Macroeconomics Study Notes 1

Macroeconomics Study Notes 1 - UNIT 1 Macroeconomics...

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UNIT 1 Macroeconomics Chapter 1: Ten Principles of Economics - Economy means “one who manages a household” and is the study of how society manages its resources - Microeconomics: the study of how households and firms make decisions and how they interact in markets - Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth - Scarcity: limited nature of society’s resources HOW PEOPLE MAKE DECISIONS - Principle #1: People face trade-offs (“there’s no such thing as a free lunch”). To get one thing we like we must usually compromise something. - Highest resource = time Efficiency vs. Equity - Efficiency: the property of society getting the most it can from its scarce resources. - Equity: the property of distributing economic prosperity fairly among the members of society - Principle #2: The cost of Something Is What You Give Up to Get it - Opportunity Cost: whatever must be given up to obtain some item - Principle #3: Rational People Think at the Margin : economists assume people are rational. Rational people know that their decisions aren’t black and white. (E.g. at dinner you’re not faced with fasting or eating like a big, but rather whether or not to take an extra spoonful of mashed potatoes). Rational people make decisions by comparing marginal benefits to marginal costs. (E.g. you might as well sell someone an extra plane ticket at discount price rather than let the seat go to waste because in reality the marginal cost is that of a bag of peanuts and soda) - Rational People: people who systematically and purposefully do the best they can to achieve their objectives - Marginal Changes: small incremental adjustments to a plan of action - Principle #4: People Respond to Incentives - Incentive: something positive or negative that induces a person to act HOW PEOPLE INTERECT - Principle#5: Trade Can Make Everyone Better Off: trade allows each person to specialize in the activities he/she does best - Principle #6 Markets Are Usually A Good way to Organize Economic Activity - Market Economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services - Adam Smith’s book The Wealth of Nations pointed towards the fact that individuals are usually best left to their own devices, without the heavy hand of government guiding their actions. Essentially the invisible hand of the marketplace will balance itself. - Principle #7: Governments can sometimes Improve Market Outcomes: we need the government because the invisible hand can work only if the government enforces the rules and maintains the institutions that are key to a market economy. Markets only work
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if property rights are enforced. We rely on government-provided police services and courts to enforce our rights over things we produce. There are two main reasons for the government to intervene: to promote efficiency and/or equity. -
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This note was uploaded on 02/07/2012 for the course ECON 1bb3 taught by Professor Holms during the Spring '10 term at McMaster University.

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Macroeconomics Study Notes 1 - UNIT 1 Macroeconomics...

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