Unit 1 Macroeconomics

economics

the study of how individuals and societies choose to allocate scarce resources

scarcity

the fact that there is a limited amount of resources to satisfy unlimited wants

economic resources

also called the factors of production; these are the land (natural resources such as minerals and oil), labor (work contributed by humans), capital (tools, equipment, and facilities), and entrepreneurship (the capacity to organize, develop, and manage a business) that individuals and businesses use in the production of goods and services

models

graphical and mathematical tools created by economists to better understand complicated processes in economics

ceteris paribus

a Latin phrase meaning “all else equal”

agent

some entity making a decision; this can be an individual, a household, a business, a city, or even the government of a country

incentives

rewards or punishments associated with a possible action; agents make decisions based on incentives

rational decision making

an agent is “rational” if they use all available information to choose an action that makes them as well off as possible; economic models assume that agents are rational

positive analysis

analytical thinking about objective facts and cause-and-effect relationships that are testable, such as how much of a good will be sold when a price changes

normative analysis

unlike positive analysis, normative analysis is subjective thinking about what we should value or a course of action that should be taken, such as the importance of environmental factors and the approach to managing them

microeconomics

the study of the interactions of buyers and sellers in the markets for particular goods and services

macroeconomics

the study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment, inflation, economic growth and interest rates

economic aggregates

measures such as the unemployment rate, rate of inflation, and national output that summarize all markets in an economy, rather than individual markets; economic aggregates are frequently used as measures of the economic performance of an economy

production possibilities curve (PPC)

(also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs

opportunity cost

the value of the next best alternative to any decision you make; for example, if Abby can spend her time either watching videos or studying, the opportunity cost of an hour watching videos is the hour of studying she gives up to do that

efficiency

the full employment of resources in production; efficient combinations of output will always be on the PPC

inefficient use (under utilization) of resources

the underemployment of any of the four economic resources (land, labor, capital, and entrepreneurial ability); inefficient combinations of production are represented using a PPC as points on the interior of the PPC

growth

an increase in an economy's ability to produce goods and services over time; economic growth in the PPC model is illustrated by a shift out of the PPC

contraction

a decrease in output that occurs due to the under-utilization of resources; in a graphical model of the PPC, a contraction is represented by moving to a point that is further away from, and on the interior of, the PPC

constant opportunity costs

when the opportunity cost of a good remains constant as output of the good increases, which is represented as a PPC curve that is a straight line; for example, if Colin always gives up producing 2 fidget spinners every time he produces a Pokemon card, he has constant opportunity costs

increasing opportunity costs

when the opportunity cost of a good increases as output of the good increases, which is represented in a graph as a PPC that is bowed out from the origin; for example Julissa gives up 2 fidget spinners when she produces the first Pokemon card, and 4 fidget spinners for the second Pokemon card, so she has increasing opportunity costs.

productivity

(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed, which would be represented by a shift out of the PPC

opportunity cost formula

each unit of good X = (Y1-Y2) / (X1-X2) unit of good Y

absolute advantage

the ability to produce more of a good than another entity, given the same resources. For example, in a single dat, Owen can embroider 10 pillows and Penny can embroider 15 pillows, so Penny has absolute advantage in embroidering pillows

comparative advantage

the ability to produce a good at a lower opportunity cost than another entity. For example, for every pillow Owen embroiders his opportunity cost is 2 scarves knitted, while Penny must forego 3 scarves for every pillow she embroiders, so Owen has comparative advantage in embroidering pillows

specialization

when an individual or a country allocates most or all of its resources towards the production of a particular good or service. For example Sal specializes in producing educational videos, and Bangladesh specializes in producing textiles

trade

the exchange of goods, services or resources between one economic agent and another

international trade

the exchange of goods, services, or resources between one country and another

gains from trade

the ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage

terms of trade (also called “trading price”)

the price of one good in terms of the other that two countries agree to trade at; beneficial terms of trade allows a country to import a good at a lower opportunity cost than the cost for them to produce the goods domestically, thus the country gains from trade

demand

all of the quantities of a good or service that buyers would be willing and able to buy at all possible prices; demand is represented graphically as the entire demand curve

demand schedule

a table describing all of the quantities of a good or service; the demand schedule is the data on price and quantities demanded that can be used to create a demand curve