Macro Vocab For Final
Terms in this set (199)
Mia wants to buy a book. The economic perspective suggests that Mia will buy the book if
The marginal benefit is greater than the marginal cost
Which of the following is a normative economic statement
A trade surplus of 200 billion dollars should be our policy goal
Suppose that a consumer purchases just two goods, X and Y. The Y intercept of the budget line in this case would indicate the
Maximum quanity of good Y that the consumer could buy with a given budget
Assume that a consumer has given budget or income of 12 and that she can only buy two goods, apples or bananas. The price of an apple is 1.50 and the price if the banana is .75
Assume that a consumer purchases only two products and there is a decrease in the consumers income prices of the two. Products stay constant. The decrease in income will result in a
Shift of the budget line inward to the left
The economizing problem is essentially one of the deciding how to make the best use of
Limited resources to satisfy unlimited economic wants
One basic difference between "land" and "capital" resources us that land is
Natural and capital is man-made
Which if the following is one of the simplifying assumptions made in comstructing a production possibilities curve
Resources are fully employed and are used in least cost methods of production
All of the following would affect the position and shape of a nations production possibilities curve
The amount of labor available
The amount of the capital resources
The rate of technological progress
He social science concerned with the how individuals , institutions, and society make optimal descions in scarcity
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal costs and benefits
Limits placed in goods and services
The amount of the other product that must be forgone or sacraficed to produce a unit of a product
The want-satisfying power of a good or service
The comparison of marginal or "extra" benefits and marginal costs usually for descions making
A widely accepted generalization about economic behavior of individuals or institutions
Other things equal
The part of economics that deals with decision making by individuals(households, firms, or industry) and about specific goods
The part of economics concerned with the performance and behavior of the economy as a whole. Focuses on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the household, business, and government sectors.
The analysis of facts or data to establish scientific generalizations about economic behavior.
The part of economics involving value judgments about what the economy should be like; focused on which economic goals and policies should be implemented; policy economics.
The choices necessitated because society's economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).
A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.
The land, labor, capital, and entrepreneurial ability that are used to produce goods and services; the factors of production.
In addition to the part of the earth's surface not covered by water, this term refers to any and all natural resources ("free gifts of nature") that are used to produce goods and services. Thus, it includes the oceans, sunshine, coal deposits, forests, the electromagnetic spectrum, and fisheries. Note that land is one of the four economic resources.
Any mental or physical exertion on the part of a human being that is used in the production of a good or service. One of the four economic resources.
Human-made resources (buildings, machinery, and equipment) used to produce goods and services; goods that do not directly satisfy human wants; also called capital goods. One of the four economic resources.
In economics, spending for the production and accumulation of capital and additions to inventories. (For contrast, see financial investment.)
The human resource that combines the other economic resources of land, labor, and capital to produce new products or make innovations in the production of existing products; provided by entrepreneurs.
Individuals who provide entrepreneurial ability to firms by setting strategy, advancing innovations, and bearing the financial risk if their firms do poorly.
Factors of production
The four economic resources: land, labor, capital, and entrepreneurial ability.
Products and services that satisfy human wants directly.
(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.
The law of increasing opprotunity costs
The principle that as the production of a good increases, the opportunity cost of producing an additional unit rises.
production possibilities curve
A curve showing the different combinations of two goods or services that can be produced in a full-employment, full-production economy where the available supplies of resources and technology are fixed.
A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types.
hypothetical economic system in which the government's economic role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets in which only mutually agreeable transactions would take place between buyers and sellers; sometimes referred to as "pure capitalism."
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. Compare with market system.
An economic system in which individuals own most economic resources and in which markets and prices serve as the dominant coordinating mechanism used to allocate those resources; capitalism. Compare with command system. (2) All the product and resource markets of a market economy and the relationships among them.
The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
Freedom of enterprise
The freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice.
Freedom of choice
The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.
That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.
The effort and striving between two or more independent rivals to secure the business of one or more third parties by offering the best possible terms.
Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.
The use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services.
Division of labor
The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.
Medium of exchange
Any item sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter.
