Macro Terms

Economics

the study of the allocation of scare resources

Scarcity

the coexistence of unlimited wants and limited resources

Opportunity Cost

what we give up when we do something else

Production Possibilities Frontier (PPF)

For two goods, what combination of those goods would be attainable given the scarce resources that we face

Opportunity costs are constant along a _____

linear PPF (if resources are equally suited to produce either good)

Opportunity costs are increasing along a _____

bowed out PPF (if resources are not equally suited to produce either good

Absolute Advantage

a country has an _____ in producing a particualr good or service if it can produce more units of that good or service than other countries.

Comparative Advantage

a country has an ____ in producing a particlar good or service if it can do so at a lower opportunity cost than other countries

Production Efficiency

producing goods and services at the lowest possible cost

Marginal Cost

opportunity cost of producing one more unit of that good

increases

As the PPF gets steeper, the marginal cost ______.

Marginal Benefit

benefit received from consuming one more unit of this good, also the most a consumer is willing to pay for this good (benefit is subjective)

Principle of Decreasing Marginal Benefit

The more we have of any good or service, the smaller is its marginal benefit and the less we are willing to pay for an additional unit.

Allocative Efficiency

Reached when marginal cost and marginal benefit are equal

Firms

economic unit that hires factors of production and organizes them to produce and sell goods and services

Markets

any arrangement that enables buyers and sellers to get information and to do business with each other

Property Rights

social arrangements that govern the ownership, use, and disposal of anything that people value

Demand

the relationship between the price of a good or service and the quantity demanded of that same good or service, all else held equal

Law of Demand

Demand curve is downward sloping AKA As the price of a good or service rises (falls), the quantity demanded decreases (increases)

Demand Shifters

• Consumers income

• Prices of related goods

• Preferences and advertising

• Availability of credit

• Expected future prices

Supply

the relationship between the price of a good or service and the quantity supplied by firms of that same good or service, all else held equal

Law of Supply

The supply curve is upward sloping AKA As the price of a good or service falls (rises) the quantity supplied decreases (increases)

Supply Shifters

• cost of production/price of essentials/inputs

• technological innovation

• prices of related goods IN PRODUCTION

• state of nature

• expected future prices

When price is BELOW equilibrium

• quantity demanded exceeds quantity supplied

• shortage of the good or service

• price will rise towards equilibrium price

When price is ABOVE equilibrium

• quantity supplied exceeds quantity demanded

• surplus of the good or service

• price wall fall towards equilibrium

Demand Curve Moves Left…

Price goes down and quantity demanded goes down

Demand Curve Moves Right…

Price goes up and quantity demanded goes up

Supply Curve Moves Left…

Price goes up and quantity demanded goes down

Supply Curve Moves Right…

Price goes down and quantity demanded goes up

Law of Demand

Other things remaining the same,

• the higher the price of a good, the smaller is the quantity demanded

• the lower the price of a good, the greater is the quantity demanded

Price Goes Up, Quantity Demanded…

Goes Down

Price Goes Down, Quantity Demanded…

Goes Up

Demand Shifters

• price of related goods

• expected future prices

• income

• expected future income and credit

• population

• preferences

Consumer Surplus is

everything below the demand curve + above price + out to the quantity consumers purchase

CS = ½ (equilibrium quantity)(max price - equilibrium price)

Producer Surplus

everything below the price + above the supply curve + out to the quantity that sellers actually sell

PS = ½ (equilibrium quantity) (equilibrium price - min price)

Gains and Losses from Imports

• Consumer surplus EXPANDS

• Producer surplus SHRINKS

Gains and Losses from Exports

• Consumer surplus SHRINKS

• Producer surplus EXPANDS

International Trade Restrictions

• Tariffs

• Important quotas

• Other important barriers

• Export subsidies

Excise Tax

charged based on the quantity you consume

Ad Valorem Tax

charged based on how much you pay