macro test 1n

What is price-ceiling and price-floor?

A price-ceiling represents the maximum legal price producers are allowed to charge while a price-floor refers to the minimum legal price that producers are allowed to charge.

What does the production possibilities curve illustrate?

A production possibilities model shows different combinations of two goods that can be produced with a specific set of resources.

what is economics

Economics is the social science concerned with making optimal choices under conditions of scarcity. Since economic wants exceed society's productive capacity - resources or inputs used to produce goods and services - one is confronted with making choices. Every choice would involve a sacrifice, i.e. an opportunity cost, defined as what you give up to get something

How is economic growth measured?

Economists define and measure economic growth two different ways. The first is as an increase in real GDP over some time period, and the second is as an increase in real GDP per capita over some time period. It typically is measured as a percentage rate of growth either on a quarterly or yearly basis.

complementary goods

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely). as the cost of a product increases, the user's demand for the complement product decreases as consumers are unlikely to use the complement product alone. Further, as consumer demand weakens, the market price of the complementary good or service may fall.

if there were no decisions for an economist to make

Should the means - that is, the resources, or inputs, also known as factors of production - to obtain economic wants were unlimited then every want would have been satisfied and no choices would have been necessary to make. Hence, there would have been no opportunity cost.

What are institutional structures that promote modern economic growth?

Strong property rights are important b/c people are more likely to invest if they don't fear that others can take their returns on investment without compensation. Patents & copyrights give inventors and authors the exclusive right to market and sell their creation. Efficient financial institutions help channel savings generated by households toward the businesses that do most of the society's investing and inventing. Literacy and widespread education create inventors and new technologies. Free trade allows countries to specialize so that different types of output can be produced in the countries where they can be made at the lowest opportunity cost. A competitive market system signal firms what to make and how much of it to make.

income effect

The income effect indicates that when the price of a product falls, the purchasing power of our money income rises and thus permits us to purchase more of the product. Once again, an inverse relationship is displayed between price and quantity demanded.

Macroeconomics

Macroeconomics is the study of the entire economy. In other words, Macroeconomic issues study economy wide (or national) unemployment, income, inflation, and business cycles patterns.

Microeconomics

Microeconomics is the study of the individual consumer, firm, or market. In other words, microeconomic issues study the behavior of specific economic units that make up the economic system. For instance, change in the price of laptops, smartphones, oranges, apples.

How do we measure Net Domestic Product and National Income?

Net Domestic Product = GDP - Depreciation (i.e., Consumption of Fixed Capital) NI = NDP - Statistical Discrepancy + Net Foreign Factor Income Personal income includes all income received, regardless of whether it is earned or unearned. Finally, disposable income is PI less personal taxes.

Which variable is the largest and which one the smallest for the U.S. economy?

Net exports represent the smallest component in the expenditure approach while consumption spending by households is the largest component in the expenditure approach to GDP.

What is simultaneous consumption and network effects?

Network effects are increases in the value of a product to each user, including existing users, as the total number of users rises whereas simultaneous consumption refer to products and services that can satisfy large number of customers at the same time i.e., a software program needs to be produced only once then it becomes available to all buyers.

What is the largest contributor to labor productivity in the U.S.?

The largest contributor is technological advance, which accounts for approximately 40 percent of productivity growth.

What are the factors that describe the negative slope of the demand curve?

The negative slope of the demand curve is, firstly, consistent with common sense. People buy more goods & services when price goes down and less of them when price goes up. the law of diminishing marginal utility, income effect, and substitution effect

Why is the supply curve positively sloped?

The positive slope of the supply curve reflects the law of supply. That is, when price increases, quantity supplied increases and when price decreases, quantity supplied decreases, other things equal.

What is the rule of 70?

The rule of 70 tells us approximate number of years required to double real GDP = 70 / annual percentage rate of real GDP growth.

slope of budget line

The slope of the budget line is equal to the NEGATIVE ratio of the prices of two goods (always downward slope). An increase in the purchase of one good leads to a decrease in the other good. Thus, there is an opportunity cost with every purchase. The opportunity costs are constant in the example Every time, the consumer chooses to watch one additional movie, the number books given up is equal to 2.

substitution effect

The substitution effect states that when the price of X falls, consumers purchase more of X and less of substitute good Y, holding other things constant. The negative relationship between price and quantity demanded is again at display here.

