Macroeconomics & Microeconomics

used by economists to discuss laws in economics (Latin)
“all other things being equal”

an economy in which the governments makes all economic decisions about how the factors of production are used
Mnemonic device: associate command with communism

the forces of supply and demand determine how economic questions will be answered

an economy in which economic decisions are made based on tradition

land, labor, capital, entrepreneurial ability (resources)
land, labor, capital, entrepreneurship

land, labor, capital, entrepreneurial ability (factors of production)

the study of how we allocate our scarce resources among competing forces

productive resources that come from nature
Ex: water, trees, minerals

human resources
Ex: physical effort of people, knowledge and skills of people

person produced tools of the trade
Ex: buildings, equipment, tools, and machines

The intelligence, imagination, and ability to take the risks that are needed to start up and maintain a business
Ex: Oprah Winfrey, Ted Turner, Bill Gates

when there are not enough resources to supply everyone’s unlimited wants or needs

the value of the next best alternative

a graphic representation of the production relationship between the two goods

goods used in the production process
goods used by people in their day to day lives

as you increase production of one good, you must give up increasing units of the other good

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources or fewer number of resources

when some individual, group, or country has the ability to produce a product more efficiently than another individual, group, or country.

the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

the ability of an individual to own and exercise control over scarce resources

The possibility of personal gain; what motivates people to be involved in the market system and is a major contributor of efficiency in a market economy

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

an exchange that occurs as a compromise

steady growth in the productive capacity of the economy (and so a growth of national income)

unskillfulness resulting from a lack of efficiency

an economic system that combines private and state enterprises
has elements of both a command and market economy

an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth.

A theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

conformity with rules or standards; fairness; impartiality

the ratio of the output to the input of any system

the amount of goods and services people are willing to buy

the amount of a good or service that a consumer is willing and able to purchase at a given price

consumers buy more of a good when its price decreases and less when its price increases

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.

when consumers react to an increase in a good’s price by consuming less of that good and more of other goods

the five different factors that can cause a shift in demand
T: Tastes and preferences
R: Related goods and services
I: Income
B: Buyers, number of
E: Expectations of price

Goods used together so that as price of the first good rises (falls), demand for the second or complement good will fall (rise.) Examples include razors and razor blades, coffee and cream or sugar, etc.

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.

A good for which the demand increases as income rises and decreases as income falls

A good for which the demand increases as income falls and decreases as income rises

A cost that can be easily and conveniently traced to a specified cost object.

the pleasure or satisfaction derived from some activity or decision

the additional benefit to a consumer from consuming one more unit of a good or service

the additional cost to a firm of producing one more unit of a good or service

known out of pocket, obvious costs

non obvious or opportunity costs

the right of government to take private property for public use

the total national income divided by the number of people in the nation

people can get more of what they want through trade than they could if they tried to be self-sufficient

the concentration of the productive efforts of individuals and firms on a limited number of activities

how much of a good or service producers are willing and able to supply at every price

the amount a supplier is willing and able to supply at one price level

there is a direct relationship between price and quantity supplied

ROTTEN
Resource: cost and availability
Opportunity: cost of alternative production
Taxes, subsidies and government regulation
Technology (productivity)
Expectations of the producer
Number of firms in the industry

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

a situation in which quantity demanded is greater than quantity supplied

a situation in which quantity supplied is greater than quantity demanded

a maximum price that can be legally charged for a good or service

a legal minimum on the price at which a good can be sold

A model that shows the process of exchange among consumers (also called households), businesses and government

market in which firms purchase the factors of production from households

a market in which households sell and firms buy resources or the services of resources

the banking, stock and bond markets through which private savings and foreign lending flow to become investment, government, and foreign borrowing

the total dollar value of all final goods produced in a nation during one year
Aggregate Spending (GDP) = C + I + G + (X-M)
OR Aggregate Spending (GDP) = (W + P + I + R + depreciation + indirect business taxes (non-profit based taxes paid by corporations) ─ subsidies + net income of foreigners)

The total value of goods and services, including income received from abroad, produced by the residents of a country within a specific time period, usually one year.

government spending where no good or service is exchanged; does not count towards GDP
Ex: student aid; unemployment benefits; etc….

