Ch1-2 Macro

Entrepreneurship

(the talent to organize the aforementioned resources) is also frequently considered a kind of resource.

Attainable but Inefficiently

A point inside the production possibilities curve (such as point D)

unattainable

A point outside the production possibilities curve

Eileen is training for a triathlon, a timed race that combines swimming, biking, and running. While Eileen usually practices swimming for two hours per day, she decides to continue for an additional hour because the pool is less crowded than usual today allowing her practice time to be more productive.

Decisions are made at the margin.

Sam, the president of a company that makes electronic devices, borrows a large sum of money from the local bank to purchase new, automated technology to make a new series of laptop computers. This new generation of laptops is expected to drive desktop computers out of the market. As depicted in the above scenario, which of the following is an example of creative destruction?

Desktop computers becoming obsolete due to the introduction of this new series of laptops

natural resources

Land, plants, mineral deposits, oceans, and rivers

We all face scarcity.

T

efficiently

The points along the curve represent all possible combinations of food and clothing that could be produced with the current level of resources and technology of the economy

Eleanor needs a new roof. She finds Kevin, a roofing contractor, through an ad he posted in the local newspaper. Kevin paid $70 to post the ad in the newspaper. After Eleanor and Kevin agree on the price for the new roof, they sign a contract, which Eleanor has a law firm write up for $115, stating that Kevin will install Eleanor's new roof for $2,400.

Transaction costs are the costs required to search out, negotiate, and consummate a trade. In order for Kevin and Eleanor to find each other, Kevin had to post an ad in the newspaper, which cost $70. And to complete the trade, the two needed to sign a contract, which cost $115 to have written up. Therefore, the transaction costs associated with this trade are $70+$115=$185$70+$115=$185. Notice that the repair cost of the roof is not a transaction cost; rather, it is simply the cost of the service being provided after transaction costs have occurred.

True or False: Suppose that the hypothetical country of Andesland has a chronic scarcity of quinoa, its staple grain. This implies that if Andesland has a market economy, quinoa will be available only for a price.

True

Every economy faces three basic questions:

What will be produced? How will it be produced? And For whom will it be produced?

creative destruction.

When entrepreneurs bring new and improved products to the market, they will capture a significant share of the market

Economists divide resources into three categories:

human resources, capital (human-made resources), and natural resources.

Capital

includes items such as tools, machines, and buildings that allow us to (or improve our ability to) produce goods or services. Therefore, a band's saxophone is included in the capital category.

Under market organization

individual buyers and sellers communicate their desires and preferences both directly and indirectly

A normative statement

is one that offers an opinion as to the way the world should be. The first and third statements fall into this category.

A positive statement

is one that seeks to describe the world as it is. The second and fourth statements fall into this category.

Capital formation, or investment

is the purchase, construction, or development of physical and human resources that expands an economy's future resources.

Investment

is the purchase, construction, or development of physical and human resources that expands an economy's future resources.

Macroeconomics

is the study of factors that affect the entire economy. Therefore, macroeconomists tend to create models to analyze how aggregate phenomena such as growth, inflation, and unemployment respond to policy decisions of governments and central banks, changes in aggregate spending or savings, and supply or demand shocks.

Microeconomics

is the study of how prices and quantities are determined through interactions between buyers and sellers (individuals and firms) in individual markets. Therefore, microeconomists are more likely to create models to analyze the decisions of firms (such as pricing) and those of consumers (such as shopping choices), as well as how government policies affect those decisions.

Suppose that in the hypothetical country of Caffistan, coffee mugs are distributed based on government policy. This distribution rule gives the residents of Caffistan an incentive to spend time

lobbying government officials.

Ceteris paribus

means "other things constant" in Latin. Economic theory says that if everything else were to remain constant, higher prices would reduce purchases. But many other factors impact home sales as well (for example, income level), and one of these other factors must have changed. Everything else has not been held constant.

scarcity

means that a good is less freely available from nature than people would like

law of increasing opportunity costs.

opportunity cost of producing more

human resources

refers to the productive knowledge, skill, and strength of human beings. Therefore, the saxophone skill is included in the human resources category.

Comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

Invention

the discovery of a product or process, often through the use of imagination, ingenuity, and experimentation. Invention refers to not only a process but also to the result of such a process.

innovation

the successful introduction and adoption of a new product or first use of a new method.