ECON BIBLE V 2.0
ECON 1010 Review
Chapter 1: What is Economics?
Benefit: The gain or pleasure that it brings and is determined by preference.
Capital: The tools, equipment, buildings, and other constructions that businesses use to produce goods
Economic Model: Adescription of some aspect of the economic world that includes only those features
of the worth that are needed for the purpose at hand.
Economics: The social science that studies the choices that individuals, businesses, governments, and
entire societies make as they cope with scarcity and the incentives that influence and reconcile those
Efficiency: Asituation in which the available resources are used to produce goods and services at the
lowest possible cost and in quantities that give the greatest value or benefit.
Entrepreneurship: The human resources that organizes the other factors of production: labour, land, and
Factors of Production: The productive resources used to produce goods and services.
Goods & Services: The objects that people value and produce to satisfy human wants.
Human Capital: The knowledge and skill that people obtain from education, on-the-job training, and
Incentive:Areward that encourages an action or a penalty that discourages one.
Interest: The income capital earns.
Labour: The work time and work effort that people devote to producing goods and services.
Land: The "gifts of nature" that we use to produce goods and services.
Macroeconomics: The study of the performance of the national economy and the global economy.
Margin: When a choice is made by comparing a little more of something with its cost, the choice is made
at the margin.
Marginal Benefit: The benefit that a person receives from a good or service. It is measured as the
maximum amount that a person is willing to pay for one more unit of the good or service.
Marginal Cost: The opportunity cost of producing one more unit of a good or service. It is the best
alternative forgone. It is calculated as the increase in total cost divided by the increase in output. Microeconomics: The study of the choices that individuals and businesses make, the way these choices
interact in markets, and the influence of governments.
Opportunity Cost: The highest-valued alternative that we must give up to get something.
Preferences: Adescription of a person's likes and dislikes and the intensity of those feelings.
Profit: The income earned by entrepreneurship.
Rational Choice: Achoice that compares costs and benefits and achieves the greatest benefit over cost
for the person making the choice.
Rent: The income that land earns.
Scarcity: Our inability to satisfy all our wants.
Self-Interest: The choices that you think are the best ones available for you are the choices made in your
Social Interest: Choices that are the best ones for society as a whole.
Tradeoff: Aconstraint that involves giving up one thing to get something else.
Wages: The income that labour earns.
Definition of Economics
• All economic questions arise from scarcity.
• Economics is the social science that studies the choices people make as they cope with scarcity.
• The subject divides into microeconomics and macroeconomics.
Two Big Economic Questions
• Two big questions summarize the scope of economics:
1. How do the choices end up determining what, how, and for whom goods and services are
2. When do choices made in the pursuit of self-interest also promote the social interest?
The Economic Way of Thinking
• Every choice is a tradeoff
• People make rational choices by comparing benefit and cost
• Benefit is the gain you get from something
• Cost (opportunity cost) is what you must give up to get something
• Most choices are made at the margin by comparing marginal benefit and marginal cost • Choices respond to incentives.
Economics as Social Science and Policy Tool
• Economists distinguish between positive statements (what is) and normative statements (what
ought to be)
• To explain the economic world, economists create ad test economic models
• Economics is a toolkit used to provide advice on government, business, and personal economic
Chapter 2: The Economic Problem
AbsoluteAdvantage: Aperson has an absolute advantage if that person is more productive that another
Allocative Efficiency: Asituation in which goods and services are produced at the lowest possible cost
and in the quantities that provide the greatest possible benefit. We cannot produce more of any good
without giving up some of another good that we value more highly.
CapitalAccumulation: The growth of capital resources, including human capital.
Comparative Advantage: Aperson or country has a comparative advantage in an activity if that person
or country can perform the activity at a lower opportunity cost than anyone else or any other country.
Economic Growth: The expansion of production possibilities.
Firm: An economic unit that hires factors of production and organizes those factors to produce and sell
goods and services.
Marginal Benefit: The benefit that a person receives from consuming one more unit of a good or service.
It is measured as the maximum amount that a person is willing to pay for one more unit of the good or
Marginal Benefit Curve: A curve that shows the relationship between the marginal benefit of a good and
the quantity of that good consumed.
Marginal Cost: The opportunity cost of producing one more unit of a good or service. It is the best
alternative forgone. It is calculated as the increase in total cost divided by the increase in output.
Market: Any arrangement that enables buyers and sellers to get information and to do business with each
Money:Any commodity or token that is generally acceptable as a means of payment.
