macroeconomics midterm 1

economics

Social science that studies how people behave, unique perspective on how societies allocate their scarce resources among competing uses

Scarcity

A condition that arises from the conflict between unlimited human wants and the limited resources available to fulfill those wants

Economics

A social science that studies how individuals, businesses, governments, and societies allocate scarce resources to satisfy unlimited wants and needs

Macroeconomics

The study of the economic behavior of entire economies, as measured, for example, by total production and employment (country level economics, economics on the national square)

Fiscal policy

run by the government, deals with taxes and government expenditure

Monetary policy

run by the central bank, interest rates and money supply

Microeconomics

The study of the economic behavior in individual markets, industries, or sectors, such as that for computers or unskilled labor

Scientists

try to explain the world (positive statements)

Policy advisors

try to improve the world (normative statements)

Economic theory/Economic model

A simplification of reality used to make conjectures about cause and effect in the real world

Scientific method

A systematic approach scientists use to study and understand the world through observation, hypothesis formulation, experimentation, data analysis, and conclusion drawing

Variable

A measure or a quantity that can take on different values or levels and is used to represent economic concepts or phenomena

Assumptions

simplify the complex world, make it easier to understand

Other-things-constant-assumption (ceteris paribus)

The assumption, when focusing on the relation among key economic variables, that other variables remain unchanged; in Latin, ceteris paribus

Behavioral assumptions

An assumption that describes the expected behavior of economic decision makers—what motivates them

Hypothesis

A theory about how key variables relate

Positive economic statement

A statement that can be proved or disproved by reference to facts and date

Normative economic statement

A statement that reflects an opinion, which cannot be proved or disproved by reference to the facts

Circular flow model

A diagram that traces the flow of resources, products, income, and revenue among economic decision makers

Resources

The inputs, or factors of production, used to produce the goods and services that people want; consists of labor, capital, human capital, and natural resources

Labor

The physical and mental effort used to produce goods and services

Capital

The buildings, equipment, tools, utensils, appliances, and machinery used to produce goods and services

Human capital

The knowledge, skills, abilities, and other attributes that individuals possess, which can be used to produce goods and services and generate economic value

Entrepreneurial behavior

The imagination required to develop a new product or process, the skill needed to organize production, and the willingness to take the risk of profit or loss

Entrepreneur

A profit-seeking decision maker who starts with an idea, organizes an enterprise to bring that idea to life, and assumes the risk of the operation

Natural resources

All gifts of nature used to produce goods and services; includes renewable and exhaustible resources

A good

A tangible product used to satisfy human wants

A service

An activity, or intangible product, used to satisfy human wants

Wages

Payment to resource owners for their labor

Interest

Payment to resource owners for the use of their capital

Rent

Payment to resource owners for the use of their natural resources

Profit

Reward for entrepreneurial ability; sales

revenue minus resource cost

Markets

A set of arrangements by which buyers and sellers carry out exchange at mutually agreeable terms

Product markets

A market in which a good or service is bought and sold

Resource markets

A market in which a resource is bought and sold

Rational self-interest

Each individual tries to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit

Association-is-causation fallacy

The incorrect idea that if two variables are associated or correlated in time, one must necessarily cause the other

Fallacy of composition

The incorrect belief that what is true for the individual, or part, must necessarily be true for the group, or the whole

Secondary effects

Unintended consequences of economic actions that may develop slowly over time as people react to events

households

The supply of labor, capital, human capital, and natural resources produces output

Utility

The satisfaction received from consumption; sense of well-being

Proprietors

people who work for themselves rather than for employers; farmers, plumbers, and doctors are often self-employed.

Transfer payments

Cash or in-kind benefits given to individuals by the government

Cash transfers

monetary payments, such as welfare benefits, Social Security, unemployment compensation, and disability benefits.

In-kind transfers

provide for specific goods and services, such as food, healthcare, and housing.

