Macroeconomics

Economics

the study of how society manages its scarce resources.

Scarcity

society has limited resources and cannot produce all the goods and services people want.

Opportunity cost

whatever must be given up to obtain something.

Marginal analysis

making decisions by evaluating the costs and benefits of small adjustments to a plan.

Rational people

people who systematically and purposefully do the best they can to achieve their goals, given the available opportunities.

Marginal change

an incremental adjustment to an existing plan of action.

Market economy

an economy where decisions are made by millions of firms and households instead of a central planner.

Property rights

the rights to own and control scarce resources.

Market failure

when the market does not produce an efficient allocation of resources on its own.

Externality

the impact of one person’s actions on the well-being of a bystander.

Market power

the ability of a single person or firm to unduly influence market prices.

Productivity

the amount of goods and services produced by each unit of labor input.

Inflation

an increase in the overall level of prices in the economy.

Business cycle

the irregular and largely unpredictable fluctuations in economic activity.

Model

a simplified representation of a more complicated reality.

Firms

produce goods and services using factors of production.

Households

own the factors of production and consume the goods and services that firms produce.

Production Possibilities Frontier (PPF)

a graph showing combinations of outputs that an economy can possibly produce, given its available resources and technology.

Efficient

getting the greatest benefits from the scarce resources available; points on the PPF.

Equality

scarce resources are distributed uniformly among society’s members.

Inefficient

production at points inside the PPF.

Not feasible

points outside the PPF.

Increased opportunity cost

giving up more of one good to produce each extra unit of another.

Decreased opportunity cost

giving up less of one good to produce another.

Economic growth

when the PPF shifts outward because of increased technology, resources, or productivity.

Microeconomics

the study of how households and firms make decisions and interact in markets.

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

Positive statement

a descriptive statement that can be confirmed or refuted by evidence.

Normative statement

a statement about how the world should be; based on values and views on ethics.

Market

a group of buyers and sellers of a good or service.

Competitive market

a market with many buyers and sellers, where each has a negligible impact on the market price.

Perfectly competitive market

a market where goods are exactly the same and there are so many buyers and sellers that no one can affect the market price.

Price takers

people who accept the price the market determines.

Monopoly

a market that has only one seller, and the seller sets the price.

Quantity demanded

the amount of a good that buyers are willing and able to purchase.

Law of demand

when the price of a good rises, quantity demanded falls; when the price falls, quantity demanded rises.

Market demand

the sum of all the individual demands for a particular good or service.

Normal good

a good where demand falls when income falls.

Inferior good

a good where demand rises when income falls.

Substitutes

pairs of goods that are used in place of each other.

Complements

pairs of goods that are used together.

Quantity supplied

the amount of a good sellers are willing and able to sell.

Law of supply

when the price of a good rises, quantity supplied rises; when the price falls, quantity supplied falls.

Market supply

the sum of the supplies of all sellers.

Equilibrium

the price level where quantity supplied equals quantity demanded.

Surplus

when producers are unable to sell all they want at the going price.

Shortage

when consumers are unable to buy all they want at the going price.

Law of supply and demand

the price of a good adjusts to bring quantity supplied and quantity demanded into balance.

Change in supply

a shift in the supply curve.

Change in demand

a shift in the demand curve.

Change in quantity supplied

a movement along a fixed supply curve.

Change in quantity demanded

a movement along a fixed demand curve.

Gross Domestic Product (GDP)

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

Intermediate good

something used to make a final good; its price is included in the price of the final good.

Gross Domestic Income (GDI)

the same number as GDP.

Statistical discrepancy

the difference between GDP and GDI.

Gross National Product (GNP)

the total income earned by a nation’s permanent residents.

Net National Product (NNP)

the total income of a nation’s residents minus losses from depreciation.

Depreciation

the wear and tear on the economy’s stock of equipment and structures.

Personal income

the income that households and noncorporate businesses receive.

Disposable personal income

the income households and noncorporate businesses have left after satisfying their obligations to the government.

Consumption

spending by households on goods and services, except purchases of new housing.

Investment

the purchase of goods that will be used in the future to produce more goods and services.

Government purchases

spending on goods and services by federal, state, and local governments.

Transfer payments

payments that are not made in exchange for a currently produced good or service.

Net exports

foreign purchases of domestically produced goods minus domestic purchases of foreign goods.

Real GDP

the value of goods and services produced this year using the prices from a specific year in the past.

GDP deflator

measures the current price level relative to the price level in the base year.

Real GDP per capita

the main indicator of the average person’s standard of living.