Macro Units 1-3

Capital

Produced goods that can be used as inputs for further production, such as factories, machinery, tools, computers and buildings

Ceteris Paribus

A Latin term meaning "all other things constant", or "nothing else changes". The assumption in economics that nothing else changes in a given situation except for the stated change.

Complements

Two goods that are used jointly in consumption.

Consumers' Surplus

The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid.

Marginal Analysis (Decisions at the Margin)

Decision making characterized by weighing the additional benefits of a change against the additional costs of a change with respect to current conditions.

Demand

The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period.

Demand Schedule

The numerical tabulation of the quantity demanded of a good at different prices.

Disequilibrium

A state of either surplus of shortage in a market.

Economic System

The way in which society decides to answer key economic questions- in particular those questions that relate to production and trade.

Economics

The science of scarcity; the science of how individuals and societies make choices because of scarcity.

Entrerpreneurship

The particular talent that some people have for organizing the resources of land, labor and capitol to produce goods, seek new business opportunities, and develop new ways of doing things.

Equilibrium

The price-quantity combination from which there is no tendency for buyers or sellers to move away.

Equilibrium Price (Market Clearing Price)

The price at which quantity demanded of the good equals quantity shipped.

Equilibrium Quantity

The quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount actually bought and sold.

Labor

The physical and mental talents people contribute to the production process.

Land

All natural resources, such as minerals, forests, water, and unimproved land.

Law of Demand

As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, Ceteris Paribus.

Law of Diminishing Marginal Utility

For a given time period, the marginal utility or satisfation gained by consuming equal successive units of a good will decline as the amount consumed increases, Ceteris Paribus.

Law of Increasing Opportunity Costs

As more of a good is produced, the opportunity costs of producing that good increases, Ceteris Paribus.

Law of Supply

As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, Ceteris Paribus.

Macroeconomics

The branch of economics that deals with human behavior and choices as they relate to highly aggregate markets or the entire economy.

Microeconomics

The branch of economics that deals with human behavior and choices as they relate to relatively small units - an individual, a firm, an industry, a single market.

Normative Economics

The study of "what should be" in economic matters.

Opportunity Costs

The most highly valued opportunity or alternative forfeited when a choice is made.

Positive Economics

The study of "what is" in economic matters.

Price Ceiling

A government-mandated maximum price above which legal trades cannot be made.

Price Floor

A government-mandated minimum price below which legal trades cannot be made.

Producers' Surplus

The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good.

Production Possibilities Frontier (PPF)

Represents the possible combinations of the two goods that can be produced in a certain period of time, under the conditions of a given state of technology and fully employed resources.

Productive Efficiency

The situation that exists when a firm produces its output at the lowest possible per unit cost.

Scarcity

The condition in which our wants are greater than the limited resources available to satisfy those wants.

Shortage

A condition in which quantity demanded is greater than quantity supplied. Shortages occur only at prices below equilibrium price.

Substitutes

Two goods that satisfy similar needs or desires.

Supply

The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period.

Supply Schedule

The numerical tabulation of the quantity supplied of a good at different prices. A supply schedule is the numerical representation of the law of supply.

Surplus

A condition in which quantity supplied is greater than quantity demanded. Surpluses occur only at prices above equilibrium price.

Comparative Advantage

The situation where a country can produce a good at lower opportunity cost than another country can.

Absolute Advantage

The ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources.

Resource

Anything that can be used to produce something else.

Trade-Offs

All options given up in order to have the the option chosen.

Efficiency

the use of resources in such a way as to maximize the output of goods and services.

Technology

The technical means for producing goods and services.

Trade

Providing good(s), service(s) or money to others and receiving good(s), service(s) or money in return.

Gains from Trade

Getting more of what is wanted/needed through trade than what could be gained if a country tried to be self-sufficient.

Specialization

A situation in which each person engages in a task that he or she is good at performing.

Quantity Demanded

The amount of a good or service that consumers are willing and able to purchase at a specific price.

Demand Curve

A graphical representation of the demand schedule. It shows the inverse relationship between quantity demanded and price.

Change in Demand

A shift of the demand curve, caused by an "outside the market" shift, which changes the quantity demanded at any/all given prices.

A Movement along the Demand Curve

A change in the quantity demanded of a good that is the result of a change in that good's price.

