Macroeconomics chapter 1

Thinking about the world from a macroeconomics point of view involves answering three important questions:

1.) What goods and services can and should we produce and how much? 2.) How should these goods and services be produced? 3.) Who will consume these goods and services?

economists goal is to help us understand and improve the performance of the economy. They do this by

1.) conduct research on issues in the economy, testing hypotheses to explain the cause and effect of unemployment, for example 2.) use their most reliable findings to build economic theory 3.) the theories that they have most supportive evidence for further research become widely accepted as economic principles, such as rational choice and laws, such as the law of supply and demand 4.) when theories, principles, and laws are combined together, they become economic models, such as the classic or Keynesian economic models

economists form their perspective about the economy based on three basic factors:

1.) scarcity and choice 2.) rational behavior 3.) marginalism

The Incentive Principle:

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.

The Scarcity Principle (also called the No-Free-Lunch Principle):

Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

Birth rate

The slope of a horizontal line is considered to be zero. It is flat, so it neither goes up or down It runs parallel to the horizontal axes

government intervention

This will be done in cases of market failure, such as when there is high unemployment, imbalanced trade deficits, or health concerns. example: impose taxes or trade embargos, offer subsidies and loan guarantees, or even create new environmental protection legislation to influence the market outcomes

T or F Scarcity is a basic factor of economic life

True. Because of scarcity, having more of one good thing almost always means having less of another

Inverse relationship

When A goes up, B goes down When A goes down, B goes up

Direct relationship

When A goes up, B goes up When A goes down, B goes down

The pitfall of ignoring implicit costs.

When performing a cost-benefit analysis of an action, it is important to account for all relevant costs, including the implicit value of alternatives that must be forgone in order to carry out the action. A resource (such as a frequent-flyer coupon) may have a high implicit cost, even if you originally got it "for free," if its best alternative use has high value. The identical resource may have a low implicit cost, however, if it has no good alternative uses.

sunk cost

a cost that is beyond recovery at the moment a decision must be made sunk costs must be borne whether or not an action is taken, so they are irrelevant to the decision of whether to take the action.

Market mechanism

involves a competitive rationing function of price. In a competitive market, prices and sales volume serve as signals to where resources should be focused. This mechanism usually provides the most efficient outcomes.

When you make rational decisions about how to use scarce resources, you compare

marginal cost and marginal benefit

equilibrium

occurs when production and consumer wants are in balance At the equilibrium price, the quantity that buyers are willing to buy exactly matches the quantity that sellers are willing to sell. So everybody is satisfied

positive economic principle

one that predicts how people will behave

normative economic principle

one that says how people should behave

economic force

the necessary section to the scarcity of valuable resources

average benefit

the total benefit of undertaking n units of an activity divided by n

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

ongoing cycle of macroeconomics

Consumption drives production. Production enables profit and income. Profits and income lead to exchange among households, businesses, and government. Exchange creates demand. Demand prompts more production

The pitfall of measuring costs or benefits proportionally

Many decision makers treat a change in cost or benefit as insignificant if it constitutes only a small proportion of the original amount. Absolute dollar amounts, not proportions, should be employed to measure costs and benefits.

The pitfall of failing to think at the margin.

When deciding whether to perform an action, the only costs and benefits that are relevant are those that would result from taking the action. It is important to ignore sunk costs—those costs that cannot be avoided even if the action isn't taken. It's also important not to confuse average costs and benefits with marginal costs and benefits. Decision makers often have ready information about the total cost and benefit of an activity, and from these it's simple to compute the activity's average cost and benefit. A common mistake is to conclude that an activity should be increased if its average benefit exceeds its average cost. The Cost-Benefit Principle tells us that the level of an activity should be increased if, and only if, its marginal benefit exceeds its marginal cost.

abstract model

a simplified description that captures the essential elements of a situation and allows us to analyze them in a logical way.

the economic perspective

a way of viewing the world that assumes people and institutions make decisions through rational thinking about the costs and benefits of different possible actions scarcity of resources relative to human wants, assumes that individuals rationally pursue their self-interest, and assumes that individuals compare costs and benefits at the margin. These assumptions hold in both the long term and the short term.

a simplified version of equilibrium is

an auction

The cost-benefit principle says that....

an individual (or a firm or a society) should take an action if, and only if, the extra benefit from taking the action is at least as great as the extra cost.

economic models

are abstract frameworks for perceiving the real world, based on combinations of economic principles

marginal analysis

comparison of extra or incremental benefits or costs

marginalism

is the analysis of extra benefits and costs when making decisions.

The dependent variable is typically placed along the vertical axis, whereas the independent variable is placed along the horizontal axis.

placed along the horizontal axis.

the most important economic force

scarcity

three key concepts in macroeconomics

scarcity, production, and consumption

what influences market prices

social, cultural, and political forces

rational person

someone with well-defined goals who tries to fulfill those goals as best he or she can

consumption

the amount spent by customers on final goods and services

economic surplus

the benefit of taking an action minus its cost

marginal benefit

the increase in total benefit that results from carrying out one additional unit of an activity the extra advantage above what you have already received.

marginal cost

the increase in total cost that results from carrying out one additional unit of an activity

opportunity cost

the loss of potential gain from other alternatives when one alternative is chosen.

The slope of a straight line represents

the ratio of the vertical change to the horizontal change between any two points. In economics, a downward slope means that at higher prices less is sold. graphs in economics are always read from left to right!

Economics

the study of how people make choices under conditions of scarcity and of the results of those choices for society.

microeconomics

the study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

macroeconomics

the study of the performance of national economies and the policies that governments use to try to improve that performance the study of the economy as a whole

average cost

the total cost of undertaking n units of an activity divided by n

factors of production

the use of resources to create goods and services

The value of the dependent variable (the effect) is influenced by

the value of the independent variable on the graph (the cause).

economic perspective

the way viewing the world in which explains economic behavior and outcomes in terms of scarcity, resources, and rational decision making based on a cost-benefit analysis

Why do economists like slopes

they measure marginal concepts

why do economists use graphs

too present both real world data and abstractions

two variables are inversely (negatively) related

when their values change in opposite directions. The line slopes downward.

Two variables are said to be directly (positively) related

when their values change in the same direction. The line representing the two variables slopes upward.

equation for a straight line in its most general form:

y = a + b x y = dependent variable a = vertical intercept b = slope of the line x = indépendant variable