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Macroeconomics Key Concepts and Principles

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  • What is scarcity in economics?

    Scarcity means resources used to produce goods and services are limited while wants are unlimited, forcing choices and trade-offs.

  • Define opportunity cost.

    Opportunity cost is what you sacrifice to get something, representing the next best alternative foregone.

  • What are the factors of production?

    Resources used to produce goods and services: natural resources, labor, physical capital, human capital, and entrepreneurship.

  • What is human capital?

    Human capital is the knowledge and skills acquired by a worker through education and experience used to produce goods and services.

  • Explain the difference between positive and normative analysis.

    Positive analysis answers "what is" using facts; normative analysis answers "what ought to be" based on opinions or values.

  • What are the three key economic questions?

    What products do we produce? How do we produce them? Who consumes the products?

  • What is an economic model?

    An economic model is a simplified representation of an economic environment, often using graphs to explain relationships.

  • Define ceteris paribus.

    Ceteris paribus means holding other variables fixed to isolate the effect of one variable on another.

  • What is marginal change?

    A marginal change is a small, one-unit incremental change in a variable.

  • State the marginal principle.

    Increase an activity as long as its marginal benefit exceeds or equals its marginal cost.

  • What does the production possibilities curve (PPC) show?

    The PPC shows possible combinations of two products an economy can produce using all resources efficiently.

  • Explain the principle of voluntary exchange.

    A voluntary exchange makes both parties better off because each values what they receive more than what they give.

  • What is the principle of diminishing returns?

    Increasing one input while holding others fixed eventually leads to smaller increases in output beyond a certain point.

  • What is the real-nominal principle?

    People care about the real value (purchasing power) of money, not its nominal value (face value).

  • Define specialization in economics.

    Specialization is when individuals or nations focus on producing what they do best to increase efficiency.

  • What is the role of entrepreneurship in production?

    Entrepreneurship coordinates natural resources, labor, physical capital, and human capital to produce and sell products.

  • How does marginal benefit change with movie sequels?

    Marginal benefit decreases with each sequel as revenue falls, while marginal cost increases due to higher actor salaries.

  • Why do economists use assumptions in models?

    Assumptions simplify complex realities to focus on key relationships and make analysis manageable.

  • What is a variable in economics?

    A variable is a measurable factor that can take on different values and affect economic outcomes.

  • How did the U.S. economy respond to the 2017 financial crisis?

    By lowering interest rates to historic lows to encourage spending and later raising them to prevent inflation.