Opportunity Cost: The highest-valued alternative that we must give up to get something.
Preferences: Adescription of a person's likes and dislikes and the intensity of those feelings. Production Efficiency: Asituation in which goods and services are produced at the lowest possible cost.
Production Possibilities Frontier (PPF): The boundary between the combinations of goods and services
that can be produced and the combinations that cannot.
Property Rights: The social arrangements that govern the ownership, use, and disposal of anything that
people value. Property rights are enforceable in the courts.
Technological Change: The development of new goods and of better ways of producing goods and
Production Possibilities and Opportunity Cost
• The production possibilities frontier is the boundary between production levels that are attainable
and those that are not attainable when all the available resources are used to their limit
• Production Efficiency occurs at points on the PPF
• Along the PPF, the opportunity cost of producing more of one good is the amount of the other
good that must be given up
• The opportunity cost of all goods increases as the production of the good increases
Using Resources Efficiently
• Allocative efficiency occurs when goods and services are produced at the least possible cost and
in the quantities that bring the greatest possible benefit
• The marginal cost of a good is the opportunity cost of producing one more unit of it
• The marginal benefit from a good is the benefit received from consuming one more unit of it and
is measured by the willingness to pay for it
• The marginal benefit from a good decreases as the amount of the good available increases
• Resources are used efficiently when the marginal cost of each good is equal to its marginal
• Economic growth, which is the expansion of production possibilities, results from capital
accumulation and technological change
• The opportunity cost of economic growth is forgone current consumption
• The benefit of economic growth is increased future consumption
Gains from Trade • Aperson has a comparative advantage in producing a good if that person can produce the good at
a lower opportunity cost than everyone else
• People gain by specializing in the activity in which they have a comparative advantage and
trading with others
• Firms coordinate a large amount of economic activity, but there is a limit to the efficient size of a
• Markets coordinate the economic choices of people and firms
• Markets can work efficiently only when property right exist
• Money makes trading in markets more efficient
Chapter 3: Demand & Supply
Change in Demand: Achange in buyers' plans that occurs when some influence on those plans other
than the price of the good changes. It is illustrated by a shift of the demand curve.
Change in Supply: Achange in sellers' plans that occurs when some influence on those plans other than
the price of the good changes. It is illustrated by a shift of the supply curve.
Change in Quantity Demanded: Achange in buyers' plans that occurs when the price of a good changes
but all other influences remain unchanged. It is illustrated by a movement along the demand curve.
Change in Quantity Supplied: Achange in sellers' plans that occur when the price of a good changes but
all other influences stay the same. It is illustrated by a movement along the supply curve.
Competitive Market: Amarket that has many buyers and many sellers, so no single buy or seller can
influence the price.
Complement:Agood that is used in conjunction with another good.
Demand: The entire relationship between the price of a good and the quantity demanded of it when all
other influences on buyers' plans remain the same. It is illustrated by a demand schedule.
Demand Curve:Acurve that shows the relationship between the quantity demanded of a good and its
price when all other influences on consumers' planned purchases stay the same.
Equilibrium Price: The price at which the quantity demanded equals the quantity supplied. Equilibrium Quantity: The quantity bought and sold at the equilibrium price.
Inferior Good:Agood for which demand decreases as income increases.
Law of Demand: Other things remaining the same, the higher the price of a good, the smaller is the
quantity demanded of it; the lower the price of a good, the larger is the quantity demanded of it.
Law of Supply: Other things remaining the same, the higher the price of a good, the greater is the
quantity supplied of it.
Money Price: The number of dollars that must be given up in exchange for a good or service
Normal Good:Agood for which when demand increases as income increases.
Quantity Demanded: The amount of a good or service that consumers plan to buy during a given time
period at a particular price.
Quantity Supplied: The amount of a good or service that producers are planning to sell during a given
time period at a particular price
Relative Price: The ratio of the price of one good or service to the price of another good or service. A
relative price is an opportunity cost.
Substitute: Agood that can be used in place of another.
Supply: The entire relationship between the price of a good and the quantity supplied of it when all other
influences on producers' planned sales remain the same. It is described by a supply schedule and
illustrated by a supply curve.
Supply Curve:Acurve that shows the relationship between the quantity supplied of a good and its price
when all other influences on producers' planned sales remain the same.
