Macro Unit 1 Flashcards
Scarcity
The problem of human’s unlimited wants but limited resources; Scarcity forces us to make choices.
Factors of production
Land, Labor, Capital, and Entrepreneurship.
Land- all natural resources
Labor- paid work
Capital- physical
Human Capital
The skills or knowledge gained by a worker through educaion and experience.
Capital goods
Goods created for indirect consumption; Used to create consumer goods
Consumer Goods
Created for direct consumption
countries that produce more capital goods than consumer goods will experience more economic growth in the long run.
Microeconomics
the study of small units such as households, firms, and industries; small individualized decisions.
Macroeconomics
the study of the large economy as a whole; economic growth, inflation, unemployment
Marginal Analysis
Making decisions based on increments; youll continue to do something as long as the marginal benefit is greater than or equal to the marginal cost.
“marginal” means additional
Positive statements
based on facts; avoids value statements
Normative statements
Includes value judgements and is subjective (debatable)
what SHOULD be (whereas positive statements are what IS)
Price vs Cost
Price is how much the buyer or consumer pays for a given product whereas cost is what the seller pays to make/produce that product.
Investment
the money spent by businesses to improve their production
Absolute Advantage
The producer that can produce the most output OR requires the least amount of resources to produce a given product
Comparative Advantage
The producer with the lowest opportunity cost
(comparative advantage is never the same for two countries, only one can have the comparative advantage)
Terms of Trade
The agreed upon conditions that would benefit both countries; they should trade at a rate that lies between the two opportunity costs.
Demand
The different quantities of goods that customers are both willing and able to buy at different prices.
What does the Law of Demand state?
There is an inverse relationship between price and quantity demanded (if price increases, demand decreases and vice versa)
The Law of Demand is the result of which three patterns?
- The Substitution Effect
- The Income Effect
- The Law of Diminishing Marginal Utility
What are the five shifters of Demand?
- Tastes and Preferences
- Number of Buyers
- Change in Buyer Income
- Price of Related Goods
- Future Expectations
A shift to the right on the demand graph is always an increase in demand whereas a shift to the left is always a decrease in demand
Why is the Demand Curve downward sloping?
Because it shows the inverse relationship between price (y) and quantity demanded (x)
Supply
The different quantities of a good that sellers are both willing and able to produce/sell at different prices
What does the Law of Supply state?
There is a direct (or positive) relationship between price and quantity supplied
Why is the supply curve upward sloping?
because at higher prices, businesses have an incentive to produce more and therefore earn more profit
What are the five shifters of supply?
- Price/availability of inputs (resources)
- Number of sellers
- Technology
- Government action (taxes and subsidies)
- Expectation of future profit
The Substitution Effect
If the price of a product goes up, customers buy less of that product and more of a substitute product.
The Income Effect
As product price decreases, the purchasing power for customers increases allowing them to purchase more.
What does the Law of Diminishing Marginal Utility state?
As you consume anything, the additional satisfaction you recieve from continually consuming that product will eventually decrease.
Subsidies
A government payment that supports a business or market. Can cause supply to increase.
Price Ceiling
The maximum legal price a seller can charge for a product. The goal of these is ti make goods affordable by keeping price from reaching equilibrium.
in order for a price ceiling to have an effect, it has to be below equilibrium
Price Floor
A minimum legal price a seller can sell a product for. Goal of this is to keep prices high by preventing them from falling to equilibrium.
in order to have an effect, price floor must be above equilibrium
What is the double shift rule?
If two curves shift at the same time, either price or quantity will be indeterminate.
