Econ Unit 1 Key Terms

Front 1

Economics

Back 1

The study of markets

Front 2

The economic problem

Back 2

figuring out how to satisfy unlimitted wants with limitted resources

Front 3

Land

Back 3

one of the four factors of production
earns rent

Front 4

Labor

Back 4

one of the four factors of production
earns wages

Front 5

Capital

Back 5

one of the four factors of production
earns interest

Front 6

Entrepreneurs

Back 6

one of the four factors of production
earn profits

Front 7

Goods

Back 7

things that have tangible substance

Front 8

Durables

Back 8

goods that have an economic life greater than or equal to 3 years

Front 9

Nondurables

Back 9

goods that have an economic life of less than 3 years

Front 10

Services

Back 10

intangibles (health care, transportation, etc.)

Front 11

Ceteris paribus

Back 11

Assumption of "all else being equal"

Front 12

Pitfalls of Economic Analysis

Back 12

Correlation and Causality
Other Conditions Fallacy
Fallacy of Composition
Law of Unintended Consequences/Ignoring Secondary Effects

Front 13

Correlation and Causality

Back 13

causality implies correlation
correlation DOES NOT imply causality

Front 14

Spurious correlation

Back 14

two variables have correlation, but there isn't causality
(i.e. there is a 79% correlation that if an NFC team or old AFC team wins the superbowl, then the stock market increases)

Front 15

Other conditions fallacy

Back 15

"what happened in the past will happen in the future"
-->yes, but only if all other conditions stay the same, which is rare, and almost impossible to measure

Front 16

Fallacy of composition

Back 16

if you (wrongly) say that what is true of part is true of the whole (this is why we need large sample sizes)

Front 17

Law of unintended consequences/Ignoring secondary effects

Back 17

When government policy, designed to achieve a certain goal, yields unintended side effects
i.e. Alcohol prohibition (people were poisoned; crime rate increased)

Front 18

Aggregate demand

Back 18

total spending on final goods and services
AD = C + I + G + Net X

Front 19

What do households spend money on?

Back 19

C - Consumption spending

Front 20

What do business firms spend money on?

Back 20

I - Investment spending
-->firms spending on new plants/structures/buildings; new equipment/machinery; new residential structures; change in inventories

Front 21

What does the government spend money on?

Back 21

G - Government spending on goods and services

Front 22

Net exports

Back 22

= (Exports) - (Imports)
Measure of economic output
~0

Front 23

5 factors that influence home production vs. buying from a firm

Back 23

1. specialization/skills needed
2. opportunity cost
3. avoiding taxes
4. technological advancements
5. reduction of transaction costs

Front 24

Economic functions of the government

Back 24

1. establish & enforce "rules of the game"
2. promote employment
3. regulate natural monopolies
4. provide public goods
5. deal with externalities
6. promote equal income distribution

Front 25

natural monopolies

Back 25

a case wehre it makes sense to have one producer because there are very high fixed costs

Front 26

public goods

Back 26

goods where consumption by one person doesn't diminish the amount available for others
(lighthouses, parks, national defense)

Front 27

free riders

Back 27

people who consume but don't pay

solution: government provides public goods and taxes everyone

Front 28

externalities

Back 28

when there is a social cost > production cost

Front 29

graduated/progressive income tax

Back 29

the more you make, the higher your taxes

Front 30

Marginal tax rate

Back 30

tax rate on one more $ of income

Front 31

average tax rate

Back 31

(taxes paid)/(income)

Front 32

flat tax

Back 32

constant marginal tax rate regardless of income

Front 33

regressive tax

Back 33

marginal tax rate decreases as income increases

Front 34

GDP

Back 34

gross domestic product;
output of all final goods and services produced in United States
~14trillion

Front 35

flow variable

Back 35

a variable measured over a period of time ("per year")
i.e. GDP, wage rate

Front 36

stock variable

Back 36

a variable measured at a point in time
i.e. money holdings, money supply, capital stock

Front 37

budget deficit

Back 37

(federal outlays/year) - (federal revenue/year)
= new federal borrowing per year
(flow variable)

Front 38

federal debt

Back 38

the total value of all federal borrowing (how much debt the government owes)
= how much debt the government owes
(stock variable)

Front 39

price level

Back 39

average price of final goods and services

Front 40

real GDP

Back 40

the quantity of final goods and services produced

Front 41

why does aggregate demand slope down?

