Glossary of ECO 101

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study of how individuals/societies choose to use the scarce resources that nature and previous generations have provided
Opportunity cost
Best alternative that we forgo or give up when we make a choice/decision
The process of analyzing the additional or incremental costs or benefits arising from a choice or decision.
Sunk Costs
costs that cannot be avoided because they have already been incurred

Outlet Mall

Efficient Market
Market in which profit opportunities are eliminated almost instanteously
Industrial Revolution
Period in England during the late 18th century and early 19th century which new manufacturing technology/ transportation gave rise to the modern factory system/massive movement of the population from the countryside to cities
Branch of economics that examines the functioning of individual industries and the behavior of individual decision making units- that is firms/households
Branch of economics that examines economic behavior of aggregates,income, employment, output.
Macro vs Micro
Micro is analysis of a tree, and its structure , how that tree works to be the most efficient

Macros is analysis of a forest, and as a whole, how that forest is being most efficient

Positive economics
An approach to economics that seeks to understand behavior and the operation of systems without making judgments. Its describes what exists and how it works.
Normative economics
An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad and may prescribe courses of action.

aka Policy Economics

Descriptive economics
compilation of data that describe phenomena and facts
Economic theory
statement or set of related statements about cause and effect, action and reaction
Formal statement of a theory usually a mathematical statement of a presumed relationship between two or more variables
A measure that can change from time to time or observation to observation
Ockham's razor
Principle that, irrelevant detail should be cut away
Ceteris Paribus
A device used to analyze relationship between 2 variables while the values of other variable are held unchanged

Concept helps us simplify reality to focus on relationships that interest us

Post hoc, ergo propter hoc
"after this(in time), therefore because of this" A common error made in thinking about causation: If event A happens before Event B, it is not necessarily true that A caused B

Post Hoc Fallacy

Fallacy of composition
erroneous belief that what is true for a part is necessarily true for the whole
Empirical economics
collection/use of data to test economic theories
Economic Policy
Criteria for judging economic outcomes

1) Efficiency
2) Equity
3) Growth
4) Stability

In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost
An increase in the total output of an economy
A condition in which national output is growing steadily, with low inflation and full employment of resources
two-dimensional representation of a set of numbers or data.
Time series graph
shows how a single measure or variable changes over time
Certesian Coordinate System
constructed by drawing two perpendicular lines
Positive Slope
Increases in X are associated with increases in Y

Decreases in X are associated with decreases in Y

Negative slope
When X increases, Y decreases

X decreases, Y increases

3 Economic based questions
what gets produced?
How is it produced?
Who gets what is produced?

things that are produced and then used in the production of other goods and services
Factors of productions
Inputs into the process of production.

aka Resources

The process that transforms scarce resources into useful goods/services
aka resources aka factors of production.

Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants

Goods and services of value to households
Theory of comparative advantage
Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers
Absolute advantage
Producer has an absolute advantage over another in the production of a good or service if he or she can produce that product using fewer resources
Comparative advantage
producer has a comparative advantage over another in the production of a good or service if he or she can produce that product at a lower opportunity cost
Consumer goods
Goods produced for present consumption
The process of using resources to produce new capital
ProductionPossibility Frontier
graph that shows all the combinations of goods and services that can be produce if all of society's resources are used efficiently
During economic downturns or recessions, industrial plants run at less than their total capacity. When there is unemployment of labor and capital, we are not producing all that we can
Waste and mismanagement are the results of a firm operation below its potential

Inefficiency results from mismanagement of the economy instead of mismanagement of individual private firms

Marginal rate of transformation (MRT)
Slope of the production possibility frontier (ppf)
Economic Growth
an increase in the total output of an economy

occurs when society acquires new resources or when it learns to produce more using existing resources

Command economy
An economy in which a central government either directly or indirectly sets outputs target, incomes and prices

Centrally planned economy

Laissez faire economy
"allow them to do(French"
an economy which individual people and firms pursue their own self-interest without any central direction or regulation

Free market economy

Institution through which buyers and sellers interact and engage in exchange
Consumer Sovereignty
The idea that consumers ultimate dictate what will be produced(or not produced) by choosing what to purchase (and what not to purchase)
Free enterprise
the freedom of individuals to start/operate private businesses in search of profits
Distribution of output
The amount that any household gets depends on its income and wealth
the amount that a household earns each year, it comes in a number of forms: wages, salaries, interest and the like.
the amount that households have accumulated out of past income through saving or inheritance.
Price theory
Invisible Hand