How do we find the optimal point on the production possibilities curve? (marginal benefit and marginal cost analysis) (Figure 1.3)

We find the optimal point on the PPC by compare marginal benefits to marginal costs. The optimal point would be where MB=MC. Should MB be greater than MC then the production of output should increase and when MC is greater than MB then the production of output should decrease.

What is the difference between change in quantity demanded and change in demand curve?

These changes in demand are to be distinguished from a change in quantity demanded, which is caused by a change in the price of the product and is shown by a movement from one point to another point on a fixed demand curve. Change in demand curve is caused by a determinant A change in price of product X does not change (or shift) the demand curve for product X, it changes the quantity demanded for X. A change in quantity demanded for X in response to a change in the price of X would be represented by a movement on the demand curve for product X. A downward movement on the demand curve for X would indicate an increase in quantity demanded for X due to a decrease in the price of X while an upward movement on the demand curve for X would be a decrease in quantity demanded for X due to an increase in the price of X.

What is the difference between change in quantity supplied and change in supply curve?

These changes in supply are to be distinguished from a change in quantity supplied, which is caused by a change in the price of the product and is a movement from one point to another point on a fixed supply curve. A change in price of product X does not change (or shift) the supply curve of product X, it changes the quantity supplied of X. A change in quantity supplied of X in response to a change in the price of X would be represented by a movement on the supply curve of product X. A downward movement on the supply curve of X would indicate a decrease in quantity supplied of X due to a decrease in the price of X while an upward movement on the supply curve of X would be an increase in quantity supplied of X due to an increase in the price of X.

What are some factors that shift the production possibilities curve inside or outside? (Figure 1.5, Figure 1.6)

Those points on the table are plotted on the graph above. Should there be an increase in technological improvement, the PPC would shift outwards to the right and what was unattainable previously would now become attainable and the economy would grow by producing more. Similarly, if there is increase in trade, the PPC would shift outwards to the right and the economy would grow. Changes in resource supplies, improvements in resource quality, and technological advancement, trade

What type of goods are included (and excluded) in the calculation of GDP?

To avoid multiple counting of goods, GDP includes only the market value of final goods and ignores intermediate goods, which are goods either purchased for resale or for further processing into final goods. What are nonproduction transactions that are excluded from GDP? Nonproduction transactions must be excluded from GDP since they have nothing to do with the production of final goods. There are two types: purely financial transactions and secondhand sales. Purely financial transactions include such items as public transfer payments like Social Security, private transfer payments (e.g., Christmas gifts), and stock market transactions. Secondhand sales contribute nothing to current production, so they are ignored in calculating GDP.

What happens to equilibrium price and quantity when there is a change in demand? When there is change in supply?

When demand increases, equilibrium price and quantity increases. When demand decreases, equilibrium price and quantity decreases. When supply increases, equilibrium price decreases but quantity increases. When supply decreases, equilibrium price increases and equilibrium quantity decreases.

inferior good

a good for which, other things equal, an increase in income leads to a decrease in demand ex. Public transportation: if your income decreases, you switch from taxis to public transport because it is less expensive. McDonalds (when compared to high-end eateries): because fast food outlets are less heavy on your pocket.

net exports

exports - imports

law of diminishing marginal utility

the law of diminishing utility states that successive units of a goods produce less and less additional satisfaction to the consumer so the price must fall to encourage a buyer to purchase more units of the good. Thus, when the price declines, the quantity demanded increases.

normal goods

A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant. ex. Luxury goods such as Lamborghinis, designer perfumes and clothes; because if there is increase in your income level, you can afford to pay for the upgrade in your social status. Vacations and other leisure activities; if your income is high, you can afford to take off from work, bear the travel and hotel costs, etc. Taxis and ride-hailing services like Uber; if you have more income, you can switch from crowded public transportation to cabs and other dedicated modes of transportation. High-end restaurants; with increase in income, you can afford the luxury of expensive dine-outs

What are the consequences of price-ceiling and price-floors?

