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SRES 102 midterm

Terms in this set (59)

Marginal cost
the cost of producing one more unit of a good
Marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
Microeconomics vs. Macroeconomics
Microeconomics is the study of economics at an individual, group or company level. Macroeconomics, on the other hand, is the study of a national economy as a whole.
Comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
Opportunity cost
the most desirable alternative given up as the result of a decision
production possibilities curve
a graph that shows alternative ways to use an economy's productive resources
Efficient points
combinations of production possibilities that squeeze the most output possible from all available resources
Inefficient points
Points that lie strictly to the left of the curve
attainable point
any combination of goods that can be produced using currently available resources
unattainable point
any combination of goods that cannot be produced using currently available resources
What does comparative advantage teach us about free trade?
When countries specialize they become wealthy. ex: Saudi Arabia has lots of oil, therefore, they should stick to selling oil.
Supply and demand curves
It shows the relationship between price and the quantity of a product or service that is supplied and demanded.
Equilibrium price
the price that balances quantity supplied and quantity demanded
Equilibrium quantity
the quantity supplied and the quantity demanded at the equilibrium price
Factors of Demand
1. Society's income
2. The prices of other goods
3. Tastes
4. Expectations
5. Taxes and subsidies
Factors of Supply
1. Price of inputs
2. Technology
3. Expectations
4. Taxes and subsidies
no cash on the table principle
Economic metaphor for unexploited gains from exchange. When people have failed to take advantage of all mutually beneficial exchanges, we often say that there is cash on the table.
What would happen if price ceiling (Maximum price) was set below the equilibrium price?
quantity demanded will exceed quantity supplied, and excess demand or shortages will result.
what would happen if a price floor (minimum price) was set above the Equilibrium Price
quantity supplied will exceed quantity demanded, and excess supply or surpluses will result.
Normal goods
goods that consumers demand more of when their incomes rise
Inferior Goods
A good that consumers demand less of when their incomes increase
Aggregation
Total demand for final goods and services in an economy at a given time
fiscal policy
Government policy that attempts to manage the economy by controlling taxing and spending.
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
Structural Policy
Government policies aimed at changing the underlying structure, or institutions, of the nation's economy.
Positive vs. Normative
Positive economics is objective and fact based, while normative economics is subjective and value based. Positive economic statements do not have to be correct, but they must be able to be tested and proved or disproved. Normative economic statements are opinion based, so they cannot be proved or disproved.
Gross Domestic Product (GDP)
A measurement of the total goods and services produced within a country.
Capital goods included
Govt. Spending on services included
Non-Market Activities not included
Final Goods are included
If production takes more than a year, intermediate goods are included
Real GDP
the production of goods and services valued at constant prices
Nominal GDP
the production of goods and services valued at current prices
final goods and services
goods and services sold to the final user
intermediate goods
products that are purchased for resale or further processing or manufacturing
Methods of measuring GDP
Output method, Expenditure method, Income method
Output method
The value of output produced by the economy, but only counting the value added at each stage of production.
Expenditure Method
A method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period. C+I+G+(X-M)
Income Method
a method that determines how much life insurance is needed based on the policyholder's annual income
Explain how real GDP is not the same as economic well being
Because GDP uses market prices to value goods and services, it excludes the value of almost all activity that takes place outside markets.
labor force
the total number of workers, including both the employed and the unemployed
unemployment rate
the percentage of the labor force that is unemployed
Participation Rate
measures the number of people who are in the labor force who are working, willing to work, or are actively looking for work. (ages 18-65)
What are some costs of Unemployment?
Economic Costs, Social Costs, and Psychological costs.
Why do some economists think that the official unemployment rate underestimates the actual level of unemployment?
Because the official unemployment rateleaves out discouraged workers and the underemployed.
Inflation Rate Formula
(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100
inflation rate
the percentage increase in the price level from one year to the next
Consumer Price Index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
Indexing
Providing automatic increases to compensate for inflation.
Deflating
the process of finding the real value of some monetary magnitude by dividing by some appropriate price index; a sustained decrease in the general price level.
Why do some economist believe the CPI overestimates the inflation rate?
People substitute away goods when prices go up
True Cost of Inflation
Reduced economic growth and efficiency
Hyperinflation
A very rapid rise in the price level; an extremely high rate of inflation.
real interest rate
the interest rate corrected for the effects of inflation (nominal interest rate - inflation rate)
nomial interest rate
The interest ratebefore taking inflation into account.
The Fisher Effect
an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
Real GDP per person
real GDP divided by the population
average labor productivity
total output divided by the quantity of labor employed in its production
Human Capital
the skills and knowledge gained by a worker through education and experience
physical capital
the human-made objects used to create other goods and services
Diminishing returns to capital
each additional unit of capital provides a smaller increase in output than the previous unit of capital
determinants of average labor productivity
1. human capital
2. physical capital
3. land and other natural resources
4. technology
5. entrepreneurship and management
6. political and legal environment
Why do most economists do not think there are limits to economic growth?
More Growth does not always mean "More stuff". Some say we may run out of resources. We have gotten better at finding and conserving scarce resources
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