National income includes all money payments (wages, profit interest, rent) earned by households as a result of their interaction in the resource market. When added together, these factor payments should be equivalent to GDP (with the addition of a few things like depreciation and indirect business taxes). Transfer payments from the government are not counted in measures of national income.

calculated by subtracting consumption of fixed capital (depreciation) from GDP. If you didn’t account for depreciation, the value of an economy’s output would be significantly overstated. Especially in regard to macroeconomics, accounting for slight changes can have dramatic effects. Remember, we are dealing with billions and trillions of dollars, so 1 or 2 % of depreciation can mean hundreds of millions of dollars—equal to some undeveloped nations’ entire GDP.

While national income includes income from productive resources, personal income includes income directly and indirectly earned by households. Because personal income is spendable income, payments for Social Security taxes or undistributed corporate taxes or profits are not counted in measures of personal income, but transfer payments such as unemployment and welfare are counted.

DI is what households actually have to spend. If you subtract personal income tax from PI, you are left with disposable income. You can think of it as your take-home pay. Disposable income equals and individual’s spending plus savings because people can either spend their money or save it.

gross domestic product (GDP) adjusted to account for changes in currency values and price changes as well as inflation
real = nominal – inflation

the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

purely financial transactions
intermediate goods:used in the production process and counted when the final good is sold (e.g. the flour used in baking bread)
secondhand sales (used goods)
non-market and other household production activities
leisure activities
the underground economy
the costs of pollution

portrays the highs and lows of the economy as people buy and sell goods and services

people in the labor force who are actively looking for jobs

structural and frictional unemployment that is always in an economy

a consumer’s desire to buy a good or service

the difference between your willingness to pay and the price you actually pay. It is the area below the demand curve and above the price.

the difference between the price received and the marginal cost of producing the good. It is the area above the supply curve and under the price.

a tax that is measured by the amount of business done (not on property or income from real estate)

the sum of consumer surplus and producer surplus. The free market equilibrium provides maximum combined gain to society.

a measure of the relative satisfaction from, or desirability of, consumption of goods and services

the fictional measuring unit of utility

(economics) the amount that utility increases with an increase of one unit of an economic good or service

a law that states that if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease

an artificial limit on how much of a good or service can be produced

a tax on sales of a good or service

The law that states that for any law or policy implemented to achieve one or more set of objectives, there will be unintended, or unexpected costs from that law or policy.

a negative impact that affects people not involved in an activity

a relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product such as liquor or tobacco

a penalty tax set to restrict an activity

burden of taxation; the percentage of any tax actually paid by consumers and producers

a school of thought based on the idea that free markets regulate themselves; proposed by Adam Smith

theory that supply creates its own demand; advanced by John Baptiste Say in early 1800s

the total amount of goods and services that all firms are willing and able to produce within the economy

A time period when all production factors have time to adjust to full employment; this curve is vertical at the natural rate of employment

Resource prices
Actions by the government
Political or environmental phenomena
Productivity

the amount of goods and services in the economy that will be purchased at all possible price levels

as interest rates in the U.S. fall, investors tend to put more money into foreign investments. This drives foreign prices up and lowers U.S. prices, which then leads to a better exchange rate. When American-made goods are cheaper compared to foreign goods, more goods are exported than imported, leading to a better net export rate

as price levels fall, consumers’ demand for money increases. This causes interest rates (which are the price of money) to rise. Higher interest rates cause investment and other interest-sensitive components of aggregate demand to decrease

When prices rise in an economy, the real value of household income declines, and so consumer spending drops. This drop results in a decrease in real GDP. If price levels drop, the value of money and other financial assets is higher, and consumers will spend more

results when there is too much consumer spending; when prices go up due to an increase in consumer demand for goods

when prices rise because the cost of making the product increases.

when prices increase due to the fact that workers receive more wages for the same amount of work.

when the owners of business raise prices simply because they wish to make more profit.