A government-imposed price-ceiling would generate a shortage in the market since the price-ceiling is always less than the equilibrium market price and a price-floor would generate a surplus in the market since it is always more than the market equilibrium price. Price ceilings are set on goods that are considered to be necessities, but the equilibrium price is so high that many people are unable to purchase the item. To be effective, the price ceiling must be set below the equilibrium price. When price ceilings are placed on a good, this creates a chronic shortage which makes it difficult to determine how to ration the limited output for all of the consumers who are willing and able to buy the good. The shortages often lead to black markets where the good is sold at a higher price than the price ceiling. Price ceilings distort the efficient allocation of resources.

Which economic regions experienced the most and least growth in real GDP per capita?

Africa, Asia, Latin America experienced the least growth in real GDP per capital while the United States, Western Europe, and Japan experienced the most growth.

how does budget line shift

An increase in money income will shift the budget line to the right (outwards) while a decrease in money income will shift the consumer's budget line to the left (inwards).

growth rate doubled in the period 1995 to 2010 as compared to the period 1973 to 1995

As measured by changes in the index of labor productivity, the growth rate doubled in the period 1995 to 2010 as compared to the period 1973 to 1995. Economists relate the increase to the significant wave of new technology coupled with global competition. The increase in productivity growth is important as real output, real income, and real wages are all linked to it. It is the main route for improving the standards of living for a nation's workers. What are some of the reasons for the increased productivity growth between 1995 and 2010? A core element was the explosion of entrepreneurship and innovation based on the development of the microchip. Microchips have found their way into thousands of products and changed the way business is conducted. Hundreds of new start-up firms aided in the advancement of the new information technology. These new firms took advantage of increasing returns and economies of scale as they helped to increase labor productivity. Global competition fueled by the collapse of the socialist economies was another key factor in the increasing rate of labor productivity growth.

When do we achieve allocative and productive efficiency? What is meant by allocative and productive efficiency?

Both allocative and productive efficiency is achieved where quantity demanded is equal to quantity supplied, i.e. at market equilibrium. At that point marginal benefit and marginal cost are also equal to each other. Allocative efficiency is concerned with producing the combination of goods and services most desired, or valued, by the society. Productive efficiency refers to the use of the least-cost method of production using the best technology and the right mix of resources.

determinants of supply

Change in resource prices A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline Changes in technology The development of more effective wireless technology increases the supply of smartphones Changes in taxes and subsidies An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education Change in prices of other goods An increase in the price of cucumbers decreases the supply of watermelons Change in producer expectations An expectation of a substantial rise in future lumber prices decreases the supply of logs today Change in number of suppliers An increase in the number of tattoo parlors increases the supply of tattoos; the formation of women's professional basketball leagues increases the supply of women's professional basketball games

Determinants of Demand

Changes in buyer taste Physical fitness rises in popularity, inceasing the demand for jogging shoes and bicycles Smartphone usage rises, reducing the demand for desktop computers Change in number of buyers A decline in the birthrate reduces the demand for chidlrens toys Change in income A rise in income increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as turnips, bus passes, and inexpensive wine Change in the prices of related goods A reduction in airfares reduces the demand for train transpo (substitute goods); a decline in the price of printers increases the demand for ink cartridges (complementary goods) Changes in consumer expectations inclement weather in south america creates an expectation of higher future coffee bean prices, thereby increasing todays demand for coffee beans

What is demand and the law of demand?

Demand shows various quantities of an output that would be bought at different prices. The law of demand states that there is an inverse (or negative) relationship between price and quantity demanded. In other words, when price increases, quantity demanded decreases and when price decreases, quantity demanded increases, other things equal.

How are economic theories defined?

