Macro economics ch. 1-7 Pearson text book

Economics

The study of how individuals or societies choose to use the scarce resources that nature or previous generations have provided. Allocation of scarce resources.

Opportunity cost

The best alternative that we forgo, or give up, when we make a choice or a decision.

Marginalism

The process of analyzing the additional or incremental costs or benefits arising from a decision

efficient markets

Profit opportunities are eliminated almost instantly

Microeconomics

the branch of economics that examines the functioning of individual industries and the behavior of individual decision making units, that is mainly firms and businesses

Macroeconomics

the branch of economics that examines the economic behavior of aggregates - Income, employment, output, and so on, on a national scale.

Positive economics

Attempts to understand behavior without making judgements about whether the outcome is good or bad.

Normative economics

Looks at the outcome of economic behavior and asks whether they are good or bad and whether it can be made better.

Ockham's razor

The principle that irrelevant detail should be cut away.

Ceteris paribus

all other values aren't changing. Are held unchanged

Post hoc ergo fallacy

Correlaion (esp in time) does not mean causation

Fallacy of composition

What is true for the part is not always true for the whole.

Capital

Things that are produced and then used in the production of other goods and services

four factors of production

Land, Labor, capital, entrepreneur

Absolute advantage

When a producer can produce more of a good or service using less resources including time.

Comparative advantage

when a producer can produce that good or service at a lower opportunity cost

Investment

The process of using resources to produce new capital

Consumer sovereignty

The consumer decides what will be produced

Law of demand

The negative relationship between price and quantity demanded. The price increases, quantity demanded decreases.

Change in income/ savings/ price of other products/ T and P/ expectations

Change in demand

How demand for normal good is affected by income

Positive relationship. Income goes up, demand goes up.

How demand for inferior good is affected by income

Negative relationship. income goes up, demand goes down.

How demand for substitutes is affected by price

Positive relationship. If the price of one substitute goes up. The demand for the other good will go up.

How demand of complements is affected by price

Negative relationship. If the price of a complement goes up. There will be a decrease in demand for the product.

How population affects demand

Positive relationship. Population goes up, demand for product goes up.

Market demand

The sum of all the quantities demanded by all the individual households shopping in the market at that price.

Law of supply

The positive relationship between price and quantity of good supplied. Increase in price will lead to an increase in quantity supplied.

How prices of factors of production (land, labor, capital, entrepeneur) affect supply

Negative relationship. Price of FOC goes up, supply goes down.

How price of opportunity cost affects supply

negative relationship

How science and tech. affect supply

Positive relationship. Science and tech improve supply goes up

Number of firms effect on supply

Positive relationship. More firm, more supply.

excess demand or shortage

When quantity demanded is greater than quantity supplied. Price rises until quantity demanded and quantity supplied are equal. Price rationing

excess supply or surplus

When quantity supplied exceeds quantity demanded at the current price, the price tends to fall.

Price rationing

The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

Price ceiling

A maximum price that sellers may charge for a good. Has to be below price ceiling . Causes excess demand or shortage.

Queuing

Waiting in line as a means for distributing goods and services. A non price rationing system.

Price floor

is a minimum price below which exchange is not permitted. Has to be set above equilibrium. Excess supply or surplus.

Recession

aggregate output declines for two consecutive quarters.

Inflation

An increase in overall price level.

Hyperinflation

periods of very rapid increases in price level

Deflation

A decrease in overall price level

Know about circular flow diagram

Everone's expenditure is someone else's receipt

Fiscal Policy

Government policies concerning taxes and spending

monetary policy

The tools used by the fed. reserve to control the short-term interest rate.

Keynesianism in low economic output; gov should...

Decrease taxes and/or increase gov spending

Stagflation

High inflation and high unemployment

GDP

Gross domestic Product: Total market value of a countries output. Market value of all final goods and services produced within a given time period by factors of production located in a country.

Intermediate goods

Goods that are produced by one firm for use in further processing in another firm.

Calculating GDP

We can sum up the value added at each stage of production or we can take the value of final sales.

GNP

The total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where it is produced.

Calculating GDP, Expenditure approach,

Adding up total amount spent on final goods and services during a given period.

Expenditure approach formula

GDP= C+I+G+ (EX-IM) | C=personal consumption expenditures, I=Gross private domestic investment, G=government consumption and gross investment, and (EX-IM)=net spending or exports minus imports.

Three categories of Personal consumption expenditures(C)

Durable goods, nondurable goods, and services

Three components of gross private investment (I)

1). Nonresidential investment (expenses by firms for machines or tools and so on)

2). Residential investment (Expenditures by households and firms on new houses or apartments).

3). Change in business inventories (goods produced and intended to be sold later).

Three components of Gov consumption and gross investment.

Federal, state, and local.

Net investment vs. Gross investment

Gross investment takes no account of depreciation. Net investment= gross investment minus depreciation.

Calculating GDP, The income approach

National income + statistical discrepancy + Depreciation + Payment factors from the rest of the world - receipts of factor income from the rest of the world.

Nominal GDP

GDP measured in current dollars

Real GDP

Nominal GDP adjusted for prices

Fixed weight price procedure

Prior to 1996, Pick a base year and to use base year prices in that base year as weights. Does not account for responses in economy supply shifts.

GDP deflator

measure of the overall price level.

Calculating GDP deflator

deflator = Nominal GDP / Real GDP

Labor force=

employed + unemployed

Population =

Labor force + not in labor force

unemployment rate =

Unemployed / labor force.

or

Unemployed / (employed + unemployed)

Labor force participation rate =

labor force / population

employed

Any person 16 years or older (1) who works for pay, either for someone else or in his or her own business for 1 or more hours per week, (2) who works without pay for 15 or more hours per week in a family enterprise, or (3) who has a job but has been temporarily absent with or without pay

Unemployed

a person 16 years old or older, available for work, and has made specific efforts to find work in the past 4 weeks.

Frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs. due to normal turnover in the labor market; skill matching.

Structural unemployment

unemployment caused by a fundamental change in the economy that reduces the demand for some workers. Changes structure of economy making skills obsolete.

Natural Rate of unemployment

Unemployment rate that occurs in a normal functioning economy. refers to the sum of frictional and structural unemployment rate.

Cyclical unemployment

Unemployment that is above frictional and structural unemployment. Above the natural rate.

CPI

consumer price index; a bundle that is used to represent the market basket purchased by a typical urban consumer in a month.

Comparative Advantage and trade

The ability of a country or entity to produce a good or service at a lower opportunity cost than another. It forms the basis for international trade.

Gains from trade

The benefits that countries or entities receive from engaging in international trade lead to increased overall economic welfare. Occurs when countries specialize in producing goods where they have a comparative advantage.

labor

one of the four factors, all types of work from part time labor in retail to senior managment

capital

one of four factors, refers to physical capital, such as computers, office. buildings, and machine tools. USED TO PRODUCE OTHER GOODS

natural resources

Land, water, oil, iron ore, and other raw materials (or “gifts of nature”) that are used in producing goods

enterpreneur

one of the four factors; someone who operates a business

Entrepreneurial ability

the ability to bring together the other factors of production to successfully produce and sell goods and services.

free markets

market with few government restrictions on
how a good or service can be produced or sold or on how
a factor of production can be employed

invisible hand

a metaphor for the self-regulating nature of the marketplace, where individuals' pursuit of self-interest inadvertently benefits society as a whole.

decision fatigue

a psychological phenomenon where an individual's ability to make sound decisions deteriorates after making numerous choices over a period of time