Macroeconomics Midterm 1

Chapters 1-4, 7

tradeoffs

bc of scarcity, producing more of one good/service=producing less of another good/service

rational, respond to incentives, and optimal decisions are made at the margin (when MB=MC)

What are the 3 key economic ideas? people are ___

marginal

extra/additional

marginal analysis

analysis that compares marginal benefits and marginal costs

opportunity cost

the highest valued alternative that must be given up to engage in an activity

consumers, firms, and government

Who determines what goods/services are produced?

centrally planned economy

In this type of economy, the government decides how economic resources will be allocated (EX: Soviet union, North Korea)

Market Economy

In this type of economy, the decisions of consumers and firms as they interact in markets determine the allocation of economic resources (US, Japan, Canada, Western Europe); more efficient than CPEs

mixed economy

In this type of economy, most economic decisions result from the interaction of buyers and sellers but in which the government plays a significant role in the allocation of resources (modern economy of US, Japan, Canada, and Western Europe)

productive efficiency

occurs when a good/service is produced at the lowest possible cost

allocative efficiency

occurs when production is aligned with consumers preferences

voluntary exchange

when both the buyer and seller are made better off by the transaction

equity

the fair distribution of economic benefits (there is often a trade off between efficiency and this)

economic models

a simplified version of reality used to analyze real-world economic situations; economics use these to analyze real-world issues like the effects of tariffs on the prices on imported goods

decide on assumptions, create hypothesis, use economic data to test hypothesis, revise model if it fails to explain data well, and retain the revised model to help answer questions

What are the 5 steps to developing an economic model?

assumptions

what are economic models based off of? (this is bc models must be simplified to be useful)

economic variable

something measurable that can have different values (i.e. the # of ppl employed in manufacturing); in economic models, the hypothesis is about this

positive analysis

concerned with WHAT IS; this is what economics is all about, which measures the costs and benefits of different courses of action

normative analysis

concerned with what OUGHT TO BE

microeconomics

study of how households and firms make choices, interact in markets, and how the government attempts to influence their choices

macroeconomics

study of the economy as a whole, including topics like inflation, unemployment, and economic growth

entrepreneur

someone who operates a business

innovation

the practical application of an invention or any significant improvement in a good or in the means of producing a good

technology

the processes a firm uses to produce goods and services

goods

tangible merchandise

services

activities performed for others

revenue

total amount received for selling a good/service (Price x untis sold)

profit

revenue - costs (including opportunity costs)

labor, capital, natural resources, entrepreneurial ability

What are factors of production, economic resources, and inputs?

capital

manufactured goods that are used to produce other goods and services

capital stock

total amount of physical capital available in a country

human capital

the accumulated training and skills that workers possess

scarcity

unlimited wants exceed the limited resources available to fulfill those wants

reverse causality

when researchers mistakenly assume Variable X causes Variable Y, but in reality Y is actually causing X

“how much” decision

involves determining the optimal quantity of an activity or good using marginal analysis to compare MC and MB rather than an all or nothing choice

production possibilities frontier (PPF)

a curve showing the maximum attainable combinations of two goods that can be produced with available resources and current technology

economic growth

the ability of an economy to produce increasing quantities of goods and services

outward

what kind of shift (inward or outward) in the PPF represent economic growth

technology, labor, natura resources

The increase of these things create economic growth

trade

the act of buying and selling

absolute advantage

the ability of an individual, firm, or a country to produce more of a good or service than competitors, using the same amount of resources

comparative advantage

the ability of an individual, firm, or country to produce a good/service at a lower opportunity cost than competitors; the basis for trade

produce markets

a market for goods (ie phones) or services (ie medical treatment, haircuts)

factor markets

a market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability

circular flow design

a model that illustrates how participants in markets are linked; 2 key groups of this are households and firms

free market

market w/ few government restrictions on how a good/service can produced or sold or on how a factor of production can be employed

relative price

price of one good/service relative to prices of other goods/services

Adam Smith

According to ___________, people must be free to pursue their self interest for proper functioning of the market system and that prices are the invisible hand used to direct economic activity

competition

A market system mobilizes knowledge through _______.

