macro.docx - Chapter 1 • • Economy “oikonomos”(Greek – “One who manages a household” – Households and economies have much in common

macro.docx - Chapter 1 • • Economy...

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Chapter 1 Economy, “oikonomos” (Greek) “One who manages a household” Households and economies have much in common Households face many decisions Allocate scarce resources Ability, effort, and desire Society faces many decisions Allocate resources and output Resources are scarce Scarcity The limited nature of society’s resources Society has limited resources and therefore cannot produce all the goods and services people wish to have Economics How society manages its scarce resources How people make decisions Economists study: How people make decisions Work, buy, save, invest How people interact with one another Analyze forces and trends that affect the economy as a whole Growth in average income Fraction of the population that cannot find work Rate at which prices are rising How people make decisions 1. People face trade-offs 2. The cost of something is what you give up to get it 3. Rational people think at the margin 4. People respond to incentives People face trade-offs
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1. Make decisions Compare cost with benefits of alternatives Opportunity cost 1. Whatever must be given up to obtain some item
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Chapter 2 Scientific method Dispassionate development and testing of theories about how the world works Observation, theory, more observation Conducting experiments in economics Is often impractical Substitute for laboratory experiments Economists pay close attention to the natural experiments offered by history The role of assumptions Assumptions Can simplify the complex world Make it easier to understand The art in scientific thinking: deciding which assumptions to make Different assumptions To answer different questions To study short-run or long-run effects Economic models Diagrams and equations Omit many details Allow us to see what’s truly important Built with assumptions Simplify reality to improve our understanding of it Circular-flow diagram Visual model of the economy Shows how dollars flow through markets among households and firms Decision makers Firms and Households Markets For gods and services For factors of production (inputs) Firms
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Produce goods and services Use factors of production (inputs) Households Own factors of production Consume goods and services Firms and Households interact in markets Markets for goods and services Firms are sellers Households are buyers Markets for factors of production Firms are buyers Households are sellers Production possibilities frontier A graph Combinations of output that the economy can possibly produce Given the available Factors of production Production technology Efficient levels of production The economy is getting all it can from the scarce resources available Points on the production possibilities frontier
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