ECON 2105 Final

Economics

The study of how society manages its scarce resources, focusing on human behavior in relation to ends and scarce means with alternative uses.

Microeconomics

The study of choices made by individuals and businesses, interactions in markets, and the impact of government policies.

Macroeconomics

The study of the performance of entire national or global economies.

Incentives

Rewards and penalties that drive behavior, influencing choices and responses in predictable ways.

Opportunity Cost

The value of the next best alternative given up when making a choice in a world of scarcity.

Marginal Analysis

Making decisions by comparing marginal costs and marginal benefits, ensuring pursuit of choices where benefits exceed costs.

Comparative Advantage

Producing a good at the lowest opportunity cost compared to other producers, leading to mutually beneficial trade.

Production Possibilities Frontier (PPF)

A graph showing the combinations of goods an individual or country can produce with given resources, illustrating trade-offs and opportunity costs.

Absolute Advantage

The ability to produce a good using fewer inputs than another producer.

Demand Curve

A graphical representation showing the quantity demanded at different prices, reflecting buyers' willingness and ability to purchase at various price levels.

Individual Demand Curve

A graph showing the quantity of an item an individual plans to buy at each price, reflecting the buyer's decision-making process.

Demand Curve

A function illustrating the quantity demanded at various prices, with a negative slope indicating higher demand at lower prices.

Consumer Surplus

The benefit consumers gain from trade, calculated as the area below the demand curve and above the price.

Total Consumer Surplus

The sum of consumer surplus for each consumer and unit, depicted as the shaded area under the demand curve.

Law of Demand

States that the quantity demanded increases as the price decreases, holding other factors constant.

Market Demand

The total quantity of an item demanded by the entire market at each price, derived from the sum of individual demands.

Supply Curve

A function showing the quantity supplied at different prices, with an upward slope due to increasing marginal costs.

Quantity Supplied

The amount sellers are willing to sell at a specific price, influencing the supply curve's shape and movement.

Producer Surplus

The benefit producers gain from trade, calculated as the area above the supply curve and below the price.

Law of Supply

Indicates that the quantity supplied rises with an increase in price, considering other factors constant.

Surplus

A situation where the quantity supplied exceeds the quantity demanded, leading to a decrease in prices due to competition.

Equilibrium price

The price at which the quantity demanded equals the quantity supplied, ensuring market stability.

Equilibrium quantity

The quantity at which the quantity demanded equals the quantity supplied, indicating a balanced market.

Market competition

Drives the market towards equilibrium where quantity supplied equals quantity demanded.

Consumer surplus

The benefit consumers gain from exchange, calculated as the difference between willingness to pay and the price paid.

Producer surplus

The benefit producers gain from exchange, calculated as the difference between the price received and the cost of production.

Total surplus

The sum of consumer and producer surplus, representing the total gains from participating in the market.

Gains from trade

Achieved when goods are bought by buyers with the highest willingness to pay and sold by sellers with the lowest costs, maximizing benefits.

Externalities

Uncompensated effects of actions on bystanders, impacting social welfare and market efficiency.

Gross Domestic Product (GDP)

The market value of all finished goods and services produced within a country in a year, a key economic indicator.

Intermediate goods and services

Goods and services sold to firms and processed with others for later sale.

Gross national product

Measures production by labor and property of residents worldwide.

Real variable

Adjusted for price changes, like real GDP.

GDP deflator

Price index measuring inflation, (nominal GDP/Real GDP) x 100.

Recessions

Widespread declines in real GDP and employment.

National spending approach to GDP

Y= C+ I + G + (Exports-Imports).

Factor income approach to GDP

Y = Employee Compensation + Rent + Interest + Profit.

Economies of Scale

Average cost decreases as production quantity increases.

Law of diminishing returns

Increasing inputs yield smaller output increases.

GDP per capita

Rough estimate of a nation's standard of living.

NGDP

Nominal Gross Domestic Product, the total value of goods and services produced in a country at current market prices

Real GDP

Real Gross Domestic Product, the total value of goods and services produced in a country adjusted for changes in price levels

Base Year

The year used as a reference point for comparing real GDP by holding prices constant

GDP Deflator

A price index used to measure inflation by comparing nominal GDP to real GDP

Real GDP per Capita

Real GDP divided by the population, used to measure economic growth accounting for changes in population

Nominal GDP

GDP measured at current market prices without adjusting for inflation

Short-Run Business Fluctuations

Short-term movements in real GDP around its long-term trend, used to measure business cycles

Growth Rate

The percentage change in a variable over a given period, such as the growth rate of real per capita GDP

Factors of Production

Resources like physical capital, human capital, and technological knowledge used in the production of goods and services

Incentives and Institutions

Factors influencing economic growth, including property rights, honest government, political stability, legal system, and competitive markets

GDP per capita

The measure of a country's economic output that accounts for its population, calculated by dividing the GDP by the total population.

Growth "miracles"

Instances where poor countries rapidly catch up to rich countries in terms of economic development and GDP per capita.

