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Macro Economics Chapter 1
Terms in this set (37)
The Latin Expression meaning that other variables are held fixed.
A simplified representation of an economic environment, often employing a graph
The study of choices when there is scarcity
The effort used to coordinate the factors of production- natural resources, labor, physical capital, and human capital- to produce and sell products.
factors of production
The resources used to produce goods and services. (also known as production inputs or resources)
The knowledge and skills acquired by a worker through education and experience and used to produce goods and services.
Human effort, including both physical an mental effort, used to produce goods and services
The study of the nation's economy as a whole; focuses on the issues of inflation, unemployment, and economic growth.
A small, one unit change in value
The study of the choices made by households, firms, and government and how these choices affect the markets for goods and services.
Resources provided by nature and used to produce goods and services.
Answers the question "What 'ought' to be?"
The stock of equipment, machines, structures, and infrastructure that is used to produce goods and services.
Answers the question "What 'is' is?" or "What 'will' it be?"
The resources we use to produce goods and services are limited.
A measure of something that can take on different values.
Scarcity pg. 2
Economists use the word scarcity to convey the idea that resources are limited, while human warns are unlimited. Therefore, we cannot produce everything that everyone wants. Economics is the study of the choices we make when there is scarcity; its all about trade-offs... (cont. in "trade-offs)
Here are some examples of scarcity and the trade-offs associated with making choices:
~ You have limited amounts of time (there's the scarcity). If you get a part time job, each hour spent working is an hour less that you will have in your day.
~ A city has a limited amount of land (scarcity). If the city uses an acre of land for a park, that's one less acre for retail, housing, industry, etc..
~You have a limited income this year (there's the scarcity). If you spend $17 on a CD, that's $17 that you won't have for saving or another product.
Factors of Production (Natural Resources, labor, physical capital, human capital, and entrepreneurship) pg.2
People produce goods and services by using one or more of the following 5 factors of production (aka production inputs or resources):
Natural Resources: are provided by nature (duh). Some examples are fertile land, mineral deposits, oil and gas deposits, and water.
Labor: is the physical and internal effort people use to produces g&s
Physical capital: is the stock of equipment, machines, structures, and infrastructure that is used to produce g&s.Some examples are forklifts, machine tools, computers, factories, airports, roads, and fiber-optic cables
Human Capital: is the knowledge and skills acquires by a worker through education and experience. Every job requires some human capital- to be a surgeon you must learn anatomy and acquire surgical skills. To be an accountant, you must learn the rues of accounting and acquire computer skills. To be a musician you need to know how to play an instrument.
Entrepreneurship: is the effort used to coordinate the factors of production in order to produce and sell g&s. An entrepreneur comes up with an idea for a product, decides how to produce it, and raises the funds to bring it into the market. Ex. Bill Gates of Microsoft Steve Jobs of Apple Howard Schultz of Starbucks and Ray Kroc of McDonald's.
Limited Resources pg.2
Given our limited resources, we make our choices in a variety of ways, Sometimes we make our decisions as individuals, and other times we participate in collective decision making, allowing the government and other organizations to choose for us... (cont. in "Markets")
Many of our choices happen within markets -institutions or arrangements that enable us to buy and sell things. For example most people participate in the labor market, exchanging our time for money, and we all participate in consumer markets, exchanging money for food and clothing.
Every Decision Has a Trade-Off pg.3
Economists are always reminding us that there is scarcity- there are trade-offs in everything we do. The book uses some weird example with outer space but here it goes:
Suppose that in a convo with an economist you share enthusiasm about an upcoming launch of a space shuttle. The economist may say that the resources for the shuttle could have been used instead for an unmanned mission to Mars. By introducing the notion of scarcity into your conversation, the economist is simply reminding you that there are trade-offs, that one thing (i.e. the Mars mission) is sacrificed for another (the space shuttle). Talking about alternatives is the 1st step in a process that can help make better choices about how to use these limits resources. For example, we could compare the scientific benefits of a shuttle mission to the benefits of a Mars mission and choose the mission with the greater benefit.
Positive Analysis pg.3
Most modern economics is based on positive analysis, which predicts the consequences of alternative actions by answering the question "what is?" or "what will be?"
(Tip: They're usually "If" or "How" questions. Not a yes or no answer)
Normative Analysis pg.3
There's a second type of economic reasoning that is normative in nature. Normative Analysis answers the question "What ought to be?" Normative questions lie at the heart of policy debates... (cont/ Economists utilize positive analysis...)
(Tip: They're usually "Should" questions. Yes or No answers)
Economists utilize positive analysis to analyze consequences pg.3-4
Economists contribute to policy debates by concluding positive analyses of the consequences of alternative actions. Armed with the conclusions of the economist's positive analysis, policy makers could then make a normative analysis decision. Economists don't always reach the same conclusions in there positive analyses. The disagreements often concern the magnitude of a popular effect. Example: Most agree that a raise in minimum wage will result in unemployment. They disagree on just exactly how much unemployment will happen.
There are 3 economic questions that must be answered within an economic system
It goes back to choices and decisions. The choices of individuals, firms, and governments answer three questions:
1. What products do we produce? (Trade-offs exist: If a hospital uses its resources to preform more heart transplants, it has fewer resources to care for premature infants)
2. How do we produce products? (Alternative means of production are available: Power companies can produce electricity with coal, natural gas, or wind power.)
