Macroeconomics Vocab Terms Review for Final Chapter 1 The Economic Approach Vocab Scarcity Resource Capital Objective Subjective Rationing o Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like o An input used to produce economic goods Land labor skills natural resources and capital are examples Throughout history people have struggled to transform available but limited resources into things they would like to have economic goods o Human made resources such as tools equipment and structures used to produce other goods and services They enhance our ability to produce in the future o A fact based on observable phenomena that is not influenced by differences in personal opinion o An opinion based on personal preferences and value judgments o Allocating a limited supply of a good or resource among people who would like to have more of it When price performs the rationing function the good or resource is allocated to those willing to give up the most other things in order to get it o A set of definitions postulates and principles assembled in a manner that makes clear the cause and effect relationships o The highest valued alternative that must be sacrificed as a result of Economic theory Opportunity Cost choosing an option Economizing behavior possible cost Utility or course of action Marginal o Choosing the option that offers the greatest benefit at the least o The subjective benefit or satisfaction a person expects from a choice o Term used to describe the effects of a change in the current situation For example a producer s marginal cost is the cost of producing an additional unit of a product given the producer s current facility and production rate Secondary effects Scientific thinking o The indirect impact of an event or policy that may not be easily and immediately observable In the area of policy these effects are often both unintended and overlooked o Developing a theory from basic principles and testing it against events in the real world Good theories are consistent with and help explain real world events Theories that are inconsistent with the real world are invalid and must be rejected Positive economics Normative economics o The scientific study of what is among economic relationships o Judgments about what ought to be in economic matters Normative economic views cannot be proven false because they are based on value judgments Ceteris paribus o A Latin term meaning other things constant that is used when the effect of one change is being described recognizing that if other things changed they also could affect the result Economists often describe the effects of one change knowing that in the real world other things might change and also exert and effect Fallacy of composition Microeconomics o Erroneous view that what is true for the individual or the part will also be true for the group or the whole o The branch of economics that focuses on how human behavior affects the conduct of affairs within narrowly defined units such as individual households or business firms Macroeconomics o The branch of economics that focuses on how human behavior affects outcomes in highly aggregated markets such as the markets for labor or consumer products Chapter 2 Some Tools of the Economist Vocab Transaction costs and complete an exchange Middleman o The time effort and other resources needed to search out negotiate o A person who buys and sells goods or services or arranges trades A middleman reduces transaction costs o The rights to use control and obtain the benefits from a good or Property rights resource Private property rights o Property rights that are exclusively held by an owner and protected against invasion by others Private property can be transferred sold or mortgaged at the owner s discretion Production possibilities curve o A curve that outlines all possible combinations of total output that could be produced assuming a a fixed amount of productive resources b a given amount of technical knowledge and c full and efficient use of those resources The slope of the curve indicates the amount of one product that must be given up to produce more of the other Investment Technology Invention Innovation o The purchase construction or development of resources including physical assets such as plants and machinery and human assets such as better education Investment expands an economy s resources The process of investment is sometimes called capital formation o The technological knowledge available in an economy at any given time The level of technology determines the amount of output we can generate with our limited resources o The creation of a new product or process often facilitated by the knowledge of engineering and science o The successful introduction and adoption of a new product or process the economic application of inventions and marketing techniques Entrepreneur o A person who introduces new products or improved technologies and decides which projects to undertake A successful entrepreneur s actions will increase the value of resources and expand the size of the economic pie Creative destruction o The replacement of old products and production methods by innovative new ones that consumers judge to be superior The process generates economic growth and higher living standards Division of Labor o A method that breaks down the production of a product into a series of specific tasks each performed by a different worker Law of comparative advantage o A principle that states that individuals firms regions or nations can gain by specializing in the production of goods that they produce cheaply at a low opportunity cost and exchanging them for goods they cannot produce cheaply at a high opportunity cost Market organization o A method of organization in which private parties make their own plans and decisions with the guidance of unregulated market prices The basic economic questions of consumption production and distribution are answered through these decentralized decisions Capitalism o An economic system in which productive resources are owned privately and goods and resources are allocated through market prices Collective decision making o The method of organization that relies on public sector decision making voting political bargaining lobbying to resolve basic economic questions Socialism o A system of economic organization in which a the ownership and control of the basic means of production rest
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