Macroeconomics Today Chapter One

Three Basic economic questions every society must answer

1)What and how much will be produced? 2)How will items be produced? 3)Foe whom will items be produced

Inverse Relationships

A relationship between two variables that is negative

Direct Relationships

A relationship between two variables that is positive

Economics

A social science that studies how people distribute their limited money to satisfy their unlimited wants

Normative Economics

Analysis involving value judgements about economic policies ( what ought to be or should be)

Positive Economics

Analysis that is strictly limited to making pure descriptive statements (What is)

Centralized Command Control or Central Planning

Authority that makes ALL economic decisions

Two antithetical answers to which existing societies are a mixture

Centralized Command and Control or Central Planning; The Price System or Market System

Price System/Market System

Decentralized decision making process, in which, prices are terms (signals) under which people agree to make exchanges

Empirical

Relying on real world data in evaluating the usefulness of a model

Rationality Assumption

The assumption that people do not intentionally make decisions that would leave them worst off

Wants

The items people would purchase if they had unlimited resources

Self-Interest

The pursuit of one's goals, prestige, friendship, love, power, wealth, etc

Economic way of thinking

a framework to analyze solutions to economic problems

Bounded Rationality

hypothesis that people are not extremely rational, because they can not study every possible alternative; instead use simple rules of thumb to decide among choices

Economic system

in which resources are utilized to satisfy human wants

Mixed Economic Systems

incorporates both centralized command control and decentralized price system

Difference between micro and macro economics

micro-studies the smaller sections of the economy(households/firms) macro studies the behavior of the economy as a whole

models or theories

simplified representations of the real world used as the basis for predictions or explanations

Behavioral Economics

study of consumer behavior that emphasizes psychological limitations interfering with rational decision making

Ceteris Paribus Assumption

that nothing changes except the factor or factors being studied

Resources

things of value and what's used to produce goods and services that satisfy people's wants