Macroeconomics Final Review - Macroeconomics Final Review Chapter 1 Economics Foundations and Models Economics The study of how societies make decisions

Macroeconomics Final Review - Macroeconomics Final Review...

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Macroeconomics Final Review Chapter 1 – Economics: Foundations and Models Economics - The study of how societies make decisions and choose to allocate scarce resources. Microeconomics – The study of how households and firms make choices and decisions. Macroeconomics - The study of the economy as a whole, including: inflation, unemployment, and economic growth. Scarcity - A situation where there are unlimited wants and limited resources. Ex. Time, natural resources, labor and financial capital. Scarcity requires agents to make trade-offs, to get more of one good, something must be given up. Opportunity cost – The highest valued alternative that must be given up to engage in an activity. Ex. Attending college vs. getting a job, Going to the movies vs. studying for an exam. Exchanges and transactions take place in markets , where buyers and sellers come together. Ex. Stock Market, Labor Market etc. People engage in voluntary exchanges that make both the buyer and seller better off. Ex. Individuals choose how much they are willing to sell their labor for to firms. Three basic principles of economics 1. People are rational – people weigh costs and benefits and use all available information. 2. People respond to economic incentives – If price goes up consumption goes down, if subsidies go up production goes up. 3. Optimal decisions are made at the margin people make decisions such that the marginal benefit equals the marginal cost (MB=MC) of an activity. a. Optimal decisions are made at the margin. Review chart. Marginal Analysis – Analysis that involves comparing marginal benefits and marginal costs. Three fundamental questions – Every society must answer three questions:
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