Principles of Macroeconomics Vocabulary Flashcards

Vocabulary flashcards covering core economic terms, definitions, principles, and models from Principles of Macroeconomics 3e.

Scarcity

The condition in which human wants for goods, services, and resources exceed what is available.

Division of labor

The production practice of dividing the required tasks to produce a good or service among different workers rather than having one person perform all tasks.

Economies of scale

A condition where, as the level of production increases, the average cost of producing each individual unit declines.

Microeconomics

The branch of economics that focuses on the actions of individual agents within the economy, such as households, workers, and business firms.

Macroeconomics

The branch of economics that focuses on the economy as a whole, addressing broad issues such as growth of production, unemployment, inflation, and trade balances.

Monetary policy

Economic policy conducted by a nation's central bank that involves altering interest rates, the availability of credit, and the extent of borrowing.

Fiscal policy

Economic policy determined by a nation's legislative body that involves government spending and taxation.

Circular flow diagram

An economic model showing how households and firms interact in the goods and services market (where households buy and firms sell) and in the labor market (where households supply labor and firms demand it).

Opportunity cost

The value of the next best alternative that must be given up or forfeited to obtain a desired item or outcome.

Law of diminishing marginal utility

The economic principle stating that as a person receives more of a good or service, the additional (or marginal) utility obtained from each additional unit declines.

Sunk costs

Costs incurred in the past that cannot be recovered and should be disregarded when making current economic decisions.

Production possibilities frontier (PPF)

A diagram illustrating the productively efficient combinations of two products an economy can produce given its available resources and technology.

Law of increasing opportunity cost

The economic principle holding that as the production of a good or service increases, the marginal opportunity cost of producing it increases as well.

Productive efficiency

A state in which, given available inputs and technology, it is impossible to produce more of one good without decreasing the quantity produced of another good.

Allocative efficiency

A state in which the particular mix of goods and services produced along a production possibilities frontier represents the specific combination that society most desires.

Comparative advantage

The ability of a country or entity to produce a good or service at a lower opportunity cost than another country or entity.

Law of demand

The economic principle stating that a higher price for a good or service leads to a lower quantity demanded, while a lower price leads to a higher quantity demanded, holding all other variables constant.

Law of supply

The economic principle stating that a higher price for a good or service leads to a higher quantity supplied, while a lower price leads to a lower quantity supplied, holding all other variables constant.

Equilibrium price

The price level in a market at which the quantity demanded by buyers equals the quantity supplied by sellers.

Price ceiling

A legal maximum price set by a government that prevents the price of a good or service from rising above a specified level.

Price floor

A legal minimum price set by a government that prevents the price of a good or service from falling below a specified level.

Consumer surplus

The extra benefit consumers receive from buying a good or service, calculated as the maximum price they were willing to pay minus the price they actually paid.

Producer surplus

The extra benefit producers receive from selling a good or service, calculated as the price actually received minus the minimum price they were willing to accept.

Deadweight loss

The loss in total social surplus that occurs when an economy produces at an inefficient quantity, such as under price controls.

Price elasticity of demand

The percentage change in the quantity demanded of a good or service divided by the percentage change in its price.

Gross domestic product (GDP)

The total dollar value of all final goods and services produced within a country in a given year.

Cyclical unemployment

Unemployment closely tied to the business cycle, rising during economic recessions and falling during economic expansions.

Natural rate of unemployment

The rate of unemployment that persists in a growing and healthy economy due to economic, social, and political forces when the economy is at potential GDP.

Frictional unemployment

Unemployment that occurs as workers take time to search for and transition between jobs in a dynamic economy.

Structural unemployment

Unemployment that occurs when workers lack the specific skills valued by employers due to technological shifts or permanent changes in market demand.

Consumer Price Index (CPI)

A measure of inflation calculated by U.S. government statisticians based on the price level of a fixed basket of goods and services representing average household purchases.

Core inflation index

A measure of inflation calculated by taking the Consumer Price Index and removing volatile economic variables, such as food and energy prices.

Current account balance

A broad measure of trade that includes international flows of goods and services, foreign investment income payments, and unilateral transfers.

Say's law

The macroeconomic viewpoint summarized as "supply creates its own demand," holding that the production of goods and services generates an equivalent amount of total demand in the long run.

Keynes' law

The macroeconomic viewpoint summarized as "demand creates its own supply," holding that total spending drives real economic output in the short run.

Money multiplier

A ratio calculated as $\frac{1}{\text{reserve requirement}}$ that determines the total M1 money supply the banking system can create from a given change in bank reserves.

Quantitative easing (QE)

An unconventional monetary policy in which a central bank purchases long-term government and private mortgage-backed securities to increase credit availability and stimulate aggregate demand.