Consumer spending
Investment spending
Government spending
Net Exports (Exports – Imports)

AD includes transfer payments because they can influence consumer’s income but GDP does not include transfer payments anywhere in its calculation.

the average price of all goods and services in the economy

how much of every extra dollar would be consumed
MPC= Change in Spending/Change in Income

how much of every extra dollar would be saved
MPS= Change in Savings/Change in Disposable Income

aids in calculating the change in GDP when expenditures change
Spending Multiplier = 1/1-MPC; 1/MPS; Change in GDP/Change in Spending

aids in calculating the change in GDP when taxes change
Tax Multiplier= MPC/MPS; Change in GDP/Change in Taxes

A calculation of total earnings that includes the explicit costs of doing business, such as depreciation, interest and taxes, but does not include implicit costs such as opportunity costs.

the fixed cost per unit of output

total revenue divided by quantity sold

the variable cost per unit of output

total revenue minus economic plus accounting costs

known, out of pocket, obvious costs

costs that do not change in the short run, like rent on a building

non-obvious or opportunity costs

a period of time long enough to change the amount of any input used in production

the additional, or incremental cost incurred from any activity, or action

additional revenue a firm earns from selling an additional unit of some good or service

a period of time too short to change some inputs in the production process

fixed costs + variable costs

price times quantity sold

the cost of inputs such as labor, that can change in value

Fixed cost divided by the quantity of output

the point in a curve where the rate of change in the slope begins to change

increases in costs stemming from a company becoming too large

cost savings associated with large scale production

a market structure where thousands of competing firms sell a homogenous good or service

a good where any change in price causes quantity demanded to change in an infinite manner (a horizontal demand curve)

economic profits far exceeding what is normal in some industry

the lowest price that can be charged for a good or service before losses begin to occur

total revenue equal to the explicit and implicit costs of production

the point where the price of a good or service is equal to the minimum point on the average variable cost curve

is reached in production when marginal cost equals the price, which equals marginal revenue

is reached in production when price is set where the minimum average total cost (ATC) is equal to the price, which also equals marginal revenue and demand

an increase in gross domestic product illustrated by an outward shift of the long run aggregate supply curve or the production possibilities curve

the government’s use of tax and spending policies to battle problems in the economy
Examples include: government expenditures and personal income taxes

pricing a good or service at a level that creates enough revenue to pay the total cost of production

pricing a good or service at a level that creates enough revenue to pay only the variable costs of production

where P = ATC, monopolist will only earn normal profits (break-even profits that will cover all his/her costs)

pricing a good or service at a level just sufficient to pay for the marginal cost of production

a monopoly that is created from economies of scale- like an electric utility

occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs

a company that sells a good or service that is vital to the public interest (electric power) and thus faces regulations on prices and output

where P = MC, it is the best option for consumers since it is the highest quantity of the lowest price

a way of blocking new entrants into a market if profits are being earned (e.g. patents, trademarks and violence)

The commission that regulates communications to ensure that the media does not post libel and that the government does not abuse their power of prior restraint; established in 1934

a measure of how concentrated (how much, or little competition exists) an industry is

a market structure characterized by a single seller of a unique product with no close substitutes

a price that is set equal to a monopolist’s demand curve, rather than at a level that is just equal to cost of production

the single buyer of some good or service, typically the single buyer of labor in some market

1. gold plating: One of the major criticisms of public utility regulation is that if utilities are allowed to submit expenses to a body of elected regulators, the utility will have every incentive to inflate expenses in order to be allowed a higher rate charged to its customers.
2. the lack of research and development
3. the nuclear scare

when goods and services are brought into a nation

when goods and services are sold to other nations

an agreement regarding how much of each product in terms of the other product being traded

a situation where buyers do not change their behavior much in response to price changes because they are loyal to a company’s brand

the difference between how much of a good or service is produced and how much could be produced

an unwritten agreement between two parties- often a source of brand name loyalty

a market structure where a few firms enjoy some brand name loyalty

a way of helping consumers see differences in goods or services (advertising)

a consortium of independent organizations formed to limit competition by controlling the production and distribution of a product or service

a merger among firms in unrelated industries

A strategy where no matter what your rival does you are no better off or worse off from the strategy you have picked.

A firm that is incurring economic losses and is facing bankruptcy.

A theory that seeks to explain how the behavior of one person, or firm, is impacted by the behavior of another person or firm.

A merger among competing firms.

The joining of two firms.

A situation where rival individuals or rival firms cannot gain by changing their behavior.

A market structure where only a few firms dominant the sales for a good or service.

The phenomena that occurs when two agents acting together produce more than the expected outcome.

Coordination of the production process from beginning to end.