Markets and Prices
• Acompetitive market is one that has so many buyers and sellers that no single buyer or seller can
influence the price
• Opportunity cost is a relative price
• Demand and supply determine relative prices
• Demand is the relationship between the quantity demanded of a good and its price when all other
influences on buying plans remain the same
• The high the price of a good, other things remaining the same, the smaller is the quantity
demanded (the law of demand)
• Demand depends on the prices of related goods (substitutes and compliments), expected future
prices, income, and expected future income and credit, the population, and preferences Supply
• Supply is the relationship between the quantity supplied of a good and its price when all other
influences on selling plans remain the same
• The higher the price of a good, other things remaining the same, the greater the quantity supplied
(law of supply)
• Supply depends on the prices of factors of production used to produce a good, the prices of
related goods produced, expected future prices, the number of suppliers, technology, and the state
• At the equilibrium price, the quantity demanded equals the quantity supplied
• At any price above the equilibrium price, there is a surplus and the price falls
• At any price below the equilibrium price, there is a shortage and the price rises
Predicting Changes in Price and Quantity
• An increase in demand brings a rise in the price and an increase in the quantity supplied.A
decrease in demand brings a fall in the price and a decrease in the quantity supplied
• An increase in supply brings a fall in the price and an increase in the quantity demanded.A
decrease in supply brings a rise in price and a decrease in the quantity demanded
An increase in demand and an increase in supply bring an increased quantity but an uncertain price
change. An increase in demand and a decrease in supply bring a higher price but an uncertain change in
Chapter 20: Measuring GDPand Economic Growth
Business Cycle: The periodic but irregular up-and-down movement off total production and other
measures of economic activity.
Chained-dollar real GDP:Ameasure of real GDP derived by valuing production at the prices of both the
current year and previous year and linking (chaining) those prices back to the prices of the reference base
Consumption Expenditure: The total payment for consumer goods and services.
Cycle: The tendency for a variable to alternate between upward and downward movements.
Depreciation: The decrease in the value of a firm's capital that results from wear and tear and obsolete.
Expansion:Abusiness cycle phase between a trough and a peak - a period in which real GDP increases. Exports: The goods and services that we sell to people in other countries.
Final Good:An item that is bought by its final user during the specified time period.
Government Expenditure: Goods and Services bought by the government.
Gross Domestic Product (GDP): The market value of all final goods and services produced within a
country during a given time period.
Gross Investment: The total amount spent on purchases of new capital and on replacing depreciated
Imports: The goods and services that we buy from people in other countries.
Intermediate Good:An item that is produced by one firm, bought by another firm, and used as a
component of a final good or service.
Investment: The purchase of new plant, equipment, and buildings, and additions to inventories.
Net Exports: The value of exports of goods and services minus the value of imports of goods and
Net Investment: The amount by which the value of capital increases - gross investment minus
Nominal GDP: The value of the final goods and services produced in a given year valued at the prices
that prevailed in that same year. It is a more precise name for GDP.
Potential GDP: The value of production when all the economy's labour, capital, land, and entrepreneurial
ability are fully employed; the quantity of real GDP at full employment.
Real GDP: The value of final goods and services produced in a given year when valued at the prices of a
reference base year.
Real GDPper person: Real GDP divided by the population.
Recession: Abusiness cycle phase in which real GDP decreases for at least two successive quarters.
Time-series graph: Agraph that measures time (for example, years, quarters or months) on the x-axis
and the variable or variables in which we are interested on the y-axis.
Trend: The tendency for a variable to move in one general direction.
Gross Domestic Product
• GDP is the market value of all the final goods and services produced in a country during a given
period • Afinal good is an item that is bought by its final user, and it contrasts with an intermediate good,
which is a compound of a final good
• GDP is calculated by using either the expenditure or income totals in the circular flow model
• Aggregate expenditure on goods and services equals aggregate income and GDP
Measuring Canada's GDP
• Because aggregate expenditure, aggregate income, and the value of aggregate production are
equal, we can measure GDP by using the expenditure approach or the income approach
• The expenditure approach sums consumption expenditure, investment, government expenditure
on goods and services, and net exports
• The income approach sums wages, interest, rent, and profit (plus indirect taxes less subsidies plus
• Real GDP is measured using a common set of prices to remove the effects of inflation from GDP
The Uses and Limitations of Real GDP
• Real GDP is used to compare the standard of living over time and across countries
• Real GDP per person grows and fluctuates around the more smoothly growing potential GDP
• Incomes would be much higher today if the rate of real GDP per person had not slowed during
• International real GDP comparisons use PPP prices
• Real GDP is not a perfect measure of the standard of living because it excludes household
production, the underground economy, health and life expectancy, leisure time, security,
environmental quality, and political freedom and social justice
Chapter 21: Monitoring Jobs and Inflation
Chained Price Index for Consumption (CPIC): An index of the prices of all the items included in
consumption expenditure in GDP. It is the ratio of nominal consumption expenditure to real consumption
expenditure. Consumer Price Index (CPI): An index that measures the average of the prices paid by urban consumers
for a fixed basket of consumer goods and services.
