Macroeconomics Chapters 1-4 Cram Set

A comprehensive 48-card flashcard set covering core concepts from Chapters 1 through 4 of Macroeconomics, including trade-offs, opportunity cost, supply and demand, and market equilibrium.

What is scarcity?

Resources are limited, so people cannot have everything they want.

What is a trade-off?

Getting more of one thing usually means giving up something else.

What is opportunity cost?

Whatever must be given up to obtain something.

Efficiency vs. equity

Efficiency = getting the most from scarce resources. Equity = distributing economic prosperity fairly.

What does it mean to think at the margin?

Compare the extra benefit of doing a little more with the extra cost of doing a little more.

Adam Smith is associated with what idea?

The invisible hand.

What is an externality?

The effect of one person's actions on a bystander, such as a loud dog waking the neighbors.

What is productivity?

The quantity of goods and services produced from each hour of a worker's time; higher productivity generally supports a higher standard of living.

Inflation and the Phillips curve

Inflation = an increase in the overall price level. The Phillips curve shows the short-run trade-off between inflation and unemployment.

What is macroeconomics?

The study of economy-wide forces and trends such as inflation, unemployment, and economic growth.

Positive statement

Describes what IS and can be tested with data.

Normative statement

Describes what SHOULD be and involves a value judgment.

Quick clue for normative statements

Words like should, ought, better, worse, or serious problem usually signal a normative statement.

Circular-flow diagram

A visual model showing how households and firms interact through markets.

Who buys and sells in the goods market?

Households buy goods and services; firms sell them.

Who buys and sells in the factor market?

Households sell productive resources; firms buy them.

Circular-flow inner vs. outer loop

Inner loop = goods, services, and productive inputs. Outer loop = dollars.

PPF point locations

On = efficient. Inside = possible but inefficient. Outside = currently unattainable.

What does a PPF show?

Trade-offs and opportunity cost between two goods that can be produced with current resources and technology.

What is interdependence?

People and countries rely on one another for the goods and services they consume.

Absolute advantage

Who can produce MORE output with the same resources.

Comparative advantage

Who has the LOWER opportunity cost.

What are gains from trade based on?

Comparative advantage, not absolute advantage.

What is specialization?

Focusing on the good or activity for which a producer has comparative advantage.

Imports

Goods produced abroad and sold domestically. Think: imports come IN.

Exports

Goods produced domestically and sold abroad. Think: exports EXIT.

USA can make 20 wheat or 10 cars. Opportunity cost of 1 wheat?

$\frac{1}{2}$ car.

USA can make 20 wheat or 10 cars. Opportunity cost of 1 car?

$2$ wheat.

Japan can make 12 wheat or 8 cars. Opportunity costs?

$1\text{ wheat} = \frac{2}{3}\text{ car}$. $1\text{ car} = \frac{3}{2}\text{ wheat}$.

USA/Japan example - who has comparative advantage?

USA in wheat; Japan in cars.

What is a market?

A group of buyers and sellers of a particular good or service. A yard sale counts as a market.

Competitive market

A market with many buyers and sellers, so each has little influence on market price.

Price taker

A buyer or seller who accepts the market price as given.

Market types

Monopoly = one seller. Oligopoly = a few sellers. Monopolistic competition = many sellers with slightly different products.

Law of demand

Other things equal, when price rises quantity demanded falls; when price falls quantity demanded rises.

Demand curve direction

Downward sloping.

Law of supply

Other things equal, when price rises quantity supplied rises; when price falls quantity supplied falls.

Supply curve direction

Upward sloping.

Own-price change vs. demand shift

A change in the good's own price causes movement along the demand curve = change in quantity demanded. Another determinant changing shifts the demand curve = change in demand.

Concert tickets fall from $100 to $80 and more are bought. What is this?

A change in quantity demanded, because the ticket's own price changed.

Demand shifters

Income, prices of related goods, tastes, expectations, and number of buyers.

Normal vs. inferior goods

Normal good: income rises -> demand rises. Inferior good: income rises -> demand falls.

Examples: normal and inferior goods

Organic groceries = normal good. Instant ramen = inferior good.

Substitutes

Goods used instead of each other. If the price of one rises, demand for the other rises. Example: Netflix and Hulu.

Complements

Goods used together. If the price of one rises, demand for the other falls. Example: printer and ink.

Supply shifters

Input prices, technology, expectations, and number of sellers.

Equilibrium

Quantity demanded equals quantity supplied ($QD = QS$).

Surplus vs. shortage

Price above equilibrium -> surplus ($QS > QD$). Price below equilibrium -> shortage ($QD > QS$).