MacroEcon CHAPTER 1

Globalization (brings rapid income growth)

Globalization—the expansion of international trade and the production of components and services by firms in other countries—has been going on for centuries.

big economic questions: What, How, and For Whom?

Goods and services: are the objects (goods) and actions (services) that people value and produce to satisfy human wants. What: goods and services get produced and in what quantities? How: are goods and services produced? For Whom: are the various goods and services produced?

THE ECONOMIC WAY OF THINKING A rational choice:

A rational choice: is a choice that uses the available resources to best achieve the objective of the person making the choice. We make rational choices by comparing costs and benefits.

THE ECONOMIC WAY OF THINKING

Because we face scarcity we must make choices. To make a choice we select from alternatives. Whatever choice you make, you could have chosen something else. You can think about your choices as tradeoffs. A tradeoff is an exchange—giving up one thing to get something else.

THE ECONOMIC WAY OF THINKING Benefit: Cost:

Benefit: What You Gain: Benefit is the gain or pleasure that something brings. Benefit is measured by what you are willing to give up. Cost: What You Must Give Up: Opportunity cost is the best thing that you must give up to get something—the highest-valued alternative forgone.

THE ECONOMIC WAY OF THINKING Disagreement: Normative versus Positive

Disagreements that CAN'T be settled by facts are NORMATIVE statements—statements about what ought to be. Disagreements that CAN be settled by facts are POSITIVE statements—statements about what is. (opinion based)

Scarcity

Scarcity is the condition that arises because wants exceeds the ability of resources to satisfy them.

THE ECONOMIC WAY OF THINKING

Economic Ideas: -Choice is a tradeoff -People make rational choices by comparing benefits and costs -Benefit is what you gain from something -Cost is what you must give up to get something -Most choices are "how much" choices made at the margin -Choices respond to incentives.

THE ECONOMIC WAY OF THINKING

Economic Models An economist's second step is to build a model that provides a possible answer to the question of interest. An economic model is a description of some feature of the economic world that includes only those features assumed necessary to explain the observed facts. Check Models Against Facts An economist's third step is to check the proposed model against the facts.

-Microeconomics -Macroeconomics

Economics divides into two parts: -Microeconomics: The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments. -Macroeconomics: The study of the aggregate (or total) effects on the national economy and the global economy of the choices that individuals, businesses, and governments make.

Economics Defined

Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity, the incentives that influence those choices, and the arrangements that coordinate them.

THE ECONOMIC WAY OF THINKING Economics as a Social Science

Economists try to understand and predict the effects of economic forces by using the scientific method first developed by physicists. The scientific method is a common sense way of systematically checking what works and what doesn't work.

THE ECONOMIC WAY OF THINKING How Much? Choosing at the Margin

How Much? Choosing at the Margin A choice made at the margin is a choice made by comparing all the relevant alternatives systematically and incrementally.

THE ECONOMIC WAY OF THINKING Choices Respond to Incentives

Making a Rational Choice You make a rational choice when you take those actions for which marginal benefit exceeds or equals marginal cost. Choices Respond to Incentives An incentive is a reward or a penalty—a "carrot" or a "stick"—that encourages or discourages an action.

THE ECONOMIC WAY OF THINKING Marginal Cost Marginal Benefit

Marginal Cost Marginal cost is the opportunity cost of a one-unit increase in an activity. The marginal cost of something is what you MUST give up to get one additional unit of it. Marginal Benefit Marginal benefit is the what you gain when you get one more unit of something. The marginal benefit of something is measured by what you are WILLING to give up to get one additional unit of it

big economic questions: When Is the Pursuit of Self-Interest in the Social Interest?

The choices that are best for the individual who makes them are choices made in the pursuit of self-interest. The choices that are best for society as a whole are choices made in the social interest.

THE ECONOMIC WAY OF THINKING

To check an economic model against the facts, economists use Natural experiments Statistical investigations Economic experiments

Inflation

is the rising of the general price level of one decimal to another