Principles of Macroeconomics Exam 1

Macroeconomics vs Microeconomics

Macroeconomics examines either the economy as a whole or its basic subdivision or aggregates (a collection of eco units treated as one); government, households, and business sectors.

Microeconomics is the part of economics concerned with decision-making by individual customers, workers, households, and business firms.

Factors of Production

economics resources: land, capital, labor, and entrepreneurial ability

Definition of Economics

Social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.

Rational Behavior

Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility

Consumer Goods vs Capital Goods

Consumer goods are products and services that satisfy human wants directly.

Capital goods are human-made resources (buildings, machinery, and equipment) used to produces goods and services; goods that do not directly satisfy human wants

The Economic Perspective

A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.

“Ceteris Paribus”

The other-things-equal assumption; is the assumption that factors other than those being considered do not change.

Utility

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).

Purposeful Behavior

• rational self-interest

• individual and utility

• firms and profit

• desired outcomes

Marginal Benefit vs Marginal Cost

Marginal benefit is the extra (additional) benefit of consuming 1 more unit of some good or service; the change in total benefit when 1 more unit is consumed

Marginal cost is the extra (additional) cost of producing 1 more unit of output; equal to the change in total cost divided by the change in output (and to changed in total variable cost divided by the change in output)

Opportunity Costs

The amount of other products that must be forgone or sacrificed to produce a unit of product.

Unlimited Wants and Scarce Resources

The insatiable desires of consumers for goods and services that will give them satisfaction or utility.

The limited quantities of land, capital, labor, and entrepreneurial ability that are never sufficient to satisfy people’s virtually unlimited economic wants.

Normative vs Positive

Normative economics incorporates value judgments about what the economy should be like or what particular policy action should be recommended to the desirable goal.

Positive economics focusses on facts and cause-and-effect relationships.

The Economizing Problem

The need to make choices because economic wants exceed economic means.

Investment

In economics, spending for the production and accumulation of capital and additions to investors

“Other Things Equal” Assumption

The assumption that factors other than those being considered are held constant; ceteris paribus assumption.

Fallacy of Composition

The false notion that what is true for the individual (or part) is necessarily true for the group (or whole).

Direct Relationship vs Inverse Relationship

The relationship between two variables that change in the same direction, product price and quantity supplied is a positive relationship.

Inverse relationships are the relationship between two variables that change in opposite directions, product price and quantity demanded is a negative relationship.

The Scientific Method

the procedure for the systematic pursuit of knowledge involves the observation of facts and the formulation and testing of hypothesis to obtain theories, principles, and laws.

Post Hoc Fallacy

The false belief is that when one event precedes another, the first event must have caused the second event.

Economic Resources

All natural, human, and manufactured resources that go into the production of goods and services.