Macroeconomics: Chapter One

productive vs allocative efficiency

goods and services are produced at the lowest possible cost vs goods and services are produced to a point where there is a marginal benefit to society equal to the marginal cost of producing it

centrally planned economy vs market economy

government decides how resources will be allocated vs households and privately owned firms decide

what does optimal decisions are made at the margin mean?

margin refers to extra (cost), different from all or nothing choice, optimal decision is when the marginal benefits outweigh the marginal cost (watch an hour of TV or study- which is better- depends on assignments due, difficulty of class, stress levels, etc)

mixed economy

more a market economy because most decisions are based off interactions of buyers and sellers but the government also plays a role in the allocation of resources

can positive economic analysis tell us whether policy is good or bad?

no - it can only show the consequences of a particular policy

is the US a true market economy?

no, a mixed economy - Ex: social security (to help disproportionately poor groups such as the elderly and sick)

what type of analysis is this statement? we should value the losses to the losers (from policy decision) more than the gains of the winners

normative analysis - this is opinionated (says whether something is good or bad policy) whereas positive analysis tell us factual consequences resulting from policy

central planned economy bad?

not as successful as market economies in producing low-cost, high quality goods and services

what determines "what good and services are produced"

opportunity cost, weigh pros and cons of devoting energy, time, money, etc to produced one thing over another

what three ideas explain why we can understand what happens in a market

people are rational people respond to economic incentives optimal decisions are made at the margin

what is the result when engaging in an activity increases

people engage in that activity less

relation between health insurance and obesity rates

people who have health insurance and don't incur out of pocket expenses due to complications resulting from obesity are more likely to be obese than those who have no health insurance (lower cost to obese people with health insurance)

what determines "how goods and services will be produced?"

primarily by humans or machines?

trade off

producing more of one good or service results in producing less of another

financial vs physical capital

stocks/bonds vs goods

economics

study of choices people make to attain their goals given that resources are scarce

capital stock

total capital available in a country

why are new technologies developed specifically in the US for example?

economic incentive (people need something so companies capitalize on this need by producing something new) because we use the market system

equity

"fair" distribution of economic benefit, Ex: tax rich to give more money to programs to help the poor (but this may not be efficient because people will have less incentive to start a business and make a lot of money if it all goes to the poor)

Who receives goods and services produced

Those who are most willing and able to buy them***

five steps to developing a new economic model

1) decide on assumptions to use in its development 2) hypothesis 3) use economic data to test hypothesis 4) revise model if it is insufficient 5) retain model to help answer similar future questions

marginal analysis

compares marginal benefits and marginal costs

explain the statement humans are rational

consumers and firms use available information as they act to achieve a goal (weigh costs and benefits before acting)

positive and normative analysis? which does economics deal with

deals with "what is" (economics deals with this - measures costs and benefits of particular actions) vs what ought to be

economic models: behavioral assumptions

describes that of consumers (maximize well-being) and firms (maximize profit)

market

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

what must be done before accepting a hypothesis?

analyze statistics on all relevant economic variables (Ex: in the last example are do welders work longer hours and have to travel for work because they are so scarce

explain the statement people respond to economic incentives

banks don't install bulletproof glass and station a security guard because this costs much more per year than the average amount banks lose from a robbery

what explains why a lot of companies move from the US to China?

because the market economy pushes firms to produce low cost, high quality goods and services compared to other firms and cost of manufacturing is lower in China so these companies can typically keep costs lower

why can disagreements arise about accepting hypotheses (based off statistics)?

because there are many variables at play so the question becomes which variable is correlated with the phenomena observed or if two variable are merely coincidentally occurring and there is an outside influence

opportunity cost

highest valued alternative that is given up in order to engage in an activity (don't always involve actual payments of money), Ex: if going to a football stadium instead of staying home for quiet time the opportunity cost = cost of the ticket and gas and the value I place on not staying home to enjoy quiet time

Macroeconomic issues (straightforward), examples of microeconomic issues

how consumers react to price changes cost and benefits of approving the sale of a new drug what is the most effective way to reduce pollution

micro vs macroeconomics

how households and firms interact in a market and how the government attempts to influence choices vs study of the economy from the big picture (inflation, unemployment)

when are economic models accepted and used?

if it leads to a hypothesis confirmed by statistical analysis (still can be incorrect - due to different interpretations especially if there are a lot of variable at play)

economic models: hypotheses and causal relationships (give an example)?

if skilled workers (welders) are needed more because there is a scarcity of welders and they make a higher income then more people will want to be a welder because wages are increasing

cost

is applicable to more than just money, also could be the cost of releasing harmful chemicals into the air (cost is pollution) which affects the productive efficiency

factor of production/economic resources/inputs

labor capital economic resources entrepreneurial ability

profit is the difference between

revenue and costs

name for the process of developing a model, testing hypotheses, and revising models?

scientific method

economic models

simplified versions of reality to analyze real-world situations

what type of science is economics

social science

economic models: economic variable? relation of hypothesis to economic variables

something measurable that can have different values (ex income of an electrician- what city are they in? do they own a business?), a hypothesis may be correct or incorrect about an economic variable

human capital

training and skills that a worker possesses

revenue calculation

units of a good sold x price per unit

revenue

what firms receive from selling goods

What three fundamental questions are answered by any economic system?

what goods and services will be produced how will they be produced and who will receive what is produced

when is allocative efficiency achieved

when competition among firms and and voluntary exchange results in the production of the mix of goods that customers prefer the best

when is productive efficiency achieved?

when goods and services are produced at the lowest possible cost due to competition in the market economy

voluntary exchange

when the buyers and seller are better off after a transaction

scarcity

when unlimited wants exceed limited resources