Macroeconomics Exam 1 – Vocabulary Review

A set of vocabulary flashcards covering essential macroeconomic terms and concepts from the study guide.

Positive economics

Branch of economics that describes and explains economic phenomena—answers the “What is…?” question without value judgments.

Normative economics

Branch of economics that incorporates value judgments—answers the “Should we…?” question and cannot be resolved solely with data.

Free market

An economic system where prices and production are determined by unrestricted competition among privately owned businesses and consumers.

Command economy

An economic system in which a central authority (usually the government) determines production targets, prices, and resource allocation.

Opportunity cost

The value of the next-best alternative forgone when a choice is made.

Equity

Fairness or justice in the distribution of economic benefits; often a policy goal that can conflict with efficiency.

Efficiency (economic)

The allocation of resources that maximizes total surplus; achieved where marginal benefit equals marginal cost.

Production Possibilities Frontier (PPF)

A curve showing the maximum attainable combinations of two goods that can be produced with available resources and technology.

Economic agent

Any individual or entity that makes economic decisions; primarily consumers, firms, and governments.

Factors of production

Inputs used to produce goods and services: land (earns rent), labor (earns wages), capital (earns interest), and entrepreneurship (earns profit or loss).

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer.

Marginal benefit

The additional gain received from consuming one more unit of a good or service.

Marginal cost

The additional cost incurred from producing or consuming one more unit of a good or service.

Equilibrium price (P*)

The price at which quantity demanded equals quantity supplied in a market.

Equilibrium quantity (Q*)

The quantity bought and sold at the equilibrium price.

Surplus (market)

A situation in which quantity supplied exceeds quantity demanded at the current price.

Shortage (market)

A situation in which quantity demanded exceeds quantity supplied at the current price.

Consumer surplus

The difference between what consumers are willing to pay and what they actually pay; area below the demand curve and above price.

Producer surplus

The difference between the price producers receive and the minimum they are willing to accept; area above the supply curve and below price.

Deadweight loss

The reduction in total surplus that results from an inefficient level of production, often due to price controls or taxes.

Price ceiling

A legal maximum price set below equilibrium, leading to shortages.

Price floor

A legal minimum price set above equilibrium, leading to surpluses.

Complementary goods

Products consumed together so that an increase in the price of one decreases demand for the other (e.g., phones and contracts).

Substitute goods

Products that can replace each other; an increase in the price of one raises demand for the other (e.g., Starbucks vs. Coffee Bean coffee).

Law of increasing opportunity cost

Principle reflected by a bowed-out PPF: producing more of one good requires larger sacrifices of the other good.

Constant opportunity cost

Situation illustrated by a straight-line PPF where opportunity cost remains the same along the curve.

Total surplus

The sum of consumer and producer surplus; maximized at the efficient output level.

Supply shift

Movement of the entire supply curve due to factors like input prices, technology, or number of sellers.

Demand shift

Movement of the entire demand curve due to factors like income, prices of related goods, tastes, or expectations.