Macroeconomics: Key concepts

Fallacy of Composition

The assumption that what is true for one individual, firm, or group must also be true for the entire economy.

Equilibrium

A situation where opposing forces are balanced, so there is no tendency for the outcome to change.

Endogenous variable:

A variable that is determined within the economic model.

Exogenous variable:

A variable that is determined outside the model and treated as given.

Ceteris Paribus

Latin for “all else equal” or “holding everything else constant.”

Comparative Statics

The comparison of two equilibrium outcomes—usually before and after a change in an economic variable.

Real Wage

The purchasing power of a worker's wage, adjusted for prices/inflation.

Incomplete Contracts

Contracts that cannot specify every possible future situation or action.

Reservation Wage

The lowest wage a person is willing to accept to take or keep a job.

No-Shirking Wage

The minimum wage a firm must pay to motivate workers not to shirk

Market Power

How much power firms have to set prices above the marginal cost of production

Monopsony Power

The ability of a large employer to set wages, typically below the marginal product of labor

Markup

The amount by which a firm's price is above its marginal cost.

Price Elasticity of Demand

Measures how strongly quantity demanded responds to a change in price.

Disequilibrium

An excess supply or excess demand.

Guard Labor

Labor used to monitor undesirable behavior, rather than directly producing the good or service.

Nash Equilibrium

By individually choosing a different action, it could bring about an outcome that they would prefer

Elephant Curve

A graph showing how income growth has differed across different parts of the global income distribution, particularly during periods of globalization.

Intergenerational Income Elasticity

Measures how strongly a person's income is related to their parents' income.

Productivity & Wage Decoupling

The phenomenon where worker productivity increases faster than worker compensation/wages over time.

Labor Share

The percentage of national income/output that goes to workers as compensation, rather than to owners of capital.

Segmented Labor Markets

The idea that the labor market is divided into different segments with different wages, opportunities, working conditions, and mobility.

Cause of Inequality

Differences in education and skills

tax policies

Consequences of Inequality

Differences in access to education and healthcare

Lower economic mobility

Reduced social mobility

Political polarization