Logan Miller MACRO test 1

3 key economic ideas

people are rational, people respond to economic incentives, optimal decisions are made at the margin

Positive vs Normative analysis

Positive analysis: Analysis concerned with what is

Normative analysis: Analysis concerned with what ought to be

Centrally planned economy:

An economy in which the government decides how economic resources will be allocated

Market economy

and economy I which decisions of households and firms interacting in markets allocate economic resources

Mixed economy

an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources

Role of economic models

Simplified versions of reality used to analyze real-world economic situations

Micro

the study of household and firm make choices/how they interact in markets/how the government attempts to influence their choices.

Macro

is the study of the economy as a whole including topics such as inflation, unemployment, and economic growth.

Appendix

How to use all graphs and formulas

Production Possibilities Frontier (PPF)

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

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

Absolute advantage

The ability of an individual, a 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, a firm, or a country to produce a good or service at a lower opportunity cost than competitors.

Complete specialization

refers to production only of goods that are exported or nontraded, but none that compete with imports

Gains from trade

net benefits to economic agents from being allowed an increase in voluntary trading with each

other.

A market system

is a systematic process enabling many market players to offer and demand

Perfectly competitive markets

(1) many buyers and sellers,

(2) all firms selling identical products, and

(3) no barriers to new firms entering the market

Law of Supply

A rule that states that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

Law of demand

A rule that states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

Supply and Demand curves

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

Quantity demanded

The amount of a good or service that a consumer is willing and able to purchase at a given price.

Quantity supplied

The amount of a good or service that a firm is willing and able to supply at a given price.

Gross Domestic Product (GDP)

Measures the market value of all final goods and services produced within a country during a period of time. Typically one year.

GDP =

y = C+I+G+NX

(X-M)

GDP Equation what does G equal

G = Government purchases - spend by all levels of government on goods and services

No transfer payments: payments from the government to the households that aren't for goods and services

GDP equation what does I equal

I = Investment - spending by firms on new factories, office buildings, machinery, and addition to investments.

Investments, households purchasing new homes

No stocks or bonds.

GDP equation what does C equal

C= Consumption - Spending by households on goods and services, not including new home purchases. Money must change hands

GDP equation what does NX equal

NX = NetExports = X-M = exports - Imports

Exports - are counted and add to GDP

Imports are counted, do not add to GDP

Equity

Fairly distributing the products with cost of efficiency

Efficiency

How fast you distribute the products with cost of Equity