Macroeconomics Chapter One

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Production Possibility Frontier

A graph that shows possible combinations of goods that an economy can produce given available technology and factors of production.

Theory

A representation of the relationships among facts.

What considerations underlie the choice of who will do which work?

Cooperation can greatly enhance economic efficiency. Three things make cooperation worthwhile: teamwork, learning by doing, and comparative advantage. Teamwork can enhance productivity even when there is no specialization. Learning by doing improves productivity even when all workers start with equal talents and abilities. Comparative advantage comes into play when people have different abilities or, after learning by doing, have developed specialized skills. Having a comparative advantage in producing a particular good or service means being able to produce it at a relatively lower opportunity cost than someone else.

Conditional Forecast

A prediction of future economic events in the form "If A, then B, other things being equal."

Direct Relationship

A relationship between two variables in which an increase in the value of one variable is associated with an increase in the value of the other.

Efficiency in Production

A situation in which it is not possible, given available knowledge and productive resources, to produce more of one good without forgoing the opportunity to produce some of another good.

Scarcity

A situation in which there is not enough of a resource to meet all of everyone's wants.

Positive Slope

A slope having a value greater than zero.

Negative Slope

A slope having a value less than zero.

Economic Efficiency

A state of affairs in which it is impossible to make any change that satisfies one person's wants more fully without causing some other person's to be satisfied less fully.

Tangent

A straight line that touches a curve at a given point without intersecting it.

Model

A synonym for theory; in economics, often applied to theories that take the form of graphs and equations.

What is the subject matter of economics?

Economics is a social science that seeks to understand the choices people make in using scarce resources to meet their wants. Scarcity is a situation in which there is not enough of something to meet everyone's wants. Microeconomics is the branch of economics that studies choices that involve individual households, firms, and markets. Macroeconomics is the branch of economics that deals with large-scale economic phenomena, such as inflation, unemployment, and economic growth.

How do economists use theory, graphs, and evidence in their work?

A theory or model is a representation of the relationships among facts. Economists use graphs to display data and make visual representations of theories and graphs. For example, a production possibility frontier is a graph, using available factors of production and knowledge, which shows the boundary between combinations of goods that are possible to produce and those that are not. Economists refine theories in the light of empirical evidence, that is, evidence gleaned from observation of actual economic decisions. Econometrics means the economic analysis of empirical evidence. Economic models are a way to make conditional forecasts of the form "If A, then B, other things being equal."

Hierarchy

A way of achieving coordination in which individual actions are guided by instructions from a central authority.

Spontaneous Order

A way of achieving coordination in which individuals adjust their actions in response to cues from their immediate environment.

Slope

For a straight line, the ratio of the change in y value to the change in the x value between any two points on the line.

Capital

All means of production that are created by people--including tools, industrial equipment, and structures.

Market

Any arrangement people have for trading with one another.

Investment

The act of increasing the economy's stock of capital, that is, its supply of means of production made by people.

Factors of Production

The basic inputs of labor, capital, and natural resources used in producing all goods and services.

Macroeconomics

The branch of economics that studies large-scale economic phenomena, particularly inflation, unemployment, and economic growth.

Microeconomics

The branch of economics that studies the choices of individual units--including households, business firms, and government agencies.

Labor

The contributions to production made by people working with their minds and their hands.

Opportunity Cost

The cost of a good or service measured in terms of the forgone opportunity to pursue the best possible alternate activity with the same time or resources.

What considerations underlie the choice of how to produce?

The economy can produce goods and services in many different ways, some of which are more efficient than others. Economic efficiency means a state of affairs in which it is impossible to make any change that satisfies one person's wants more fully without causing some other person's wants to be satisfied less fully. Efficiency in production means a situation in which it is not possible, given the available productive resources and existing knowledge, to produce more of one good or service without forgoing the opportunity to produce some of another good or service. Once an economy achieves efficiency, it can expand production potential by increasing the availability of resources or by improving knowledge. The term investment refers to the process of increasing the economy's stock of capital. Entrepreneurship is the process of looking for new possibilities--making use of new ways of doing things, being open to new opportunities, and overcoming old limits.

How are economic choices coordinated?

The two principle methods of coordinating choices are hierarchy and spontaneous order. Markets are the most important example of spontaneous order. The internal decisions made by large corporations and units of government are the most important examples of hierarchy.

Efficiency in Distribution

A situation in which it is not possible, by redistributing existing supplies of goods, to satisfy one person's wants more fully without causing some other person's wants to be satisfied less fully.

Natural Resources

Anything that people can use as a productive input in its natural state, such as farmland, building sites, forests, and mineral deposits.

Empirical

Based on experience or observation.

Comparative Advantage

The ability to produce a good or service at a relatively lower opportunity cost than someone else.

Entrepreneurship

The process of looking for new possibilities--making use of new ways of doing things, being alert to new opportunities, and overcoming old limits.

Economics

The social science that seeks to understand the choices people make in using scarce resources to meet their wants.

Econometrics

The statistical analysis of empirical economic data.

What considerations underlie the choice of who will benefit from goods and services that the economy produces?

In part, deciding who will benefit revolves around issues of efficiency. Efficiency in distribution refers to a state of affairs in which, with a given quantity of goods and services, it is impossible to satisfy one persons wants more fully without satisfying someone else's less fully. In addition, the choice of how we distribute goods depends on judgements about fairness.

What considerations underlie the choice of what an economy will produce?

Producing more of one good requires producing less of something else because productive resources that go into producing one good cannot produce another at the same time. Productive resources fall into three groups called factors of production. Labor means the productive contributions made by people working with their hands and minds. Capital means the productive inputs created by people. Natural resources include anything useful in its natural state as a productive input. The opportunity cost of a good or service is its cost in terms of the forgone opportunity to pursue the best possible alternative activity with the same time or resources.


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