Economic theories are generalizations based on hypotheses tested and supported with observations. Economics relies on scientific method: Observe real word => Formulate Hypothesis => Test the hypothesis => Accept, Reject, or Modify the hypothesis => Continue to test the hypothesis, if necessary. A well-tested and widely accepted theory is called an economic law or an economic principle - a statement about economic behavior or the economy that enables predictions of the probable effects of certain actions. Economic principles (i) are generalizations - expressed as the tendencies of typical or average consumers, workers, or business firms, (ii) rely on other-things-equal assumption - the assumption that factors other than those being considered do not change - example: when considering the relationship between the price of pepsi and the amount of pepsi that is purchased, economists do not take into account all of the factors that might influence the amount of pepsi purchased (the price of coke and consumer incomes and preferences). Holding other things equal is helpful because the economists can then focus on the relationship between the price of pepsi and purchases of pepsi without being confused by changes in other variables, (iii) use graphical expressions

what are we doing every time we make an economic choice

Every time we make a choice, we are weighing the marginal benefit and cost. Marginal means "extra" or "additional". Should you attend school for another year? Should you study an extra hour for an exam? Should a business expand or reduce its output? Should government increase or decrease its funding for a missile defense system? We will choose to do something if the marginal benefit is greater than the marginal cost because that is rational and will help to maximize utility.

What are supply factors, demand factor, and efficiency factor (i.e., determinants of growth)?

Four of the determinants of growth relate to the physical ability of the economy to expand. Supply factors of economic growth are (i) increases in the quantity and quality of natural resources, (ii) increases in the quantity and quality of human resources, (iii) increases in the supply (or stock) of capital goods, (iv) improvements in technology. The fifth determinant of economic growth is the demand factor. To achieve the higher production potential created by the supply factors, households, businesses, and government must also expand their purchases of goods and services. The sixth factor, efficiency, involves the issue that the economy must achieve economic efficiency as well as full employment. It must use its resources in the least costly way to provide the specific mix of goods and services that maximizes people's well-being. Economic growth is made possible by the four supply factors that shift the production possibilities curve outward, as from AB to CD. Economic growth is realized when the demand factor and the efficiency factor move the economy from points such as a and c that are inside CD to the optimal output point, which is assumed to be point b in this figure. Point c represents situations in which real output falls below what it should have been if the economy was operating at full employment.

How de we measure value added?

GDP could also avoid multiple counting by counting only the value added at each stage. Value added is the market value of a firm's output, less the value of the inputs that the firm purchased from others.

Limitation of GDP

GDP fails to capture the full value of improvements in product quality. Let's face it, a $200 cell phone purchased today is of very different quality than a cell phone that cost $200 just a decade ago.

What is the difference between nominal GDP and real GDP?

GDP measures production at current dollar values, which creates problems because the value of a dollar changes over time. One hundred years ago, the purchasing power of one dollar was much different from what it is today. To get around that problem, there are two different GDPs. Nominal GDP is based upon the prices that were in effect when the output was produced. A GDP that has been deflated or inflated to reflect changes in price levels is referred to as real GDP. In order to calculate real GDP, a base year must be selected and then the current year's prices adjusted accordingly. Nominal GDP 2019 = Units of Output 2019 × Price per Unit 2019 Real GDP 2019 = Nominal GDP 2019 / Price Index 2019

When does the government decide to impose a price-ceiling and a price-floor?

Government would impose a price-ceiling when it finds the equilibrium market price too high and it would enact a price-floor when it determines that the equilibrium market price is too low.

What is the difference between gross investment and net investment? How is investment defined by an economist?

Gross private domestic investment = net investment spending + depreciation (aka consumption of fixed capital). If gross private domestic investment and depreciation are equal then net investment would be zero. If depreciation is greater than gross investment then net investment would be negative. If gross investment is larger than depreciation then net investment would be positive. Gross private investment spending includes all final purchases of machinery, equipment, and tools by businesses, all construction, changes in business inventories, and money spend on research and development or for the creation of new works of art, music, writing, film, and so on. Investments in stocks & bonds are not considered economic investments.

How do we calculate the growth rate in real GDP and real GDP per capita?

Growth Rate of real GDP 2018-2019 = real GDP 2019 - real GDP 2018 / real GDP 2018 Real GDP per capita = Real GDP / Population Growth Rate of real GDP per capital 2018-2019 = real GDP per capita 2019 - real GDP per capita 2018 / real GDP per capita 2018

Which measure or definition is best for comparing living standards?