Factors of production

Inputs used by firms in the production process, including labor, physical capital, human capital, and technological knowledge.

Institutions for economic growth

Key entities like property rights, honest government, political stability, legal systems, and competitive markets that foster economic development.

Nominal GDP vs

Nominal GDP is calculated using current prices, while real GDP adjusts for inflation, providing a more accurate measure of economic growth over time.

GDP deflator

A price index measuring inflation by comparing nominal GDP to real GDP, helping to understand changes in price levels.

Circular Flow Model

Illustrates the flow of goods, services, and income in an economy, emphasizing the equality between total output and total spending.

National spending approach

Method of calculating GDP by summing up components of spending like consumption, investment, government spending, and net exports.

Factor income approach

Approach to GDP calculation by summing up incomes generated from producing goods and services, including employee compensation, rent, interest, and profit.

Dependency Ratio

The ratio of dependents (people younger than 15 or older than 64) to the working-age population.

Post-WWII Baby Boom

A significant increase in birth rates following World War II.

Labor Force Participation

The number of people who are employed or actively seeking employment.

Per Capita GDP

The total economic output of a country divided by its population, providing an average measure of economic performance.

Technological Knowledge

Information about how the world works used to produce goods and services.

Institutions

The rules and structures that shape economic incentives within a country.

Property Rights

Legal rights to control tangible or intangible resources, encouraging investment and innovation.

Marginal Product of Capital

The increase in output resulting from adding one more unit of capital.

Catching-Up Growth

Economic growth driven by capital accumulation in countries with low capital per worker.

Cutting-Edge Growth

Economic growth fueled by new ideas and technological advancements in countries with high capital per worker.

Marginal Product of Capital

The rate at which the additional unit of capital contributes to output growth, influencing the growth rate of a country like China.

Poor Banking System

A challenge in China's economy, hindering growth due to issues in financial infrastructure.

Human Capital

Refers to the skills, knowledge, and experience of a population, impacting GDP per capita and economic growth.

Capital Depreciation

The decrease in value of capital over time, affecting the need for continuous investment to maintain economic growth.

Conditional Convergence

The tendency for poorer countries to grow faster than richer ones, leading to income convergence over time.

Ideas and Economic Growth

Emphasizes the role of technological knowledge and innovation in driving long-term economic growth.

Spillovers

The sharing of ideas that can benefit others, but may lead to underprovision of new ideas.

Patents

Legal protection for innovations, influencing the balance between innovation and imitation in the market.

Government Role in Innovation

Involves providing incentives like subsidies or prizes to promote the production of new ideas.

Market Size and R&D

Highlights how larger markets incentivize research and development efforts, impacting economic growth.

Solow Model

A model of economic growth that highlights the impact of diminishing returns on capital accumulation and economic growth.

Marginal Product of Capital

The additional output produced by one more unit of capital, indicating the productivity of capital in the production process.

Steady-State Level of Capital

The point where the capital stock neither increases nor decreases, achieved when investment equals depreciation.

Investment Rate

The rate at which a country invests in new capital goods, influencing the level of capital stock and economic growth.

Conditional Convergence

The tendency for poorer countries to grow faster than richer countries with similar steady-state levels of output, leading to income convergence.

Cutting Edge Growth

The concept that better ideas drive long-term economic growth, emphasizing the importance of innovation and technological progress.

Savings

Income not spent on consumption goods, crucial for capital accumulation and investment in the economy.

Investment

The purchase of new capital goods for future production, essential for economic growth and increasing the capital stock.

Interest Rate

The cost of borrowing funds or the return on savings, influencing the quantity of savings and investment in the economy.

Market for Loanable Funds

The market where savers supply funds to borrowers, determining the equilibrium interest rate and quantity of savings in the economy.

Bond Finance

A method of raising large sums of money by issuing bonds that promise to pay back the principal amount with interest over a specified period.

Junk Bonds

Bonds with ratings below BBB that are considered risky, leading to higher interest rates to compensate for the increased risk of default.

Collateral

Something of value that is used to secure a loan, which can be claimed by the lender if the borrower defaults on the loan.

Crowded Out

The decrease in private consumption and investment that occurs when the government borrows a significant amount of money, leading to a shift in the demand curve for loanable funds and an increase in interest rates.

Rate of Return

For a zero-coupon bond, it is calculated as (Face value - Price) / (Price) x 100, with bond prices falling when interest rates rise.

Arbitrage Principle

The practice of exploiting price differences for the same asset in different markets, such as buying low in one market and selling high in another.

Stocks

Shares of ownership in a corporation that entitle the owner to a claim on the firm's profits and can be bought and sold in the stock market.

Initial Public Offering (IPO)

The first sale of a corporation's stock to the public to raise capital, allowing investors to buy shares in the company.

Insolvent

A bank or institution whose liabilities exceed its assets in value, leading to financial instability.

Securitization

The process of bundling loans together and selling them as financial assets, often done to increase liquidity and reduce risk on a bank's balance sheet.

Saving

Income that is not spent on consumption goods