Normal Good

A good for which, other things equal, an increase in income leads to an increase in demand & a decrease in income leads to a decrease in demand.

Inferior Good

A good for which, other things equal, an increase in income leads to a decrease in demand & a decrease in income leads to an increase in demand.

Quantity Supplied

The actual amount of a good or service producers are willing to sell at a specific price.

Supply Curve

Shows the positive relationship between quantity supplied and price.

Change in Supply

A shift of the supply curve, caused by an "outside the market" shift, which changes the quantity supplied at any/all given prices.

A Movement along the Supply Curve

A change in the quantity supplied of a good that is the result of a change in that good's price.

Price Controls

Legal restrictions on how high or low a market price may go.

Consumer Surplus

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

Production Possibilities Curve

An economic model of a simplified economy (an economy producing only 2 goods) to show trade-offs graphically.

Competitive Market

A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good is sold.

Supply and Demand Model

A model of how a competitive market works. A way of showing the behaviors and interactions of buyers and sellers.

Aggregate

Sum total; a collection of separate things mixed together.

Aggregate Demand (AD)

A schedule or curve that shows the total quantity demanded for all goods and services of a nation at various price levels in a given period of time. AD is downward sloping.

Aggregate Supply

The total amount of goods and services that all firms in all the industries in a country will produce at various price levels in a given period of time. Short Run Aggregate Supply is upward sloping. (SRAS)

Automatic Stabilizers

Built-in mechanisms in the tax code and transfer payment programs that increase government spending and reduce tax revenue automatically when aggregate demand decreases. They reduce government spending and collect more in tax revenues when aggregate demand increases.

Transfer Payment

A payment made when no good or service is exchanged. Allowances are private transfer payments; social security checks are governmental transfer payments. Transfer payments are NOT included in GDP because they do NOT represent production.

Budget Deficit

When a government spends more than it collects in tax revenues in a given year. The USA typically runs a budget deficit each year. G > T

Budget Surplus

When a government collects more in tax revenues than it spends in a given year. T > G

Classical Economic Theory

The view that an economy will self-correct from periods of economic shock if left alone. Also known as "laissez-faire" and derived from the thinking of Adam Smith, Thomas Malthus, and David Ricardo. Neoclassical theories are up-to-date versions of similar belief systems. Key idea that price levels and wages are fully flexible both upwards and downwards.

Contractionary Fiscal Policy

A demand-side (AD) policy whereby government increases taxes or decreases its expenditures in order to reduce aggregate demand. Could be used in a period of high demand-pull inflation to bring down the inflation rate. T up and/or G down

Cost-push inflation

Inflation resulting from a decrease in AS (from higher wage rates and raw material prices, such as the price of oil) and accompanied by a decrease in real output (real GDP) and decreases in employment. Also referred to as "stagflation" or "adverse/negative aggregate supply shock." AS decreases. The USA had cost-push inflation during the 1970's and early 1980's.

Crowding-out Effect

The rise in interest rates and the resulting decrease in investment spending (I) in the economy caused by increased government borrowing in the loanable funds market. This occurs because of budget deficits, so the government must borrow money, which drives up real interest rates. The crowding-out effect is seen as a disadvantageous side effect of expansionary fiscal policy.

Demand-Pull Inflation

Inflation resulting from an increase in aggregate demand without a corresponding increase in aggregate supply. AD is increasing.

Quantity Theory of Money

MV = PY. A monetarist's view that explains how changes in the money supply (M) will affect the price level (P) and/or real output (Y) assuming the velocity of money (V) is fixed in the short run. PY = nominal GDP.

Disposable Income

The portion of income that an individual can choose to spend or save; after-tax income = take home pay. Disposable income is the main factor that drives both spending and savings decisions. DI = C + S. Where "C" is Consumption/Consumer Spending. "S" is savings.

Economic Growth

An increase in the potential output of goods and services in a nation over time. PPC is shifting outward or could also be depicted as Long Run Aggregate Supply (LRAS) curve shifting to the right.

Exchange rate

The price of one currency in terms of another currency, determined in the FOREX market (foreign exchange market). 1 dollar = 2 Euros.

