Econ Chapter 1

Economics

The study of the choices people make to attain their goals, given their scarce resources.

Macroeconomics

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Market economies tend to be efficient because:

They promote competition and facilitate voluntary exchange.

Mixed economy

An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.

Market economy

An economy in which the decisions of households and firms interacting in markets allocate economic resources.

There is often a trade-off between:

Efficiency and equity.

3 Economic Ideas

People are rational People respond to economic incentives Optimal decisions are made at the margin

Market definition is specific about (2)

geographical boundaries boundaries in terms of range of products produced and sold within it

Marginal

marginal means the next small incremental unit if additional (marginal) benefit outweighs additional cost, take the action

Steps for developing an economic model: (5)

1. Decide on the assumptions to use in developing the model. 2. Formulate a testable hypothesis. 3. Use economic data to test the hypothesis. 4. Revise the model if it fails to explain the economic data well. 5. Retain the revised model to help answer similar economic questions in the future.

Efficiency and Equity: Important things to keep in mind (2)

1. Markets promote but don't guarantee efficiency 2. Efficiency might not be all we care about

Trade-offs force society to make choices when answering the following three fundamental questions:

1. What goods and services will be produced? 2. How will the goods and services be produced? 3. Who will receive the goods and services produced?

Market

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Economic model

A simplified version of reality used to analyze real-world economic situations.

Productive efficiency

A situation in which a good or service is produced at the lowest possible cost.

Scarcity

A situation in which unlimited wants exceed the limited resources available to fulfill those wants.

Voluntary exchange

A situation that occurs in markets when both the buyer and seller are made better off by the transaction.

Allocative efficiency

A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it. MC=MB

Centrally planned economy

An economy in which the government decides how economic resources will be allocated.

Positive analysis

Analysis concerned with what is.

Normative analysis

Analysis concerned with what ought to be.

Imports Exports Between:

Domestic and Global Economy

Microeconomics

Microeconomics The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.

Equity

The fair distribution of economic benefits.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Trade-off

The idea that because of scarcity, producing more of one good or service means producing less of another good or service.

Buyers ⇒ households, businesses firms, government agencies, foreigners Sellers ⇒ households, businesses firms, government agencies, foreigners

Who is buying? Who is selling? (Buyers/Sellers)

function of two variables

is a relationship between a dependent variable and independent variable such that for any value of the independent variable, there is one and only one value of the dependent variable. Examples: Y = f(X), Y = 20 - 2X, Y = X2, etc.