Growth of real GDP per capita

what happens to equilibrium price and quantity when there is a simultaneous change in demand and supply

If supply increases and demand decreases, price declines, but the new equilibrium quantity depends on the relative sizes of shifts in demand and supply. If supply decreases and demand increases, price rises, but the new equilibrium quantity depends on the relative sizes of shifts in demand and supply. If supply and demand change in the same direction (both increase or both decrease), the change in equilibrium quantity will be in the direction of the shift but the change in equilibrium price now depends on the relative shifts in demand and supply.

What is meant by infrastructure and human capital?

Infrastructure refers to public capital goods such as highways and sanitation systems where as human capital refers to the skills and knowledge that enable a worker to be productive.

positive of international trade

International trade enables countries to specialize in the production of goods which they produce more efficiently than other countries. With international trade, resources are allocated more efficiently, and it essentially is the equivalent of an increase in resources. Now a country can not only use its own resources, but it can also take advantage of foreign resources through trade. This leads to a rightward shift of the production possibilities curve.

why have productivity rates slowed recently

It is not clear why productivity rates have slowed during the past five years. It may be that the growth seen in 1995-2010 was an anomaly brought about by the information technology revolution, but that alone would not explain why rates have now dropped below the pre-revolution growth rates. Several explanations have been offered to explain this change. The first is that the high debt levels accumulated by individuals and firms prior to the Great Recession (2007-2009) may be to blame. Another explanation is that there is an excess of capacity existing, which makes firms reluctant to purchase newer, more productive equipment. Many new products being created are technology-based and offered free to consumers, so they are not measured in GDP. And finally, technological progress just may be at a stall, meaning growth will continue to stagnate until invention and innovation speed up again.

How can we calculate real GDP using labor productivity and hours of work?

Labor productivity would shift the production possibilities curve outward. Real GDP = hours of work × labor productivity

How do we calculate the market demand?

Market demand is the horizontal summation of individual demand schedules at each price level

normative economics

Normative economics deals with value judgements - i.e. what something ought to be. Examples, when interest rates decline, stock market should soar. The passage of USMCA trade agreement is supposed to create domestic jobs.

What do points inside, on, and outside of the production possibilities curve represent?

Points inside the PPC indicate that the economy is not making use of all of its available resources and therefore it is being inefficient by producing less than the possible maximum. Points on the PPC show us that the economy is operating efficiently since all the available resources are full utilized. Points outside the PPC are unattainable with the current technology.

positive economics

Positive economics deals with factual statements, not opinions, or value judgments - Examples, Federal Reserve is the central bank of the United States. Washington, D.C. is the capital of the United States.

What is the formula for GDP Price Index and how do we calculate real (or nominal) GDP using Price Index?

Price Index 2019 = Price per Unit 2019 / Price per Unit base year Alternatively, Price Index 2019 = Nominal GDP 2019 / Real GDP 2019

How did modern economic growth affect cultural, social, and political arrangements?

Prior to the Industrial Revolution, living standards were basically stagnant for long periods of time. Since then, however, modern economic growth has been characterized by sustained and ongoing increases in the standard of living. This growth has dramatically affected cultural, social, and political arrangements. Countries experiencing modern economic growth have tended to move toward democratic forms of government, people's life-spans have doubled, and ordinary people have been able to experience leisure time and the arts due to increased wealth and living standards. discrepancies in growth rates have led to a great difference in the wealth of nations that have experienced modern economic growth and those that have not. While it is possible for those poorer nations to catch up, they typically must rely upon the help of the wealthier nations. The follower countries must copy the technological advances pioneered in the leader nations.

substitute goods

Substitutes are goods that satisfy a similar need or desire. An increase in the price of a good will increase demand for its substitute, while a decrease in the price of a good will decrease demand for its substitute.

What is supply and the law of supply?

Supply show various quantities of an output that producers are willing and able to produce at different prices. The supply curve shows the positive relationship between price and quantity supplied. The law of supply states that there is a direct (or positive) relationship between price and quantity supplied. In other words, when price increases, quantity supplied increases and when price decreases, quantity supplied decreases, other things equal.