3. Who consumes the products? (We must decide how to distribute the products of society. If some people earn more money than others, should they consume more goods? How much money should the government take from the rich and give to the poor?)
Most of these decisions are made in markets, where prices play a key role in determining what products we produce, how we produce the, and who gets the products,
John Maynard Keynes pg.7
The economic way of thinking is best summarized by British economist Keynes (1883-1946). The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor draw correct conclusions.
Alfred Marshal pg.8
A british economist (1842-1924) who refined the economic model of supply and demand and provided a label for the process. He picked one variable that affected apple purchases (price) and threw the other variable (income) into what he called the "pound." That variable waited in the pound while Marshall examined the influence of the first variable. Marshall labeled the pound "ceteris paribus"... (cont. in ceteris paribus)
Ceteris Paribus pg.8
the Latin expression meaning that other variables are held fixed: "the existence of other tendencies is not denied, but their disturbing effect is neglected for a time. The more the issue is narrowed, the more exactly it can be handled".
Ex. The number of computers produced by Dell is dependent on the wag of the workers and the cost of microchips. When we say "An increase in the price of computers increases the quantity of computers produced," we are assuming that the other 2 variables- wage and cost of microchips- do not change. That is, we apply the ceteris paribus assumption.
Marginal Change pg.8
How will a small change in one variable affect another variable and what impact does that have on people's decisions? If circumstances change only slightly, how will people respond? A small, one unit change in value is called marginal change. They key feature of marginal change is that the first variable changes only by one unit. "if i study for just one more hour, how much will my grade change?" Economists call this process "thinking at the margin." Thinking at the margin is similar to thinking on the edge.
Adam Smith pg.8
Scottish philosopher (1723-1790) considered the founder of economics, wrote that he discovered within humankind "a desire of bettering our condition, a desire which though generally calm and dispassionate, comes with us from the womb, and never leaves us until we go to the grave."
Smith didn't say people are motivated exclusively by self-interest, but rather that self-interest id more powerful than kindness or altruism. We assume that people act in their own self-interest. Rational people respond to incentives. When the payoff/benefit, from doing something changes, people change their behavior to get the benefit.
Economists use assumptions to simplify tasks. pg.7
Economists use assumptions ti make things simpler and focus attention on what really matters.(Book ex. If you use a road map to plan a road trip, you make two unrealistic assumptions 1. the earth is flat and 2. the roads are flat. Instead of a map, you can use a globe but, since these two factors don't really matter, a map would suffice and be much simpler.) Economists can't always simplify however because consider this: if you were taking a bike and not a car on the same road trip, you would need to know the elevations of roads and a map wouldn't suffice.
Economists isolate variables to answer key questions. pg.7
Economic analysis often involves variables and how they affect one another. Economists are interested in exploring relationships between 2 variables - ex. the price of apples vs. how many apples are consumed. The quantity of apples consumed has to do with other variables such as the consumer's income. To evaluate the relationship, we have to assume that the variable of income, remains constant through the observation. To isolate variables, use ceteris paribus.
Economists evaluate the role of marginal change. pg.8
Economists often consider how a small change in one variable affects another variable and what impact that has on people's decision making. A small one unit change is marginal change (we've now been over this 3 times). Economists use the answer to a marginal question as a first step in deciding whether to do more or less of something.
People respond to incentives. pg. 8
A key assumption of most economic analysis is that people act rationally, meaning they act in their own self-interests. Long story short, if it helps us or benefits us, we do it. (See Adam Smith for more details)
study of the nation's economy as a whole; focuses on the issues of inflation, unemployment, and economic growth. Maco explains why economies growth and change and why growth is sometimes interrupted.
1. Understand why economies grow
Macro explains why resources increase over time and the consequences for our standard of living. In the fastest growing countries, citizens save a large fraction of the money they earn. Firms can then borrow the funds saved to purchase machinery and equipment to make their firm more productive.The fastest growing countries also have well educated workforce, allowing for quick adaptation.
2. Understand Economic Fluctuations
All economies including those that experience a general trend of rising per capita income, are subject to economic fluctuation, including times when the economy temporarily shrinks. During an economic downturn, some of the economy's resources are idle. Some workers are unemployed and some factories and stores are closed. By contrast, the economy can actually grow too quickly and cause prices to rise. Macro helps us understand why this happens and what the government can do to moderate it.
3. Make informed Business Decisions
The government uses various policies to influence interest rates and the inflation rate. Use Macro to predict the effects of current public policies on interest rates and then decide whether to borrow money now or later. Managers watch inflation rates in order to figure out what to charge for a product.
the study of the choices made by households, firms, and government and how these choices affect the markets for g&s.
1. Understand Markets and Predict Changes
understand how markets work and to predict how various events affect the prices and quantities of products in markets. Ex. if more people die in car accidents because they drink beer, an increase in beer tax will lead to decreased deaths.
2. Make Personal and Managerial Decisions
we use economic analysis to decide how to spend our time, what career to pursue, and how to produce g&s.
3. Evaluate Public Policies
Although modern societies use markets to make most of the decisions about production and consumption,the government does fulfill several important roles. We can use economic analysis to determine how well the government preforms its roles in the market economy. We can also explore the trade-offs associated with various public policies.
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