Economics 121: Principles of Macroeconomics Review

Comprehensive vocabulary flashcards covering fundamental macroeconomic principles, market mechanics, PPF models, national income accounting, unemployment categories, and price indices from Economics 121 lecture notes.

Economics

The study of how people allocate their limited resources to satisfy their unlimited wants and needs.

Microeconomics

The branch of economics that focuses on individual decision-making units, such as single firms, individual households, and specific markets.

Macroeconomics

The branch of economics that studies the economy as a whole, focusing on nationwide aggregates such as inflation, central bank policy, national unemployment rates, and economic growth.

Scarcity

The fundamental economic condition in which available resources are limited, but human wants and needs are practically unlimited, forcing individuals and societies to make choices.

Opportunity Cost

The value of what you must give up (the next best alternative) in order to get an item you want; calculated as $\text{Opportunity Cost} = \text{Explicit Cost} + \text{Implicit Cost}$.

Marginal Thinking

The economic evaluation of comparing the costs and benefits of doing a bit more of an activity versus doing a bit less, or evaluating one additional unit of something.

Incentives

Factors that motivate a person to act, providing an opportunity to make oneself better off by changing behavior.

Direct Incentive

A straightforward promise or punishment put into place to achieve a specific intended result.

Indirect Incentive

An unstated secondary consequence that unintentionally changes the way people behave in an unplanned manner.

Trade-offs

The economic concept that to get more of one thing, an individual or society almost always has to sacrifice time, resources, energy, or some amount of another good.

Specialization

When an individual, business, or country focuses on producing a specific good or service where they hold an advantage and incur the lowest opportunity cost, resulting in higher total output and lower overall costs.

Comparative Advantage

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

Ceteris Paribus

A Latin condition meaning 'holding all else equal,' used when examining the impact of changing one variable while keeping all other variables constant.

Production Possibilities Frontier (PPF)

An economic model showing the combinations of output that can be produced using available resources and technology efficiently.

Attainable Production

Combinations of goods and services that can be produced with current resources and technology, represented by points on or inside the production possibilities frontier.

Efficient Production

A situation where an economy is getting all it can from scarce resources, represented by points located directly on the production possibilities frontier curve.

Inefficient Production

A state where resources are underemployed or misallocated, represented by combinations lying strictly inside the production possibilities frontier curve.

Unattainable Production Bundles

Output combinations that require more resources or higher technology than currently available, represented by points located outside the production possibilities frontier curve.

Consumer Good

A good produced for present consumption by households.

Capital Good

A good that helps produce other valuable goods and services in the future rather than being consumed immediately.

Economic Growth (PPF Model)

An outward expansion of the production possibilities frontier over time, resulting from an increase in resources, improved technology, or greater capital accumulation in the short run.

Circular-Flow Diagram

A visual model of the economy showing how dollars flow through markets among households and firms as goods, services, and factors of production are exchanged.

Expanded Circular-Flow Diagram

A macroeconomic circular-flow model that includes flows between households, firms, the government, financial markets, and the rest of the world.

Law of Demand

The economic principle stating that, all else being equal, an increase in the price of a good leads to a decrease in the quantity demanded, and a decrease in price leads to an increase in quantity demanded.

Movement Along the Demand Curve

A change in the quantity demanded caused exclusively by a change in the price of the good itself.

Shift of the Demand Curve

A change in demand caused by non-price factors (such as consumer income, tastes and preferences, prices of related goods, future expectations, and number of buyers) that shifts the entire curve right or left.

Market Equilibrium

The situation in a market where the quantity demanded equals the quantity supplied ($Q_d = Q_s$), establishing an equilibrium price and equilibrium quantity.

Surplus

A market condition occurring when the market price is higher than the equilibrium price, resulting in excess inventory where sellers respond by lowering their prices.

Shortage

A market condition occurring when the market price is lower than the equilibrium price, leading to excess demand where buyers compete for limited goods by bidding prices upward.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced within an economy's borders during a given period, typically one year.

GDP Expenditure Formula

The calculation of total economic output as $\text{GDP} = C + I + G + NX$, representing Consumption ($C$), Gross Private Domestic Investment ($I$), Government Consumption Expenditures and Gross Investment ($G$), and Net Exports ($NX = \text{Exports} - \text{Imports}$).

Intermediate Good

A good or service used as an input in the production of another final product, which is excluded from GDP to prevent double counting.

Double Counting

The error of including the value of the same intermediate good or service more than once during the calculation of GDP.

Nominal GDP

The total market value of goods and services produced in an economy measured using current prices, calculated as $\text{Nominal GDP} = P_{\text{current year}} \times Q_{\text{current year}}$, without adjusting for inflation.

Real GDP

The market value of goods and services produced in an economy measured using constant base-year prices, calculated as $\text{Real GDP} = P_{\text{base year}} \times Q_{\text{current year}}$, which adjusts for changes in the price level.

Labor Force

The total number of people in the non-institutionalized working-age population who are either employed or actively seeking employment (unemployed).

Frictional Unemployment

Unemployment resulting from the normal time delays and friction involved in matching available jobs with qualified job seekers.

Structural Unemployment

Unemployment caused by fundamental changes in the industrial makeup or technological structure of the economy that render certain skills obsolete.

Cyclical Unemployment

Unemployment that fluctuates with the business cycle, caused by economic downturns or recessions when aggregate demand is insufficient to provide jobs.

Natural Unemployment Rate

The typical baseline rate of unemployment that exists even in a healthy, growing economy, calculated as $\text{Natural Unemployment} = \text{Frictional Unemployment} + \text{Structural Unemployment}$.

Full Employment

The economic condition achieved when the actual unemployment rate is equal to the natural unemployment rate, meaning cyclical unemployment is zero.

Consumer Price Index (CPI)

A price index measuring the overall cost of a fixed basket of goods and services bought by a typical consumer relative to the cost of that exact basket in a chosen base year.

GDP Deflator

A price index that measures the price level of all new, domestically produced, final goods and services in an economy during a given year.

Rule of 70

A formula stating that the number of years required for an economic variable to double in size is approximately equal to $70$ divided by its annual percentage growth rate.