What is the law of increasing opportunities cost?

The above table shows that every time an additional unit of pizza - a consumer good - is produced, less and less robots - a capital good - are produced. For instance, between points A and B, 1 unit of robot is given up to get a unit of pizza while between points B and C, 2 units of robots are given up to get an additional unit of pizza. In other words, the opportunity cost of producing more and more pizzas keeps on increasing. It is not constant due to the nature of the production possibilities curve which is concave, not linear. This fact, is known as, the law of increasing opportunity cost. The law of increasing opportunity cost states that if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of another good to do so. That is because economic resources are not completely adaptable to alternative uses. Many resources are better at producing one type of good than at producing others. Switching resources from one good to another at the beginning is relatively easy so the economy gives up less of one good. However, as the society chooses to produce more & more pizzas, the society needs to give up more & more industrial robots b/c more and more resources must be switched from the robot industry to the pizza production. Law: in order to produce more of one good, you need to give up producing more of another good

What are the assumptions behind the model of the production possibilities?

The assumptions behind the model of PP are (i) Full-employment; all the available resources of the economy are fully utilized, (ii) fixed- resources; the amount of resources (land, labor, capital, & entrepreneurial ability) in the economy are constant, and (iii) fixed-technology; the state of the technology is constant. PPC illustrates the principle that if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced (The negative slope of the PPC illustrates that principle).

economic perspective

The economic perspective envisions that individuals and institutions making rational decisions - decisions that will make them better off, not worse off. The goal is to maximize utility or satisfaction. This does not mean that we are completely selfish or that we can't make wrong decisions. We can derive utility by helping others and often when we make decisions, we don't have all of the information, so wrong decisions can be made. Thus, "purposeful behavior" simply means that people make decisions with some desired outcome in mind.

economizing problem

The economizing problem refers to the need to make choices b/c economic wants exceed economic means. In other words, it is one of deciding how to make the best use of limited resources to satisfy unlimited wants. The individual's economizing problem is limited income and unlimited wants. Budget line shows all possible combination of two goods that can be purchased, given money income and the prices of the goods.

Which variables are included in the expenditure approach to GDP?

The expenditures approach measures GDP as the sum of all the money spent in buying the output he expenditures approach measures GDP as the sum of four items: (1) consumption by households, (2) investment by businesses, (3) government purchases, and (4) expenditures by foreigners. Personal consumption expenditures include spending by households on durables, nondurables, and services. Gross private investment spending includes all final purchases of machinery, equipment, and tools by businesses, all construction, changes in business inventories, and money spend on research and development or for the creation of new works of art, music, writing, film, and so on. Government purchases include expenditures for goods & services that government consumes in providing public services, expenditures for publicly owned capital such as schools & highways, and government expenditures on research and development. Net exports are defined as the difference between exports and imports (net exports = exports - imports). Exports are what we sell to the rest of the world and imports are what we buy from the rest of the world. Should exports be higher than imports then net exports would be positive and when imports are larger than exports then net exports would be negative.

How do we measure GDP using the income approach? Which variables are included in the income approach to GDP?

The major component is national income, which is made up of employee compensation, rents, interest, proprietor's income, corporate profits, and taxes on production and imports. The largest share is employee compensation, which includes wages and salaries paid by both businesses and government as well as supplements, such as benefits paid by employers on behalf of employees. Corporate Profits = Corporate Income Tax + Dividends + Undistributed Corporate Profits Under the income approach, all expenditures on final goods and services flow as income to either private citizens or the government. To move from national income to GDP, several adjustments must be made. The first adjustment is for net foreign factor income, which is income Americans gain from supplying resources abroad. It would be taken out and then income that foreigners gain from supplying resources to the United States would be added. The next adjustment comes from what is called a statistical discrepancy, which basically is just a balancing amount. The final adjustment factor is the useful life of private capital equipment that extends well beyond the year in which it was produced. The cost of the equipment must be allocated over its useful life.

How do we find the equilibrium price and quantity? How do we measure a surplus and shortage?