Transfer payments are represented as the money flowing from the government to the households

durable goods

goods expected to last three or more years—such as a car or a refrigerator

nondurable goods

food, clothing, and gasoline

Industrial Revolution

Development of large-scale factory production that began in Great Britain around 1750 and spread to the rest of Europe, North America, and Australia

Firms

Economic units formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale

Sole proprietorship

A firm with a single owner who has the right to all profits but who also bears unlimited liability for the firm’s losses and debts

Partnership

A firm with multiple owners who share the profits and bear unlimited liability for the firm’s losses and debts

Corporation

A legal entity owned by stockholders whose liability is limited to the value of their stock ownership

Cooperative

An organization consisting of people who pool their resources to buy and sell more efficiently than they could individually

Consumer Cooperative

A retail business owned and operated by some or all of its customers in order to reduce costs

producer cooperative

producers join forces to buy supplies and equipment and to market their output

Nonprofit organization

Groups that do not pursue profit as a goal; they engage in charitable, educational, humanitarian, cultural, professional, or other activities, often with a social purpose

Information Revolution

Technological change spawned by the microchip and the Internet that enhanced the acquisition, analysis, and transmission of information

Realized capital gain

any increase in the market price of a share that occurs between the time the share is purchased and the time it is sold.

Function of the governemnt

The government sets and enforces the rules related to private property, contracts, monopolies, and more which are needed for markets to function

Market failure

A condition that arises when the unregulated operation of markets yields socially undesirable results

Government antitrust laws were designed to

try to avoid competition through collusion

Collusion

an agreement among firms to fix the price and carve up the market

Antitrust laws

Prohibitions against price fixing and other anticompetitive practices

Monopoly

A sole supplier of a product with no close substitutes

Natural Monopoly

One firm that can supply the entire market at a lower per-unit cost than could two or more firms

Private good

A good, such as pizza, that is both rival in consumption and exclusive

Public goods

A good that, once produced, is available for all to consume, regardless of who pays and who doesn’t; such a good is nonrival and nonexclusive, such as a safer community

Externality

A cost or a benefit that affects neither the buyer nor seller but instead affects people not involved in the market transaction

Fiscal policy

The use of government purchases, transfer payments, taxes and subsidies, and borrowing to influence economy-wide variables such as inflation, employment, and economic growth

Monetary policy

Regulation of the money supply and interest rates to influence economy-wide variables such as inflation, employment, and economic growth

Gross domestic product, or GDP

the total value of all final goods and services produced in the United States

Mandatory spending

government spending that is mandated by laws and does not require annual congressional approval through the appropriations process

Federal discretionary spending

Government spending that is determined through the annual appropriations process and is subject to limits set by Congress

Ability-to-pay tax principle

Those with a greater ability to pay, such as those earning higher incomes or those owning more property, should pay more taxes

Benefits-received tax principle

Those who get more benefits from the government program should pay more taxes

Tax incidence

The distribution of tax burden among taxpayers; who ultimately pays the tax

Proportional taxation

The tax as a percentage of income remains constant as income increases; also called a flat tax

Progressive taxation

The tax as a percentage of income increases as income increases

Marginal tax rate

The percentage of each additional dollar of income that goes to the tax

Regressive taxation

The tax as a percentage of income decreases as income increases

Trade balance

The value during a given period of a country’s exported goods minus the value of its imported goods

Net exports

The value during a given period of a country’s exported goods minus the value of its imported goods

Balance of payments

A record of all economic transactions during a given period between residents of one country and residents of the rest of the world

Foreign exchange

Foreign money needed to carry out international transactions

Tariffs

A tax on imports

Quotas

A legal limit on the quantity of a particular product that can be imported or exported

Economy

The structure of economic activity in a community, a region, a country, a group of countries, or the world

gross product

the market value of all final goods and services produced in a region during a given period

Gross domestic product

Measures the market value of all final goods and services produced within a country’s borders during a specific time period

Gross world product

The market value of all final goods and services produced in the world during a given period, usually a year

Flow variables

A measure of something per period of time, such as your spending per week

Stock variable

A measure of something at a point in time, such as the amount of money you have with you right now

Economic fluctuations

the rise and fall of economic activity relative to the long-term growth trend of the economy

Mercantilism

The incorrect theory that a nation’s economic objective should be to accumulate precious metals in the public treasury; this theory prompted trade barriers, which cut imports, but other countries retaliated, reducing trade and the gains from specialization

Expansion

A period during which the economy grows as reflected by rising output, employment, income, and other aggregate measures

Contraction

A period during which the economy declines as reflected by falling output, employment, income, and other aggregate measures

Depression

A severe and prolonged reduction in economic activity, as occurred during the 1930s