Principles of Macroeconomics Chapters 1-4

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The social science that deals with the analysis of material problems and how societies allocate scarce resources to satisfy human wants
The study of aggregated economic activity such as the forces that determine the level of income and employment in a society
the study of disaggregated economic activities, or how a market economy allocates resources through prices
Independent Variable
In a set of relationships, this is the variable that changes first
Dependent Variable
In a set of relationships, the variable whose value depends on the value of the independent variable
the relationship between independent and dependent variables is inverse if the dependent variable changes in the opposite direction from the independent variable
the relationship between the independent variable and the dependent variable is direct if the dependent variable changes in the same direction as the independent variable
Normative Economics
Consists of making judgments about what should be
Positive Economics
Consists of determining what is
Market System
A set of means through which buyer-seller exchanges are made
Invisible Hand Argument
The idea that self-interest based voluntary exchanges can make all those involved in the exchanges better off
The inputs that are used to make consumer and producer goods
The relationship between limited resources and unlimited wants which results in the inability to satisfy all human wants for goods and services
Free Goods
Those in such abundant supply relative to demand that they have zero prices
1) What shall be produced
2) How shall goods be produced
3) for whom shall output be produced
Production-Possibilities Function
Shows the combinations of goods that a society’s resources can produce at full employment in a particular period of time (using the best technology)
the condition in which a resource is used to produce commodities or services
The condition in which a resource is unable to find a use to produce economic goods
the condition in which some units of resources are not employed in their most productive uses
Opportunity Cost
What is given up of other goods in order to produce more of one particular good
Increasing Opportunity Cost
The assumption that as a nation chooses to produce more of one good, it must (ultimately) give up increasing amounts of the other good
Marginal Rate of Transformation
the rate at which one good is traded off for another
Diminishing Marginal Rate of Transformation
The rate at which one good may be traded off or transformed into another ultimately decreases. In other words, the real opportunity cost ultimately rises
Economic Institutions
the social arrangements through which economic decisions are made
Property Rights
Rights of ownership to use, to transfer, and to benefit from the employment of factors of production
Economic Development
the long-term process by which the material well-being of a society’s people is increased
Pure Economic Determinism
The assumption that the actions of people are mere reactions to changing economic reality or opportunities.
The ability to organize the resources into producing units
Incremental Capital-Output Ratio
The ratio of the additional capital to additional output
Human Capital
consists of improvement in the skills and knowledge of people
A situation in which economic actions depend on each other
Complementary Investment
One that increases the productivity of other investments
Capital-Intensive processes
those processes that use relativity more capital than labor or land
Labor-Intensive Processes
those that use relatively more labor than capital or land
A term that refers to the substitution of less expensive factors of production including skilled labor available in developing nations
Price Rivalry
The contest in which sellers watch what prices others charge and then react to those prices
the market form in which no buyer or seller has influence over the price at which the product is sold
A set of relationships showing the quantities of a good that consumers will buy at each of several prices within a specific period of time
Products used in conjunction with each other
Products that may be consumed in place of each other
Ceteris Paribus
The “Other Things Being Equal” assumption that involves holding other factors constant while permitting a key variable to change
Demand Schedule
Indicates the quantity demanded at each of several prices
Demand Curve
represents that schedule when plotted on a two dimensional graph
Law of Demand
Consumers buy more of a product at (relatively) low prices than at (relatively) high prices (ceteris paribus)
Substitution Effect
The change in quantity demanded of a good as its relative price changes and it becomes relatively less or more expensive leading to its substitution
Income-Inferior Goods
Goods whose consumption decreases when income increases
Change in Quantity Demanded
A movement along a good’s demand curve that can be caused only by a change in the price of that good
Change in Demand
A shift of a good’s demand curve that may be caused by a change in any factor other than the price of that good
Market Demand
the quantity demanded by all consumers in a market at each of several prices
A set of relationships showing the quantities of a product that a firm or all firms will offer for sale at each of several prices within a specific period of time
Law of Supply
A firm will offer more for sale at (relatively) higher prices than at (relatively) lower prices
Supply Curve
Represents a firm’s or industry’s supply schedule plotted on a two dimensional graph
Changes in Quantity Supplied
Movements along a supply curve that are caused only by changes in the price of that product
Changes in Supply
Shifts in a supply curve that may be caused by changes in any factor affecting supply other than a change in the price of that good
Equilibrium price
The price at which quantity demanded equals quantity supplied. It is a market-clearing price
Excess Demand
the amount consumers are unable to obtain of a good at a non-equilibrium price
Excess Supply
the quantity of a good firms are unable to sell at a non-equilibrium price
Closed Economy
An economy that does not trade with other economies. One in which all economic activity is domestic
Factor Market
Those markets in which the supply of and demand for factors of production interact to determine wages and other factor prices
Product Markets
Markets in which the flows of goos and services are established and in which the prices of goods and services are determined
Functional Distribuiton of Income
The distribution of income that shows how each factor of production derives income according to its economic functions
Lorenz Curve
The difference between the actual distribution of income and a perfectly proportional distribution as shown graphically
Sole Proprietorship
A business firm owned by one individual who has full responsibility for it
A form of business organization in which two or more individuals combine to operate an enterprise
Business fins whose existence and function is apart from that of their owners
Limited Liability
In a corporation, the fact that individual owners are responsible only for the value of their shares purchased and not other debts
Debt instruments issued by corporations
Preferred Stock
Stock issued by a corporation that has no voting rights but has a preferred right to dividend payments
Common Stock
Stock issued by a corporation that has voting rights but no preference in the distribution of dividends
Double Taxation
the fact that a corporation pays taxes on its gross earnings and its shareholders pay taxes again when corporate earnings are distributed as dividends
Multinational Corporations
those that buy resources as well as produce and sell products in many countries and throughout parts of the world
Benefits-Recieved Principle
That argument that tax payments should be commensurate with the benefits received from government services
Ability-to-Pay Principle
The argument that, as people’s incomes grow, they can afford to pay a larger part of their incomes in taxes
Tax rate
The percentage of income paid in taxes
Progressive tax
A tax in which the rate increases as income increases
Regressive tax
a tax in which the rate decreases as income increases
Proportional tax
A tax in which the rate remains constants as income changes
Open Economy
One whose levels of income and product depend on both domestic and feign economic activities
Categories: Macroeconomics