Basic economics questions are answered without government

The market is left on its own and is coordinated by price

organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy
Person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business
Consuming units in an economy
Product or output Market
Markets in which goods/services are exchanged
Input or factor markets
markets in which the resources used to produce goods and services are exchanged
Labor market
Input/factor market in which households supply work for wages to firms that demand labor
Capital market
The input/factor market in which households supply their savings for interest or for claims to future profits to firms that demand funds to buy capital goods
Land market
Input/factor market in which households supply land or other real property in exchange for rent
Factors of production
Inputs into the production process. Land,labor, and capital are 3 key factors of production.
Quantity demanded
amount (numbers of units) of a product that a household would buy in a given period if it could all it wanted at the current market price.
Demamd schedule
Table showing how much of a given product a household would be willing to buy at different prices
Demand curve
graph illustrating how much of a given product a household would be willing to buy at different prices
Law of demand
negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as prices falls, quantity demanded increases

actual shape of an individual household demand curve, whether it is sleep or flat, whether it is bowed in or bowed out- depends on the unique tastes and preferences of the household and other factors.

Net worth
total value of what a household owns minus what it owes

aka wealth

Normal goods
Goods for which demand goes up when income is higher and for which demand goes down when income is lower
Inferior goods
Goods for which demand tends to fall when incomes rises
Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases
Perfect substitutes
Identical products
Complementary goods
goods that go together; a decrease in the price of one results in an increase in demand for the other and vice versa.
Shift of a demand curve
Change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions
Movement along a demand curve
Change in quantity demanded brought about by a change in price
Market demand
Sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service
difference between revenues and cost
Quantity supplied
the amount of a particular product that a firm would be willing and bale to offer for a sale at a particular price during a given time period
Supply schedule
Table showing how much a product firms will sell at alternative prices
Law of supply
Positive relationship between price and quantity of a good supplied: an increase in market price will lead to an increase in quantity supplied and a decrease in market price will lead to a decrease in quantity supplied
Supply Curve
Graph illustrating how much of a product a firm will sell at different prices
Cost of production
depends on a number of factors including the available technologies and the prices and quantities of the inputs needed by a firm ( labor land capital )
Movement along a supply curve
change in quantity supplied brought about by a change in price
Shift of a supply curve
change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. Shift is brought about by a change in the original conditions
Market Supply
Sum of all that is supplied each period by all producers of a single product
condition that exists when quantity supplied and quantity demanded are equal. at equilibrium there is no tendency for price to change
Excess demand or shortage
Condition that exists when quantity demanded exceeds quantity supplied at the current price
Excess supply or surplus
Condition that exists when quantity supplied exceeds quantity demanded at current price
Price rationing
the process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied
waiting in line as a means of distributing goods and service: a non price rationing mechanism
Favored customers
Those who receive special treatment from dealers during situation of excess demand
Ration coupons
Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month
Black market
Market in which illegal trading takes place at market determined prices
Price floor
minimum price below which exchange is not permitted
Minimum wage
price floor set for the price of labor

Leads to unemployment

Microeconomics chapter 5
examines the functioning of individual industries and the behavior of individual decision making units firms and households
Macroeconomics chapter 5
Deals with the economy as a whole. Macro focuses on the determinants of total national incomes, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices
Aggregate behavior
behavior of all households and firms together
Sticky Prices
prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded
Major concerns of macroeconomics
Output growth

Business cycle
cycle of short term ups and down in the economy

peaks and troughs


Aggregate output
total quantity of goods/services produced in an economy in a given period
period during which aggregate output declines. Conventionally a period in which aggregate output declines for two consecutive quarters
prolonged/ deep recession
Expansion or boom
Period in the business cycle from a trough up to a peak during which output and employment grow
Contraction, recession or slump
Period in the business cycle from a peak down to a through during which output and employment fall
Unemployment rate
the percentage of labor force that is unemployed
an increase in the overall price level
period of very rapid increases in the overall price level
decrease in the overall price level
Circular flow
a diagram showing the income received and payments made by each sector of the economy
Transfer payments
cash payments made by the government to people who do not supply goods, services or labor in exchange for these payments.

ex Social security benefits
veterans benefits
welfare payments

three market arenas
Goods/services market
Labor market
Money market

Goods-and-services market
Firms supply to the goods-and-services market. Households, the government, and firms demand from this market.
Money Market
Households supply funds to this market in the expectation of earning income in the form of dividends on stocks and interest on bonds

