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70 Cards in this Set

  • Front
  • Back
Positive Statement
Testable.
"I will study for the midterm"
Normative Statement
What ought to be.
Not testable.
"I should study for the midterm"
Explicity costs
dollars sacrificed
Money cost
Implicity costs
value of something sacrificed
Production Efficiency
We cannot produce more of one ogood without producing less of some other good.
Allocative Efficiency
We cannot produce more of any good without giving up some other good that we "value more highly"

Point on PPF boundary where marginal benefit = Marginal cost
Technical Efficiency
For a given level of output being produced, we cannot decrease our inputs used.
Bowed Out PPF
Increasing Slope/Increasing Opportunity Costs
Linear PPF
Constant Slope/Constant Opportunity Costs
When does a person have absolute advantage?
When that person is more productive than another person in a task.
When does a person have comparative advantage?
When that person has less opportunity cost in doing the cost.
What is necessary in order to specialize in a particular task?
Comparative Advantage
What must the acceptable price of trade be?
Higher than the opportunity cost of the seller.

Lower than the opportunity cost of the buyer.

*Between the two opportunity costs*
Gain from trade steps (5)
1. Calculate OC
2. Identify who has Comparative Advantage -> specialization
3. Evaluate the price and identify the required amounts of production that each person has to do to complete the trade.
4. Calculate the costs of production
5. Compare what each person will get from trade ( if benefits exceed costs, then you gain)
Economic Growth
expansion of production
Extensive Growth
More Resources
Capital Accumulation
Intensive Growth
Existing Resources become better

Technological Change
Methods of Resource Allocation
Traditional Economy
Command Economy
Market Economy
Traditional Economy
Resources are allocated according to long-lived practices from the past
Command Economy
According to eplicit instructions from a central authority
Market Economy
Resources are allocated through individual decision making
Market
Any arrangement that enables buyers and sellers to get information and to do business with each other.
Markets can only work when...
Property rights exist
Property Rights
The social arrangements that govern the ownership, use and disposal of resources, goods and services
Real Property
Land, buildings, durable goods
Financial Property
stocks, bonds, money
Intellectual Property
Intangible product of creative effort (books, music, inventions)
Perfectly Competitive Market
A market that has many buyers and many sellers, so no single buyer or seller can influence the price.
Goods Market
Market where households are buyers and firms are sellers
Factor Market
Market where households are sellers and firms are buyers
Factors of Production
resources that businesses use to produce goods and services

Land, Labor, Capital, Entrepreneurship
Land
earns rent
"gifts of nature"
Labor
earns wages
"the time spent producing goods/services"
Capital
earns interest
"long-lasting products that are used to produce other goods
Two Kinds of Capital
1. Physical Capital

2. Human Capital
Physical Capital
Macinery, equipment, etc.
Human Capital
Skills and training of workers
Entrepreneurship
earns profit

ability to combine other factors of production into a productive enterprise
Money Price
number of dollars that must be given up in exchange for a product
Relative Price
number of other goods that must be given up in exchange for a product

Ratio of one price to another

Opportunity Cost
Law of Demand
As price increases, quantity demand decreases
Substitution Effect
Price increases, buy more substitutes, buy less of the product, quantity demanded decreases
Determinants of Demand
taste/preference
price of other goods
average income
number of buyers in market
Change in price
does not shift the demand curve

changes the quantity demanded
Determinants in Supply
Technology
Input Price
Expectation of future price
Number of sellers in the market
Law and regulation
Price of related goods
Change in Price (Supply)
will not shift the entire supply curve.
will change the quantity supplied
Equilbrium
Intersection of demand and supply curves

Price at which quantity demanded = quantity supplied
Shortage
quantity demanded > quantity supplied
Three Important Macroeconomic Goals
Economic Growth
High Employment/Low Unemployment
Stable Prices
GDP
the value of the total production of all final goods and services produced within a country during a given year
Real GDP
States the GDP value in term of prices of a single year
Potential GDP
the value of production when all the economy's factors of production (land, labor, capital and entrepreneurship) are fully employed.
Business Cycles
Fluctuations in real GDP around its potential GDP
Expansion
period of increasing real GDP (economy is growing)
Contraction
period of decreasing real GDP
Recession
period of significant decline in real GDP for at least two consecutive quarters (6 months)
Depression
an unusually severe recession
Peak
represents the end of expansion and the beginning of contraction
Trough
represents the end of contraction and the beginning of expansion
Rule of 72
given the growth rate of g and initial real GDP, the GDP will be double in approximately 72/g years
Lucas Wedge
the accumulated loss of output that results from a slowdown in the growth rate of real GDP per person.

measures the cost of slower productivity growth
Okun Gap
the gap between real GDP and potential GDP

output gap

source of loss from economic fluctuations
Price level
the average level of price
Inflation
a sustained increase of price level over time
Deflation
A situation in which the prices of most goods and services are falling over time so that inflation is negative
Fiscal Policy
making changes in tax rates and in government spending programs

federal government
Monetary Policy
Making changes in interest rates and the amount of money in the economy

The Federal Reserve (The Fed)
Government Budget Surplus
Government collects more in taxes than it spends
Government Budget Deficit
Government spends more than it collects in taxes
The Federal Reserve is also known as
The Fed