econ 201 john must final
Terms in this set (51)
What is opportunity cost?
The amount of other products that must be forgone or sacrificed to produce a unit of a product.
What does the term "marginal" mean to an economist?
To economists, "Marginal" means "extra," "additional," or "a change in".
What does the term "ceteris paribus" mean?
other-things-equal assumption- the assumption that factors other than those being considered are held constant.
Positive versus normative statements.
Positive economics- The analysis of facts or data to establish scientific generalizations about economic behavior.
Normative economics- the part of economics involving value judgements about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.
Characteristics of the command system
a method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; socialism; communism.
What is meant by the term "division of labor"?
The separation of th work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.
What is barter?
swapping goods for goods; the direct exchange of one good or service for another good or service.
The 5 fundamental questions every economy must answer.
1. What goods will be produced?
2. How will the goods and services be produced?
3. Who will get the goods and services?
4. How will the system accommodate change?
5. How will the system promote progress?
How does an economist define the word demand?
A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each f a series of possible prices during a specified period of time. Demand shows the quantities of a product that will be purchased at various possible prices, other things equal.
Determinants of demand and difference between change in demand and change in quantity demanded.
Factors other than price that determine the quantities demanded of a good or service. Also referred to as "demand shifters" because changes in the determinants of demand will cause the demand curve to shift either right or left.
1. Consumers' tastes (preferences)
2. the number of buyers in the market
3. consumers income
4. the prices of related goods
5. consumer expectations
Normal versus inferior goods and impact of income change on them.
Normal goods- a good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
Inferior goods- a good or service whose consumption declines as income rises, prices held constant.
Complements versus substitutes and impact on demand when prices change.
compliments- products and services that are used together. When the prices of one falls, the demand for the other increases (And conversely).
substitutes- products or services that can be used in place of each other. When the price of one dualism the demand for the other product falls; conversely, then the price of one product rises, the demand for the other product rises.
Determinants of supply
Factors other than price that determine the quantities supplied of a good or service. Also referred to as "supply shifters" because cages in the determinants of supply will cause the supply curve to shift either right or left.
1. resource prices
3. taxes and subsidies
4. prices of other goods
5. producer expectations
6. the number of sellers in the market.
When is there a shortage in the market?
shortage- The amount by which the quantity demanded of a product exceeds thee quantity supplied at a particular (below equilibrium) price.
occurs at any price below the equilibrium price- quantity demanded exceeds quantity supplied
Equilibrium in the market.
where supply and demand curves intersect
Price ceiling versus price floor.
ceiling- sets the maximum legal price a seller may charge for a product or service; a legally established maximum price for a good, or service Normally set at a price below the equilibrium price.
floor-a minimum price fixed by the government; A legally established minimum price for a good, or service. Normally set at a price above the equilibrium price.
Differences between public and private goods.
private- a good or service that is individually consumed and that can be profitably provided by privately owned firms because they can exclude nonpayers from receiving the benefits.
public- a good or service that is characterized by non rivalry and non excludability. these characteristics typically imply that no private firm can break even when attempting to provide such products. As a result, they are often provided by governments, who pay for them using general tax revenues.
How can the government encourage production of goods with positive external benefits?
Subsidies provide service themselves
What is a business cycle?
recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
Phases of a business cycle.
1. peak-activity has reached a temporary maximum
2. recession- a period of decline in total output, income, and employment.
3. trough- output and employment "Bottom out" at their lowest levels
4. expansion- real GDP, income, and employment rise.
Real gross domestic product versus nominal gross domestic product.
Real- adjusted for inflation
Nominal- GDP measured in terms of the Price level at the time of measurement; GDP not adjusted for inflation.
What does an economist mean by a "shock" to the economy?
Sudden, unexpected changes in demand or supply. situations in which firms are expecting one thing but then something else happened.
How do we avoid multiple counting in calculating the GDP?
multiple counting-Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once. Only count the final goods and services in the GDP
Why are public transfer payments not included in the GDP?
Since the recipients contribute nothing to the current production in return, to include such payments in GDP would be to overstate the year's output. (double Count)
What is the rule of 70, what does it tell us?
The rule tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase into the number 70.
How do we demonstrate economic growth on a production possibilities curve graph?
The curve shifts right to demonstrate economic growth.
What has been the main factor in economic growth in the U.S.?
What is meant by the unemployment rate? How do we calculate it?
The percentage of the labor force unemployed at any time.
unemployment rate= unemployed/labor force X 100
Who do we considered as unemployed when calculating the unemployment rate?
those who are willing and able to work and actively seeking employment.
How do we treat the "discouraged workers" in calculating the unemployment rate?
we do not count them in the unemployed category
3 types of unemployment and examples.
frictional- a type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
structural- unemployment workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.
cyclical- a type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.
How do we determine the natural rate of unemployment?
The full employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.
What is Okun's Law?
The generalization that any 1-percentage-point rise in the unemployment rate of unemployment is associated with a rise in the negative GDP gap by 2percent of potential output (potential GDP).
Changes in the real interest rate and their effect on the investment schedule.
the real interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate of inflation
Impact of changes in personal income tax on the aggregate demand curve.
if taxes go up demand goes down so the curve shifts left
Impact of changes in the expected rate of return on the aggregate demand curve.
If the expected rate of return goes up the demand will go up and shift the aggregate demand curve to the right
What "tools' does the government use when conducting fiscal policy?
taxes and government spending
Contradictory versus expansionary fiscal policy.
expansionary- an increase in government purchases of goods and services, a decrease in net taxes, or some combination of two for the purpose of increasing aggregate demand and expanding real output.
contractionary- a decrease in government purchases of goods and services, an increase in net taxes, or some combo of the two, for the purpose of decreasing aggregate demand and thus controlling inflation.
M1 money components.
1. currency in the hands of the public- coins and paper money
2. checkable deposits
Who controls the supply of money in the U.S.?
the Federal Reserve Issues currency in the US
What does FOMC stand for?
Federal Open Market Committee- set the Fed's monetary policy and directs the purchase and sale of government securities (bills, notes, and bonds) in the open market.
How are the members of the Federal Reserve Board of Governors selected?
The U.S. president, with the confirmation of the Senate appoints the seven Board members.
Why is specialization important to economic growth?
Specialization- uses the resources of an individual, firm, region, or nation to produce one of a few goods or services instead of the entire range of goods and services.
How do we define unemployment?
The failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force.
How do we define inflation?
A rise in the general level of prices in an economy; an increase in the economy's price level.
What 3 statistics are important in measuring economic health in macroeconomics?
1. Economic growth
What is the definition of MPC?
Marginal propensity to consume- the fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income.
What is meant by dissavings?
Spending for consumer goods in excess of disposable income; the amount by which personal consumption expenditures exceed disposable income.
What affect will a change in the real interest rate have on investment?
real interest rate goes up- investment goes down. They have an inverse relationship.
What 2 items are the immediate determinants of investment spending?
1. the expected rate of return
2. real interest rate
Shape of the aggregate supply curve, immediate/short run/long run.
Short run- up sloping
Long run- vertical
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