Macroeconomics exam 1 review

Economics

a social science concerned with the efficient use of scarce resources to satisfy unlimited wants

Scarcity

Limited supply of something

Rational Self-Interest Theory

people make decisions based on what gives them the greatest amount of satisfaction

marginal benefits

additional benefits

marginal cost

additional cost

Economic Methodology

economist uses two approaches to examine economic topics

Induction

facts to theory

deduction

theory to facts

Theory

economist use models/theories because they are simplifications of reality ( understand how the world works )

cetius peribus

all other things remain constant (allows us to focus on certain variables)

policy economics

the use of economic principles to help solve political, social, and economic problems

economic growth

the ability of the economy to increase the production of goods and services

Macroeconomics

the study of the economy as a whole

Microeconomics

the study of the economy at the level of individuals

Positive Economic Analysis

analysis based on facts

normative economic analysis

analysis based on value judgements

fallacy of composition

the mistaken assumption that what applies in the case of one applies to the case of many

association as causation

the mistaken assumption that because two events seem to occur together, one causes the other

The fundamental problem of economics is

unlimited wants vs limited resources

labor

human effort

Land/Natural Resources

consist of land for farming

Economic Capital

machinery and factories

Financial Capital

consists of bonds, stocks, and cash

Entrepreneur

they take the three other productive resources and produce goods and services

labor receives

wages

land receives

rent

capital receives

interest

Entrepreneur receives

profits

Relative Scarcity

The four factors of production are all scarce or limited in supply

Four characteristics for efficient use of resources

full employment, production efficiency, allocation efficiency, distribution efficiency

oppurtunity cost

The highest-valued alternative that must be given up to engage in an activity.

production possibility curve

an economic model which shows the various amounts of 2 goods that an economy can produce with full employment and fixed technology

Market

brings buyers and sellers to exchange goods and services

Demand (buyers)

The amount of a good or service that people are both willing and able to buy.

Law of Demand

price and quantity demanded are inversely related

Law of supply

price and quantity supplied are directly related

change in quantity demand

a move along a given demand curve for a commodity as a result of a change in price

change in demand

a shift of the demand curve

Four determinates of demand

income, population size, taste, expectations about future prices

Supply (sellers)

the amount of a good/service that producers are willing and able to offer for sale at each possible price

Cost determinates

Technology/productivity and price of resource

Market Equillibrium

a situation in which quantity demanded equals quantity supplied