Principles of Macro 1-3 (copy)

What does economics study?

The choices people make, their responses to scarcity, and the incentives they face.

What is microeconomics?

The study of individual people, firms, industries, and government effects on them.

What is macroeconomics?

The study of national economies and the global economy.

What is scarcity?

The condition of having limited resources relative to wants.

What are goods? Physical things that people value.

What are services?

Tasks that accomplish something people value.

What are the four factors of production?

Land, labor, capital, and entrepreneurship.

What is land as a factor of production?

Natural resources provided by nature; it earns rent.

What is labor as a factor of production?

Human physical and mental effort; it earns wages.

What is human capital?

Knowledge and skills that increase the productivity of labor.

What is capital as a factor of production?

Nonhuman tools, buildings, and machines used to produce goods and services; it earns interest.

What is entrepreneurship?

Developing new ways to organize resources to create value; it earns profit.

How is self-interest different from selfishness?

Self-interest means choosing what is best for you based on your preferences; it does not require harming or ignoring others.

What is social interest?

The best possible outcome for society as a whole.

What is economic efficiency?

A situation in which no one can be made better off without making someone else worse off.

Does economics have a technical definition of fairness?

No. People may disagree about what is fair.

Why does every choice involve a tradeoff?

Scarcity means choosing one option requires giving up another.

What is rational choice theory?

People consider available options and select the option that is best for them.

What is a benefit?

The pleasure or value a person gains; it depends on preferences and is not the same as price.

What is opportunity cost?

The highest-valued alternative given up to obtain something.

What does making a decision at the margin mean?

Considering the benefit and cost of one more unit.

What is marginal benefit?

The additional benefit from one more unit.

What is marginal cost?

The opportunity cost of one more unit.

How do incentives affect choices?

Changing expected benefits or costs can change behavior.

What is a positive statement?

A claim about what is or will be that can be checked or tested.

What is a normative statement?

A claim about what ought to be based on values or opinion.

What is a production possibilities frontier?

The boundary between production combinations that are attainable and unattainable.

What does a point on the PPF represent?

Attainable and production efficient output.

What does a point inside the PPF represent?

Attainable but inefficient output.

What does a point outside the PPF represent?

Output that is unattainable with current resources and technology.

How do you calculate opportunity cost on a PPF?

Decrease in one good divided by the increase in the other good.

What does a bowed-out PPF show?

Increasing opportunity cost.

What does the slope of a PPF show?

The opportunity cost of the good on the horizontal axis.

When should production increase?

When marginal benefit is greater than marginal cost.

When should production decrease?

When marginal benefit is less than marginal cost.

When is allocative efficiency achieved?

When production is on the PPF and marginal benefit equals marginal cost.

What is the principle of decreasing marginal benefit?

The more people already have of something, the less they are willing to pay for one more unit.

What is absolute advantage?

The ability to produce more of a good in the same amount of time.

What is comparative advantage?

The ability to produce a good at a lower opportunity cost.

What determines specialization?

Comparative advantage, not absolute advantage

How can two parties gain from trade?

Each specializes according to comparative advantage and trades at a price between their opportunity costs.

What is a firm?

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

What is a market?

An arrangement that lets buyers and sellers obtain information and do business.

How do you calculate the relative price of A in terms of B?

Money price of A divided by money price of B.

What is quantity demanded?

The amount consumers plan to buy at a particular price during a given period.

What is the law of demand?

As a good's own price rises, quantity demanded falls, all else equal.

Why does quantity demanded fall when price rises?

Because of the substitution effect and income effect.

What is demand?

The entire relationship between price and quantity demanded.

What causes a movement along the demand curve?

A change in the good's own price.

What causes a shift of the demand curve?

A change in a nonprice determinant of demand.

What does an increase in demand look like?

The demand curve shifts right.

How does a substitute's price affect demand?

If the substitute's price rises, demand for this good rises.

How does a complement's price affect demand?

If the complement's price rises, demand for this good falls.

How does expected future price affect demand today?

If expected future price rises, demand today rises when the good can be stored.

How does income affect demand for a normal good?

Income up means demand up.

How does income affect demand for an inferior good?

Income up means demand down.

How do expected future income and credit affect demand today?

Higher expected income or more available credit increases demand today.

How does population affect demand?

More potential buyers generally increases demand.

What is quantity supplied?

The amount producers plan to sell at a particular price during a given period.

What is the law of supply?

As a good's own price rises, quantity supplied rises, all else equal.

What is supply?

The entire relationship between price and quantity supplied.

What causes a movement along the supply curve?

A change in the good's own price.

What does an increase in supply look like?

The supply curve shifts right.

How do higher factor prices affect supply?

They decrease supply.

How does a substitute in production's price affect supply?

If its price rises, supply of this good falls.

How does a complement in production's price affect supply?

If its price rises, supply of this good rises.

How does expected future price affect supply today?

If expected future price rises, supply today falls.

How does the number of suppliers affect supply?

More suppliers increases supply.

How does improved technology affect supply?

It lowers marginal cost and increases supply.

What is equilibrium price?

The price at which quantity demanded equals quantity supplied.

What is equilibrium quantity?

The quantity bought and sold at the equilibrium price.

What is a shortage?

Quantity demanded exceeds quantity supplied; price tends to rise.

What is a surplus?

Quantity supplied exceeds quantity demanded; price tends to fall.

What happens to equilibrium when demand increases?

Price rises and quantity rises.

What happens to equilibrium when demand decreases?

Price falls and quantity falls.

What happens to equilibrium when supply increases?

Price falls and quantity rises.

What happens to equilibrium when supply decreases?

Price rises and quantity falls.

What happens when demand and supply both increase?

Quantity rises; price is uncertain.

What happens when demand and supply both decrease?

Quantity falls; price is uncertain.

What happens when demand increases and supply decreases?

Price rises; quantity is uncertain.

What happens when demand decreases and supply increases?

Price falls; quantity is uncertain.