ECON 2301 UTD Luba K.

Economics

The study of how induviduals and societies choose to use scarce resources that nature and previous generations have provided.

Opportunity Cost

The best alternative that we forgo, or give up, when we make a decision

Marginalism

The process of analyzing the additional or incremental cost or benefits arising from a choice or decision

Positive economics

An approach to economics that seeks to understand behavior and the operation of systems without making judgements. It describes what exists and how it works.

Normative Economics

An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.

Ceteris Paribus, or all else equal

A device used to analyze the relationship between two variables while the values of other variables are held unchanged.

Four criteria in judging economic outcomes:

1. Efficiency

2. Equity

3. Growth

4. Stability

Equity

Fairness

Capital

Things that are produced and then used in the production of other goods and services.

Factors of Production (or factors)

The inputs into the process of production. Another term for resources.

Absolute Advantage

A producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources (a lower absolute cost per unit).

Comparative Advantage

A producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost.

theory of Comparative Advantage

Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.)

Production Possibility Frontier (PPF)

A graph that shows all the combinations of goods and services that can be produced if all of society's resources are used efficiently.

Marginal Rate of Transformation (MRT)

The slope of the production possibility frontier (ppf).

Income

amount that a household earns each year. It comes in a number of forms: wages, salaries, interest, and the like.

Wealth

amount that households have accumulated out of past income through saving or inheritance.

Firm

organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

Law of Demand

negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.

Change in price of a good or service leads to

Change in quantity demanded (movement along a demand curve).

Change in income, preferences, or prices of other goods or services leads to:

Change in demand (shift of a demand curve).

Law of Supply

positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

Change in price of a good or service leads to:

​Change in quantity supplied (movement along a supply curve).

Change in costs, input prices, technology, or prices of related goods and services leads to:

​Change in supply (shift of a supply curve)

Normal Goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Inferior Goods

Goods for which demand tends to fall when income rises.

Substitutes

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Complementary Goods

Goods that "go together"; a decrease in the price of one results in an increase in demand for the other and vice versa.

Price Ceiling

Maximum price that seller may charge for a good, usually set by the government

Ration Coupons

Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month

Price Floor

Minimum price below which exchange is not permitted

Minimum Wage

A price floor set for the price of labor

Deadweight Loss

The total loss of producer and consumer surplus from underproduction or overproduction.

Aggregate Behavior

The behavior of all households and firms together

Aggregate Output

Total quantity of goods and services produced in the economy in a given period

Business cycle

The cycle of short-term ups and downs in the economy

Recession

period during which aggregate output declines. Conventionally, a period in which aggregate output declines for two consecutive quarters.

Depression

Prolonged and deep recession

Expansion or boom

period in the business cycle from a trough up to a peak during which output and employment grow.

Contraction, recession, slump

period in the business cycle from a peak down to a trough during which output and employment fall.

Unemployment Rate

percentage of the labor force that is unemployed.

Inflation

increase in the overall price level.

Hyperinflation

period of very rapid increases in the overall price level.

Deflation

decrease in the overall price level

Transfer Payments

cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. they include Social Security Benefits, veterans benefits, and welfare payments.

Treasury, Bonds, Notes and Bills

promissory notes issued by the federal government when it borrows money.

Corporate Bonds

promissory notes issued by firms when they borrow money.

Shares of Stock

financial instruments that give to the holder a share in the firms ownership and therefore the right to share in the firms profits.

Dividends

portion of a firm's profits that the firm pays out each period to its shareholders.

Fiscal Policy

government policies concerning taxes and spending.

Monetary Policy

tools used by the federal reserve to control the short-term interest rate.

Stagflation

situation of both high inflation and high unemployment.

Gross Domestic Product(GDP)

total market value of all final goods and services produced within a given period by factors of production within a country.

Final Goods and Services

goods and services produced for final use.

Intermediate Goods

goods that are produced by one firm for use in further processing by another firm

Value Added

difference between the value of goods as they leave a stage of production and the cost of the goods as the enter that stage.

Gross National Product(GNP)

total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced.

Expenditure Approach

method of computing GDP that measures the total amount spent on all final goods and services during a given period.

Income Approach

method of computing GDP that measures the income- wages, rents, interests, and profits- received by all factors of production in producing final goods and services.

GDP Calculation (GDP=)

Final Sales+Change in Business Inventories

Depreciation

amount by which an asset's value falls in a given period.

Gross Investment

total value of all newly produced capital goods(plant, equipment, housing, and inventory) produced in a given period.

Net Investment

gross investment - depreciation

Capital (end of period)=

Capital(beginning of period)+ Net Investment

Net National Product(NNP)

gross national product minus depreciation; a nation's total product minus what is required to maintain the value of its capital stock .

Nominal GDP

gross domestic product measured in current dollars.

Expenditure Approach to GDP

GDP= C+I+G+(EX-IM)

Labor Force

number of people employed + number of unemployed

Population

Labor force + not in labor force

Unemployment Rate Equation

unemployed/ (employed+unemployed)

Labor Force Participation Rate

ratio of the labor force to the total population 16 years or older

Labor Force Participation Rate Equation

labor force/ population

Discouraged-Worker Effect

decline in the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.

Frictional Unemployment

portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill-matching problems

Structural Unemployment

portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries.

Cyclical Unemployment

unemployment that is above frictional plus structural unemployment.

Natural Rate of Unemployment

unemployment rate that occurs as a normal part of the functioning of the economy. sometimes taken as the sum of the frictional unemployment rate and the structural unemployment rate.

Consumer Price Index (CPI)

price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the 'market basket' purchased monthly by the typical urban consumer.

Producer Price Index(PPI)

measures of prices that producers receive for products at all stages in the production process.

Real Interest Rate

difference between the interest rate on a loan and the inflation rate

output growth

growth rate of the output of the entire economy

Per-capita output growth

growth rate of output per person in the economy

productivity growth

growth rate of output per worker

Opportunity Cost=

Loss/Gain