Macroeconomics - Chapter 1 and Chapter 2 Key Terms

Definitions of Key Terms from Chapter 1 and Chapter 2

economic agent

an individual or a group that makes choices

scarce resources

things that people want, where the quantity that people want exceeds the quantity that is available

scarcity

the situation of having unlimited wants in a world of limited resources

economics

the study of how agents choose to allocate scarce resources and how those choices affect society

positive economics

analysis that generates objective descriptions or predictions, which can be verified with data

normative economics

analysis that recommends what an individual or society ought to do

microeconomics

the study of how individuals, households, firms, and governments make choices, and how those choices affect prices, the allocation of resources and the well-being of other agents

macroeconomics

the study of the economy as a whole. macroeconomists study economy-wide phenomena, like the growth rate of a country's total economic output, the inflation rate, or the unemployment rate

optimization

trying to pick the best feasible option, given whatever limited information, knowledge, experience, and training the economic agent has

equilibrium

the special situation in which everyone is simultaneously optimizing, so nobody believes they would benefit personally by changing his or her own behavior, given the choices of others

empiricism

analysis that uses data - evidence-based analysis. economists use data to develop theories, to test theories, to evaluate the success of different government policies, and to determine what is causing things to happen in the world

trade-off

when the economic agent needs to give up one thing to get something else

budget constraint

shows the bundles of goods or services that a consumer can choose given her limited budget

opportunity cost

the best alternative use of a resource

cost-benefit analysis

a calculation that identifies the best alternative, by summing benefits and subtracting costs, with both benefits and cost denominated in a common unit of measurement, like dollars

net benefit

the sum of the benefits of choosing an alternative minus the sum of the costs of choosing that alternative

sceinetific method

the name for the ongoing process that economists and other scientists use to (1) develop models of the world and (2) evaluate those models by testing them with data

model

a simplified description of reality. sometimes, economists will refer to a model as a theory. these terms are usually used interchangeably.

empiriacal eveidence

consists of facts that are obtained through observation and measurement. empirical evidence is also called data

hypotheses

predictions (typically generated by a model) that can be tested with data

median

calculated by ordering the numbers from least to greatest and then finding the value halfway through the list.

mean

the sum of all of the different values divided by the number of values

causation

occurs when one thing directly affects another through a casue-and-effect relationship

vaiable

a changing factor or characteristic

correlation

two variable tend to change at the same time

positive correlation

implies that two varibles tend to move in the same direction

negative correlation

implies that two variables tend to move in opposite directions

zero correlation

variable have movements that are not related, we say the variable have zero correlation

omitted variable

something that has been left out of a study, if included, would explain why two variables that are in the study are correlated

reverse causality

occurs when we mix up the direction of cause and effect

experiment

a controlled method of investigating causal relationship among varaibles

randomization

the assignment of subjects by choice, to a treatment or control group

natural experiment

an empirical study in which some process - out of the control of the experimenter - has assigned subjects to control and treatment group in a random or nearly random way

pie chart

a circle split into slices of different sizes. The area of each slice represents the relative importance of non-overlapping parts that add up to the whole

bar chart

uses bars of different heights or lengths to indicate the properties of different groups

independent variable

a variable whose value does not depend on another variable; in an experiement it is manipulated by the experimenter

dependent variable

a variable whose value depends on another variable

time series graph

diplays data at different points in time

slope

the change in the value of the variable plotted on the y-axis divided by the change in the value of the varaible plotted on the x-axis