Principles of Macroeconomics: Chapter 1 and 2

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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


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