Principles of Macroeconomics - Chapter 1

Constant (or Parameter)

A quantity that is fixed in value

Sunk Cost

A cost that is beyond recovery at the moment a decision must be made

Equation

A mathematical expression that describes the relationship between two or more variables

The Incentive Principle

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter

Variable

A quantity that is free to take a range of different values

Independent variable

A variable in an equation whose value determines the value taken by another variable in the equation

Dependent Variable

A variable in an equation whose value is determined by the value taken by another variable in the equation

The Scarcity Principle (also called the No-Free-Lunch Principle)

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

The Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

Vertical Intercept

In a straight line, the value taken by the dependent variable when the independent variable equals zero

Positive economic principle

One that predicts how people will behave

Normative economic principle

One that says how people should behave

Rational Person

Someone with well-defined goals who tries to fulfill those goals as best he or she can

Economic Surplus

The benefit of taking an action minus its cost

Marginal benefit

The increase in total benefit that results from carrying out one additional unit of an activity

Marginal cost

The increase in total cost that results from carrying out one additional unit of an activity

Opportunity Costs

The loss of potential gain from other alternatives when one alternative is chosen. A sacrifice. The value of what must be forgone to undertake an activity.

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

Macroeconomics

The study of the performance of national economies and the policies that governments use to try to improve that performance.

Average benefit

The total benefit of undertaking n units of an activity divided by n

Average cost

The total cost of undertaking n units of an activity divided by n

Slope

in a straight line, the ratio of the vertical distance the straight line travels between any two points (rise) to the corresponding horizontal distance (run)

Economics

the study of how people make choices under conditions of scarcity and of the results of those choices for society