Expansionary Fiscal Policy

A demand-side (AD) policy whereby government decreases taxes or increases its expenditures in order to increase aggregate demand. Could be used in a period of high unemployment (recession) to increase national output (real GDP). T down, G up so AD increases.

Fiscal Policy

Changes in government spending (G) and tax collections (T) implemented by government with the aim of either increasing or decreasing aggregate demand to achieve the macroeconomic objectives of full employment and price-level stability.

Inflationary Gap

The difference between a nation's equilibrium level of output and its full employment level of output when the nation is overheating (producing beyond its full employment level).

Inflationary spiral

The rapid increase in average price level result from demand-pull inflation leading to higher wages, causing cost-push inflation.

Keynesian Economics

Economic theory based on the ideas of John Maynard Keynes, who argued that periods of low employment and output would not self-correct quickly and that government action to stimulate aggregate demand was useful in these times (i.e., engage in fiscal policy).

Keynesian Economics vs. Classical Economics

see picture

Long Run Aggregate Supply (LRAS)

The level of output to which an economy will always return in the long run. The LRAS curves intersects the horizontal axis at the full employment or potential level of output. "at the full-employment level of real GDP"

Long Run

The period of time over which the wage rate and price level of inputs in a nation are flexible. In the long run, any changes in AD are cancelled out due to the flexibility of wages and prices and an economy will return to its full employment level of output. Sometimes referred to as the "flexible wage period."

Short Run Aggregate Supply (SRAS)

Positive relationship between the aggregate amount of GDP produced and the price level in an economy in the short run, when it is presumed that prices of goods are flexible but wage rates are fixed.

Macroeconomic Equilibrium

The level of output at which a nation is producing at any particular period of time. May be below its full employment level (if the economy is in recession) or beyond its full employment level (if the economy is overheating). In the picture, short-run equilibrium is at P1 and Y1

Marginal Propensity to Consume (MPC)

The fraction of any change in income spent on domestically produced goods and services; equal to the change in consumption divided by the change in disposable income.

Marginal Propensity to Save (MPS)

The fraction of any change in income that is saved; equal to the change in savings divided by the change in disposable income.

Multiplier Effect

The increase in total spending in an economy resulting from an initial injection of new spending. The size of the multiplier effect depends upon the spending multiplier. An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

Spending multiplier

= 1/(1-MPC) or 1/MPS. This tells you how much total spending an initial interjection of spending in the economy will generate. For example, if the MPC = .8 and the government spends $100 million, then the total increase in spending in the economy = $100 x 5 = $500 million.

Phillips curve (long run)

A vertical curve at the natural rate of unemployment showing that in the long run there is no trade-off between the price level and the level of unemployment in an economy.

Phillips curve (short run)

A downward-sloping curve showing the short-run inverse relationship between the level of inflation and the level of unemployment.

Recessionary Gap

The difference between an economy's equilibrium level of output and its full employment level of output when an economy is below full-employment.

Self-correction

The idea that an economy producing at an equilibrium level of output that is below or above its full employment level will return on its own to it full employment level if left to its own devices. Requires fully flexible wages and prices and is associated with classical economic views.

Stagflation

A macroeconomic situation in which both inflation and unemployment increase. Caused by a negative supply shock (i.e., Aggregate Supply decreases).

Sticky wage and price model

The short-run Aggregate-Supply Curve is sometimes referred to as the "sticky wage and price model," because workers' wage demands take time to adjust to changes in the overall price level, and therefore, in the short-run an economy may produce well below or beyond its full employment level of output.

Supply Shock

Anything that leads to a sudden, unexpected change in aggregate supply. Can be negative (decreases in AS) or positive (increases in AS). May include a change in energy prices, wages, or business taxes, or may result from a natural disaster or a new discovery of important resources.

Wealth

An important determinant of consumption. Wealth is the total value of a household's assets minus all its liabilities.

Real Balances Effect = Wealth Effect

One of the reasons the aggregate demand curve slopes downward: The tendency for increases in price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output. The idea that any wealth that you may have in the form of a cushion or securities becomes less valuable as prices rises because higher prices reduce real spending power, prices and output are negatively related.

Interest Rate Effect

if the average price level rises, consumers and firms might need to borrow more money for spending and capital investment, which increases the interest rate and delays current consumption. Reduces current consumption of domestic products and the price level rises. One of the reasons why AD is downward sloping.