Macroeconomics - 1.1, 1.2, 1.3, 1.4, 1.5, 1.6

Good

Physical items created by the people to be used right away

Service

Valuable action supplied by other people

Economy

A system that coordinate choices about production with choice about consumption , and distributes goods and services to the people who want them

Market Economy

Economy in which production and consumption are the result of decentralized decision by many firms and individuals.

→ Owned by private sectors

→ Supply and Demand

→ Freedom to start business

Command economy

Industry is publicly owned and there is a central authority that makes production and consumption decisions.

→ Owned by government

→ Price Control

→ Government regulation

Mixed-Market economy

Combines elements of both command and market economy like the US.

Opportunity cost

Whatever give up to do something

Incentive

A set of external (rather intrinsic) motivates that explain people’s choices

Scarcity

Unlimited wants and limited resources

Trade off

Situation where making one choice mean giving up another

Marginal Analysis

The study of decisions considering the marginal benefits and cost

Positive Economics

Economic analysis that is used to answer questions about the way the economy works, questions that have definite right and wrong answers

Normative economics

Economic analysis that involves saying how the economy should work

Cost-Benefit analysis

One way to make an educated choice. Allow the listing of pros and cons to make a decision

Production Possibilities Curve

To improve our understanding of trade offs by considering a simplified economy that produces only two goods.

Shows trade offs graphically

Factors of production

Resources required to produce the things we would like to have, are land, capital, labor and entrepreneurs

Inefficiency

Efficiency

There are no missed opportunities

Economic growth

An expansion of the economy’s production possibilities

Allocative efficiency

All resources are allocated so that consumers are as well off as possible

Trade

People divide tasks among themselves and each person provides a good or service that other people want in return for different goods and services that he or she wants

Gains from trade

Dividing tasks and trading to enable each person to get more of what they want than what they could get by being self sufficient

Comparative advantage

If the opportunity costs of producing the good or service is lower for that individual than for other people

Absolute Advantage

If an individual is capable of producing more goods or services with a given time and resources

Specialization

A situation in which different people each engage in different task

Mutually beneficial terms of trade

When individuals and countries specialize in producing things in which they have a comparative advantage and then trade with other countries that specialize in something else

Demand

The willingness and ability of a customer to buy goods and services at a specific price

Demand Schedule

Shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time.

Plotted on a demand curve

Demand curve

Shows the quantity demanded at each price that might prevail in the market

→ Plots the info from a demand schedule

→ Shows the law of demand

Law of demand

States that quantity demanded varies inversely with its price. Shown own a demand curve

Quantity demanded

The amount of products that consumers demand NOT demand itself

Income effect

Changes in price affect the purchasing power of consumers’ income

Substitution effect

Changes in price motivate consumers to buy relatively cheaper substitutes goods

Marginal utility

The extra usefulness or additional satisfaction a person gets from acquiring or using one more unit of a product

Law of diminishing marginal utility

As you continue to consume a given product, you will eventually get less additional utility from each unit you consume

Determinants of Demand

Various factors whose change can cause change in demand; Consumer taste or preference, Number of consumers, Price of substitute or complementary goods, consumer income and expectations

Substitute

Goods that can be used in place of each other, meaning a rise in the price of one will lead to an increase in demand for the other.

Complement

Goods that are typically used together, so an increase in the price of one will lead to a decrease in demand for the other. 

Normal Goods

Income and the demand for the product are directly related

Inferior Goods

Income and the demand for the product are inversely related

Supply

The amount of product that would be produced, grown, or acquired and offered for sale at all possible prices that could prevail in the market.

Supply Schedule

A listing of the various quantities of a particular product supplied at all possible prices in the market

Supply curve

A graph showing the various quantities supplied at all possible prices that might prevail in the market at any given time

→ Has a positive slope

Law of supply

States that more will be offered for sale at a higher prices than at lower prices. Direct relationship between price and quantity supplied

Quantity supplied

Amount that a single producer or all producers bring to a market at any given prices.

Determinants of supply

various factors whose change can cause change in supply. Cost of resources, Number of producers, Technology, Taxes and Subsidies and Expectations

Subsidy

When government wants farms to produce more, so they give them money to produce mroe outputs causing a shift to the right of the supply curve.

Change in supply

Suppliers offer different amounts of a product for sale at all possible prices in the market.

Market equilibrium

The price has moved to a level at which the quantity of a good demanded equals the quantity of good supplied

Equilibrium Price

The price that matches the quantity supplied and the quantity demanded is the equilibrium price

Equilibrium Quantity

The quantity bought and sold at the equilibrium price

Market clearing price

AKA Equilibrium price. The price that clears the market by ensuring that every buyer willing to pay that price finds a seller willing to sell at that price

Surplus

Whenever the market price is above its equilibrium level

Shortage

Whenever the price is below its equilibrium level

Double Shift Rule

When two curves shift at the same time either the price or quantity will be indeterminate