Core Inflation Rate: The inflation rate excluding volatile elements (food and fuel).
Cyclical Unemployment: The higher than normal unemployment at a business cycle trough and the
lower than normal unemployment at a business cycle peak.
Deflation:Apersistently falling price level.
Discouraged Worker: Amarginally attached worker who has stopped looking for a job because of
repeated failure to find one.
Employment-to-population Ratio: The percentage of people of people of working age who have jobs.
Frictional Unemployment: The unemployment that arises from normal labour turnover - from people
entering and leaving the labour force and from the ongoing creation and destruction of jobs.
Full Employment: Asituation in which the unemployment rate equals the natural unemployment rate.At
full employment, there is no cyclical unemployment - all unemployment is frictional and structural.
GDPDeflator: An index of the prices of all the items included in GDP. It is the ratio of nominal GDP to
Hyperinflation: An inflation rate of 50% a month or higher that grinds the economy to halt and causes a
society to collapse.
Inflation:Apersistently rising price level.
Labour Force: The sum of the people who are employed and who are unemployed.
Labour Force Participation Rate: The percentage of the working-age population who are members of
the labour force.
MarginallyAttached Worker: Aperson who currently is neither working nor looking for work but has
indicated that he or she wants and is available for a job and has looked for a work some time in the recent
Natural Unemployment Rate: The unemployment rate when the economy is at full employment -
natural unemployment as a percentage of the labour force.
Output Gap: The gap between real GDP and potential GDP.
Price Level: The average level of prices.
Structural Unemployment: The unemployment that arises when changes in technology or international
competition change the skills needed to perform jobs or change the locations of jobs.
Unemployment Rate: The percentage of the people in the labour force who are unemployed. Working-age Population: The total number of people aged 15 years and older.
Employment and Unemployment:
• Unemployment is a serious personal, social, and economic problem because it results in lost
output and income and a loss of human capital
• The unemployment rate averaged 7.6 percent between 1960 and 2010. It increases in recessions
and decreases in expansions.
• The labour force participation rate and the employment-to-population ratio have an upward trend
and fluctuate with the business cycle.
• About 60% of unemployment last for 1 to 13 weeks
• Long-term unemployment spells - 14 weeks or longer - have trended downward.
Unemployment and Full Employment:
• Some unemployment is unavoidable because people are constantly entering and leaving the
labour force and losing or quitting jobs; also firms that create jobs are constantly being born,
expanding, contracting, and dying.
• Unemployment can be frictional, structural, or cyclical.
• When all unemployment is frictional and structural, the unemployment rate equals the natural
unemployment rate, the economy is at full employment, and real GDP equals potential GDP.
• Over the business cycle, real GDP fluctuate around potential GDP and the unemployment rate
fluctuates around the natural unemployment rate.
The Price Level and Inflation:
• Inflation (or deflation) that is unexpected redistributes income and wealth that diverts resources
• The Consumer Price Index (CPI) is a measure of the average of the prices paid by urban
consumers for a fixed basket of consumer goods and services
• The CPI is defined to equal 100 for a reference base period - currently 2002
• The inflation rate is the percentage change in the CPI from one period to the next
• Changes in the CPI probably overstate the inflation rate because of the bias that arises from new
goods, quality changes, commodity substitution, and outlet substitution • The bias in the CPI distorts private contracts and increases government outlays
• Alternative price level measures avoid the bias of the CPI but do not make a large difference to
the measured inflation rate.
• Real economic variables are calculated by dividing nominal variables by the price level
Chapter 27: Expenditure Multipliers: The Keynesian Model
Aggregate Planned Expenditure: The sum of planned consumption expenditure , planned investment,
planned government expenditure o goods and services, and planed exports minus planned imports.
Autonomous Expenditure: The sum of those components of aggregate planned expenditure that are not
influenced by real GDP. Autonomous expenditure equals the sum of investment, government expenditure,
exports, and the autonomous parts of consumption expenditure and imports.
Autonomous Tax Multiplier: The change in equilibrium expenditure and real GDP that results from a
change in autonomous taxes divided by the change in autonomous taxes.
