Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
128 Cards in this Set
- Front
- Back
|
What Is Economics?
|
The study of choices when there is scarcity.
|
|
|
scarcity
|
The resources we use to produce goods and services are limited.
|
|
|
factors of production
|
The resources used to produce goods and services; also known as production inputs, or resources.
|
|
|
natural resources
|
Resources provided by nature and used to produce goods and services
|
|
|
labor
|
The physical and mental effort people use to produce goods and services.
|
|
|
physical capital
|
The stock of equipment, machines, structures, and infrastructure that is used to produce goods and services.
|
|
|
human capital
|
The knowledge and skills acquired by a worker through education and experience.
|
|
|
entrepreneurship
|
The effort used to coordinate the factors of production—natural resources, labor, physical capital, and human capital—to produce and sell products.
|
|
|
positive analysis
|
Answers the question “What is?” or “What will be?”
ex...If the government increases the minimum wage, how many workers will lose their jobs? |
|
|
normative analysis
|
Answers the question “What ought to be?”
ex...Should the government increase the minimum wage? |
|
|
The Three Key Economic Questions
|
1 What products do we produce?
2 How do we produce the products? 3 Who consumes the products? |
|
|
economic model
|
A simplified representation of an economic environment, often employing a graph.
|
|
|
variable
|
A measure of something that can take on different values.
|
|
|
ceteris paribus
|
The Latin expression meaning that other variables are held fixed.
|
|
|
Think at the Margin
|
small change in one variable affects another variable
|
|
|
marginal change
|
A small, one-unit change in value.
|
|
|
key assumption of most economic analysis...
|
Rational People Respond to Incentives
|
|
|
macroeconomics
|
The study of the nation’s economy as a whole; focuses on the issues of inflation, unemployment, and economic growth
|
|
|
microeconomics
|
The study of the choices made by households, firms, and government and how these choices affect the markets for goods and services.
|
|
|
positive relationship
|
A relationship in which two variables
move in the same direction. |
|
|
negative relationship
|
A relationship in which two variables
move in opposite directions. |
|
|
opportunity cost
|
What you sacrifice to get something.
|
|
|
production possibilities curve
|
A curve that shows the possible combinations of products that an economy can produce, given that its productive resources are fully employed and efficiently used.
|
|
|
marginal benefit
|
The additional benefit resulting from a small increase in some activity.
|
|
|
marginal cost
|
The additional cost resulting from a small increase in some activity.
|
|
|
M A R G I N A L P R I N C I P L E
|
Increase the level of an activity as long as its marginal benefit exceeds its marginal cost. Choose the level at which the marginal benefit equals the marginal cost
|
|
|
P R I N C I P L E O F V O L U N T A R Y E X C H A N G E
|
A voluntary exchange between two people makes both people better off.
|
|
|
Principle of Diminishing Returns
|
Suppose output is produced with two or more inputs, and we increase one input while holding the other input or inputs fixed. Beyond some point—called the point of diminishing returns—output will increase at a decreasing rate.
|
|
|
Real nominal Principle
|
What matters to people is the real value of money or income—its purchasing power—not its “face” value.
|
|
|
nominal value
|
The face value of an amount of money.
|
|
|
real value
|
The value of an amount of money in terms of what it can buy.
|
|
|
Principle of Opportunity Cost
|
The opportunity cost of something is what you sacrifice to get it
|
|
|
comparative advantage
|
The ability of one person or nation to produce a good at a lower opportunity cost than another person or nation.
|
|
|
absolute advantage
|
The ability of one person or nation to produce a product at a lower resource cost than another person or nation.
|
|
|
Smith listed three reasons for productivity to increase with specialization, with each worker performing a single production task:
|
Repetition, continuity, and innovation
|
|
|
import
|
A product produced in a foreign country and purchased by residents of the home country.
|
|
|
export
|
A product produced in the home country and sold in another country.
|
|
|
market economy
|
An economy in which people specialize and exchange goods and services in markets.
|
|
|
centrally planned economy
|
An economy in which a government bureaucracy decides how much of each good to produce, how to produce the good, and who gets the good.
|
|
|
perfectly competitive market
|
A market with so many buyers and sellers that no single buyer or seller can affect the market price.
|
|
|
quantity demanded
|
The amount of a product that consumers are willing and able to buy.
|
|
|
individual demand curve
|
A curve that shows the relationship between the price of a good and quantity demanded by an individual consumer, ceteris paribus.
|
|
|
law of demand
|
There is a negative relationship between price and quantity demanded, ceteris paribus.
