Principles of Macroeconomics: Chapter 1 and 2
Economic Model
A simplified version of reality used to analyze real world economic situations
Production Possibilities Frontier (PPF)
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
Product Market
a market for goods
Factor Market
a market for the factors of production
Free Market
a market with FEW gov restrictions on how a good or service can be produced
Circular flow diagram
a model that illustrates how participants in markets are linked
Voluntary Exchange
a situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction
Mixed economy
an economy where most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
Marginal analysis
analysis that involves comparing marginal benefits to marginal costs
Productive efficiency
good or service is produced at the lowest possible cost
Allocative efficiency
production is in accordance with consumer preferences
Scarcity
situation in which unlimited wants exceed the limited resources available to fulfill those wants
Economic Variable
something measurable that can have different values
Macroeconomics
study of economy as a whole - inflation, unemployment, economic growth
Absolute Advantage
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
Comparative advantage
the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors
Economic growth
the ability of the economy to increase the production of goods and services
Equity
the fair distribution of economic benefits
Opportunity cost
the highest valued alternative that must be given up to engage in an activity
Trade off
the idea that producing more of one good means producing less of another
Factors of Production
the inputs used to make goods and services
Microeconomics
the study of how households and firms make choices
Economics
the study of the choices people make to attain their goals given their scarce resources
Positive analysis
what is
Normative analysis
what ought to be
Centrally planned economy
government decides how economic resources will be allocated
Market
group of buyers and sellers of a good or service and the institution by which they come together to trade
Market economy
households and firms interacting in markets allocate economic resources