The direct exchange of one good or service for another good or service.
Any item that is generally acceptable to sellers in exchange for goods and services.
The determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers' direction of production through their dollar votes.
The "votes" that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available.
The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies.
The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests.
Circular flow diagram
An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms.
Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants.
Economic entities (firms) that purchase resources and provide goods and services to the economy.
An unincorporated firm owned and operated by one person.
An unincorporated firm owned and operated by two or more persons.
A legal entity ("person") chartered by a state or the federal government that is distinct and separate from the individuals who own it.
A market in which products are sold by firms and bought by households.
A market in which households sell and firms buy resources or the services of resources.
A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.
A table of numbers showing the amounts of a good or service buyers are willing and able to purchase at various prices over a specified period of time.
Law of demand
The principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price.
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
(1) A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the good's own price; (2) the reduction in the quantity demanded of the second of a pair of substitute resources that occurs when the price of the first resource falls and causes firms that employ both resources to switch to using more of the first resource (whose price has fallen) and less of the second resource (whose price has remained the same).
A curve that illustrates the demand for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity demanded (on the horizontal axis).
Determinant of demand
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.
A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.
A good or service whose consumption declines as income rises, prices held constant.
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).
Change in demand
A movement of an entire demand curve or schedule such that the quantity demanded changes at every particular price; caused by a change in one or more of the determinants of demand.
Change in quanity demanded
change in quantity demanded
A change in the quantity demanded along a fixed demand curve (or within a fixed demand schedule) as a result of a change in the price of the product.
A schedule or curve that shows the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time.
A table of numbers showing the amounts of a good or service producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time.
Law of supply
The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.
A curve that illustrates the supply for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity supplied (on the horizontal axis).
Determinant of supply
Factors other than price that determine the quantities supplied of a good or service. Also referred to as "supply shifters" because changes in the determinants of supply will cause the supply curve to shift either right or left.
Change in quanity supply
A change in the quantity supplied along a fixed supply curve (or within a fixed supply schedule) as a result of a change in the product's price.
A legally established minimum price for a good, or service. Normally set at a price above the equilibrium price.
The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.
A legally established maximum price for a good, or service. Normally set at a price below the equilibrium price.
(1) The quantity at which the intentions of buyers and sellers in a particular market match at a particular price such that the quantity demanded and the quantity supplied are equal; (2) the profit-maximizing output of a firm.
The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.
The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.
The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.
The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar's worth of input is the same for all inputs.
The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods.
Demand side market failures
Underallocations of resources that occur when private demand curves understate consumers' full willingness to pay for a good or service.
Supply side market failures
Overallocations of resources that occur when private supply curves understate the full cost of producing a good or service.
The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.
The difference between the actual price a producer receives (or producers receive) and the minimum acceptable price; the triangular area above the supply curve and below the market price.
Efficiency loss (deadweight)
Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss.
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.
(1) The characteristic of a private good, the consumption of which by one party excludes other parties from obtaining the benefit; (2) the attempt by one firm to gain strategic advantage over another firm to enhance market share or profit.
The characteristic of a private good, for which the seller can keep nonbuyers from obtaining the good.
A good or service that is characterized by nonrivalry and nonexcludability. 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.
The idea that one person's benefit from a certain good does not reduce the benefit available to others; a characteristic of a public good.
Free rider problem
The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.
Cost benefit analysis
A comparison of the marginal costs of a project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.
Marginal cost and benefit rule
As it applies to cost-benefit analysis, the tenet that a government project or program should be expanded to the point where the marginal cost and marginal benefit of additional expenditures are equal.
Quasi -public good
A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.
A cost or benefit from production or consumption that accrues to to someone other than the immediate buyers and sellers of the product being produced or consumed (see negative externality and positive externality).
The idea, first stated by economist Ronald Coase, that some externalities can be resolved through private negotiations among the affected parties.
Optimal reduction of externality
The reduction of a negative externality such as pollution to the level at which the marginal benefit and marginal cost of reduction are equal.
