FOR REVIEW MACRO MIDTERM #1 CH 1 Economics study of how people use their scarce resources to satisfy their unlimited wants Scarcity amount people desire exceeds amount available, not freely available Unlimited wants people can want virtually anything, however scarcity allows them to only have some of the things they want Factors of production labor, capital, land, entrepreneurial ability Entrepreneur has managerial and organizational skills needed to start a firm combined with risk-taking ability Capital buildings, equipment, and human skill, used to produce goods/services Circular flow model outlines flow of resources, products, income, and revenue among economic decision makers Households supply labor, capital, land, and entrepreneurial ability to firms through resource market and demand goods/services through product markets Firms demand factors of production from households through resource markets and supply goods/services to households through product markets Households provide revenue to firms through product market and firms provide wages, rent, profit, etc. to households through resource market Price is determinant between households and firms Marginal incremental, additional, or extra Microeconomics economic behavior in particular markets i.e. computers, gasoline Macroeconomics economic behavior of entire economy Economic theory or model simplification of reality used to make predictions about cause and effect in real world Positive vs. normative economics factual data compared to opinionated statements CH 2 Opportunity cost value of best alternative forgone after a choice Barter economy products traded directly for other products, no money exchange Specialization focusing effort on specific work task, result of division of labor; specialization leads to comparative advantage Efficiency maximum possible output from available resources "Invisible hand" Adam Smith's idea that due to self interest, the market system will provide the most wanted goods to consumers at the best price move towards equilibrium Economic growth expansion in economy's production possibilities reflected by outward shift of PPF; result of better technology, more skilled labor, etc. Capitalism private ownership of resources and use of prices to coordinate economic activity in unregulated markets Command economy resources are directed and production is coordinated not by the market but by the command of government Mixed economy private ownership of some resources and public ownership of others and some parts are regulated by the government
CH 3 Household consumers that provide resources to firms and demand goods/services Sole proprietorship firm with single owner who has the right to all profits and bears unlimited liability for firm's debts Advantages easy to start, owner is own boss Disadvantages unlimited liability, due to small size its difficult to raise enough money to get going, goes out of business when proprietor dies Partnership firm with multiple owners that share profits Advantages strength in numbers, can raise more money than sole proprietorship Disadvantages disagreement between partners, still difficult to raise money, unlimited liability, death of one partner could disrupt entire operation Corporations legal entity owned by stockholders Advantages limited liability (value of stock), easy to raise fund (investors, bank loans, etc.), corporation survives separately from owners Disadvantages stockholder has limited influence in firm, double taxation (corporate income plus dividends) Fiscal policy changes in taxes and government spending to influence inflation, employment, and economic growth Monetary policy regulating money supply to influence activity economy-wide GDP gross domestic product final production of goods/services in an economy over a given period of time, usually one year Tax incidence distribution of tax burden among taxpayers; who pays the tax; person's ability to pay (those with higher income should pay more) compared to the benefits received (those who benefit more should pay more) Progressive tax tax as a percentage of income increases as income increases Proportional tax tax as a percentage of income remains constant as income increases (flat tax) Regressive tax tax as percentage of income decreases as income increases CH 4 Demand curve relation between price of good and quantity consumers are willing and able to pay; downward sloping due to law of demand, income and substitution effects (people will buy more of product at cheaper price because income relative to price is higher and costs of substitutes is higher) Law of demand quantity demanded relates inversely to its price Determinants of demand Consumer income increase in income results in ability to buy more goods Price of related goods cost of substitutes increase results in increased demand, decrease in price of complements results in increased demand Consumer expectations consumer views about futures prices, product availability, etc. Number of buyers more buyers results in increased demand Consumer tastes favorable changes result in increase in demand
Supply curve relation between price of good and quantity supplied that producers are willing and able to sell; upward slope because (1) as price increases, sellers are more willing to supply more because higher profits can be made and (2) producers are more able to supply more goods when price is higher (the law of increasing opportunity costs says marginal cost rises as more is produced) Law of supply quantity of good supplied relates directly to price Determinants of supply Technology better technology results in lower production costs increasing supply Resource prices if price of resource drops then production costs go down Price of alternative goods if the price of an alternative good is higher, producers will shift resources to that good in order to increase profits Producer expectations expectations of future price can cause producers to increase or decrease supply Number of sellers larger the number of sellers the greater the supply Equilibrium condition that exists in a market when quantity demanded equals quantity supplied and the market clears Shortage at given price, quantity demanded exceeds quantity supplied; shortage forces the price up; results from price ceiling Surplus at given price, quantity supplied exceeds quantity demanded; surplus forces price down; result of price floor CH 5 Objective of macroeconomics to study the overall performance of the economy in order to better understand how it works to be able to solve problems when they occur; economists use theories to simplify variables in order to study how economies work Recession decline in economy's total output lasting at least two consecutive quarters, or six months; an economic contraction Depression severe recession lasting more than a year Stagflation a contraction, or stagnation, of a nation's GDP accompanied by inflation in the price level Great Depression period from about 1929-1933, after stock market crash it was the deepest contraction in history; GDP decline 27% and price level fell 25% John Keynes demand-side economics, came up with the idea that an expansionary fiscal policy (where govt cuts taxes and increases spending) will jolt the economy out of depression; lowering axes increased after-tax income which provided an incentive to increase labor and other resources