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Opportunity Cost
The cost of an alternative that must be forgone in order to pursue a certain action.
Utility
Satisfaction derived from consuming goods and services.
Positive Economics
Focuses on facts and cause-and-effect relationships.
Normative Economics
Focuses on what particular policy actions should be taken.
Marginal Analysis
If marginal benefits are larger than marginal costs, pursue the action.
Economic Resources
Natural, human, or manufactured inputs used to produce goods and services.
Classification of Economic Resources
Includes Land, Labor, Capital, and Entrepreneurial Ability.
Market System
Known as capitalism; an economic system where decisions are made by individual firms and consumers.
Command System
Known as socialism or communism; an economic system where decisions are made by a central authority.
Law of Demand
There is a negative relationship between price level and demand.
Demand Curve
A graphical representation of the relationship between the price of a good and the quantity demanded.
Individual Demand
The demand from one consumer.
Market Demand
The total demand from all consumers.
Change in Demand vs. Change in Quantity Demanded
Change in Demand is a shift of the demand curve; Change in Quantity Demanded is a movement along the demand curve.
Supply Curve
A graphical representation of the relationship between the price of a good and the quantity supplied.
Determinants of Supply
Factors that affect the position of the supply curve, such as technological improvements.
Equilibrium Price and Quantity
Determined by the intersection of the demand and supply curves.
Surplus
Occurs when supply is larger than demand.
Shortage
Occurs when demand is larger than supply.
GDP per Person
Calculated as GDP divided by population.
Business Cycles
Short-run movements around the growth trend driven by shocks.
Demand Shocks
Unexpected events that affect demand.
Supply Shocks
Unexpected events that affect supply.
GDP measures
The dollar value of final goods and services; the unit for GDP is dollar
Final Goods and Services
Goods and services that are directly consumed by consumers.
Two ways to calculate GDP
Expenditure approach and Income approach
Expenditure Approach to GDP
Calculates GDP by summing Consumption, Investment, Government spending, and Net Exports.
Intermediate Goods
Goods that are not counted in GDP to avoid multiple counting.
Business Cycle
Business cycle are short run movements around the growth trend
Business Cycle Phases
Includes Peak, Recession, Trough, and Expansion.
The production of durable goods is affected more by business cycles than that of non durable goods
Durable purchases are postponable
Unemployment Rate
Calculated as Unemployed individuals divided by Labor Force.
Frictional Unemployment
Workers with desirable skills searching for new jobs or waiting to take new jobs.
Structural Unemployment
Unemployment due to changes in technology.
Cyclical Unemployment
Unemployment caused by economic downturns or recessions.
Natural Rate of Unemployment (NRU)
Sum of frictional and structural unemployment.
GDP Gap
Difference between actual GDP and potential GDP.
Inflation Rate
Calculated as (CPI this year – CPI last year) / CPI last year.
Rule of 70
Estimates the number of years for the price level to double, calculated as 70 divided by the inflation rate.
Demand-Pull Inflation
Inflation resulting from excess total spending in the economy.
Cost-Push Inflation
Inflation resulting from factors that raise production costs.
