Study guide exam 1

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.