Macroeconomics Midterm

Resource 

anything that can be used to produce something else

Scarce

A resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it

Opportunity Cost

What you must give up in order to get something

Trade Off

Comparison of the costs and benefits or doing something

Marginal Decision

A decision made at the margins of an activity about whether to do a bit more or a bit less of that activity

Marginal analysis

the study of marginal decisions 

Incentive

anything that offers rewards to people who change their behavior

Specialization

The situation in which each person specializes in the task that they are good at performing

Equilibrium 

an economic situation in which no individual would be better off doing something different 

Efficiency

all the opportunities to make people better off have been exploited

Equity

a condition in which everyone gets their “fair share”

During recessions, a drop in business spending leads to:

Less income and less spending 

Overall spending 

amount of goods and services that consumers and business what to buy 

recession

overall spending is short of what is needed to keep workers employed

Inflation

when overall spending outstrips the supply

Economic growth

the increase in living standards over time

Economy’s potential 

the total amount of goods and services it can produce 

Model

A simplified representation of a real situation that is used to better understand real- life situations

The other things equal assumption

all other relevant factors remain unchanged

PPF

production possibilities frontier 

PPF diagram

shoes the combinations of two goods that are possible for a society to produce at full employment

PPF helps us understand some aspects of the real economy

Efficiency, Opportunity costs, Economic growth

Increase in production 

resources used to produce goods and services 

Resources used to produce goods and services

land, labor, physical capital, and human capital

Theory of Comparative Advantage

it makes sense to produce the things you’re especially good (relatively better) at producing and buy everything else from others

Comparative advantage and gains from trade go hand and hand because

specialization 

Barter

when people directly exchange goods or ervices that they have for goods or services that they want

Circular flow diagram

represents the transactions in an economy by flows around the circle

Household

is a person or group of people who share their income 

Firm

is an organization that produces goods and services for sale

Markets for goods and services

Firms sell goods and services that they produce to households

Factor markets 

Firm buy the resources they need to produce goods and services 

An economy’s income distribution

is the way in which total income is divided among the oweners of teh various factors of production

Positive economics  

The brand of economic analysis that describes the way the economy actually works; description

Normative economics

makes predictions about the way the economy should work; prescription 

Forecast

a simple prediction of the future

Competitive market

has many buyers and sellers of the same good or service, none of whom can influence the price

Supply

represents the behavior of sellers

Supply schedule 

shoes how much of a good or service would be supplied at different prices 

Supply Shifters 

Input prices, prices of related goods or services, technology, expectations, the number of producers 

An increase in the price of an input makes production more costly for sellers

supply decreases

A fall in the price of an input makes the production less costly for sellers

supply increases

Entry

implies more sellers in the market, increasing supply

Exit

implies fewer sellers in the market, decreasing demand

Demand

represents the behavior of buyers

Demand schedule 

a table showing how much of a good or service consumers will want to want at different prices 

Law of demand

a higher price for a good leads people to demand a smaller quantity of that good, other things equal

Demand Shifters

changes in the prices of related foods or services, changes in income, change in taste, change in expectations, change in the number of consumers

Substitutes

serve as a similar function

Complements

consumed together

Normal good

demand increases when incomes increases

Inferior good

demand decreases when income

Fads

short term increase in demand caused by temporary popularity or changing taste

Expectations

Buyers adjust current spending in anticipation of the direction of future [rices in order to obtain the lowest possible price

Market equilibrium

Qs=Qd

Uniform price

also know as market price

Surplus

do not last; quantity supplied exceeds the quantity demanded, price is above its equilibrium

Shortage

do not last; quantity demanded exceeds the quantity supplied, price is below its equilibrium level

Individual consumer surplus

the gain to an individual buyer from the purchase of a good; difference between the price paid and what the buyer is willing to pay

Total consumer surplus 

the sum of individual consumer surpluses of all buyers in a market

Consumer surplus

a consumer’s willingness to pay for a good is the maximum price that they would pay for that good

Producer surplus

the difference between the market price and the price at which firms are willing to supply the product

Individual producer surplus 

the net gain to an individual seller from selling a good is equal to the idfference between the price received and the seller’s costs

Total producer surplus 

the sum of individual producer surpluses of all the sellers in the market 

Hyper globalization

the phenomenon of extremely high levels of international trade

Ricardian model

analyzes trade under the assumption that makes production possibilities frontiers straight liens (assume constant opportunity costs)

Autarky 

a situation in which a country does not trade with other countries 

Sources of Comparative advantage

climate, factor endowments, technology

Factor abundance

the supply of a factor of production relative to other factors

Factor Intensity 

a measure of the quantity of a factor used in comparison 

Hechsher- Ohlin Model

A country that has an abundant supply of a factor of production will have a comparative advantage in goods whose production is intensive in that factor

Returns to scale increasing returns to scale

Productivity rises with the quantity of output

Domestic demand curve

shows how the quantity of a good demanded by domestic consumers depends on the price of that good 

Domestic supply curve

shoes how the quantity of a good demanded by domestic consumers depends on the price of that good

World price

of a good is the price at which that good can be bought or sold abroad

Macroeconomics

focuses on the behavior of the economy as a whole

Microeconomics

focuses on decisions made by individuals and firms

Paradox Thrift

when people are worried about economic hard times, they prepare by cutting their spending, this reduction in spending depresses the economy, and businesses by laying off workers

Combined effect

individuals decisions can have results that are different from what any one individual intended

Monetary policy

uses changes in the quantity of money to alter interest rates, which in turn affect the level of overall spending

Fiscal policy

uses changes in taxes and government spending to affect overall spending

What does John Maynard Keynes do?

established the idea that managing the economy is a government responsibility 

Recessions (contractions)

periods of economic downturn when output and employment are falling

Expansions (recoveries)

periods of economic upturn when output and employment are rising

Business cycle 

the short-run alternation between recessions and expansions

Long-run economic growth

sustained upward trend in the economy’s output over time

Inflation falls

when the economy is depressed and jobs are hard to find

Inflation rises

when the economy is booming

Open economy

it trades goods and services with other countries

Trade deficit

the value of goods and services bought from foreigners is more than the value of goods and services sold to them

Trade surplus

the value of goods and services bought from foreigners is less than the value of the goods and services sold to them 

GDP (Gross Domestic Product)

the market value of all final goods and services produced within a country in a given period of time

CPI (Consumer Price Index)

a way of measuring the price level 

National accounts

they keep track of the spending of consumers, the sales of producers, business investment spending, government purchases, and other flows of money between different sectors of the economy

Consumer spending

household spending on goods and services

Government purchases

purchases of goods and services are total expenditures on goods and services by federal, state, and local governments

Investment spending

spending on productive physical capital (such as machinery) and on changes in inventories

Exports

goods and services sold to other countries

Imports

goods and services purchased from other countries

GDP excludes:

illegal, illicitly, old (or end user), intermediate