Macroeconomics Chapters 1-5

What are the three core choices in the economy?

what, how, and for whom

Define "economy".

the grand sum of all production and consumption activities

Define "scarcity".

the limitation of a nation's resources

What are the four basic factors of production?

land, labor, capital, and entrepreneurship

Define "economics".

the study of how people use scarce resources

Define "opportunity cost".

what is given up to get something else

What does the law of increasing opportunity cost state?

We must give up ever-increasing quantities of other goods and services in order to get more of a particular good.

Define "efficiency".

squeezing maximum output out of available resources

Are output combinations outside of the production possibilities curve attainable or unattainable?

unattainable

What type of economy do conservatives support?

laissez faire (resist work place regulation, price controls, and minimum wage)

What type of economy do liberals support?

government intervention (argue that resistance of work place regulation, price controls, and minimum wage temper the excesses of the market)

Define "macroeconomics".

allocating the resources of an entire economy to achieve aggregate economic goals

Define "microeconomics".

behavior and goals of individual market participants

Give the basic definition of economics.

the scarcity of resources

What is the equation for opportunity cost?

what you give up divided by what you get

Who is the grandfather of economics and supports laissez faire economy?

Adam Smith

Who is the father of modern Communism?

Karl Marx

Who supports the mixed economy?

John Maynard Keynes

Define "gross domestic product (GDP)".

the total market value of all the goods and services a nation produces in a year

Define "per capita GDP".

how much output the average person would get if all output were divided evenly among the population

Define "human capital".

the skills and knowledge of workers

Define "capital intensive".

production processes that use a high ratio of capital to labor inputs (i.e. machines and technology)

Define "productivity".

output per unit of input

Define "factor mobility".

reallocating resources from one industry to another (i.e. agriculture -> technology)

Define "comparative advantage".

what advantage you have with your factors of production; huge aspect of trade

Define "production possibilities".

alternative combinations of final goods and services that could be produced in a given period with all available resources and technology

Define "outsourcing".

doing something in another country; increases output

Define "externalities".

costs or benefits of a market activity borne by a third party; affects the collective well-being of a community

List the [four] sources of government intervention.

1. Legal Framework (i.e. property rights, laws)

2. Environment (i.e. externalities, pos & neg)

3. Protection of Consumers (antitrust, monopoly)

4. Protection of Labor (min wage, child labor laws)

Define "monopoly".

a firm that produces the entire market supply of a particular good or service

Define "monopoly exploitation".

paying too much for too little (antitrust laws)

Define "income quintile".

one fifth of the population rank ordered by income

Define "market supply".

the total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus

List the [six] determinants of the market supply.

1. Technology

increase, increase

decrease, decrease

2. Factor Costs

increase, decrease

decrease, increase

3. Taxes/Subsidies

taxes increase, supply decrease

(at some point, taxes make products unprofitable)

4. Expectations of Prices

increase, increase supply

decrease, decrease supply

5. Number of Sellers

increase, increase supply

decrease, decrease supply

6. Price of Other Goods

increase price, decrease

decrease price, increase

Define "market supply curve".

summary of the supply intentions of all procedures (combined sales of all market participants)

How does changes in quantity supplied differ from changes in supply?

Changes in quantity supplied are movements along a given supply curve. Changes in supply are shifts of the supply curve.

Define "equilibrium price".

the price at which a quantity of a good demanded in a given time period equals the quantity supplied

Define "market mechanism".

the use of market prices and sales to signal desired outputs

Define "market surplus".

the amount by which the quantity supplied exceeds the quantity demanded

Define "market shortage".

an excess of quantity demanded than is supplied

Define "self adjusting prices".

whenever the market prices is set above or below the equilibrium price, either a market surplus or shortage will emerge

Define "demand shift".

new demand curve intersects the unchanged market supply curve at a new price

Define "supply shift".

supply decreases, price increases

Define "price ceiling".

an upper limit imposed on the price of a good

Define "market".

wherever transactions of goods or services occur

What is the Law of Supply?

As a price of a good increases, demand increases.

What is the Law of Demand?

As price increases, quantity supplied decreases.

List the [six] determinants of demand.

1. Preferences

2. Income

For most goods: increase, increase

decrease, decrease

For inferior goods: increase, decrease

decrease, increase

3. Price of Related Goods

Substitutes: price increase, demand increase

price decrease, demand decrease

Compliments: increase price, demand decrease

decrease price, demand increase

4. Expected Future Price

increase, increase

decrease, decrease

5. Expected Future Income/Credit

increase, increase

decrease, decrease

6. Population

increase, increase

decrease, decrease

Define "optimal mix of output".

the most desirable combination of output attainable with existing resources, technology, and social values

Define "market failure".

an imperfection in the market mechanism that prevents optimal outcomes

Define "public good".

Everyone can use and benefit from this good. They are non-excludable, sometimes creating a free rider problem and even market failure.

Define "free rider".

an individual who reaps direct benefits from someone else's purchase (consumption) of a public good

Define "private good".

an excludable good

Define "externalities".

costs or benefits of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity; there are positive and negative aspects

Define "market power".

being able to manipulate the prices of goods and services (i.e. monopolies, patents, antitrust laws)

What is inequity?

cash transfers (taking from rich, giving to poor), in-kind transfers (not a good, but a service such as medicaid or medicare); government uses our taxes

Define "national income accounting".

measurement of aggregate economy activity

Define "gross national product (GNP).

value of all final goods produced in your country (USA); excludes factories in our country owned by another country

What is the GDP equation?

Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (N)

What is the per capita GPD equation?

GPD divided by total population

Define "value added".

the increase in the market value of a product that takes place at each stage of the production process

What is the net exports (N) equation?

Exports minus Imports

Define "nominal GDP".

value of goods with the price NOW (C+I+G+N)

Define "real GDP".

apt to change

What is the real GDP equation?

Nominal GDP divided by price index

What is the price index equation?

100 (base) + % Price Increase divided by 100 (base)