|
|
|
change in quantity demanded
|
A change in the quantity consumers are willing and able to buy when the price changes; represented graphically by movement along the demand curve.
|
|
|
quantity supplied
|
The amount of a product that firms are willing and able to sell.
|
|
|
individual supply curve
|
A curve showing the relationship between price and quantity supplied by a single firm, ceteris paribus.
|
|
|
excess demand (shortage)
|
A situation in which, at the prevailing price, the quantity demanded exceeds the quantity supplied.
|
|
|
excess supply (surplus)
|
A situation in which the quantity supplied exceeds the quantity demanded at the prevailing price.
|
|
|
change in demand
|
A shift of the demand curve caused by a change in a variable other than the price of the product.
|
|
|
normal good
|
A good for which an increase in income increases demand.
|
|
|
inferior good
|
A good for which an increase in income decreases demand.
|
|
|
substitutes
|
Two goods for which an increase in the price of one good increases the demand for the other good.
|
|
|
complements
|
Two goods for which a decrease in the price of one good increases the demand for the other good.
|
|
|
labor force
|
The total number of workers, both the employed and the unemployed.
|
|
|
unemployment rate
|
The percentage of the labor force that is unemployed.
|
|
|
labor force participation rate
|
The percentage of the population over 16 years of age that is in the labor force.
|
|
|
discouraged workers
|
Workers who left the labor force because they could not find jobs.
|
|
|
cyclical unemployment
|
Unemployment that occurs during fluctuations in real GDP.
|
|
|
frictional unemployment
|
Unemployment that occurs with the normal workings of the economy, such as workers taking time to search for suitable jobs and firms taking time to search for qualified employees.
|
|
|
structural unemployment
|
Unemployment that occurs when there is a mismatch of skills and jobs.
|
|
|
natural rate of unemployment
|
The level of unemployment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment.
|
|
|
Consumer Price Index
|
A price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer.
|
|
|
menu costs
|
The costs associated with changing prices and printing new price lists when there is inflation.
|
|
|
shoe-leather costs
|
Costs of inflation that arise from trying to reduce holdings of cash.
|
|
|
hyperinflation
|
An inflation rate exceeding 50 percent per month.
|
|
|
classical models
|
Economic models that assume wages and prices adjust freely to changes in demand and supply.
|
|
|
production function
|
The relationship between the level of output of a good and the factors of production that are inputs to production.
|
|
|
real business cycle theory
|
The economic theory that emphasizes how shocks to technology can cause fluctuations in economic activity.
|
|
|
crowding out
|
The reduction in investment (or other component of GDP) caused by an increase in government spending.
|
|
|
closed economy
|
An economy without international trade.
Y = C + I + G |
|
|
Crowding in
|
The increase of investment (or other component of GDP) caused by a decrease in government spending.
|
|
|
open economy
|
An economy with international trade.
Y = C + I + G + NX |
|
|
capital deepening
|
Increases in the stock of capital per worker.
|
|
|
technological progress
|
More efficient ways of organizing economic affairs that allow an economy to increase output without increasing inputs.
|
|
|
real GDP per capita
|
Gross domestic product per person adjusted for changes in prices. It is the usual measure of living standards across time and between countries.
|
|
|
growth rate
|
The percentage rate of change of a variable from one period to another.
|
|
|
rule of 70
|
A rule of thumb that says output will double in 70/x years, where x is the percentage rate of growth.
|
|
|
convergence
|
The process by which poorer countries close the gap with richer countries in terms of real GDP per capita.
|
|
|
saving
|
Income that is not consumed.
C+S=Y C+I=Y I=S |
|
|
creative destruction
|
The view that a firm will try to come up with new products and more efficient ways to produce products to earn monopoly profits.
|
|
|
aggregate demand curve (AD)
|
A curve that shows the relationship between the level of prices and the quantity of real GDP demanded.
|
|
|
wealth effect
|
The increase in spending that occurs because the real value of money increases when the price level falls.
|
|
|
CHANGES IN THE SUPPLY OF MONEY
|
An increase in the supply of money in the economy will increase aggregate demand and shift the aggregate demand curve to the right.
|
|
|
CHANGES IN TAXES
|
A decrease in taxes will increase aggregate demand and shift the aggregate demand curve to the right.
|
|
|
CHANGES IN GOVERNMENT SPENDING
|
At any given price level, an increase in government spending will increase aggregate demand and shift the aggregate demand curve to the right.
|
|
|
multiplier
|
The ratio of the total shift in aggregate demand to the initial shift in aggregate demand.
|
|
|
consumption function
|
The relationship between the level of income and consumer spending.
