macroeconomics module 1

this course sucks but i must become a doctor

PPC

production possibilities curve

Economics

is the study of the production and exchange of goods and services. economics can include the study of all human choices made in light of scarcity.

scarcity

refers to the limited nature of society's resources, which necessitates making choices about how to allocate them.

shortage

a situation where demand for a good or service exceeds its supply.

consumer good

a final product acquired for direct use

capital good

resource obtained by a business from another in order to produce a consumer good or service

capital

resources that improve productivity

factors of production

the inputs used in the production of goods and services, typically categorized into land, labor, capital, and entrepreneurship.

capital vs land

a capital good is one that has been produced and can be used to produce other goods and services. It is distinguished from "land" in that capital goods are not raw materials.

distribution

the way in which resources or goods are allocated among various parties in an economy.

economic system: Command

Central planning by the government using involuntary laws, taxes, regulations, and restrictions—the planning agency determines production quantities for goods and services. It also allocates resources to firms to meet the target production quantities. 

economic system: market

Price determined by voluntary negotiation of buyers and sellers. Protection for private ownership property rights and control of resources by households and business

economic system: traditional

Economic activity is determined by customs and traditions. These societies are usually based on farming, hunting, and/or fishing and are rural. Transactions are often determined by barter. Traditional economies are not a focus in macroeconomics since their impact at that large a scale is limited.

opportunity cost

the next-best option that is sacrificed

Recession

a significant downturn in the economy

underutilized resources

land, labor, or capital that is not being used for maximum efficiency, such as un-used land or part-time workers who would prefer to be full-time.

economic contraction

a decrease in a society’s ability to produce goods and services

economic growth

an increase in a society’s ability to produce goods and services.

specialization

the designation of resources and workers to specific tasks to produce in a more efficient and effective way

absolute advantage

the ability to produce more of the same good with the same or current resources

comparative advantage

the ability to produce something with a lower opportunity cost than producing another good or than someone else can produce it

how does production specialization affect a country’s PPC?

Technically, it doesn't. Neither specializing in one's comparative advantage nor trade allows for producing beyond the production possibilities curve (PPC). However, specialization and trade allows a country's people to benefit by consuming beyond the PPC.

how to know the terms of trade?

The terms of trade will always fall between the opportunity costs of the countries.

law of comparative advantage

the total output of the world economy is maximized when each country specializes in producing the good for which it has the lowest opportunity cost.

To express a good's opportunity cost as a fraction, the ...

other good's quantity goes over in output problems

other good's quantity goes under in input problems

demand

Demand is the willingness and ability to buy a range of quantities at a range of prices.

demand schedule

the quantity that will be purchased of a good or service at every possible price

in a demand schedule graph, area of rectangles equals?

the total revenue for all suppliers in the market

Law of demand:

the quantity demanded of a good or service is indirectly related to its price, ceteris paribus.

ceteris paribus

latin for “other things equal” meaning all other variables unchanged

purchasing power (real income)

what a consumer can buy w an amount of income

income effect

as prince increases, people are willing to buy less goods because higher prices take a greater portion of their income

substitution effect

The greater the price, the more likely it is that consumers will find a substitute product to purchase instead, reducing the quantity demanded for the original good.

Law of Diminishing Marginal Utility

as more of a good or unit is consumed, the personal satisfaction received from it decreases

utility

generally means usefulness, in economics it means the personal satisfaction from an economic action

effects of decreasing price as per LDMU

The lower the price, the lower the marginal utility can be, and there can still be a higher quantity demanded.

how does an increase in price affect demand?

It doesn't. An increase in price lowers quantity demanded.

determinants of demand

factors that shift the entire demand curve of a good or service

TRIBE; acronym demand shifters

T - tastes/preferences, R - related goods and services’ price, I - income, B - buyers of, E - expectations of price

complements

a good often purchased in unison with this good

normal goods

something people will buy more of when their income increases

inferior goods

something people will buy less of when their income increases

constraints

The "willingness and ability to purchase" that is part of the definition of demand is significantly affected by the price incentive and the constraints of time, income, and legal or regulatory frameworks.

Law of Supply

The quantity supplied of a good or service is directly, or positively, related to its price, ceteris paribus.

supply schedules

the quantity that will be supplied of a good or service at every possible price

determinants of supply

factors that change the quantity supplied at every price level of a good or service

ROTTEN; acronym for supply shifters

R - resource cost/availability, O - other goods’ prices, T - taxes, subsidies, gov regulations, T - technology (productivity), E - expectations of the producer, N - number of firms in the industry

subsidy

a government payment to an individual or business to encourage a certain activity

market equilibrium point

the price and quantity in which supply and demand are balanced

market shortage

when quanity supplied is less than quantity demanded at the current price

market surplus

when quantity supplied is more than quantity demanded at the current price

disequilibrium

a condition where there is imbalance between quantity supplied and quantity demanded in a market

price floor

a minimum price set by policy; if binding, will be above market equilibrium

price ceiling

a maximum price set by policy; if binding, will be below market equilibrium