Back 41

1. a decrease in price level, leads to an increase in money holdings, which leads to an increase in comsumption spending

2. as the price level goes down, exports increase, and imports decrease. --> net exports increases. As net exports increase, aggregate demand increases. THEREFORE, as P decreases, Net X increases, and Aggregate demand increases

Front 42

what shifts aggregate demand?

Back 42

1. a change in consumer optimism

2. change in wealth

3. change in government spending

Front 43

explicit labor contract

Back 43

legally binding
type held by labor unions

Front 44

implicit labor contract

Back 44

not legally binding
sets the wage rate (usually) for one year

Front 45

Profit margin

Back 45

= (profit per unit) - (cost per unit)

Front 46

Why does aggregate supply slope up?

Back 46

as P increases, the profit margin increases. therefore, firms produce more output, which leads to an increase in Real GDP (Y)
increase in P leads to increase in Y --> upward sloping

Front 47

Leftward shift of aggregate supply:
what?
why?

Back 47

businesses are willing to produce the same amount of goods but they are charging a higher price
this is a result of higher input costs

Front 48

Rightward shift of aggregate supply:
what?
why?

Back 48

this means businesses are willing to produce the same amount of goods for a lower price
this is a result of lower input costs

Front 49

If there is excess supply, then there is a tendency for price to...

Back 49

decrease

Front 50

If there is excess demand, then there is a tendency for price to...

Back 50

increase

Front 51

supply-side recession

Back 51

you're paying higher prices for lower output (result of an increase in input costs)

Front 52

what is wrong with using the percent change in real GDP to measure economic growth?
solution?

Back 52

real GDP does not adjust for population changes.
solution--compute percent change in real GDP per capita

Front 53

what is the preferred measure of economic growth?

Back 53

(percent change in real GDP) / (number of hours)
= labor productivity growth

Front 54

Rule of 72

Back 54

72 / (average annual growth rate %) = number of years for series to double

Front 55

what causes economic growth?

Back 55

Y = Real GDP = output
K = capital stock = stock of buildings/machinery
L = labor input = # of hours worked
A = state of technology

Y = (A) x f(K, L)

Front 56

Labor productivty

Back 56

= output per worker
= Y/L
= (Real GDP)/(# of hours worked)

Front 57

Equation for labor productivity growth

Back 57

Labor productivity growth = (rate of technological advancement) + (.25)(growth of capital per worker)

(Percent change in Y/L) = (Percent change in A) + (.25)(Percent change in (K/L))

Front 58

What 2 factors does labor productivity growth depend on?

Back 58

1. technological advancement
2. growth of capital per worker

Front 59

What is needed to facilitate technological advancement (5 factors)

Back 59

1. patent law
2. property law
3. educated population
4. receptive to change
5. government funding

Front 60

How does the government promote savings, and therefore the growth of capital per worker?

Back 60

1. reducing tax rates on taxable income

2. tax deferred accounts (401k, Roth IRA)

Front 61

Why can immigrants cost the border and experience a extreme increase in standard of living?

Back 61

the opportunity costs for people in a rich country is much higher.

capital & technology

Front 62

Nominal GDP

Back 62

= value of GDP @ current year prices

= (each year's output) x (that year's prices)

Front 63

Real GDP

Back 63

= each year's output @ base year's prices

= (each year's output) x (base year's prices)

Front 64

Price Index

Back 64

"GDP Deflator"
measures the average price of final goods and services

= (Nominal GDP)/(Real GDP)

Price Index = 1.28
--> The average price of cars and wheat increased 28% from 2007 (base year) to 2009 (current year)

Front 65

Why do we use nominal GDP?

Back 65

to calculate price index

Front 66

Consumer Price Index

Back 66

measures the cost of living

= (Cost in year x) / (Cost in base year) = CPI in year x

**use a constant, fixed quantity, but the price of a base year

Front 67

Why was the 1920s such a good time economically?

Back 67

Aggregate supply was shifting rightward because of technology, which led to lower prices and higher output

Front 68

What were the two economic problems developing in the late 1920s

Back 68

1. distribution of income and wealth--gap was widening

2. stock market boom--created a speculative bubble

Front 69

Greater fool theory

Back 69

Keynes - people will pay too much if you think there's a greater fool than you willing to pay even more

Front 70

Why did the federal reserve increase increase interest rates?

Back 70

to kill off stock market rally--they thought banks were feeding the speculative bubble by providing loans to brokers

Front 71

what factors influence the slope of aggregate supply?

Back 71

profit margin
(input costs)

Front 72

what factors influence the slope of aggregate supply?

Back 72

profit margin
(input costs)