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