ch 1-9 Macroeconmics Eric C.

Scarcity

Resources are limited but human wants are unlimited; forces us to make choices.

Economics

The study of how individuals, firms, and societies allocate scarce resources.

Microeconomics

The study of individual consumers, firms, and markets.

Macroeconomics

The study of the economy as a whole — GDP, unemployment, inflation, growth.

Opportunity Cost

The value of the next best alternative given up when making a decision.

Marginal Analysis

Decision-making by comparing marginal (additional) benefits vs. marginal costs.

Rational Behavior

Individuals make decisions to maximize their own well-being.

Positive Economics

Objective, fact-based statements about how the economy IS. Testable.

Normative Economics

Value-based statements about how the economy SHOULD BE. Not testable.

Ceteris Paribus

"All else equal" — holding other variables constant when analyzing one variable.

Economic Models

Simplified representations of reality used to analyze economic behavior.

Trade-off

Giving up one thing to get more of another due to scarcity.

Sunk Cost

A cost already incurred that cannot be recovered; should be ignored in future decisions.

Fallacy of Composition

Assuming what is true for one individual is automatically true for the whole economy.

Post Hoc Fallacy

Assuming that because A came before B, A caused B. Correlation ≠ causation.

Production Possibilities Curve (PPC)

A curve showing the maximum combinations of two goods an economy can produce given its resources and technology.

Law of Increasing Opportunity Costs

As production of one good increases, the opportunity cost of producing more of it rises — shown by a bowed-out PPF.

Efficiency (PPF)

Any point ON the PPF — all resources are fully and optimally used.

Inefficiency (PPF)

Any point INSIDE the PPF — resources are underutilized (unemployment or waste).

Unattainable (PPF)

Any point OUTSIDE the PPF — impossible with current resources and technology.

Economic Growth (PPF)

An outward shift of the PPF caused by more resources or improved technology.

Absolute Advantage

The ability to produce more of a good than another producer using the same resources.

Comparative Advantage

The ability to produce a good at a LOWER OPPORTUNITY COST than another producer.

Specialization

Focusing production on the good for which you have a comparative advantage.

Gains from Trade

Both parties can consume beyond their individual PPF by specializing and trading.

Opportunity Cost Formula

OC of Good A = Units of B given up ÷ Units of A gained

Law of Demand

As price increases, quantity demanded decreases. Inverse relationship; ceteris paribus.

Law of Supply

As price increases, quantity supplied increases. Positive relationship; ceteris paribus.

Market Equilibrium

The price at which quantity demanded = quantity supplied. No tendency to change.

Surplus (Excess Supply)

Quantity supplied > quantity demanded. Occurs when price is ABOVE equilibrium. Price falls.

Shortage (Excess Demand)

Quantity demanded > quantity supplied. Occurs when price is BELOW equilibrium. Price rises.

Shifters of Demand (PYNTE)

Prices of related goods, Income, Number of buyers, Tastes/preferences, Expectations.

Shifters of Supply

Resource/input prices, Prices of related goods in production, Regulations, Technology, Number of sellers, Taxes and subsidies.

Normal Good

A good for which demand INCREASES as income increases.

Inferior Good

A good for which demand DECREASES as income increases.

Substitute Goods

Goods that can replace each other. If price of A rises, demand for B increases.

Complementary Goods

Goods used together. If price of A rises, demand for B decreases.

Change in Quantity Demanded

Movement ALONG the demand curve caused by a price change.

Change in Demand

SHIFT of the entire demand curve caused by a non-price factor.

Change in Quantity Supplied

Movement ALONG the supply curve caused by a price change.

Change in Supply

SHIFT of the entire supply curve caused by a non-price factor.

Price Ceiling

A maximum legal price set BELOW equilibrium → causes a shortage.

Price Floor

A minimum legal price set ABOVE equilibrium → causes a surplus.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay. CS = Willingness to Pay − Market Price.

Producer Surplus

The difference between what producers receive and their minimum acceptable price. PS = Market Price − Minimum Acceptable Price.

Total Surplus

TS = Consumer Surplus + Producer Surplus. Maximized at free market equilibrium.

Market Failure

When markets fail to allocate resources efficiently on their own.

Externality

A cost or benefit imposed on a third party not involved in the transaction.

Negative Externality

A cost imposed on third parties (e.g., pollution). Market overproduces relative to the social optimum.

Positive Externality

A benefit conferred on third parties (e.g., education). Market underproduces relative to the social optimum.

Public Good

Non-excludable and non-rival. Cannot prevent non-payers from using it; one person's use doesn't reduce availability to others. Example: national defense.

Free Rider Problem

People benefit from a public good without paying for it, leading to underprovision by the market.