Inefficiencies in resource allocation caused by problems in the operation of the public sector (government). Specific examples include the principal-agent problem, the special-interest effect, the collective-action problem, rent seeking, and political corruption.
Principal agent problem
(1) At a firm, a conflict of interest that occurs when agents (workers or managers) pursue their own objectives to the detriment of the principals' (stockholders') goals. (2) In public choice theory, a conflict of interest that arises when elected officials (who are the agents of the people) pursue policies that are in their own interests rather than policies that would be in the better interests of the public (the principals).
Collective action problem
The idea that getting a group to pursue a common, collective goal gets harder the larger the group's size. Larger groups are more costly to organize and their members more difficult to motivate because the larger the group, the smaller each member's share of the benefits if the group succeeds.
Special interest effect
Any political outcome in which a small group ("special interest") gains substantially at the expense of a much larger number of persons who each individually suffers a small loss.
Narrow, specially designated spending authorizations placed in broad legislation by senators and representatives for the purpose of providing benefits to firms and organizations within their constituencies. Earmarked projects are exempt from competitive bidding and normal evaluation procedures.
Rent seeking behavior
The actions by persons, firms, or unions to gain special benefits from government at the taxpayers' or someone else's expense.
A future government spending commitment (liability) for which the government has not legislated an offsetting revenue source.
The amount by which expenditures exceed revenues in any year.
economic crisis in which government debt has risen so high that the government is unable to borrow any more money due to people losing faith in the government's ability to repay. Leads to either massive spending cuts or large tax increases, either of which will likely plunge the economy into a recession.
Changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth; also called discretionary fiscal policy.
A central bank's changing of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth.
Unexpected results of government policies. Can be good or bad, but normally refer to unexpected negative outcomes.
The situation that occurs when a governmental regulatory agency ends up being controlled by the industry that it is supposed to be regulating.
The removal of most or even all of the government regulation and laws designed to supervise an industry. Sometimes undertaken to combat regulatory capture.
A type of investment subsidy in which the government agrees to guarantee (pay off) the money borrowed by a private company to fund investment projects if the private company itself fails to repay the loan.
The unlawful misdirection of governmental resources or actions that occurs when government officials abuse their entrusted powers for personal gain. (Also see corruption.)
An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.
Real GDP per capita
Inflation-adjusted output per person; real GDP/population.
Rule of 70
A method for determining the number of years it will take for some measure to double, given its annual percentage increase. Example: To determine the number of years it will take for the price level to double, divide 70 by the annual rate of inflation.
Modern economic growth
The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita.
As it relates to economic growth, countries that develop and use the most advanced technologies, which then become available to follower countries.
As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries.
Supply factors in growth
four determinants of an economy's physical ability to achieve economic growth by increasing potential output and shifting out the production possibilities curve. The four determinants are improvements in technology plus increases in the quantity and quality of natural resources, human resources, and the stock of capital goods.
The requirement that aggregate demand increase as fast as potential output if economic growth is to proceed as quickly as possible.
The capacity of an economy to achieve allocative efficiency and productive efficiency and thereby fulfill the potential for growth that the supply factors (of growth) make possible; the capacity of an economy to achieve economic efficiency and thereby reach the optimal point on its production possibilities curve.
Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work.
The bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.
The interconnected network of large-scale capital goods (such as roads, sewers, electrical grids, railways, ports, and the Internet) needed to operate a technologically advanced economy.
The knowledge and skills that make a person productive.
Economies of scale
The situation when a firm's average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and, hence, its output).
New and more efficient methods of delivering and receiving information through the use of computers, Wi-Fi networks, wireless phones, and the Internet.
Start up firms
A new firm focused on creating and introducing a particular new product or employing a specific new production or distribution method.
An increase in a firm's output by a larger percentage than the percentage increase in its inputs.
Increases in the value of a product to each user, including existing users, as the total number of users rises.
Learning by doing
Achieving greater productivity and lower average total cost through gains in knowledge and skill that accompany repetition of a task; a source of economies of scale.
Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
The point in a business cycle at which business activity has reached a temporary maximum; the point at which an expansion ends and a recession begins. At the peak, the economy is near or at full employment and the level of real output is at or very close to the economy's capacity.
A period of declining real GDP, accompanied by lower real income and higher unemployment.
he point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession ends and an expansion (recovery) begins. At the trough, the economy experiences substantial unemployment and real GDP is less than potential output.
The phase of the business cycle in which real GDP, income, and employment rise.
Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work.
The percentage of the labor force unemployed at any time.
Employees who have left the labor force because they have not been able to find employment.
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
Unemployment of 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.
A type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.
full-employment rate of unemployment
The unemployment rate at which there is no cyclical unemployment of the labor force; equal to between 5 oand 6 percent in the United States because some frictional and structural unemployment are unavoidable.
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.
The real output (GDP) an economy can produce when it fully employs its available resources.
Actual gross domestic product minus potential output; may be either a positive amount (a positive GDP gap) or a negative amount (a negative GDP gap).
The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2percent of potential output (potential GDP
A rise in the general level of prices in an economy; an increase in an economy's price level.
Consumer price index
An index that measures the prices of a fixed "market basket" of some 300 goods and services bought by a "typical" consumer.
A decline in the general level of prices in an economy; a decline in an economy's price level.
Demand pull inflation
Increases in the price level (inflation) resulting from increases in aggregate demand.
Cost push inflation
Increases in the price level (inflation) resulting from an increase in resource costs (for example, raw-material prices) and hence in per-unit production costs; inflation caused by reductions in aggregate supply.
Per unit production cost
The average production cost of aparticular level of output; total input cost divided by units of output.
The underlying increases in the price level after volatile food and energy prices are removed.
The number of dollars received by an individual or group for its resources during some period of time.
The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
An increase of the price level (inflation) at a rate greater than expected.
An automatic increase in the incomes (wages) of workers when inflation occurs; often included in collective bargaining agreements between firms and unions. Cost-of-living adjustments are also guaranteed by law for Social Security benefits and certain other government transfer payments.
Real interest rate
The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.
Nominal interest rate
The interest rate expressed in terms of annual amounts currently charged for interest and not adjusted for inflation.
A very rapid rise in the price level; an extremely high rate of inflation.
45 degree line
The reference line in a two-dimensional graph that shows equality between the variable measured on the horizontal axis and the variable measured on the vertical axis. In the aggregate expenditures model, the line along which the value of output (measured horizontally) is equal to the value of aggregate expenditures (measured vertically).
A table of numbers showing the amounts households plan to spend for consumer goods at different levels of disposable income.
A table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.
A table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.
Break even income
The level of disposable income at which households plan to consume (spend) all their income and to save none of it.
Average propensity to consume APC
Fraction (or percentage) of disposable income that households spend on consumer goods; consumption divided by disposable income.
Average propensity to save
Fraction (or percentage) of disposable income that households save; saving divided by disposable income.
Marginal propensity to consume MPC
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.
Marginal propensity to save MPS
marginal propensity to save (MPS)
The fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income.
The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.
Expected rate of return
increase in profit a firm anticipates it will obtain by purchasing capital or engaging in research and development (R&D); expressed as a percentage of the total cost of the investment (or R&D) activity.
Investment demand curve
A curve that shows the amounts of investment demanded by an economy at a series of real interest rates.
The ratio of a change in equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in equilibrium GDP.
Aggregate demand and aggregate supply
The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output (real gross domestic product).
A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels.
Real balance effectt
he tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level
The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).
Foreign purchases effects
The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
Determinants of aggregate demand
determinants of aggregate demand
Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
A schedule or curve showing the total quantity of goods and services that would be supplied (produced) at various price levels.
Short run aggregate supply curve
short-run aggregate supply curve
An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.
Long run aggregate supply curve
aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level.
Determinants of aggregate supply
Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.
Equilibrium price level
n the aggregate demand-aggregate supply (AD-AS) model, the price level at which aggregate demand equals aggregate supply; the price level at which the aggregate demand curve intersects the aggregate supply curve.
he reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants.
n above-market (above-equilibrium) wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover.