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Terms in this set (74)
Positive vs. normative statement
Positive statements of what will happen that can be proved or disproved Normative economic statements are what ought to be. They are opinion-based
the loss of potential gain from other alternatives when one alternative is chosen.
Economic efficiency vs. allocative efficiency
allocative efficiency is at an output level where the price equals the Marginal Cost (MC) of production. When an economy is economically efficient, any changes made to assist one entity would harm another. (Efficient when producing goods at the lowest possible cost. Allocative is when the income from all the output goes to the right people. It could be a normative thing. - Dr. C)
all conditions remain the same. things stay equal
Factors of production
the inputs that are used in the production of goods or services in order to make an economic profit. The factors of production include land, labor, capital and entrepreneurship.
the study of large scale economics. (Interest rates, national productivity)
there are no enough resources to satisfy what everyone wants
used by economists to explain something or predict it. A simplified picture of reality
An economic system directed by consumer demand and goods produced by private- profit-seeking producers.
economic man's choices are based on the fulfillment of his or her "utility function", meaning the ability to maximize any situation that involves choice.
Necessary to build simplified models. They simplify things by using ceteris paribus
Includes manufactured goods that are used to produce other goods (examples of capital goods, which are assets used to produce consumer goods and services, are machine tools,buildings, computers, baggage-handling systems, oil rigs and battleships)
Absolute advantage vs. comparative advantage
AD is One country can produce more of a good than another country vs. CA is when two countries trade their products because they each specialize in a product and will get more of it if they trade and will have less vopportunity cost.
Production possibilities curve
Shows the combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are attainable, and those outside of the frontier are unattainable. the graph on the PPF
Entrepreneurs combine land, labor, and capital to produce goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits for this effort.
one item against another;one item against another;
involves a sacrifice that must be made to get a certain product or experience.
a name given to the market -economy because prices provided considerable information to both buyers and sellers
Surplus vs. shortage
surplus - quantity supplied is greater than quantity demanded
Shortage - quantity supplied is less than quantity demanded
Market vs. command society
no surplus no shortages quantity demanded is equal to the quantity supplied
Change in demand vs. change in the quantity demanded
a change in demand - shown as a shift in the entire demand curve. If demand goes up, demand curve shifts right. If demand decreases, demand curve shifts left
change in the quantity demanded - occurs when the price of the product changes, shown as movement along an existing demand curve.
Complement vs. substitute goods
a complementary good go together well, and substitute goods are replaced entirely
Rationing and guiding functions of the price system
Inequalities in the quantity demanded and quantity supplied will cause the price to move toward equilibrium. Guiding- Changes in price lead producers to change their output "by invisible hand" and guide resources to their most productive uses
resources that are guided to their most productive uses as if by an "invisible hand"
Market clearing price
Occurs when a free market does not lead to a socially optimal max of goods.
provided by the government for benefit of all
Free rider problem
when those who benefit from services and resources, and goods do not pay for them.
Externalities - both positive and negative
benefits many people
External Costs - may be negative effects on third parties. Like the real cost of Gasoline
Failure of market outcomes
Occurs when markets perform perfectly well (there is no market failure)
A market that is allowed to function without any government intervention.
Price ceiling vs. price floor
A PRICE CEILING is a government-set maximum price that can be charged for a product or service. When the price ceiling is set below equilibrium, it leads to shortages.; A PRICE FLOOR is a
government-set minimum price that can be charged for a product or service. When the price floor is set above equilibrium, it leads to surpluses.
Occurs when one party to a transaction has significantly better information than another party.
Circular flow diagram
illustrates that every money spent becomes a dollar of income to someone else.
GDP, GDE, GDY
GDP A measure of the economy's total output; it is the most widely reported value in the national income and product accounts (NIPA) and is equal to the total market value of all final goods and services produced by resources in a given year.
income-All income, including wages, salaries and benefits, profits (for sole proprietors, partnerships, and corporations), rental income, and interest.
All income, including wages, salaries, and other labor income; proprietors' income; rental income; personal interest and dividend income; and transfer payments (welfare and Social Security payments) received, with personal contributions for social insurance subtracted out.
(exports - imports ) for the current period
Gross private domestic investment
GPDI is Investments in such things as structures (residential and nonresidential), equipment, and software, and changes in private business inventories.
Circular flow diagram
Illustrates how households and firms interact through product and resource markets and shows that economic aggregates can be determined by either examining spending flows or income flows to households
Leakages and injections
Includes all transactions that are conducted but are not licensed and/or generate income that is not reported to the government (for tax collection)
CPI and the PPI
CPI The cost of a bundle of goods now/ cost of the same bundle in a base period %100
CPI= Cost in current period X 100
cost in base period
PPI avg change in prices received by domestic producers for their output
Deflation and inflation Deflation
A decrease in the price level of currently produced goods and services. Inflation: A rise in the price level of currently produced goods and services.
making accurate predictions of inflation and takings steps to protect themselves from it's effects.
1 to 2 % unemployment,
equals # people unemployed (divided by)
those have given up looking for work because they feel the probability of finding a job
Unemployment caused by changes in the structure of consumer demands or technology. It means that demand for some products declines and the skills of this industry's workers often become obsolete as well. This results in an extended bout of unemployment while new skills are developed.
Cyclical unemployment -
unemployment that results from changes in the business cycle, and where public policymakers can have their greatest impact by keeping the economy on a steady, low-inflationary, solid growth path.
moving from one job to the next
people taking jobs that do not fully take up their skills
an index of the average prices for all goods and services in the economy, including consumer goods, investment goods, government goods and services. It is the broadest measure of inflation in the national income and product accounts.
a reduction in the rate of inflation. An economy going through disinflation is still facing inflation, but at a declining rate.
Natural rate of unemployment
is the level of unemployment at
wage and prices decisions are consistent
actual inflation rate equals the expected inflation rate
cyclical unemployment is 0
Rule of 70
The amount of money that will double over time if you save it.
Facilities that are used by the public like roads, power, etc.)
Real vs. nominal GDP
Real GDP-Total output in a year measured in constant prices.
Investment in human capital
includes improvement to labor from training to services.
Diminishing returns to capital
Each additional unit of capital provides a smaller increase in output than the previous unit of capital.
The output of goods and services (real GDP) demanded at different prices levels.
Spending by individuals and households on both durable (autos, appliances, and electronic equipment) and nondurable goods (food, clothing, and entertainment)
money saved per week, month, year
so much of your income
Average propensity to consume and save
SAVE: The percentage of income that is saved (S/Y). CONSUME: The percentage of income that is consumed (C/Y).
Marginal propensity to consume and save
CONSUME: The change in consumption associated with a given change in income. SAVE: The change in saving associated with a given change in income.
Injections and leakages
Injections: Increments of spending, including investment, government spending, and exports. Leakages: A reduction in the amount of money that is used for lending that reduces the money multiplier. It is caused by banks choosing to hold excess reserves and from individuals, businesses, and foreigners choosing to hold more cash.
Paradox of thrift
When investment is positively related to income and households intend to save more, they reduce consumption, income, and output, reducing investment so that the result is that consumers actually end up saving less.
Recessionary and inflationary gaps
Exports and Imports
EXPORTS: The goods
Imports: from other countries. they are bad . count against GDP
Balanced budget multiplier
Equal changes in government spending and taxation (a balanced budget) lead to an equal change in income (the balanced budget multiplier is equal to 1).
has the power to dictate all levels of the business