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50 Cards in this Set

  • Front
  • Back
opportunity cost
value of next best alternative that is given up in order to engage in a particular economic engagement
Productive possibilites frontier
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technologies. The more resources devoted to that product, the smaller the payoff of devoting additional resources to it.
PPF Increasing marginal opportunity
as economy moves down the production possibilites frontier
quantity demanded is a function of:
price of good, projections of future price of good, income (rising of purchasing power)
shifts of demand surve versus movement on demand surve
MOVEMENTS ALONG: when price of good changes (change of quantity demanded)
SHIFTS: when any other variables change demand
price ceiling
a legally determined maximum that sellers may charge. ex: rent control. demand will be higher than supply. some people should have access to goods that they otherwise wouldn't be able to afford. bad because some people still wont have acess to them (long lines), and black markets.
price floor
a legally determined minimum that sellers can receive. ex: min wage. reduces economic efficiency. supply will be higher than demand
effect of sales taxes on prices
- prices are raised
- when products are taxed by government, they are bought and sold less
- we are able to observe the benefits of having a free market
tax incidence
actual division of the burden of a tax on buyers and sellers
institution that organizes production and sale of a commodity. different firms have different goals
capitalist firm
goal is to maximize profits. firm goal is the same as owner's goal
non-profit firm
example american university. extra profit is invested into making firm better. dont have to pay taxes.
sole proprietorship
owns and works firm. ex: family-owned dry cleaner or hairdresser. sometimes part of a larger franchise (motophoto)
two or more owners
shareholders have no managerial authority. larger shareholders (board of directors?) try to determine direction of company
gross domestic product. tha market value of all final goods and services produced in a country during a period of time. is often a measure of welfare and living standards and economic prosperity
GDP equation
Y = C + I + G + NX (C=consumption, I=investment, G=government spending and purchases, NX=net exports)
nominal gdp
value of goods and services evaluated at current year prices
real GPD
value of final goods and services evaluated at base-year prices (holds prices constant, better measure that nominal)
real versus nominal GDP
real GDP = (nominal GDP)(GDP deflator) x deflator
unemployment rate
number of unemployed / labor force x 100 (aka the percentage of labor force that is unemployed)
labor force
sum of employed and unemployed
discouraged workers
available for work but have not looked for job during previous four weeks b/c he thinks none are available
efficiency wage
firm pays a higher-than-market wage in order to increase efficiency
price level
a measure of the average price of all goods and services in the economy
inflation rate
percentage increase in the price level from one year to the next
consumer price index - average of price of goods and services purchased by a typical urban family of four. used to measure inflation

(Expenditures in current year/ expenditures of base year x100)
producer price index - average of the prices received by firms at all stages of production process
menu costs
costs to a firm for changing prices
nominal interest rate
state interest rate on a loan
real interest rate
adjust for inflation
decrease in price level
macro equilibrium occurs when...
aggregate expenditure = GDP
when aggregate expenditure is less than GDP, inventories and GDP...
inventories will increase and total employment will decrease
multiplier effect
process by which an increase in autonomous expenditure leads to a larger increase in GDP.
autonomous expenditure
expenditure that does not depend on level of GDP
multiplier equation
1/(1-MPC). mult will be higher if MPC is higher. income tax will decrease the multiplier. larger countries tend ot have larger multipliers
consumption expenditure
household spending. increases as income increases Consumption function: C=f(y)
consumption is affected by:
expectations of future price, wealth, interest rate, current income
MPC definition and equation
marginal propensity to consume
change in C / change in Y
between 0 and 1
C = Co + (MPC)Y
closed economy GDP equation
Y = Co + MPC(Y) + I + G
what does aggregate demand curve show?
aggregate demand curve shows relationship between price level and level of aggregate expenditure
an increase in price level causes a reduction in consumption, investment and NX. decrese in price level leads to higher equilibrium real GDP.
aggregate expenditure and four components
total amount of spending in the economy. four components: C, Planned investment, G, NX
aggregate demand
total level of expenditures produced with that economy. demand for domestically produced goods. if AD declines, output declines. if AD rises, prices rise
aggregate supply
total measure of output. equlibrium is when AD = AS, at this point there is full employment
why is AD downward sloping?
declining prices increase financial wealth and thus increase consumption. distribution of income. multiplier effect.
6 causes of aggregate demand curve shift
consumption, planned investment, governemnt spending shifts, government taxation shifts, export demand shifts, import demand shifts,
causes of aggregate supply shift
labor costs, raw material costs, import prices,
4 functions of money
-medium of exchange
-unit of account
-store of value
-standard of deffered payment
fractional reserve banking system
banking system in which banks keep less than 100 percent of deposits as reserves