Foundations of Macroeconomics Free Online FlashCards

What does macroeconomics study?

Macroeconomics studies the economy as a whole, including economic growth, unemployment, inflation, national production and income, and economic fluctuations.

What is scarcity?

Scarcity exists because human wants exceed the resources available to satisfy them. It does not necessarily mean that a resource is rare or that a person is poor.

What are the four factors of production?

The four factors are land, labor, capital, and entrepreneurship. They include natural resources, human effort, human-made productive resources, and the organization of resources and risk-taking.

What is the marginal decision rule?

Undertake an additional activity when its marginal benefit is at least as large as its marginal cost.

What is opportunity cost?

Opportunity cost is the value of the next-best alternative forgone when a choice is made. It is not the combined value of every alternative given up.

What do points on, inside, and outside a PPC mean?

A point on the PPC is productively efficient, a point inside is attainable but inefficient, and a point outside is unattainable with current resources and technology.

Why can a PPC be bowed outward?

The law of increasing opportunity cost says that the opportunity cost of producing more of a good rises as production increases. It occurs because resources are not equally suited to every use.

What causes an outward PPC shift?

An outward PPC shift indicates increased productive capacity, caused by factors such as more or better labor, capital, technology, natural resources, or productivity. Moving from inside to the curve is improved utilization, not growth.

How do absolute and comparative advantage differ?

Absolute advantage means producing more of a good with the same resources or producing a given amount with fewer resources. Comparative advantage means producing at a lower opportunity cost.

Who has comparative advantage in the Alex–Jordan example?

Jordan has the comparative advantage in pizzas because one pizza costs Jordan 1 salad, versus 2 salads for Alex. Alex has the comparative advantage in salads because one salad costs Alex fewer pizzas.

What trade rate benefits Alex and Jordan?

Trade can benefit both producers when the exchange rate lies between their opportunity costs. In the example, one pizza should trade for more than 1 but fewer than 2 salads.

How do households and firms interact in the circular flow?

In the two-sector circular flow, households supply resources to firms and buy goods and services. Firms hire resources and sell output; money flows as income to households and revenue to firms.