The market equilibrium occurs where the demand curve and supply curve intersect. At that point, the equilibrium price and equilibrium quantity are established. In the above example, the equilibrium price is $3.00 and equilibrium quantity is 7,000 units. Any price greater than the equilibrium price would generate a surplus (quantity supplied would be larger than quantity demanded) in the market while any price less than the equilibrium would create a shortage (quantity demanded would be larger than quantity supplied) in the market.

productive growth

There are five factors that, when combined, appear to explain changes in productivity growth rates. The largest contributor is technological advance, which accounts for approximately 40 percent of productivity growth. It is generated by the discovery of new knowledge. The quantity of capital explains roughly 30 percent of productivity growth. More and better plant and equipment make workers more productive. Education and training, economies of scale, and resource allocation account for the remaining productivity growth. Investment in human capital is an important means of increasing labor productivity.

how does the economy decide where to produce on the PPC

Where the economy chooses to produce on the PPC today largely determines the amount of economic growth that they will experience in the future. Goods for the future include goods like capital, education, and research and development. When we produce those kinds of goods today, they don't do anything to satisfy needs and wants today, but they will help to better satisfy future wants and needs by enabling the economy to produce a greater amount of present goods in the future. Present goods are goods that satisfy needs today and do nothing for us in the future; most of the goods that we buy are present goods. Notice that in graph A, currently the economy produces more goods for the present and less goods for the future whereas in graph B, the economy currently produces more goods for the future and less goods for the present. Thus, the shift in the future production possibilities curve of graph A is smaller compared to the shift in the future production possibilities curve of graph B.

What are anti-growth and pro-growth arguments?

While most economists usually agree that economic growth is both desirable and sustainable, not everyone agrees. Critics say industrialization and growth come with pollution, climate changes, ozone depletion, and other environmental problems. They also argue that there is little compelling evidence that economic growth has solved sociological problems such as poverty, homelessness, and discrimination. While growth has led to higher standards of living, it does not necessarily translate to a better life. There is also concern about whether the growth is sustainable. The earth has limited resources that are being consumed at alarming rates. The primary defense of growth is that it improves living standards. Proponents of growth meet all of the arguments of critics with the upside of the situation. They point to the higher education levels, increased recreation, better access to medical care, and other benefits of modern society. They feel that the concerns about the environment can be dealt with as technology advances. The automobile industry illustrates that very issue with the movement toward vehicles that use alternative fuels rather than the limited fossil fuels.

What does a budget line show?

all possible combinations of two goods that can be purchased, given money income and the prices of the goods.

related goods

complements and substitutes

how do you calculate opportunity cost

opportunity cost is just how many of one product you make and how many of another product you make in correspondence to a point on the line if you decide to produce more of one product, the amount of the other product you give up to do this is the opportunity cost

factors of production

the economy's scarce resources are land, labor, capital, and entrepreneurial ability. These are also known as factors of production. They are inputs used in the production process. Land refers to natural resources; labor refers to skills & talents of individuals; capital refers to machinery, equipment, tools used in the production process; and entrepreneurial ability refers to someone who takes the initiative to combine land, labor, and capital in order to start up a business. Money is not an economic resource b/c it does not produce anything by itself.

oppurtunity cost

the loss of potential gain from other alternatives when one alternative is chosen. opportunity cost is the loss or the benefit that could have been enjoyed if the alternative choice was chosen. There is an opportunity cost with every purchase. The opportunity costs are constant in the example Every time, the consumer chooses to watch one additional movie, the number books given up is equal to 2. So the opportunity cost of the first movie is 2 books. To obtain the second movie the opportunity cost is also 2 books. The straight-line budget constraint, with its constant slope, indicates constant opportunity cost. That is, the opportunity cost of 1 extra movie remains the same (=2 books) as you purchase more movies. Likewise, the opportunity cost of 1 extra books does not change (=½ movie) as you purchase more books.

How is gross domestic product (GDP) defined?

the primary measure of the economy's performance as a whole is its aggregate output. This is most commonly calculated as gross domestic product, or GDP. GDP is a monetary measure in that everything is valued in dollars. All goods and services produced must be converted into dollar values for GDP to work.