property rights

the rights individuals or businesses have to the exclusive use of their property, including the right to buy or sell it

perfectly competitive market

a market that meets the conditions of having (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market

demand schedules

a table that shows the relationship between the price of a product and the quantity of the product demanded

quantity demanded

the amount of a good/service that a consumer is willing and able to pay for at a given price

demand curve

a curve that shows the relationship between the price of a product and the quantity of the product demanded

market demand

the demand by all consumers of a given good or service

Law of Demand

holding everything else constant, when the price of a products falls, the quantity demanded will increase, and when the price of a product rises, the quantity demanded of the product will decrease

substitution effect

the change in the quantity demanded of a good that results due to a change in price makes the good more or less expensive RELATIVE to other goods that are substitutes

income effect

the change in the quantity demanded of a good that results due to a change in the goods price increases or decreases consumers’ purchasing power

purchasing power

quantity of goods that a consumer can buy with a fixed amount of income

substitution and income effects

Why does the Law of Demand occur?

ceteris paribus

All else equal

ceteris paribus condition

the requirement that when analyzing the relationship between two variables- such as price and quantity demanded- other variables must be held constant

normal good

a good for which the demand increases as income rises and decreases as income falls

inferior good

a good for which demand increases as income falls and decreases as income rises (ie instant noodles)

substitutes

goods and services that can be used for the same purpose

complements

goods and services that are used together

demographics

the characteristics of a population with respect to age, race, and gender

quantity supplied

the amount of a good/service that a firm is willing and able to supply at a given price

supply schedule

a table that shows the relationship between the price of a product and the quantity of the product supplied

supply curve

a curve that shows the relationship between the price of a product and the quantity of the product supplied

Law of Supply

ceteris paribus, increases in price cause increases in the quantity supplied and decreases in price cause decrease in the quantity supplied

technological change

a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs

right

what kind of shift in demand would an increase in income result in if the good is normal?

left

what kind of shift in demand would an increase in income cause if the good is inferior?

right

what kind of shift in demand would an increase in the taste for the good cause?

right

what kind of shift in demand would an increase in the price of a substitute cause?

left

what kind of shift in demand would an increase in the price of a complementary good cause?

right

what kind of shift in demand would an increase in population cause?

right

what kind of shift in demand would an increase in the expected price of a good in the future cause?

left

what kind of shift in supply would an increase in the price of an input cause?

right

what kind of shift in supply would an increase in productivity cause?

left

what kind of shift in supply would an increase in price of a substitute in production cause?

right

what kind of shift in supply would an increase in the price of a complement in production cause?

right

what kind of shift in supply would an increase in the number of firms in the market cause?

left

what kind of shift in supply would an increase in the expected future price of the product cause?

market equilibrium

a situation in which quantity demanded = quantity supplied

competitive market equilibrium

a market equilibrium with many buyers and sellers

surplus

a situation in which quantity supplied is greater than quantity demanded

shortage

a situation in which quantity supplied is less than quantity demanded

price ceiling

a legally determined maximum price that sellers may charge (designed to “help” consumers)

price floor

a legally determined minimum price that sellers may receive (designed to “help” producers)

consumer surplus

the difference between the highest price a consumer is willing to pay for a good/service and the actual price the consumer pays (net benefit to consumers)

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good/service

marginal cost

the change in a firm’s total cost from producing one more unit of a good/service

producer surplus

the difference between the lowest price a firm would be willing to accept for a good/service and the price it actually receives (net benefit for producers)

tax incidence

the actual division of the burden of a tax between buyers and sellers in a market

economic surplus

the sum of consumer and producer surplus

deadweight loss

the reduction in economic surplus resulting from a market not being in competitive equilibrium

economic efficiency

a market outcome in which the MB to consumers of the last unit produced = MC of production and in which the sum of consumer and producer surplus is at a maximum

equilibrium price

What maximizes the economic surplus?