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Macroeconomics
Test 1 Key Terms
88
Economics
Undergraduate 1
02/16/2010

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Term
Incentives
Definition
Rewards for engaging in a particular activity
Term
economic way of thinking
Definition
a framework to analyze solutions to economic problems
Term
Economics
Definition
the study of how people allocate their limited resources to satisfy unlimited wants
-the study of how people make choices
Term
Resources
Definition
things used to produce goods & services to satisfy people's wants
Term
Wants
Definition
What people would buy if their incomes were unlimited
Term
Microeconomics
Definition
Study of decision making by individuals
Term
Macroeconomics
Definition
Study of the behavior of the economy as a whole
Term
Aggregates
Definition
totals (such as total output)
Term
Economists assume
Definition
that individuals act as if motivated by self interest and respond predictably to opportunity for gain
Term
Rationality assumption
Definition
People don't intentionally make choices that would leave them worse off
Term
Self-interest
Definition
the pursuit of one's goals
-doesn;t always mean increasing one's wealth
Term
Models or Theories
Definition
simplified representations of the real world used as a basis for predictions or explanations
Term
Assumptions
Definition
set of circumstances in which a model is applicable
Term
Economic models attempt to...
Definition
focus on what is relevant to a problem @ hand and omit what is not
Term
Ceteris Paribus Assumption
Definition
Nothing changes except factor or factors being studied
"other things equal/constant"
Term
Economics is a _________ science.
Definition
Empirical (real world data evaluate a model's usefulness
Term
How is a model "good"
Definition
A model is good if it predicts economic phenomena
Term
Economics models _______, not ________
Definition
behavior, though processes
Term
Bounded rationality hypothesis
Definition
people are nearly, not fully, rational (rule of thumb)
Term
Positive economics
Definition
Purely descriptive statements or scientific predictions
Term
Normative economics
Definition
Analysis involving value judgements
Term
Scarcity
Definition
occurs when the ingredients for producing things people desire are insufficient to satisfy all wants
Term
Scarcity is NOT
Definition
A shortage
the same as poverty
Term
Production
Definition
Any activity that results in the conversion of resources into products that can be used in consumption
Term
Resources or Factors of Production
Definition
Inputs that are used to produce things people want
Term
Land
Definition
All natural resources or gifts from nature
Term
Labor
Definition
Productive contributions of working humans "human resource"
Term
Physical Capital
Definition
All manufactured resources
Term
Human Capital
Definition
Accumulated training and education of workers
Term
Entrepreneurship
Definition
person who organizes, manages, and assembles the other resources
Term
Goods
Definition
All things from which individuals get satisfaction or happiness
Term
Economic Goods
Definition
goods that are scarce - Quantity demanded exceeds quantity supplied at zero price
Term
Services
Definition
tasks that are performed for someone else
Term
Needs
Definition
Not definable to economists
Term
Opportunity Cost
Definition
The highest valued, next best alternative that must be sacrificed to obtain something or satisfy a want
Term
In economics cost is always a _________.
Definition
Forgone opportunity
Term
What does the Production Possibilities Curve represent?
Definition
All possible maximum combinations of total output that could be produced
Term
The PPC (PPF) is used to demonstrate
Definition
the related concepts of scarcity, choice, and trade-off
Term
Technology
Definition
society's pod of applied knowledge concerning how goods and services can be produced
Term
Efficiency
Definition
a given level of inputs is used to produce the maximum amount possible
Term
Inefficient point
Definition
any point below the PPc at which the used resources is not generating the max possible output
Term
Law of Increasing Relative Cost
Definition
As society attempts to produce more of a good, the opportunity cost of additional units of that good generally increases (curved shape of PPC)
Term
Economic growth...
Definition
-increases production possibilities
- occurs over a period of time
- is illustrated by outward shift in PPC
Term
Consumption
Definition
the use of goods and services for personal satisfaction
Term
Consumer goods
Definition
goods produced for personal satisfaction (food, clothes)
Term
Capital goods
Definition
goods we use to produce other goods
Term
Specialization
Definition
organization of economic activity among different individuals and regions
Term
Specialization usually leads to ______________.
Definition
greater productivity
Term
Comparative advantage
Definition
the ability to produce a good or service at a lower opportunity cost (relative)
Term
Absolute advantage
Definition
the ability to produce more units of a good or service using a given quantity of labor and resource inputs
Term
Rational individuals...
Definition
choose their comparative advantage or specialize
Term
Division of labor
Definition
assigning different workers different tasks to produce a good or service
Term
Markets
Definition
arrangements individuals have for exchange with one another
Term
Demand
Definition
schedule showing how much of a good or service people will buy at any price during specified time period, other things constant
Term
Law of Demand
Definition
Quantity demanded is inversely related to price
Term
Relative price
Definition
price of a community in terms of another community
Term
Money price
Definition
price we observe today in today's dollars
Term
Demand schedule
Definition
table related to quantity demanded
Term
Demand curve
Definition
graphical representation of the demand schedule
Term
Market Demand
Definition
The demand of all consumers in the market place for a particular good or service
Term
Factor other than price changes on demand curve
Definition
shifting curve left or right
Term
Ceteris Paribus Conditions
Definition
determinants of the relationship between P and Q that are unchanged along a curve
Term
Normal Goods
Definition
demand (up) when income (up)
Term
Inferior Goods
Definition
demand (down) when income (up)
Term
substitutes
Definition
a change in the price of one causes a shift in demand for the other in the same direction as the price change
Term
complements
Definition
a change in the price of one causes a shift in demand for the other in the opposite direction as the price changes
Term
Supply
Definition
schedule showing relationship between price and quantity supplied for a specified time period, other things constant
Term
Law of Supply
Definition
Quantity of supply is directly related to price
Term
Supply schedule
Definition
table relating prices to quantity supplied at each price
Term
Supply Curve
Definition
graphical representation of the supply schedule
Term
What causes a change in supply
Definition
a change in one or more of the non-price determinants
Term
Market Clearing (Equilibrium) Price
Definition
Price that clears market (curves intersect)
Term
Equilibrium
Definition
situation when Qd=Qs at a particular point
Term
Shortage
Definition
When Qd>Qs
Term
Surplus
Definition
When Qd
Term
Price System
Definition
An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities
Term
Functions of a price system
Definition
signals to everyone within the system as to what is relatively scarce and what is relatively abundant
Term
Voluntary exchange
Definition
An act of trading, done on and elective basis, in which both parties to the trade expect to be better off after the trade
Term
terms of exchange
Definition
the conditions under which the trade takes place
Term
transaction costs
Definition
all of the costs associated with exchange, including the informational costs and enforcing the contract
Term
what is the role of middlemen
Definition
specialize in lowering transaction costs
Term
The rationing function of prices
Definition
sychronization of decisions of buyers and sellers that lead to equilibrium
Term
Rationing must occur because of _______.
Definition
scarcity
Term
The most efficient rationing mechanism is ______.
Definition
prices
Term
Price Controls
Definition
government mandated minimum or maximum prices
Term
price ceiling
Definition
implementing a legal maximum price
Term
price floor
Definition
implements a legal minimum price
Term
Support Price
Definition
government established price floor
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