Macroeconomics Notes: Chapter 1 Upon completing this lesson, you should be able to: 1. Describe the differences between movements along a function vs. shifts in the function 2. Draw and label simple economic graphs 3. Calculate percent changes 4. Solve linear equations with one unknown Scarcity - A situation in which unlimited wants exceeds the limited resources available to fulfill those wants. Goods and Services are scarce. So, too, are the economic resources, or factors of production , workers, capital natural resources, and entrepreneurial ability used to make goods and services. Economics - The study of the choices consumers, business managers and government officials make to attain their goals given their scarce resources Economic model - A simplified version of reality used to analyze real-world economic situations. 1.1 Market - a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.. Three Key Economic Ideas 1. People are rational- Economists assume that consumers and firms use all available information as they act to achieve their goals. Rational individuals weigh the benefits and costs of each action, and they choose an action only if the benefits outweigh the costs. 2. People respond to economic incentives- While not ignoring other motives, economists emphasize that consumers and firms respond to economic incentives. Example being installation of bullet-resistant plastic in banks would cost $10,000 to $20,000 and the hiring of uniformed armed guards which would be $50,000 a year. The average loss in a bank robbery is only about $1200. 3. Optimal decisions are made at the margin- Instead of an all or nothing decision, most decisions in life involve doing a little more or a little less. Economists use the word marginal to mean “extra” or “additional”. The Marginal Benefit of watching an extra hour of television is an extra hour of enjoyment, the marginal cost is a lower grade due to one less house of studying. Economists reason that the optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost. MB= MC. Economists refer to this as Marginal Analysis. Marginal Analysis - Analysis that involves comparing marginal benefits and marginal costs.
1.2 Opportunity Cost - The highest value alternative that must be given up to engage in an activity. Example a doctor who could receive a salary of $100,000 per working year as an employee of a hospital but decides to open his own private practice instead. In that case, the opportunity cost of the physician serves he supplies to his own firm is the $100,000 he gives up by not working for the hospital, even if he does not explicitly pay himself a salary. As in this example, opportunity costs often do not involve actual payments of money Trade-of - The idea that, because of scarcity, producing more of one good or service means producing less of another good or service. Trade-offs force society to make choices when answering the following three fundamental questions: 1. What goods and services will be produced? The answer to the question of what will be produced