A merger among firms in the production process (a car maker buying a tire company).

a system by which a nation tracks all transactions between nations; this is made up of two accounts: current and capital. The sum of these two accounts must always be zero.

record of all goods and services exchanged between two nations

record of trade involving financial assets including stocks, bonds, and real estate; sometimes called the capital account

When a nation spends more on imports than it earns from exports

When a nation earns more from its exports than it spends on imports

When Americans purchase assets abroad

When foreigners purchase U.S. assets

the price of one nation’s currency in terms of another nation’s currency

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Consumer tastes and preferences – If consumers like foreign goods better than domestic goods, the demand for foreign dollars will increase and the domestic dollar will depreciate.

•
Inflation – Inflation may negatively impact a nation’s currency as demand for the nation’s goods decreases with higher price levels.

•
Economic growth and higher incomes- a nation that is healthy with a growing economy generally has a strong currency with high foreign purchasing power. The nation’s citizens normally have higher incomes, which they spend on both foreign and domestic goods.

•
Interest rates – higher interest rates cause an increase in financial investment as financial investors seek the highest return on their money. Lower interest rates cause an outflow of financial capital. NOTE: This is not the same as capital investment where businesses borrow money to build factories and acquire other capital. Remember, high interest rates decrease investment spending.

when the price of a nation’s dollar increases in relation to another nation’s dollar

when the price of a nation’s dollar decreases in relation to another nation’s dollar

the value of one currency expressed in terms of another currency

the market for final goods and services

a good used to produce another good

the market for the factors of production like land, labor and capital

a model showing how goods, services, resources, and money each flow through the economy

the single buyer of some good or service, typically the buyer of labor in some market

how the demand for one good stems from, or is derived from the demand for another good. The demand for labor is a derived demand. It comes from the demand for what labor produces.

the relationship between wages and salaries and the quantity of labor hours supplied

land, labor, capital

the additional output gained from employing one more unit of some input

the marginal product of labor or capital multiplied by the price that can be charged for what labor or capital produced

a situation where there are many suppliers and many demanders of some type of labor

the single buyer of some good or service, typically the single buyer of labor in some market

the demand for labor, capital and natural resources

a good that consumers can opt to buy if some other good increases in price and vice versa (sausage and bacon)

pairs of good for which a fall in price of one good results in a greater demand for the other good

the knowledge of how to produce some good

the total demand for any type of labor. The sum of all individual demand curves for some type of labor.

the total demand for any input in the production process

the total supply of any input in the production process

where the price of a good or service has settled at a point where quantity demanded equals quantity supplied

the value a producer or supplier receives over and above what would normally be received for a good or service

a legal floor on the wage rate

additional cost of adding one more unit of some input

total input cost divided by the total quantity of inputs used

a collection of workers who negotiate the terms of employment together, rather than individuals

the process whereby leaders of a labor union negotiate the terms of a labor contract with the management of a company

a union representing such workers such as carpentry and plumbing

a union that represents people in automobile, trucking, and other industries

the single buyer of some good or service, typically the single buyer of labor in some market

a situation where there is a single seller of some labor resource and a single buyer of that resource

value of all assets; including money, equipment, buildings, tools, inventory

money put at risk with the expectation that income, or profit from that risk will be greater than the initial investment

the percentage of the borrowed money charged for one year

the additional output gained from employing one more unit of some capital good

the additional output gained from employing one more unit of labour

the rate at which capital and labour can be substituted for one another in any given production process

consists of tools, machinery, raw materials, vehicles, structures, and inventories in various stages of production.

consists of the knowledge, education, training, and skill that humans bring to the process of production.

the percentage rate of return on investment of additional sums of money, to acquire more capital.

a tax on imported goods

a restriction on the number of goods that can be exported by a nation to another nation

when a nation agrees to restrict the number of goods it exports to avoid tariffs and quotas

The process of creating a market demand curve by summing the quantities demanded by each individual at every price.

different categories that help measure the money supply

money that has value because it is backed by the word of the federal government and not by gold or other valuable resources

The smallest, most liquid form of money; M1 includes checkable or demand deposits, travelers’ checks, coins, and currency; it is not in circulation; when we talk about money supply, this is what we are usually describing; Vault cash is not counted in the money supply because it has already been counted when it is deposited in the bank.

This definition includes M1 plus savings and small (less than $100,000) time deposits. Time deposits must remain in the bank for a fixed length of time before they can be withdrawn. Other accounts less than $100,000 like money market deposit accounts and money market mutual funds are also counted in M2 and usually earn a higher interest rate than regular deposits. M2 is larger than M1 but less liquid.

