Mankiw Principles of Macroeconomics

Scarcity

Resources are limited

Economics

Study of how society manages scarce resources

Efficiency

Society obtaining the maximum benefits from scarce resources

Equality

The distribution of the benefits obtained from society's scarce resources

Opportunity Cost

The cost of what is given up to obtain something

Rational People

People who systematically and purposefully do the best they can to achieve their objectives

Marginal Change

Small incremental adjustments

Incentive

Something that induces a person to act

Property Rights

Ability of an individual to own and exercise control over scarce resources

Market Failure

A situation in which a market left on its own fails to allocate resources efficiently

Externality

The impact of one person's actions on the well-being of a bystander

Market Power

The ability of a single economic actor (or small group of actors) to have unduly influence on market prices

Productivity

Quantity of goods and services produced from each unit of labor input; Correlated with high standards of living

Inflation

An increase in the overall price level in the economy; Inversely related with unemployment in the short run

Cause of inflation

Growth in the quantity of money

Business cycle

Fluctuations in economic activity, such as employment and production

Circular Flow Diagram

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

Factors of Production

Labor land, capital, natural resources, and other inputs used to make goods and services

Production Possibilities Frontier

A graph that shows the combinations of output that the economy can possibly produce. The slope of the PPF measures opportunity cost. Any point on the PPF curve (rather than inside) is efficient.

Microeconomics

The study of how households and firms make decisions and how they interact in specific markets

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Positive Statement

A descriptive statement

Normative Statement

A prescriptive statement

Absolute Advantage

The ability to produce a good using fewer inputs than another producer

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer

Imports

Goods produced abroad and sold domestically

Exports

Goods produced domestically and sold abroad

Market

A group of buyers and sellers of a particular good or service

Competitive Market

A market in which there are many buyers and sellers so that each has a negligible impact on the market price

Perfect Competition

A market in which all goods are exactly the same and no single buyer or seller has any influence over price

Monopoly

A market with only one seller

Quantity Demanded

Amount of a good that buyers are willing and able to purchase

Law of Demand

Claim that, all else being equal, the quantity demanded of a good falls when the price of the good rises and vice versa

Demand Schedule

A table that shows the relationship between the price of a good and the quantity demanded

Demand Curve

A graph of the relationship between the price of a good and the quantity demanded. Downward sloping

Shift in Demand Curve

Normal Good

A good for which an increase in income leads to an increase in demand

Inferior Good

A good for which an increase in income leads to a decrease in demand

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other

Complements

Two goods for which an increase in the price of one leads to a decrease in demand for the other

Determinants of Demand

Income, Tastes, Expectations, Number of Buyers; Determine shifts of the demand curve

Quantity Supplied

Amount of a good that sellers are willing and able to sell

Law of Supply

Claim that the quantity supplied of a good rises when the price of a good rises, and vice versa

Supply Schedule

A table that shows the relationship between the price of a good and the quantity supplied

Supply Curve

A graph of the relationship between the price of a good and the quantity supplied

Shift in Supply Curve

Determinants of Supply

Input Prices, Technology, Expectations, Number of Sellers; Determine shifts of the supply curve

Equilibrium

A situation in which the market price has reached the level at which quantity supplied is equal to quantity demanded

Equilibrium Price

The price that balances quantity supplied and quantity demanded

Surplus

A situation in which quantity supplied is greater than quantity demanded. Caused by price floors

Shortage

A situation in which quantity demanded is greater than quantity supplied. Caused by price ceilings

Law of Supply and Demand

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

Increase in Demand

Decrease in Supply

Elasticity

A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Price Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

Elasticity of Demand Examples

Total Revenue

The amount paid by buyers and received by sellers of a good

Income Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in consumers' income; Positive for normal goods, Negative for inferior goods

Cross Price Elasticity of Demand

A measure of how much the quantity demanded of one good responds to a change in the price of another good; Positive for substitutes, Negative for complements

Price Elasticity of Supply

A measure of how much the quantity supplied of a good responds to a change in the price of that good

Elasticity of Supply Examples

Price Ceiling

A legal maximum on the price at which a good can be sold

Price Floor

A legal minimum on the price at which a good can be sold

Binding Price Ceiling

Binding Price Floor

Tax Incidence

The manner in which the burden of a tax is shared among participants of a market

Tax on Sellers

Shifts the supply curve up by the amount of the tax

Tax on Buyers

Shifts the demand curve down by the amount of the tax

Willingness to Pay

The maximum amount that a buyer will pay for a good; measurement of how much the buyer values the good

Consumer Surplus

The amount a buyer is willing to pay for a good minus the amount actually paid for it

Cost

The value of everything a seller must give up to produce a good

Producer Surplus

The amount a seller is paid for a good minus the seller's cost of providing it

Efficiency of Allocation

The property of a resource allocation of maximizing the total surplus received by all members of society

Equality

The property of distributing economic prosperity uniformly among the members of society

Consumer and Producer Surplus in the Market Equilibrium

Deadweight Loss

The fall in total surplus that results from a market surplus, such as a tax

Laffer Curve

World Price

The price of a good that prevails in the world market for that good

International Trade in an Exporting Country

tariff

a tax on goods produced abroad and sold domestically

Effects of a Tariff

Gross Domestic Product

The market value of all final goods and services produced within a country in a given period of time. Y = C + I + G + NX

Consumption

Spending by households on goods and services, with the exception of purchases of new housing

Investment

Spending on business capital, residential capital, and inventories

Government Purchases

Spending on goods and services by local, state, and federal governments

Net Exports

Spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

Nominal GDP

The production of goods and services valued at current prices

Real GDP

The production of goods and services valued at constant prices

Real vs. Nominal GDP

GDP Deflator

A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

Inflation Rate

The percentage change in the price index from the preceding period

Consumer Price Index

Indexing for Inflation

The automatic correction by law or contract of a dollar amount for the effects of inflation

Nominal Interest Rate

The interest rate as usually reported without a correction for the effects of inflation

Real Interest Rate

The interest rate corrected for the rates of inflation

Physical Capital

The stock of equipment and structures that are used to produce goods and services

Human Capital

the knowledge and skills that workers acquire through education, training, and experience

Natural Resources

The inputs into the production of goods and services that are provided by nature such as land, rivers, and mineral deposits

Technological Knowledge

Society's understanding of the best ways to produce goods and services