ECON 252 Midterm 1 Study Guide

Vocabulary flashcards covering the core principles, supply and demand, and macroeconomic aggregates for Midterm 1.

Economics

The study of how agents make choices among scarce resources and how those choices affect society.

Scarcity

Unlimited wants in a world of limited resources, where the quantity wanted exceeds quantity available.

Positive economics

A branch of economics that describes what IS and is testable with data.

Normative economics

Economic analysis that describes what OUGHT to be, based on value judgments.

Optimization

The principle of making the best possible choice among alternatives.

Opportunity Cost

The value of the best alternative use of a resource, applied to time, money, and other resources.

Cost-Benefit Analysis

A calculation where $\text{Net Benefit} = \text{Total Benefit} - \text{Total Cost}$; optimization involves choosing the option with the HIGHEST net benefit.

Optimization in Differences (Marginal Analysis)

An optimization method where one moves to the next option only if $\text{marginal benefit} > \text{marginal cost}$.

Equilibrium

A situation where everyone is simultaneously optimizing, and no agent can benefit by unilaterally changing their behavior.

Empiricism

The practice of using data to test economic theories through developing models and testing them with real data.

Causation

A relationship where one thing directly causes another to occur.

Correlation

A situation where two variables move together (positively or negatively), though this does not prove causation.

Perfectly competitive market

A market where sellers sell identical goods, there are numerous buyers and sellers, and no single agent influences price, making everyone a price-taker.

Quantity Demanded

The specific amount of a good that buyers will purchase at a given price.

Law of Demand

As price rises, the quantity demanded falls.

Willingness to Pay (WTP)

The maximum price a buyer will pay for one more unit of a good.

Diminishing Marginal Benefit

An economic concept where as consumption rises, the willingness to pay for the next unit falls.

Quantity Supplied

The specific amount of a good that sellers will sell at a given price.

Law of Supply

The relationship stating that as price rises, the quantity supplied rises.

Willingness to Accept (WTA)

The lowest price a seller will accept for one more unit of a good.

Competitive equilibrium

The market clearing price at which $\text{Q}^d = \text{Q}^s$.

Gross Domestic Product (GDP)

The market value of final goods and services produced within a country's borders during a specific time period.

Value Added

In the production approach, it is calculated as $\text{Sales Revenue} - \text{Purchases of intermediate inputs from other firms}$.

Expenditure Approach formula

$\text{GDP} = \text{C} + \text{I} + \text{G} + (\text{X} - \text{M})$.

Investment (I)

A component of GDP including new residential construction, business equipment, inventory changes, and R&D; excludes financial investments like stocks and bonds.

Gross National Product (GNP)

The market value of production by factors of production owned by the residents of a particular country, regardless of where the production takes place.

Nominal GDP

The sum of current prices multiplied by current quantities: $\sum(\text{Price}_{\text{current}} \times \text{Qty}_{\text{current}})$

Real GDP

The sum of base-year prices multiplied by current quantities: $\sum(\text{Price}_{\text{base}} \times \text{Qty}_{\text{current}})$

GDP Deflator

A price index covering all domestic goods, calculated as $(\frac{\text{Nominal GDP}}{\text{Real GDP}}) \times 100$.

Consumer Price Index (CPI)

A price index based on a fixed basket of goods (including imports) calculated as $(\frac{\text{Basket cost today}}{\text{Basket cost base year}}) \times 100$.

Purchasing Power Parity (PPP)

A method of comparing incomes across countries that adjusts for price level differences using the relative cost of a common basket of goods.

Income per worker

Total GDP divided by the number of employed workers.

Human Capital (H)

The total efficiency units of labor, calculated as $H = L \times h$ (total workers multiplied by average skill level).

Physical Capital (K)

The stock of structures and equipment used in production.

Aggregate Production Function

$Y = A \times F(K, H)$, where Y is GDP, A is technology, K is physical capital, and H is human capital.

Diminishing marginal product

A property of the production function where each additional unit of physical capital or human capital adds less output than the previous unit, resulting in a concave curve.

Moore's Law

An observation that the number of transistors per chip doubles approximately every $2$ years.

Microeconomics

Study of individuals, firms, and government decisions.

Macroeconomics

Study of the whole economy; GDP, unemployment, inflation

3 Principles of Economics

Optimization, Equilibrium, and empiricism.

Optimization in Levels

Calculate total net benefit (or total cost) for each option and pick the best

Why correlation is not causation

Ommited variable and reverse causality

Ommited variable

a hidden third factor drives both

Reverse causality

the direction is backwards.

Market

a group of economic agents trading a good or service, plus the rules of trading