CLEP MACROECO

economics

the study of how individuals and societies choose to allocate scarce resources.

scarcity

the fact that there is a limited amount of resources to satisfy unlimited wants.

economic resources

also called the factors of production; these are the land (natural resources such as minerals and oil)

models

graphical and mathematical tools created by economists to better understand complicated processes in economics.

ceteris paribus

a Latin phrase meaning "all else equal".

agent

some entity making a decision; this can be an individual

incentives

rewards or punishments associated with a possible action; agents make decisions based on incentives.

rational decision making

an agent is "rational" if they use all available information to choose an action that makes them as well off as possible; economic models assume that agents are rational.

positive analysis

analytical thinking about objective facts and cause-and-effect relationships that are testable

normative analysis

unlike positive analysis

microeconomics

the study of the interactions of buyers and sellers in the markets for particular goods and services

macroeconomics

the study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment

economic aggregates

measures such as the unemployment rate

production possibilities curve (PPC)

(also called a production possibilities frontier) a graphical model that represents all of the different combinations of two goods that can be produced; the PPC captures scarcity of resources and opportunity costs.

opportunity cost

the value of the next best alternative to any decision you make; for example

efficiency

the full employment of resources in production; efficient combinations of output will always be on the PPC.

inefficient use (under-utilization) of resources

the underemployment of any of the four economic resources (land

growth

an increase in an economy's ability to produce goods and services over time; economic growth in the PPC model is illustrated by a shift out of the PPC.

contraction

a decrease in output that occurs due to the under-utilization of resources; in a graphical model of the PPC

constant opportunity costs

when the opportunity cost of a good remains constant as output of the good increases which is represented as a PPC curve that is a straight line; for example

increasing opportunity costs

when the opportunity cost of a good increases as output of the good increases

\[2\] fidget spinners when she produces the first Pokemon card

and

\[4\] fidget spinners for the second Pokemon card

so she has increasing opportunity costs.

productivity

(also called technology) the ability to combine economic resources; an increase in productivity causes economic growth even if economic resources have not changed

absolute advantage the ability to produce more of a good than another entity, given the same resources. For example, in a single day, Owen can embroider

\[10\] pillows and Penny can embroider

\[15\] pillows, so Penny has absolute advantage in embroidering pillows.

comparative advantage the ability to produce a good at a lower opportunity cost than another entity. For example, for every pillow Owen embroiders his opportunity cost is

\[2\] scarves knitted, while Penny must forego

\[3\] scarves for every pillow she embroiders, so Owen has comparative advantage in embroidering pillows.

specialization when an individual or a country allocates most or all of its resources towards the production of a particular good or service. For example, Sal (an individual) specializes in producing educational videos, and Bangladesh (the country) specializes in producing textiles.

trade the exchange of goods, services or resources between one economic agent and another

international trade the exchange of goods, services, or resources between one country and another

gains from trade the ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage

terms of trade (also called “trading price”) the price of one good in terms of the other that two countries agree to trade at; beneficial terms of trade allows a country to import a good at a lower opportunity cost than the cost for them to produce the good domestically, thus the country gains from trade.

absolute advantage

the ability to produce more of a good than another entity

\[10\] pillows and Penny can embroider

\[15\] pillows

so Penny has absolute advantage in embroidering pillows.

comparative advantage

the ability to produce a good at a lower opportunity cost than another entity. For example

\[2\] scarves knitted

while Penny must forego

\[3\] scarves for every pillow she embroiders

so Owen has comparative advantage in embroidering pillows.

specialization

when an individual or a country allocates most or all of its resources towards the production of a particular good or service. For example

trade

the exchange of goods

international trade the exchange of goods

services

gains from trade

the ability of two agents to increase their consumption possibilities by specializing in the good in which they have comparative advantage and trading for a good in which they do not have comparative advantage

terms of trade (also called “trading price”)

the price of one good in terms of the other that two countries agree to trade at; beneficial terms of trade allows a country to import a good at a lower opportunity cost than the cost for them to produce the good domestically