Macroeconomics Exam 1 Study Guide

The Five Foundations of Economics

1) Incentives 2) Trade-offs 3) Opportunity cost 4) Marginal thinking 5) Trade creates value

Direct Incentives

Cut my grass and I'll pay you $30 dollars.

Trade Off

Because of scarcity every decision has a cost. Deciding to do something now means you wont be able to do something else till later

Negative Incentives

also encourage action. The fear of receiving a speeding ticket keeps motorists from driving too fast.

Incentives

are factors that motivate a person to act or exert effort

Positive Statement

can be tested and validated, it describes "what is"

Positive Incentives

encourage action. End of year bonuses motivate employees to work hard throughout the year.

Monopoly

exists when a single company supplies the entire market for a particular good or service.

Exogenous Factors

factors beyond our control (outside the model)

Absolute Advantage

refers to the ability of one producer to make more than another producer with the same quantity of resources

Scarcity

refers to the limited nature of society's resources, given the society's unlimited wants and needs.

Comparative Advantage

refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can.

Market Economy

resources are allocated among households and firms with little or no government interference

Law of Supply and Demand

states that the market price of any good will adjust to bring the quantity supplied and quantity demanded into balance.

The Law of Increasing Relative Cost

states that the opportunity cost of producing a good rises as a society produces more of it.

Law of Demand

states that, all other things being equal, quantity demanded falls when prices rise, and rises when prices fall.

Microeconomics

study of the individual units that make up the economy

Fiscal Policy

the government takes an active role in managing the economy

Trade

the voluntary exchange of goods and services between two or more parties

Thinking at Margin

weighing the costs and benefits of their actions and choosing to do the thing with the greatest payoff.

Demand Curve

is a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices.

Supply Curve

is a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices.

Production Possibilities Frontier

is a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently.

Demand Schedule

is a table that shows the relationship between the price of a good and the quantity demanded.

Supply Schedule

is a table that shows the relationship between the price of a good and the quantity supplied.

Imperfect Market

is one in which either the buyer or the seller has an influence on the market price.

Ceteris Paribus

is the concept under which economists examine a change in one variable while holding everything else constant.

Equilibrium Price or Market Clearing

is the price at which the quantity supplied is equal to the quantity demanded.

Investment

is the process of using resources to create or buy new capital.

Opportunity Cost

next best alternative that must be sacrificed OR the highest valued alternative that must be sacrificed in order to get something else

Equilibrium

occurs at the point where the demand curve and the supply curve intersect- perfectly balanced.

Surplus

occurs whenever the quantity supplied is greater than the quantity demanded

Shortage

occurs whenever the quantity supplied is less than the quantity demanded

Law of Supply

states that, all other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price o the good falls.

Macroeconomics

the study of the overall aspects and workings of an economy- inflation, growth, employment, interest rates, and the productivity of the economy as a whole

Normal Good

is one that experiences an increase in demand as the income of an individual or economy increases. Fancy Items basically.

Inferior Good

is purchased out of necessity rather than choice

Equilibrium Quantity

is the amount at which the quantity supplied is equal to the quantity demanded.

Quantity Demanded

is the amount of a good or service that buyers are willing and able to purchase at the current price.

Quantity Supplied

is the amount of a good or service that producers are willing and able to sell at the current price

Economic Growth

is the process that enables a society to produce more output in the future.

Economics

is the study of how people allocate their limited resources to satisfy their nearly unlimited wants.

Market Demand

is the sum of all the individual quantities demanded by each buyer in the market at each price.

Market Supply

is the sum of the quantities supplied by each seller in the market at each price.

Normative Statement

is an opinion that cannot be tested or validated, it describes "what ought to be."

Indirect Incentives

If the gas station lowers its prices this could be indirect because lower prices might encourage consumers to use more gas.

Competitive Market

It exists when there are so many buyers and sellers that each had only a small impact on the market price and output.

Marginal Thinking

Process of systematically evaluating a course of action.

Consumer Goods

are produced for present consumption- satisfy wants now

Inputs

are resources used in the production process

Substitutes

are two goods that are used in place of each other. When the price of a substitute good rises, the quantity demanded falls and the demand for the related good goes up.

Complements

are two goods that are used together. When the price of a complementary good rises, the demand for the related good goes down.

Markets

bring buyers and sellers together to exchange goods and services.

Endogenous Factors

factors we know about and can control

Capital Goods

help produce other valuable goods and services in the future