EC 202 - Final Exam Michigan State University (MSU)

Land

Any natural resource used in production; "gift of nature"

Labor

Any physical or mental activity devoted to making goods and services; "human resources"

Capital

Any tool, machine, infrastructure, or knowledge used to produce goods and services

Physical Capital

Any tangible item that can be used to increase productivity

Human Capital

Knowledge and skills people acquire to increase productivity

Entrepreneurial Ability

The talent or ability to combine land, labor, and capital to produce goods and services

Economics

About people and the choices they make in a world of scarce resources.
The study of decision-making.

Microeconomics

The study of the economy on a small scale.
Individuals, businesses, small markets.

Macroeconomics

The study of the economy on a large scale.
Looks at total output, total consumption, etc.

Resources

Any item whether it be a gift of nature, the result of production, or result of human effort that is used to produce goods and services.

Scarcity

Humans have unlimited wants but there are limited resources

Opportunity Cost

The value of your next best foregone alternative.
Value of one activity you give up when you chose another one.

Rational Decision Making

Self-Interest, Marginal Decision Making, Optimization

Self-Interest

You decide based on your own self interest

Marginal Decision Making

Making choices in different increments

Optimization

You try to make the most out of your utilities

Marginal Benefit (MB)

The additional benefit of one more unit of an activity

Marginal Cost (MC)

The additional cost of one more unit of an activity

False

If Marginal Cost is greater than Marginal Benefit, you'll do the thing

Production Possibilities Frontier (PPF)

Taking points from a production possibilities schedule and plotting them. The line created acts as a boundary.

Comparative Advantage

The ability to produce a good or service at a lower relative opportunity cost than another producer.
Specialization.

Circular Flow Model

A model that concisely describes how goods, services, resources, and money flow back and forth in an economy.

Resource Market

Where resources are bought and sold

Product Market

Brings together buyers and sellers for goods and services

Firms

Businesses

Households

Own resources (think labor)

Market

Any place where or any mechanism by which buyers and sellers interact to trade goods, services, or resources

True

Prices are set by the "invisible hand" not by buyers nor sellers

Law of Demand

A principle in economics which states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant.

Demand Schedule

Tabular representation between the price of the good and the quantity demanded

Demand Curve

Graphical representation between the price of the good (y-axis) and the quantity demanded (x-axis).
Downward Sloping.

Marginal Benefit, Purchasing Power, Substitutes

Reasons why the demand curve is downward sloping:

Market Demand

All the buyers' demand within a market.
Add horizontally.

Tastes and Preferences, Income, Market Size, Expectations, Related Goods

Determinants of Demand (TIMER):

Tastes and Preferences

Increase preference for the good or service will increase demand and vice versa

Normal Good

A good for which there is a direct relationship between the demand for the good and income.
As income goes up, demand goes up (shift to the right).

Inferior Good

A good for which there is an inverse relationship between the demand for the good and income.
As income goes up, demand goes down (shift to the left)

Market Size

Number of buyers.
Increase in the number of buyers, demand will increase.
Decreases in the number of buyers, demand will decrease.

Expectations

Future prices.
If you think the price will go up in the future, demand will go up now.

Substitutes

Goods, services, or resources that are viewed as replacements of one another.
Ex: Coke or Pepsi
If the price of one goes up, the demand for the other will go up.

Complements

Goods, services, or resources that are used or consumed together.
Ex: peanut butter and jelly
If the price of one goes up, the demand for the other will go down.

Law of Supply

A principle in economics that states that as the price of a good, service, or resource rises, the quantity supplied will increase, and vice versa, all else held constant.

Supply Schedule

Tabular representation between the price of the good and the quantity supplied

Supply Curve

Graphical representation between the price of the good (y-axis) and the quantity supplied (x-axis).
Upward Sloping.

Market Supply

All the sellers' supply within a market.
Add horizontally.

Taxes, Use of Technology, Number of Sellers, Expectations, Resource Cost, Subsidies

Non-price determinants of supply (TUNERS)

Taxes

Any payment made to the government because of economic activity.
Cause a decrease in supply.

Use of Technology

Any knowledge, invention, or innovation that can potentially increase resource productivity.
Increased use will increase supply.

Number of Sellers

Market size.
Increased number of sellers, increase in supply.
Decreased number of sellers, decrease in supply.

Expectations

The anticipated future outcomes, including prices, that sellers associate with the production of a good, service or resource.
If sellers expect prices to increase, supply will decrease now.
If sellers expect prices of decrease, supply will increase now.

Resource Cost

Decreased resource prices will increase supply and vice versa.

