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BU ECON 362 - Chapter 1 Definitions

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Definition Sheet Chapter 1: The Science of Macroeconomics - Macroeconomics: the study of the economy as a whole - Standard of Living: depends on a country’s ability to produce goods and services - Productivity: the amount of goods and services produced by one worker in onehour - Unemployment: the state of being available and willing to work but unable to find suitable work - Cost of living: the number of dollars it takes to buy the goods and services that achieve a given standard of living - Inflation: a situation in which the cost of living is rising and the value of money is shrinking - Business Cycle: a periodic but irregular up-and-down movement in production and jobs - Endogenous variables: can be solved by your model - Exogenous variables: taken as given - Competitive Market: each buyer and seller is too small to affect the market price - General Functional Notation: shows only that the variables are related o Qd = D(P,Y)o A list of the variables that affect Qd- Specific Functional Form: shows the precise quantitative relationship o D(P,Y) = 60 – 10P + 2Y - Demand Curve: shows the relationship between quantity demanded and price,other things equal - Supply Curve: shows the relationship between quantity supplied and price, other things equal - Socially Optimal: when the competitive market outcome is efficient and maximizes total surplus - Laissez Faire: French for “allow them to do” o The notion that government should not interfere with the market - Classical Economics: the economy works well on its own o The “Invisible hand” is key to economic prosperityo Governments should have only a limited role in the economy - Market Failure: if the free market fails to allocate resource efficiently - Externality: uncompensated impact of one person’s actions on the well-being of a bystander- Negative or Positive Externalities: depending on whether impact on bystander is adverse or beneficial - Excludable: person can be prevented from using a good o Excludable: fish tacos, Wireless Internet Access o Not Excludable: FM Radio Signals, National Defense - Rival in Consumption: one person’s use of a good diminishes others’ use o Rival: Fish Tacos o Not Rival: MP3 file of Kanye West’s latest single - Private Goods: excludable, rival in consumption o Example: food, ice cream, cars, etc. - Public Goods: not excludable, not rival o Example: national defense, knowledge from basic research, fighting poverty - Free Rider: a person who receives the benefit of a good but avoids paying for ito If good is not excludable, people have incentive to be free riders, because firms cannot prevent non-payers from consuming the good - Market Clearing: an assumption that prices are flexible, adjust to equate supplyand demand - Sticky Prices: adjust sluggishly in response to changes in supply or demand - Classical Economics: as little government as possible; free market works well - Keynesian Economics: government regulations and interventions are


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