Common Resource

Non-excludable but rival (e.g., fish in the ocean). Prone to overuse.

Tragedy of the Commons

Overuse and depletion of a shared resource because individuals act in self-interest without regard for the collective.

Deadweight Loss

The loss of total surplus due to market inefficiency caused by taxes, externalities, or price controls.

Pigouvian Tax

A tax on a negative externality equal to the external cost, correcting overproduction.

Pigouvian Subsidy

A subsidy on a positive externality to correct underproduction by the market.

GDP (Definition)

The total market value of all final goods and services produced within a country's borders in a given time period.

GDP Expenditure Equation

GDP = C + I + G + NX, where C = consumption, I = investment, G = government spending, NX = net exports (X − M).

Final Goods

Goods sold to the end user. Counted in GDP.

Intermediate Goods

Goods used in the production of final goods. NOT counted in GDP — avoids double counting.

Value Added

The increase in value a firm adds to inputs before selling the output. Sum of all value added = GDP.

Nominal GDP

GDP measured at current year prices. Not adjusted for inflation.

Real GDP

GDP adjusted for inflation using base year prices. Better measure of actual output change.

Real GDP Formula

Real GDP = (Nominal GDP ÷ GDP Deflator) × 100

GDP Deflator

A price index for all goods and services in GDP. GDP Deflator = (Nominal GDP ÷ Real GDP) × 100

GDP per Capita

GDP ÷ Population. Used as a rough measure of standard of living.

Business Cycle

Recurring fluctuations in real GDP: expansion → peak → recession → trough → recovery.

Recession

Two consecutive quarters of declining real GDP.

Peak

The highest point of real GDP in a business cycle before a downturn.

Trough

The lowest point of real GDP in a business cycle before recovery begins.

Transfer Payments

Government payments not made in exchange for goods/services (e.g., Social Security). NOT counted in GDP.

Inflation

A sustained increase in the overall price level of goods and services.

Deflation

A sustained DECREASE in the overall price level.

Disinflation

A decrease in the RATE of inflation. Prices still rising, just more slowly.

Consumer Price Index (CPI)

A measure of the average change in prices paid by urban consumers for a fixed basket of goods and services.

CPI Formula

CPI = (Cost of basket in current year ÷ Cost of basket in base year) × 100

Inflation Rate Formula

Inflation Rate = [(CPI_current − CPI_previous) ÷ CPI_previous] × 100

Real Interest Rate Formula

r = i − π, where r = real rate, i = nominal rate, π = inflation rate.

Fisher Equation

(1 + i) = (1 + r)(1 + π). Links nominal interest rate, real interest rate, and inflation.

Cost-Push Inflation

Inflation caused by rising production costs (e.g., oil price shock). SRAS shifts left.

Demand-Pull Inflation

Inflation caused by excess demand — "too much money chasing too few goods." AD shifts right.

Purchasing Power

The quantity of goods and services that money can buy. Inflation erodes purchasing power.

Shoe Leather Costs

The costs and inconvenience of reducing money holdings when inflation is high.

Menu Costs

The costs of changing posted prices due to inflation.

Labor Force

All people 16+ who are either employed or actively looking for work. Labor Force = Employed + Unemployed.

Unemployment Rate Formula

Unemployment Rate = (Unemployed ÷ Labor Force) × 100

Labor Force Participation Rate (LFPR)

LFPR = (Labor Force ÷ Working-Age Population) × 100

Frictional Unemployment

Short-term unemployment from workers transitioning between jobs. Normal and healthy.

Structural Unemployment

Unemployment from a mismatch between workers' skills and available jobs (e.g., technology displacement).

Cyclical Unemployment

Unemployment caused by downturns in the business cycle (recessions). The target of stabilization policy.

Seasonal Unemployment

Unemployment caused by seasonal changes in demand for certain industries.

Natural Rate of Unemployment (NRU)

The unemployment rate at full employment = frictional + structural only. Typically 4–5%. Cyclical = 0.

Full Employment

The condition when cyclical unemployment = 0. Only frictional and structural remain.

Okun's Law

GDP Gap ≈ −2 × (Unemployment Rate − NRU). For every 1% cyclical unemployment, real GDP falls ~2%.

GDP Gap

Actual GDP − Potential GDP. Negative = recessionary gap. Positive = inflationary gap.

Discouraged Workers

People who have stopped looking for work. NOT counted in the labor force or unemployment rate — understates true unemployment.

Economic Growth

A sustained increase in real GDP per capita over time.

Rule of 70

Years to double = 70 ÷ Growth Rate (%). Example: 3.5% growth → doubles in 20 years.

Human Capital

The knowledge, skills, and health of workers that increase their productivity.