Subsidies

A payment made by the government that does not necessarily require an exchange of economic activity in return.
Cause an increase in supply.

Market Equilibrium

When the demand and supply curve intersect.
Markets will always move here.

Surplus

Price is above equilibrium; when quantity supplied is greater than quantity demanded

Shortage

Price is below equilibrium; when quantity demanded is greater than quantity supplied

Price Ceilings

A maximum legal price at which a good, service, or resource can be sold. If set above equilibrium it won't work (non-binding).

Price Gouging

When sellers spike prices of goods.

Price Floors

A minimum legal price at which a good, service, or resource can me sold.

Tax Wedge

The difference between the price that the buyers pay and what the sellers actually get

Budget Surplus

A situation in which the government receives more revenue than it spends in a given fiscal year

Budget Deficit

A situation in which the government receives less revenue than it spends in a given fiscal year

Balanced Budget

A situation in which the government spends exactly what it collects in revenue

National Debt

The accumulation of all previous budget deficits and budget surpluses by a government

GDP (Gross Domestic Product)

Measures the expenditures (or dollar value) of all final goods and services that are produced during a fixed period of time. Market value of all final goods and services produced in the economy.

Nominal GDP

A GDP measure in which the quantities produced are valued at current year prices

Final Goods and Services

Any good or service that is sold to the end user and not used to produce another product for subsequent sale

Intermediate Goods

Goods that are used to make or build another product that will be subsequently sold.

Used goods, purchases of stocks and bonds, underground market, home production

What don't we count in GDP?

The Expenditures Approach

Personal consumption and government expenditures

Consumption

All expenditures made by households on goods and services, like clothing, food, electronics, and recreation, during a given period of time.

Consumer Durables

Goods that have an average useful life of three years or more.
Ex: houses and cars

Consumer Nondurables

Goods that have an average useful life of less than three years.
Ex: food and clothing

Services

Outputs, often intangible, or the direct activities of another person.
Ex: going to a movie, going out to eat

Government Purchases

All final goods purchased by federal, state, and local governments during a given time period, as well as all final services purchased form labor resources.
Ex: police cars, security services

Gross Investment

The dollar value of all new capital purchased (as investment) and the expansion of inventories in an economy during a fixed time period.
20% of GDP

Business Fixed Investment

Any purchases by firms of new capital goods.
Ex: offices, factories, tools, machines

Residential Investment

The purchase of new homes.
Ex: home improvements

Inventory Investment

Changes in inventories from one year to the next.
Positive if firms produce more than they sell
Negative if firms sell more than they produce

Net Exports

The market value of all final goods and service produced in an economy in a fixed period of time; the difference between exports and imports.

The Income Approach

An approach to measuring GDP that measures the value of all final goods and service in an economy during a period of time using income generated data

Indirect Business Taxes

Taxes paid by businesses, such as property taxes, sales taxes, excise taxes, license fees, and tariffs

Depreciation

The consumption of physical capital, or the value of capital that wears out, is used up, or becomes obsolete during a year

Net Foreign Factor Income

The difference between payments received from resources owned in foreign countries and income earned by people in foreign countries from resources owned domestically.

National Income

Total payments to owners of resources plus profits and losses; the sum of rent, wages, interest, and profits and losses to sole proprietors and firms

Real GDP per Capita

Real GDP number divided by the population of the country

GDP Price Index

GDP Price Index = (Nominal GDP/Real GDP) x 100

Standard of Living

The level of overall wellbeing enjoyed by an average individual, group, or socitey

Economic Growth

An increase in real GDP or an increase in real GDP per capita.
Can occur if we obtain additional resources, invent new technologies, or existing resources become more productive.

True

The more capital you have, the more economic growth you will have

Growth Rate

Growth Rate = (GDPyear2 - GDPyear1)/(GDPyear1) x 100

Rule of 72

A rule of thumb used to estimate, given a constant rate of growth, how long it will take for a value to double in size.
Time to Double = 72/Growth Rate

The Business Cycle

The short-term fluctuations experienced in an economy due to changes in levels of economic activity

Employed

The number of people in the economy who hold a full or part-time position

Unemployed

The number of people in the economy who have not had a job for at least a week but have actively searched for employment in the past 4 weeks

Cyclical

Unemployment that results from fluctuations in the business cycle

Frictional

Workers are searching and waiting for jobs

Structural

The skills that some workers have to offer simply don't match the needs by the firms in the economy

Unemployment Rate

Unemployment Rate = Unemployed/Labor Force x 100

Natural Rate of Unemployment

Sum of the frictional and structural unemployment rates.
Economy achieves its potential output.

Fully-Employed Economy

An economy that is operating at its natural rate of employments