Notes Chapter 1.doc - Introduction An economy is a system...

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Introduction An economy is a system for coordination society’s productive activities. Economics is the social science that studies the production, distribution, and consumption of goods and services. A market economy is an economy in which decisions about production and consumption are made by individual producers and consumers rather than through central planning. The US economy is a market economy where we are all market participants and decision makers. Microeconomics is the branch of economics that studies how propel make decisions and how these decisions interact. Macroeconomics is the branch of economics that is concerned with overall ups and downs in the economy. Microeconomics studies individual economic behavior whereas Macroeconomics takes the entire economy as a whole. Macroeconomic phenomena are refection at the entire economy level of millions of the individual decisions. Thus Macroeconomics builds on Microeconomic foundations. Chapter 1 First Principles In this chapter, Section 1.1 is the set of principles for understanding how individuals make choices. Section 1.2 is set of principles for understanding how individual choices interact bout individual choices. These two sections belong to the realm of Microeconomics. Section 1.3 is the set of principles for understanding economy-wide interactions and belongs to the field of Macroeconomics. In our course, we will discuss some Microeconomics before we seriously study Macroeconomics. I will leave Principles 10-12 for future discussion when we move to relevant chapters. 1.1 Principles that underlie individual choices A resource is anything that can be used to produce something else. Four major types of resources: o land: all natural resources such as fertile land, mineral reserves, good weather, and clean air, etc. o labor: number of workers, total working hours o capital: man-made (created) productive assets such as tools, machines and buildings o human capital: skills, intelligence and educational achievements (that enhances labor productivity Resources are scarce because the quantity available isn’t large enough to satisfy all productive uses. Scarcity is a key theme fundamental to economics. It leads to the first principle. Principle #1 : Choices are necessary because resources are scarce. 1
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Individual choice is the decision by an individual of what to do, which necessarily involves a decision of what not to do. Explanation: We are making choices everyday. For example, you are right now reading this lecture notes after you have made a series of choices. You decided to take a summer session instead of just relaxing and enjoying the summer. You decided to take a course with Ramapo instead of at any other institution. You decided to take Introduction to Macroeconomics instead of other available courses. (You’ve made wise choices!) Why do we have to make choices all the time? We do not get to do all that we want to do or have all that we want (scarcity!) You have only 24 hours a day so that you will have to make choices among studying,
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