Exam #1

Economics

The study of how humans interact with each other and their environment in producing livelihoods, and how this changes over time.

Macroeconomics

The study of the structure, behavior, and performance of the economy as a whole.

Capitalism

An economic system organized around private property, markets, and firms, where production is for profit and labor is typically wage-based.

Private Property

The right to own, use, and transfer assets (land, machinery, etc.) and exclude others from use.

Market

An institution connecting buyers and sellers through exchange of goods and services.

Firms

Organizations where production occurs, directed by owners/managers, selling goods/services for profit.

Invisible Hand (Adam Smith)

The idea that individuals pursuing self-interest can unintentionally promote the overall good of society.

Specialization (Division of Labor)

Focusing on specific tasks increases efficiency via learning by doing, differences in abilities, and economies of scale.

Exponential Growth

Increase by a constant percentage rate each period.

Linear Growth

Increase by a constant amount each period.

Gross Domestic Product (GDP)

The total value of all final goods and services produced in a country in a given period.

Final Goods

Goods consumed by end users, not used as inputs to avoid double-counting.

Nominal GDP

GDP measured at current prices.

Real GDP

GDP adjusted for inflation; better for comparisons across time and countries.

GDP Deflator

A price index used to measure inflation across all goods and services.

Inflation Rate

Percentage change in the GDP deflator (or general price index).

Circular Flow Model

Illustrates how income, output, and spending circulate between households and firms.

Aggregate Demand (AD)

Total spending on domestic goods and services.

Aggregate Supply (AS)

Total quantity of output (real GDP) firms will produce at different price levels.

Demand-Pull Inflation

Caused by AD shifting right (excess demand).

Cost-Push Inflation

Caused by rising production costs or supply shocks.

Deflation

General decline in prices.

Disinflation

Reduction in the inflation rate.

Stagflation

Inflation combined with stagnant or negative growth.

Price Effect

Different groups face different 'personal' inflation based on what they buy.

Income Effect

If wages/incomes don’t rise as fast as inflation, purchasing power falls.

Wealth Effect

Holders of cash or fixed-interest assets lose value during inflation, while borrowers benefit.

LRAS

Long-Run Aggregate Supply, which represents the total output of goods and services that an economy can produce when utilizing all its resources efficiently in the long run.

SRAS

Short-Run Aggregate Supply, which indicates the total output of goods and services produced by an economy in the short run, often influenced by changes in prices and wages.

Endogenous change

a change in economic variables that occurs as a result of adjustments within the economic system itself, often responding to shifts in policy or market conditions.

Exogenous change

What causes shifts in the demand curve

Preferences, Number of buyers, Price of related goods, income, and expectations 

What causes shifts in supply

Price of resources, technology, Government involvement, Number of sellers, and expectations 

Equilibrium

the point where quantity supplied equals quantity demanded in a market.