Much of the borrowing and lending of households,firms and the government, and the rest of the world are coordinated by financial institutions

Treasury bonds,notes and bills
corporate bonds
shares of stock

Treasury bonds, notes and bills
Promissory notes issued by the federal government when it borrows money
Corporate bonds
Promissory notes issued by firms when they borrow money
Shares of stock
Financial instruments that give to the holder a share in the firm's ownership and therefore the right to share in the firm's profits
portions of a firms profits that the firm pays out each period to its shareholders
Fiscal Policy
Government policies concerning taxes and spending
Monetary policy
tools used by the federal reserve to control the quantity of money, which in turn affects interest rates
Great Depression
Period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930's
Phrase used by Walter Heller to refer to the government's role in regulating inflation and unemployment
situation of both high inflation and high unemployment
John Maynard Keynes
much of the framework of modern macroeconomics comes from the works of john Maynard Keynes, whose general theory of employment, interest and money was published in 1936
Gross domestic product
Total market value of all final goods and services produced withing a given period by factors of production located within a country

National incomes and product accounts
Data collected and published by the government describing the various components of national income and output in the economy
Final goods and services
Goods and services produced for final use
Intermediate goods
Goods that are produced by one firm for use in further processing by another firm
Value added
Difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage
Gross national product
The total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced
Expenditure approach
method of computing GDP that measures the total amount spent on all final goods/services during a given period.


C household spending on consumer goods

I gross private domestic investment - spending by firms and households on capital, that is, plant, equipment, inventory, and new residential structures

* includes change in business inventories

G government consumption and gross investment

Personal consumption expenditures
Expenditures by consumers on goods and services


Durable goods
Goods that last a relatively long time, such as cars, households, furniture
Non durable goods
Goods that are used up fairly quickly, such as food, clothing
Things we buy that do not involve that production of physical things, such as legal and medical services and education
Gross private domestic investment
Total investment in capital- that is, the purchase of new housing, plants, equipment, and inventory by the private (or nongovernment) sectory
Nonresidential investment
Expenditures by firms for machine, tools, plants
Residential investment
Expenditures by households and firms on new houses and apartment buildings
Change in business inventories
Amount by which firms inventories change during a period. Inventories are the goods that firms produce now but intend to sell later.

Included in expenditure approach of GDP

Amount by which an assets value falls in a given period
Gross investment
Total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period

Gross investment - depreciation = net investment

Net investment
Gross investment minus depreciation
Government consumption and gross investment
expenditures by federal, state and local governments for final goods and services


Net exports
(EX-IM) difference between exports and imports. figure can be positive or negative
National income
total income earned by factors of production owned by a country's citizens
Compensation of employees
includes wages, salaries and various supplements - employer contributions to social insurance and pension funds, for ex paid to households by firms and by the government
Propietor's Income
income of unincorporated businesses
Rental income
income received by property owners in the form of rent
Corporate profits
Income of corporations
Net interest
Interest paid by businesses
Indirect taxes minus subsidies
taxes such as sales taxes, customs duties, and license fees less subsidies that the government pays for which it receives no goods or services in return
Net business transfer payments
Net transfer payments by businesses to others
Surplus of government enterprises
Income of government enterprises
Net national product
(NNP) gross national product minus depreciation; a nation's total product minus what is required to maintain the value of its capital stock
Statistical discrepancy
Data measurement error
Personal income
Total income of households
Disposable personal income/ after-tax income
Personal income minus personal income taxes. Amount that households have to spend or save
Personal saving
Amount of disposable income that is left after total personal spending in a given period
Personal saving rate
Percentage of disposable personal income that is saved. If the personal saving rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously.
Current dollars
Current prices that we pay for goods and services
Nominal GDP
GDP in current dollars
Base year
The year chosen for the weights in a fixed weight procedure
Fixed-weight procedure
procedure that uses weights from a given base year
importance attached to an item within a group of items
GDP deflator
is one measure of the overall price level

(nominal GDP/real GDP) * 100

Underground economy
part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP
Gross national income
GNP converted into dollars using an average of currency exchange rates over several years

adjusted for rates of inflaction

Income approach
Method of computing GDP that measures the income- wages, rents, interest, and profits- received by all factors of production in producing final goods and services.

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