Macro exam 1

marginal benefit

the increase in extra benefits that results from carrying out one more unit of an activity

marginal cost

the increase in extra costs that results from carrying out one more unit of an activity

opportunity cost

what you give up in order to do another activity

cost benefit principle

a person should only make a decision if the extra benefits from taking that action are at least as great as the extra costs

sunk costs

a cost that is beyond recovery and cannot be given back

the scarcity principle

having a lot of a good thing usually means having less of another

average cost

the total cost of undertaking an activity

average benefit

the total benefit of undertaking an activity

economic surplus

the benefit of taking an action minus its cost

the invisible hand

a force that guides price and quantity to equilibrium 

the incentive principle

a person is more likely to take an action if its benefit rises, and less likely to take an action if its cost rises

absolute advantage

taking fewer time than another person to perform a task

comparative advantage

a persons opportunity cost of performing a task is lower than the other persons opportunity cost

inefficient point

any combination of goods that uses currently available resources but does not use them to the fullest extent 

efficient point

a point that uses resources to their greatest extent on the production possibility curve

the principle of increasing opportunity cost

in expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterword turn to resources with higher opportunity costs

outsourcing

using services performed by low wage workers overseas

Economic growth can result from an

increase in the amount of productive resources

demand curve

a graph showing the quantity of a good that buyers wish to buy at a given price

substitution effect

the change in the quantity demanded of a good that results from buyers switching to a different option when the price of a good changes

income effect

the change in the quantity demanded of a good that results because of a change in the price of the good changes the buyers purchasing power

buyers reservation price

the highest price a customer is willing to pay for a good

equilibrium

a balanced unchanging situation in which all forces at work within a system are canceled by others

market equilibrium

occurs in a market where all buyers and sellers are satisfied with their respective quantities at the market price

excess supply / surplus

the amount leftover when supply exceeds quantity demanded

excess demand / shortage

quantity demanded exceeds quantity supplied 

price ceiling

an allowable price specified by the law so that a product does not become too expensive 

price floor

the lowest price at which something can be sold or someone can be paid set by law (ex. minimum wage laws)

change in quantity demanded

a movement along the demand curve that occurs ONLY due to a change in price

change in demand

a shift of the entire demand curve. When demand is higher, the curve will shift to the right. When demand is lower, the curve will shift to the left

change in supply

a shift of the entire supply curve. When supply increases, the supply curve will shift to the right. When supply decreases, the supply curve will shift left

5 shifters of demand (NOT price)

tastes/preferences, number of consumers, price of substitution goods, income, expectations 

5 shifters of supply (NOT price)

price of resources, number of producers, technology, taxes, and expectations

when both supply and demand decrease…

quantity will be lower, but it is hard to determine whether price will be higher, lower, or the same

complements 

an increase in the price of one complement will result in a decrease in demand for both complement products

when demand increases but supply decreases…

prices will increase, but the effect on quantity is unsure

when supply increases but demand decreases..

prices will decrease, but it is unsure what will happen to quantity 

when both supply and demand increase…

quantity will increase, but it is unsure what will happen to price

normal good

a good whose demand curve shifts upwards when the incomes of buyers increase and shifts leftward when the incomes of buyers decrease

inferior goods

a good whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease

buyers surplus

the difference between the buyers reservation price and the price they actually end up paying

sellers surplus

the difference between the price received by the seller and their reservation price

total surplus

the difference between the buyers reservation price and the sellers reservation price

cash on the table

an economic metaphor for unexploited gains from exchange

socially optimal quantity

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

efficiency 

when all goods and services are produced and consumed at their respective socially optimal levels 

standard of living

the degree to which people have access to goods and services that make their lives easier, healthier, safer, and enjoyable

average labor productivity

how much output there is per employed worker

monetary policy

determination of the nation’s money supply

fiscal policy

decisions that determine the government’s budget, including the amount and composition of government expenditures and revenue

structural policy

government policies aimed at changing the underlying structure of the nations economy

positive analysis

addresses the economic consequences of a particular event or policy, not whether those consequences are desirable or not

normative analysis

addresses the question of whether a policy should be used 

aggregation

the adding up of an individual economic variables to obtain economywide totals

Gross Domestic Product

the market value of the final goods and services produced in a country during a given period

market value

the selling price of goods and services in the open market

final goods and services

goods or services consumed by the ultimate user because they are the end products of the process (count to GDP)

intermediate goods and services

goods or services used up in the production of other goods and services (not included in GDP)

capital good

a long-lived good that is used in the production of other goods and services 

value added

for any firm, the market value of its product or service minus the cost of inputs purchased from other firms 

four categories of what goes into a GDP

households, firms, governments, foreign sector

how to measure GDP

1) add up the market values of all the final goods and services that are produced domestically

or

2) add up the total amount spent by each of the 4 GDP categories on final goods and services then subtracting any spending on imports

consumption expenditure

spending by households on goods and services such as food, clothing, and entertainment

investment

spending by firms on final goods and services, usually on capital goods 

investment categories

business fixed investment (machinery, offices), residential investment (building of new homes, apartments), inventory investment (goods a firm produces but may not sell)

government purchases

purchases by federal, state, and local governments of any final goods or services. does not include transfer payments, which are payments made by the government for which no goods and services are received 

net exports

the value of a country’s exports minus its imports

GDP equation

GDP = C(consumption)+I(investment)+G(government production)+NX(net exports)

real GDP

GDP adjusted for inflation

real GDP formula

real GDP = nominal GDP/GDP deflator  OR price index x100

nominal GDP

GDP in which the quantities produced are valued at current year prices, measures current dollar value

nominal GDP formula

GDP deflator formula

GDP deflator = nominal GDP/real GDP x100

labor force

the total number of employed and unemployed people in the economy

unemployment rate

people who would like to find work but cannot. the total number of unemployed people divided by the labor force

participation rate

the total percentage of people that are employed or are looking for work. labor force/working age population

unemployment spell

a period during which an individual is continuously unemployed

duration

the length of an unemployment spell

discouraged workers

people who say they would like to have a job but haven’t made an effort to find one in 4 weeks

involuntary part time workers

people who would like to work full time but can only find part time work

trade surplus 

exports exceed imports

trade deficit 

imports exceed exports

transfer payments

NOT IN GDP a payment made in which no goods or services are received back, such as social security benefits, unemployment benefits, welfare payments, taxes

output per capita

a country’s economic output per person. GDP/population x100

average labor productivity

total output/number of workers x100

an unemployed person

a person without a job who is actively or has looked for a job within the past 4 weeks