Macroeconomics Chapters 1-5
What are the three core choices in the economy?
what, how, and for whom
the grand sum of all production and consumption activities
the limitation of a nation’s resources
What are the four basic factors of production?
land, labor, capital, and entrepreneurship
the study of how people use scarce resources
Define “opportunity cost”.
what is given up to get something else
What does the law of increasing opportunity cost state?
We must give up ever-increasing quantities of other goods and services in order to get more of a particular good.
squeezing maximum output out of available resources
Are output combinations outside of the production possibilities curve attainable or unattainable?
What type of economy do conservatives support?
laissez faire (resist work place regulation, price controls, and minimum wage)
What type of economy do liberals support?
government intervention (argue that resistance of work place regulation, price controls, and minimum wage temper the excesses of the market)
allocating the resources of an entire economy to achieve aggregate economic goals
behavior and goals of individual market participants
Give the basic definition of economics.
the scarcity of resources
What is the equation for opportunity cost?
what you give up divided by what you get
Who is the grandfather of economics and supports laissez faire economy?
Who is the father of modern Communism?
Who supports the mixed economy?
John Maynard Keynes
Define “gross domestic product (GDP)”.
the total market value of all the goods and services a nation produces in a year
Define “per capita GDP”.
how much output the average person would get if all output were divided evenly among the population
Define “human capital”.
the skills and knowledge of workers
Define “capital intensive”.
production processes that use a high ratio of capital to labor inputs (i.e. machines and technology)
output per unit of input
Define “factor mobility”.
reallocating resources from one industry to another (i.e. agriculture -> technology)
Define “comparative advantage”.
what advantage you have with your factors of production; huge aspect of trade
Define “production possibilities”.
alternative combinations of final goods and services that could be produced in a given period with all available resources and technology
doing something in another country; increases output
costs or benefits of a market activity borne by a third party; affects the collective well-being of a community
List the [four] sources of government intervention.
1. Legal Framework (i.e. property rights, laws)
2. Environment (i.e. externalities, pos & neg)
3. Protection of Consumers (antitrust, monopoly)
4. Protection of Labor (min wage, child labor laws)
a firm that produces the entire market supply of a particular good or service
Define “monopoly exploitation”.
paying too much for too little (antitrust laws)
Define “income quintile”.
one fifth of the population rank ordered by income
Define “market supply”.
the total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus
List the [six] determinants of the market supply.
2. Factor Costs
taxes increase, supply decrease
(at some point, taxes make products unprofitable)
4. Expectations of Prices
increase, increase supply
decrease, decrease supply
5. Number of Sellers
increase, increase supply
decrease, decrease supply
6. Price of Other Goods
increase price, decrease
decrease price, increase
Define “market supply curve”.
summary of the supply intentions of all procedures (combined sales of all market participants)
How does changes in quantity supplied differ from changes in supply?
Changes in quantity supplied are movements along a given supply curve. Changes in supply are shifts of the supply curve.
Define “equilibrium price”.
the price at which a quantity of a good demanded in a given time period equals the quantity supplied
Define “market mechanism”.
the use of market prices and sales to signal desired outputs
Define “market surplus”.
the amount by which the quantity supplied exceeds the quantity demanded
Define “market shortage”.
an excess of quantity demanded than is supplied
Define “self adjusting prices”.
whenever the market prices is set above or below the equilibrium price, either a market surplus or shortage will emerge
Define “demand shift”.
new demand curve intersects the unchanged market supply curve at a new price
Define “supply shift”.
supply decreases, price increases
Define “price ceiling”.
an upper limit imposed on the price of a good
wherever transactions of goods or services occur
What is the Law of Supply?
As a price of a good increases, demand increases.
What is the Law of Demand?
As price increases, quantity supplied decreases.
List the [six] determinants of demand.
For most goods: increase, increase
For inferior goods: increase, decrease
3. Price of Related Goods
Substitutes: price increase, demand increase
price decrease, demand decrease
Compliments: increase price, demand decrease
decrease price, demand increase
4. Expected Future Price
5. Expected Future Income/Credit
Define “optimal mix of output”.
the most desirable combination of output attainable with existing resources, technology, and social values
Define “market failure”.
an imperfection in the market mechanism that prevents optimal outcomes
Define “public good”.
Everyone can use and benefit from this good. They are non-excludable, sometimes creating a free rider problem and even market failure.
Define “free rider”.
an individual who reaps direct benefits from someone else’s purchase (consumption) of a public good
Define “private good”.
an excludable good
costs or benefits of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity; there are positive and negative aspects
Define “market power”.
being able to manipulate the prices of goods and services (i.e. monopolies, patents, antitrust laws)
What is inequity?
cash transfers (taking from rich, giving to poor), in-kind transfers (not a good, but a service such as medicaid or medicare); government uses our taxes
Define “national income accounting”.
measurement of aggregate economy activity
Define “gross national product (GNP).
value of all final goods produced in your country (USA); excludes factories in our country owned by another country
What is the GDP equation?
Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (N)
What is the per capita GPD equation?
GPD divided by total population
Define “value added”.
the increase in the market value of a product that takes place at each stage of the production process
What is the net exports (N) equation?
Exports minus Imports
Define “nominal GDP”.
value of goods with the price NOW (C+I+G+N)
Define “real GDP”.
apt to change
What is the real GDP equation?
Nominal GDP divided by price index
What is the price index equation?
100 (base) + % Price Increase divided by 100 (base)