Macroeconomy

Exam 1

Absolute Advantage

The ability to produce a good with fewer amounts of inputs (resources)

Circular Flow Model

Flow of $ in the economy between firms and households

Comparative Advantage

Produce a good at a lower opportunity cost

Economics

The study of how people or society manages its scarce resources

Externality

Impact of a person's action on a bystander (e.g. smoking, studying)

Inflation

Prices rise when government prints too much money

Law of Demand

There is a negative (inverse) relationship between the price of a good and the quantity demanded

Law of Supply

There is a positive (direct) relationship between the price of a good and the quantity supplied

Macroeconomists

Economists who focus on the big picture, aggregate phenomena like unemployment, inflation, GDP

Market

Buyers determine demand and sellers determine supply

Market Failure

Situation where if market left on its own, it does not allocate resources efficiently (e.g. Public good --> roads)

Market Power

Ability to unduly influence market prices

Microeconomists

Economists who focus on individual level analysis

Normative Statements

Opinions, judgements

Opportunity Cost

The value of the next-best alternative that you give up when you make a decision

Positive Statements

Facts, occurred, observed phenomenon

Price Ceiling

To make goods and services more affordable for consumers by setting a maximum price

Price Floors

To ensure producers or workers receive a minimum price, which can be a fair income or payment.

Principle 1:

People face trade-offs

Principle 10:

Society faces a short-run trade-off between inflation and unemployment

Principle 2:

The cost of something is what you give up to get it (opportunity cost)

Principle 3:

Rational people think at the margin

Principle 4:

People respond to incentives

Principle 5:

Trade can make everyone better off

Principle 6:

Markets are usually a good way to organize economic activity

Principle 7:

Governments can sometimes improve market outcomes

Principle 8:

A country's standard of living depends on its ability to produce goods and services

Principle 9:

Prices rise when the government prints too much money

Production Possibilities Frontier (PPF)

Graph showing the different combinations of outputs that the economy can possibly produce with the available factors of production (FOP), and the production technology

Short Run Tradeoff

Society faces a short run tradeoff between inflation & unemployment

Shortage

When quantity supplied is less than quantity demanded

Standard of Living

A country's standard of living depends on its ability to produce goods & services

Surplus

When quantity supplied is greater than quantity demanded

Tax Incidence

Manner in which the burden of tax is shared