Macroeconomics 201 Notes
Micro refers to the individual, while macro refers to the study of the economy in its entirety and
phenomena that affect the economy. Microeconomics refers to households and firms, whereas
macroeconomics involves economy-wide phenomena like inflation, unemployment, and economic
The word economy comes from the Greek word “
”, which means “, one who manages a
household.” At first, this origin might seem peculiar. But in fact, households and economies have much in
common. Household faces many decisions. It must decide which members of the household do which
tasks and what each member gets in return.
In short, the household must allocate its scarce resources
among its various members, taking into account each member’s abilities, efforts, and desires. Like a
household, a society faces many decisions. A society must decide what jobs will be done and who will do
The management of society’s resources is important because resources are scare. Scarcity means that
society has limited resources and therefore cannot produce all the goods and services people wish to have.
Scarcity is the limited nature of society’s resources. Economics is the study of how society manages its
scare resources. In most societies, resources are allocated not by a powerful dictator but through the
combined actions of millions of households and firms. Economists therefore study how people make
decisions: how much they work, what they buy, how much they save, and how they invest their savings.
An economy is just a group of people interacting with each other as they go about their daily lives.
According to Adam Smith, participants in the economy are motivated by self-interest and that the
“invisible hand” of the marketplace guides this self-interest into promoting general well-being.
The 10 Principles of Economics:
Numbers 1-4: Decision Making: 1. People Face Trade-offs:
no such thing as a free lunch.” To get one thing that we like, we usually have to give up another thing that
we like. Ex: student and her time, parents and their income, etc.
When people are grouped into societies,
they face different kinds of tradeoffs. A classic trade-off is between “guns and batter.” The more we
spend on military defense (guns) to protect our shores from foreign aggressors, the less we can spend on
consumer goods (butter) to raise our standard of living at home. Also important in modern society is the
tradeoff between a clean environment and a high level of income. Laws that require firms to reduce
pollution raise the cost of producing goods and services. Because of the higher costs, these firms end up
earning smaller profits, paying lower wages, charging higher fees, or some combination of these three.
Thus, while pollution regulations give us the benefit of a cleaner environment and the improved health