Balanced Budget Multiplier: The change in equilibrium and real GDP that results from equal changes in
government expenditure and lump-sum taxes divided by the change in government expenditure.
Consumption Function: The relationship between consumption expenditure and disposable income,
other things remaining the same.
Disposable Income: Aggregate income minus taxes plus transfer payments.
Equilibrium Expenditure: The level of aggregate expenditure that occurs when aggregate planned
expenditure equals real GDP.
Government Expenditure Multiplier: The quantitative effect of a change in government expenditure on
real GDP. It is calculated as the change in real GDP that results from a change in government expenditure
divided by the change in government expenditure.
Induced Expenditure: The sum of the components of aggregate planned expenditure that vary with real
GDP. Induced expenditure equals consumption expenditure minus imports.
Marginal Propensity to Consume: The fraction of a change in disposable income that is spent on
consumption. It is calculated as the change in consumption expenditure divided by the change in
Marginal propensity to Import: The fraction of an increase in real GDP that is spent on imports. It is
calculated as the change in imports divided by the change in real GDP, other things remaining the same. Marginal Propensity to Save: The fraction of a change in disposable income that is saved. It is
calculated as the change in saving divided by the change in disposable income.
Multiplier: The amount by which a change in autonomous expenditure is magnified or multiplied to
determine the change in equilibrium expenditure and real GDP.
Saving Function: The relationship between saving and disposable income, other things remaining the
Fixed Prices and Expenditure Plans:
• When the price level is fixed, expenditure plans determine real GDP
• Consumption expenditure is determined by disposable income, and the marginal propensity to
consume (MPC) determines the change in consumption expenditure brought about by a change in
disposable income. Real GDP determines disposable income.
• Imports are determined by real GDP, and the marginal propensity to import determines the
change in imports brought about by a change in real GDP
Real GDP with a Fixed Price Level
• Aggregate planned expenditure depends on real GDP
• Equilibrium expenditure occurs when aggregate planned expenditure equals actual expenditure
and real GDP
• The multiplier is the magnified effect of a change in autonomous expenditure on equilibrium
expenditure and real GDP.
• The multiplier is determined by the slope of the AE (Aggregate expenditure) curve
• The slope of the AE curve is influenced by the marginal propensity to consume, the marginal
propensity to import, and the income tax rate.
The Multiplier and the Price Level:
• The AD (Aggregate demand) curve is the relationship between the quantity of real GDP
demanded and the price level, other things remaining the same
• The AE curve is the relationship between aggregate planned expenditure and real GDP, other
things remaining the same. • At a given price level, there is a givenAE curve.Achange in the price level changes aggregate
planned expenditure and shifts theAE curve.Achange in the price level also creates a movement
along theAD curve
• Achange in autonomous expendityre that is not caused by a change in the price level shifts the
AE curve and shifts theAD curve. The magnitude of the shift of the AD curve depends on the
multiplier and on the change in autonomous expenditure
• The multiplier decreases as the price level changes, and the long-run multiplier is zero.
Chapter 26:Aggregate Supply andAggregate Demand
Above Full-Employment Equilibrium: Amacroeconomic equilibrium in which real GDP exceeds
Aggregate Demand: The relationship between the quantity of real GDP demanded and the price level.
Below Full-Employment Equilibrium: Amacroeconomic equilibrium in which potential GDP exceeds
Classical: The description of a macroeconomist who believes that the economy is self-regulating and
always at full employment.
Disposable Income: Aggregate income minus taxes plus transfer payments.
Fiscal Policy: The use of the federal budget, by setting and changing tax rates, making transfer payments,
and purchasing goods and services, to achieve macroeconomic objectives such as full employment,
sustained economic growth, and price level stability.
Full-Employment Equilibrium: Asituation in which the unemployment rate equals the natural
unemployment rate. At full employment, there is no cyclical unemployment -- all unemployment is
frictional and structural.
Inflationary Gap: An output gap in which real GDP exceeds potential GDP.
Keynesian:Amacroeconomist who believes that left alone, the economy would rarely operate at full
employment and that to achieve full employment, active help from fiscal policy and monetary policy is
Long-RunAggregate Supply: The relationship between the quantity of real GDP supplied and the price
level when the money wage rate changes in step with the price level to maintain full employment. Long-Run Macroeconomic Equilibrium: Asituation that occurs when real GDP equals potential GDP
-- the economy is on its long-run aggregate supply curve.