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scarcity
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refers to the limited nature of society's resources, given society's unlimited wants and needs
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economics
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is the of how people allocate their limited resources to satisfy their nearly unlimited wants
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microeconomics
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the study of the individual units that make up the economy
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macroeconomics
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the study of the overall aspects and workings of an economy
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5 foundations of economics
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incentives
trade-offs
opportunity costs
marginal thinking
trade creates value
trade-offs
opportunity costs
marginal thinking
trade creates value
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incentives
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factors that motivate a person to act or exert effort
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opportunity cost
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the highest-valued alternative that must be sacrificed in order to get something else
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economic thinking
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requires a purposeful evaluation of the available opportunities to make the best decision possible
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marginal thinking
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requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost
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markets
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bring buyers and sellers together to exchange goods and services
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trade
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the voluntary exchange of goods and services between two or more parties
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comparative advantage
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refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can
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positive statement
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can be tested and validated; it describes "what is"
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normative statement
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an opinion that cannot be tested or validated; it describes "what ought to be"
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ceteris paribus
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the concept under which economists examine a change in one variable while holding everything else constant
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endogenous factors
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are the variables that can be controlled in a model
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exogenous factors
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the variables that cannot be controlled in a model
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production possibilities frontier
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a model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently
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law of increasing relative cost
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states that the opportunity cost of producing a good rises as a society produces more of it
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absolute advantage
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refers to the ability of one producer to make more than another producer with the same quantity of resources
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Gross domestic product (GDP)
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the market value of all final goods and services produced within a country during a specific period
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per capita GDP
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GDP per person
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inflation
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the growth in the overall level of prices in the economy
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real GDP
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is the GDP adjusted for changes in prices
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economic growth
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measured as the percentage change in real per capita GDP
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recession
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a short-term economic downturn
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The Great Recession
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the U.S. recession lasting from December 2007 to June 2009
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business cycle
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short-run fluctuation in economic activiy
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economic expansion
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a phase of the business cycle during which the economy is growing faster than usual
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economic contraction
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a phase of the business cycle during which the economy is growing slower than usual
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service
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an output that provides benefits without the production of a tangible product
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intermediate good
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a good that firms repackage or bundle with other foods for sale at a later stage
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final good
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good sold to final users
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gross national product (GNP)
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the output produced by workers and resources owned by residents of the nation
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consumption
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the purchase of final goods and services by households, excluding new housing
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investment
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private spending on tools, plant, and equipment used to produce future output
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government spending
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includes spending by all levels of government on final goods and services
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net exports (NX)
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are exports minus imports of final goods and services
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nominal GDP
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GDP measured in current prices, and not adjusted for inflation
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price level
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an index of the average prices of goods and services throughout the economy
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GDP deflator
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a measure of the price level that includes prices of the final goods and services included in GDP
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unemployment
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occurs when a worker who is not currently employed is searching for a job without success
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unemployment rate
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the percentage of the labor force that is unemployed
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creative destruction
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occurs when the introduction of new products and technologies leads to the end of other industries and jobs
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structural unemployment
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unemployment caused by changes in the industrial makeup (structure) of the economy
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frictional unemployment
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unemployment caused by delays in matching available jobs and workers
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unemployment insurance
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is a government program that reduces the hardship of joblessness by guaranteeing that unemployed workers receive a percentage of their former income while unemployed
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cyclical unemployment
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unemployment caused by economic downturns
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natural rate of unemployment
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the typical rate of unemployment that occurs when the economy is growing normally
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full employment output
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the output level produced in an economy when the unemployment rate is equal to its natural rate
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labor force
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includes people who are already employed or actively seeking work
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discouraged workers
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those who are not working, have looked for a job in the past 12 months and are willing to work, but have not sought employment in the past 4 weeks
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underemployed workers
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those who have part-time jobs but who would prefer to work full time
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labor force participation rate
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the percentage of the population that is in the labor force
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deflation
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occurs when overall prices fall
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consumer price index (CPI)
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measure of the price level based on the consumption patterns of a typical consumer
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chained CPI
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a measure of the CPI in which the typical consumer's "basket" of goods considered is updated monthly
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shoeleather costs
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the resources that are wasted when people change their behavior to avoid holding money
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money illusion
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occurs when people interpret nominal changes in wages or prices as real changes
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nominal wages
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is his or her wage expressed in current dollars
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real wage
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the nominal wage adjusted for changes in the price level
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menu costs
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the costs of changing prices
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output
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the production that a firm creates
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capital gains taxes
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taxes on the gains realized by selling an asset for more than its purchase price
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loanable funds market
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the market where savers supply funds for loans to borrowers
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interest rate
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a price of loanable funds, quoted as a percentage of the original loan amount
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real interest rate
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the interest rate that is corrected for inflation
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nominal interest rate
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the interest rate before it is corrected for inflation
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fisher equation
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states that the real interest rate equals the nominal interest rate minus the inflation rate
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time preferences
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refers to the fact that people prefer to receive goods and services sooner rather than later
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consumption smoothing
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occurs when people borrow and save in order to smooth consumption over their lifetime
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dissaving
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occurs when people withdraw funds from their previously accumulated savings
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financial intermediaries
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firms that help to channel funds from savers to borrowers
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banks
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private firms that accept deposits and extend loans
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indirect finance
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occurs when savers deposit funds into banks, which then loan these funds to borrowers
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direct finance
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occurs when borrowers go directly to savers for funds
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security
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a tradable contract that entitles its owner to certain rights
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bond
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a security that represents a debt to be paid
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maturity date of a bond
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the date on which the loan repayment is due
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face value or par value of a bond
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the value of the bond at maturity - the amount due at repayment
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default risk
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the risk that the borrower will not pay the face value of a bond on the maturity date
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stocks
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ownership shares in a firm
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secondary markets
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markets in which securities are traded after their first sale
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treasury securities
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the bonds sold by the U.S. government to pay for the national debt
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securitization
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the creation of a new security by combining otherwise separate loan agreements
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