This definition includes M2 plus large ($100,000 or more) time deposits. M3 is even less liquid than M2 because the money must stay in the bank longer. An example of M3 would be a 5-year certificate of deposit or a savings bond (which are usually held for 7 years before maturity). M3 is no longer reported by the Federal Reserve but is included here to give M2 context. It will not be tested on the AP exam.

a promise to pay the holder an amount equal to the cost of the bond along with a specified amount of interest earned.

a more short-term loan than a bond.

represent partial ownership in a corporation; much more volatile than bonds or securities

the total amount of paper currency, coins, and demand deposits that is held by consumers and businesses rather than by financial institutions, central banks, and the U.S. Treasury

a good that is owned by all members of society like the air or the ocean

property that is owned by all members of society

goods where one person’s use of the good excludes others from using it

people who derive benefits from the work, or purchases of others without doing any work, or making any purchase

goods where one person’s consumption does not exclude others from consuming as well (a sunset)

a good where one person can exclusively enjoy the consumption

a good that is not produced effectively by the private sector (national defense) and thus is provided by the government

a good or service where more than one person can simultaneously enjoy it

a good where a price can be charged and exclusion can take place

a term used to refer to the near starving of the Pilgrims as a result of practicing farming based on common property

it means that when one person uses the good, it does not diminish the service to others

a theory that states even in the presence of externalities an economy can reach an efficient solution as long as transaction costs are sufficiently low

benefits conferred on party C from the transactions involving party A and B

known, out of pocket, obvious costs

a negative impact that affects people not involved in an activity

the external benefits conferred on third parties who did not participate in the original transaction directly

the amount of required reserves and excess reserves that a bank has not loaned out or otherwise invested

the portion of every dollar that is deposited that a bank can loan out or otherwise invest

shows how much a new deposit in the bank can impact the money supply (1/reserve requirement)

the portion of every dollar that is deposited that a bank cannot loan out or otherwise invest; the amount of currency they keep in the vault

the amount of money each bank must keep by law from every dollar deposited in the bank

resources are fixed but output is variable

resources are variable but output is fixed

benefits conferred on party C from the transaction involving parties A and B

costs imposed on party C from the transaction involving parties A and B (pollution)

the incremental benefits (economic growth, jobs, etc.) that are derived from each additional unit of pollution

the incremental costs (poor health, poor productivity, etc.) that are created from each additional unit of pollution

the level of pollution where the marginal social benefits of pollution equal the marginal social costs of pollution

when government spending increases real interest rates causing private investment to decrease

a graphic representation of the relationship between real interest rates and loanable funds

interest rate stated in current prices

interest rates adjusted for inflation

the principle that suggests that people with greater income should have a greater share of the tax burden than people with lower levels of income

the principle of taxation that suggests that those people who derive the greatest benefits from the use of taxpayer dollars, should pay a greater share of the tax burden

the actual burden (over and above the stated tax burden) of taxation

the stated tax rate

a tax where as income increases, the percentage of income paid in taxes increases

a flat, set percentage tax on income

a tax that charges a higher percentage of one’s income the less income one has

the burden of taxation- the percentage of any tax actually paid by consumers and producers

the willingness and ability of a person to move to a geographic location where economic opportunities are greater

a measure of statistical dispersion commonly used as a measure of inequality of income or wealth

how concentrated income is in the hands of rich, middle class and poor people

a curve that seeks to depict the distribution of income

the resources a person is born with

MV = PY

number of times a single dollar is spent during a year

belief that any problem in the economy can be solved by increasing the money supply 3-5%

belief that any problem in the economy can be solved by taking action to shift AS to the right

belief that people behave rationally so problems in the economy must be solved by actions that surprise the populace

changes to an economy that require no action by Congress or the President

actions by policymakers that impact the economy. Examples would include changing taxes or spending.

the cumulative amount of deficit that was not paid off in the year that the deficit was incurred

the amount by which spending is greater than revenue in a given time period

system of 12 district banks charged with monitoring the money supply with the goal of establishing price stability, full employment, and sustainable economic growth

actions taken by the Federal Reserve to control inflation and recession in the economy

the interest rate the Federal Reserve charges banks when they borrow money from the Fed

buying and selling securities to control inflation and recession by varying the money supply

the interest rate at which one bank lends to another bank

graphical representation of the relationship between inflation and unemployment

high unemployment and high inflation