C = Ca + by |
|
|
autonomous consumption spending
|
The part of consumption spending that does not depend on income.
|
|
|
marginal propensity to consume (MPC)
|
The fraction of additional income that is spent.
|
|
|
marginal propensity to save (MPS)
|
The fraction of additional income that is saved.
|
|
|
aggregate supply curve (AS)
|
A curve that shows the relationship between the level of prices and the quantity of output supplied.
|
|
|
long-run aggregate supply curve
|
A vertical aggregate supply curve that represents the idea that in the long run, output is determined solely by the factors of production.
|
|
|
short-run aggregate supply curve
|
A relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand.
|
|
|
supply shocks
|
External events that shift the aggregate supply curve.
|
|
|
fiscal policy
|
Changes in government taxes and spending that affect the level of GDP.
|
|
|
expansionary policies
|
Government policy actions that lead to increases in aggregate demand.
|
|
|
contractionary policies
|
Government policy actions that lead to decreases in aggregate demand.
|
|
|
stabilization policies
|
Policy actions taken to move the economy closer to full employment or potential output.
|
|
|
inside lags
|
The time it takes to formulate a policy.
|
|
|
outside lags
|
The time it takes for the policy to actually work.
|
|
|
discretionary spending
|
The spending programs that Congress authorizes on an annual basis.
|
|
|
entitlement and mandatory spending
|
Spending that Congress has authorized by prior law, primarily providing support for individuals
|
|
|
supply-side economics
|
A school of thought that emphasizes the role that taxes play in the supply of output in the economy.
|
|
|
Laffer curve
|
A relationship between the tax rates and tax revenues that illustrates that high tax rates could lead to lower tax revenues if economic activity is severely discouraged.
|
|
|
planned expenditures
|
Another term for total demand for goods and services.
|
|
|
equilibrium output
|
The level of GDP at which planned expenditure equals the amount that is produced.
equilibrium output = y* = C + I = planned expenditures |
|
|
Two factors that can cause autonomous consumption to change
|
Increases in consumer wealth will cause an increase in autonomous consumption.
Increases in consumer confidence will increase autonomous consumption. |
|
|
money
|
Any items that are regularly used in economic transactions or exchanges and accepted by buyers and sellers.
|
|
|
medium of exchange
|
Any item that buyers give to sellers when they purchase goods and services.
|
|
|
barter
|
The exchange of one good or service for another.
|
|
|
double coincidence of wants
|
The problem in a system of barter that one person may not have what the other desires
|
|
|
store of value
|
The property of money that holds that money preserves value until it is used in an exchange.
|
|
|
fiat money
|
A monetary system in which money has no intrinsic value but is backed by the government.
|
|
|
M1
|
The sum of currency in the hands of the public, demand deposits, other checkable deposits, and traveler’s checks.
|
|
|
M2
|
M1 plus other assets, including deposits in savings and loans accounts and money market mutual funds.
|
|
|
Federal Reserve Bank
|
One of 12 regional banks that are an official part of the Federal Reserve System.
|
|
|
Board of Governors of the Federal Reserve
|
The seven-person governing body of the Federal Reserve System in Washington, D.C.
|
|
|
Federal Open Market Committee (FOMC)
|
The group that decides on monetary policy: It consists of the seven members of the Board of Governors plus 5 of 12 regional bank presidents on a rotating basis.
|
|
|
reserves
|
The portion of banks’ deposits set aside in either vault cash or as deposits at the Federal Reserve.
|
|
|
required reserves
|
The specific fraction of their deposits that banks are required by law to hold as reserves.
|
|
|
excess reserves
|
Any additional reserves that a bank holds above required reserves.
|
|
|
money multiplier
|
The ratio of the increase in total checking account deposits to an initial cash deposit.
|
|
|
central bank
|
A banker’s bank: an official bank that controls the supply of money in a country.
|
|
|
lender of last resort
|
A central bank is the lender of last resort, the last place, all others having failed, from which banks in emergency situations can obtain loans.
|
|
|
monetary policy
|
The range of actions taken by the Federal Reserve to influence the level of GDP or inflation.
|
|
|
illiquid
|
Not easily transferable to money.
|
|
|
liquidity demand for money
|
The demand for money that represents the needs and desires individuals and firms have to make transactions on short notice without incurring excessive costs.
|
|
|
speculative demand for money
|
The demand for money that arises because holding money over short periods is less risky than holding
stocks or bonds. |
