ECN 102 Exam 1

Cost-Benefit Principle

Pursue a choice if and only if the extra benefits are at least as large as the extra costs

Willingness to Pay

The maximum monetary amount a person is willing to pay to get a benefit or avoid a cost

Economic Surplus

The total benefits minus total costs flowing from a decision

Framing Effect

A cognitive bias where decisions are influenced by how choices or information are presented

Opportunity Cost

The true cost of something measured by the value of the next best alternative given up

Scarcity

The problem of limited resources forcing trade-offs across unlimited wants

Sunk Cost

A cost that has already been incurred and cannot be reversed so it should be ignored in future decisions

Production Possibilities Frontier (PPF)

A visual graph showing the maximum combination of outputs attainable with scarce resources

Marginal Principle

The idea that quantity decisions should be made iteratively in small incremental steps

Marginal Benefit

The extra benefit resulting from one additional unit of an activity or good

Marginal Cost

The extra cost incurred from one additional unit of an activity or good

Rational Rule

If something is worth doing keep doing it until marginal benefit equals marginal cost

Interdependence Principle

The principle that your best choice depends on your other choices others' choices other markets and expectations

Macroeconomics

The study of total aggregate economy-wide outcomes like income production and price levels

Circular Flow Diagram

A simple macroeconomic model illustrating the flow of real resources and money between households and businesses

Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given year

Final Good

A good or service sold to its end user and counted in GDP

Intermediate Good

A good or service used as an input in the production of another product and excluded from GDP

Expenditure Approach

Y = C + I + G + NX measuring total economic spending

Consumption (C)

Household spending on final goods and services excluding new residential housing

Investment (I)

Business spending on capital goods new housing construction and inventory changes

Government Purchases (G)

Federal state and local government spending on goods and services excluding transfer payments

Net Exports (NX)

Total spending on exports minus total spending on imports

Value Added

Total sales revenue minus the cost of intermediate inputs at each production stage

Shadow Economy

Illegal or unreported economic activity omitted from official GDP statistics

Nominal GDP

GDP evaluated at current market prices without adjusting for inflation

Real GDP

GDP measured using constant base-year prices to isolate changes in actual physical output

Rule of 70

A rule stating that doubling time in years is approximately equal to 70 divided by the annual percentage growth rate

Production Function

The method or recipe by which inputs are transformed into total economic output

Aggregate Production Function

An economic model linking total GDP to aggregate labor human capital and physical capital inputs

Labor (L)

The total sum of all hours worked across the economy

Human Capital (H)

The accumulated knowledge skills and expertise that make a worker more productive

Physical Capital (K)

The stock of tools machinery equipment and infrastructure used to produce output

Labor Productivity

The quantity of goods and services produced per hour of work

Technological Progress

New methods or recipes for combining existing resources to create more valuable output

Constant Returns to Scale

The property where scaling up all inputs by a given factor scales up total output by the exact same factor

Law of Diminishing Returns

The principle that adding more of one input while holding others constant eventually yields smaller incremental increases in output

Catch-Up Growth

The rapid economic growth experienced by poorer nations when accumulating physical capital

Solow Model

An economic model analyzing how savings capital accumulation depreciation and technology drive growth

Depreciation

The loss of physical capital over time due to wear tear obsolescence or damage

Property Rights

The legal framework establishing ownership and control over tangible and intangible resources

Working-Age Population

Non-institutionalized civilians aged 16 and older available to participate in the labor market

Employed

Working-age individuals currently working for pay self-employed or temporarily absent from work

Unemployed

Working-age individuals who are without work but actively searching for jobs and available to work

Labor Force

The sum of all employed and unemployed individuals in an economy

Labor Force Participation Rate

The percentage of the working-age population in the labor force calculated as employed+unemployed / working age population * 100

Unemployment Rate

The percentage of the labor force that is unemployed calculated as unemployed / labor force * 100

Equilibrium Unemployment Rate

The long-run rate toward which the unemployment rate naturally tends to return

Marginally Attached Workers

Individuals who want a job and searched in the past year but are not currently searching

Discouraged Workers

Marginally attached individuals who stopped job searching specifically because they believe no jobs are available

Underemployed

Workers employed below their skill level or working part-time involuntarily when seeking full-time work

Frictional Unemployment

Short-term unemployment associated with the time required to match job-seekers with open jobs

Structural Unemployment

Unemployment occurring when wages remain above market equilibrium due to institutional barriers or efficiency wages

Cyclical Unemployment

Unemployment caused by recessions or temporary downturns in the business cycle

Efficiency Wages

Higher-than-market wages voluntarily paid by employers to increase worker productivity and retention

Hysteresis

The condition where a prolonged recession leads to a permanent rise in the equilibrium unemployment rate

Inflation

A generalized rise in the overall price level across an economy

Deflation

A generalized fall in the overall price level across an economy

Consumer Price Index (CPI)

An index tracking the average price paid by urban consumers for a fixed basket of goods and services

Inflation Rate

The annual percentage change in the price index calculated as Current CPI - last years CPI / last years CPI *100