ECO2013

All Chapters:

 

Pay particular attention to all the details of the terms and examples:

Please read at least three times before the test

 

Macroeconomics-Chapter 1

Limits, Alternatives, and Choices

 

The Economic Perspective

Definition

·         The social science concerned with how individuals, institutions, and society make optimal choices under scarce conditions.

Scarcity and Choice

·         Scarcity: limited goods and services; we must make choices

·         Opportunity Cost: to obtain more of one thing; society forgoes the opportunity of getting the next best thing.

Purposeful Behavior

·         People make decisions with some desired outcome

·         Self-interested behavior-designated to increase personal satisfaction (could be donating to charities)

·         Try to increase “utility”-the pleasure, happiness, or satisfaction from consuming a good/service

Marginal Analysis: Benefits and Costs

·         Comparisons of marginal benefits and marginal costs

·         Marginal:  “additional” and “extra”

·         Most decisions involve changes in status quo

·         If marginal benefit is greater than marginal cost-buy it

·         Important: Whenever a decision is made-there is opportunity cost!

 

Theories, Principles, and Models

·         Scientific Method:

o        Observe real world behaviors/outcomes

o        Form a hypothesis based on those

o        Test by comparing outcomes

o        Accept, reject, or modify hypothesis based on results

o        Repeat (continue testing)-makes a theory

·         Well tested and accepted theory=economic law/principle

·         Combinations of these are put into models-show how something works

·         “Purposeful Simplification”: models, theories, principles

**Generalizations: economic principles are generalizations relating to economic behavior or the economy.

**Other-Things-Equal: the assumption that factors other than those being considered are not changed.

 

Macroeconomics and Microeconomics

Macroeconomics

·         Looks at either the economy as a whole or its subdivisions or “aggregates”

·         “Aggregate”: a collection of specific economic units treated as if they were one unit (all consumers)

Microeconomics

·         Deals with individual units (person, household, industry)

·         Look at decision making, price, revenue, etc.

Positive and Normative Economics

·         Positive: focuses on facts and cause-effect (description, theory, development-sure thing)

·         Normative: judgments on economic policy (includes words like “ought” or “should”)

·         Positive-what is; normative-what ought to be

 

Individuals’ Economizing Problem

Main problem

·         People have to make choices because economic wants are greater than economic production ability

Limited Income

·         Finite amount of income (must decide how to spend money)

Unlimited Wants

·         This and limited income makes us economize (pick and choose goods and services which will create max. utility)

A Budget Line

·         It is a schedule/curve showing different combinations of products a consumer can buy with a fixed income (can be graphed/charted)

·         Attainable: on or below budget line

·         Unattainable: above budget line

·         Shows opportunity costs and trade offs

·         Income changes=shift in the curve/schedule

 

Society’s Economizing Problem

Scarce Resources: must make a decision between resources

Resource Categories: factors of production

·         Land, Labor, Capital, Entrepreneurial Ability

 

Production Possibilities Model

·         To understand choices and alternatives

·         Assume: full employment, fixed resources, fixed technology, two goods

Production Possibilities Table

·         Lists different combinations of two products that can be produced (with certain amount of resources)

·         **More investment (capital) –more to produce later

Production Possibilities Curve

·         Production Possibilities table shown graphically (consumer goods-x axis; capital goods-y axis)

·         Each point on the line shows max. output of both goods

Law of Increasing Opportunity Cost

·         When production of one good goes up, the opportunity cost of producing additional units goes up

·         Shows in the curve (when opportunity cost goes up-curve is steeper)

·         Cause of this-lack of flexibility of resources (other resources can not be used)

Optimal Allocation

·         Optimal=best (occurs when marginal benefit=marginal cost)

·         This makes up the points for the Production Possibilities Curve

 

Unemployment, Growth, and the Future

·         Not making as much as we could be (inside the P.P.C.)

A Growing Economy

·         Increase in resources shifts the curve out (economic growth-produce more)

·         Same with technology advances

Present Choices and Future Possibilities

·         Goods for present = consumer (food)

·         Goods for future = capital (or education)

·         Invest now-produce more in the future; opportunity cost=less present consumer products

A Qualification: International Trade

·         This shifts curve out; more of both goods