Macroeconomics Vocab/Terms Review for FinalChapter 1: The Economic ApproachVocab: - Scarcity o Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.- Resourceo 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. - Capital o Human-made resources (such as tools, equipment, and structures) used to produce other goods and services. They enhance our ability toproduce in the future. - Objectiveo A fact based on observable phenomena that is not influenced by differences in personal opinion.- Subjectiveo An opinion based on personal preferences and value judgments.- Rationingo 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.- Economic theoryo A set of definitions, postulates, and principles assembled in a manner that makes clear the “cause-and-effect” relationships. - Opportunity Costo The highest valued alternative that must be sacrificed as a result of choosing an option.- Economizing behavioro Choosing the option that offers the greatest benefit at the least possible cost. - Utilityo The subjective benefit or satisfaction a person expects from a choice or course of action.- Marginalo 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 effectso 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. - Scientific thinkingo Developing a theory from basic principles and testing it against eventsin 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 economicso The scientific study of “what is” among economic relationships.- Normative economicso Judgments about “what ought to be” in economic matters. Normative economic views cannot be proven false because they are based on value judgments.- Ceteris paribuso A Latin term meaning “other things constant” that is used when the effect of one change is being described, recognizing that if other thingschanged, 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 compositiono Erroneous view that what is true for the individual (or the part) will also be true for the group (or the whole).- Microeconomicso 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. - Macroeconomicso 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 EconomistVocab:- Transaction costso The time, effort, and other resources needed to search out, negotiate, and complete an exchange.- Middlemano A person who buys and sells goods or services or arranges trades. A middleman reduces transaction costs.- Property rightso The rights to use, control, and obtain the benefits from a good or resource.- Private-property rightso 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 curveo 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.- Investmento The purchase, construction, or development of resources, including physical assets, such as plants and machinery, and human assets, suchas better education. Investment expands an economy’s resources. The process of investment is sometimes called capital formation. - Technologyo The technological knowledge available in an economy at any given time. The level of technology determines the amount of output we cangenerate with our limited resources.- Inventiono The creation of a new product or process, often facilitated by the knowledge of engineering and science. - Innovationo The successful introduction and adoption of a new product or process; the economic application of inventions and marketing techniques.- Entrepreneuro 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 destructiono 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 Laboro 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 advantageo 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 organizationo 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. - Capitalismo An economic system in which productive resources are owned privately and goods and resources are allocated through market prices.- Collective decision makingo The method of organization that relies on public-sector decision making
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