labor supplied responds to changes in wages.

Public Policy

Government actions designed to address public issues.

Normative Views

Opinions about what policies should aim to achieve based on values.

Tax Fairness Question

Is the tax system fair when comparing different income and tax rates?

Graphs

Visual representations of data that express ideas clearly.

Pie Chart

A circular statistical graphic divided into slices to illustrate numerical proportions.

Bar Graph

A chart that presents categorical data with rectangular bars.

Time-Series Graph

A graph that displays data points at successive time intervals.

Scatterplot

A graph that uses dots to represent the values obtained for two different variables.

x-coordinate

The horizontal value in a coordinate system.

y-coordinate

The vertical value in a coordinate system.

Grade Point Average (GPA)

A measure of a student's academic performance, typically represented on the vertical axis.

Study Time

The amount of time spent studying, typically represented on the horizontal axis.

Interpolation

The method of estimating unknown values by connecting known data points.

Curves in Scatterplots

A visual representation of data points that shows trends when fine data observations are plotted.

Negatively related variables

The two variables move in opposite direction.

Positively related variables

The two variables move in the same direction.

Slope

Ratio of the vertical distance covered to the horizontal distance covered.

Δ (delta)

Change in a variable.

Slope formula

The 'rise' (change in y) divided by the 'run' (change in x).

Calculating the slope of a line

To calculate the slope of the demand curve, look at the changes in the x- and y-coordinates as we move from the point (13 novels, $8) to the point (21 novels, $6).