macroeconomics - module 1

economy

system for coordinating society’s productive activities (usually refers to an entire country’s economy)

command economy

-system where central govt officials plan and and make decisions about production

-does not work well in practice

-no competition

market economy

-decisions abt production & consumption are made by decentralized individuals or businesses

-based on supply & demand + invisible hand

-free market capitalism

mixed economy

-most countries today

-spectrum between command and market economies

invisible hand

-how a market directs self-interested activities for the good of the whole society

-possible detriment is market failure

market failure

-when pursuit of self-interest actually makes society worse

(ex) air pollution, traffic

Principles of Individual Choice

1. choices are necessary bc resources are scarce

2. the true cost of an item is it’s opportunity cost

3. decisions are made at the margin

4. people respond well to incentives

types of resources

-land, labor (workers), physical capital (buildings, assets), human capital (skills and achievements of workers; entrepreneurs)

opportunity cost

-what you give up to get something else

(ex) other choices, time, resources, money, etc.

trade-off

-weighing the benefits vs the costs of something

marginal decisions

-decisions about whether or not to do more or less of an activity

marginal analysis

-study of marginal decisions

incentive

-anything that offers reward(s) for behavior

-opportunity to make themselves better off

Principles of Interaction

1. there are gains from trade

2. markets move toward equilibrium

3. resources should be used efficiently to achieve societal goals

4. markets are generally efficient

5. gov’t intervention can improve welfare when markets aren’t efficient

specialization

-division of tasks

-people do the task they are best at and trade for the things they’re not good at to optimize performance

equilibrium

-market at equilibrium when no opportunities to make the individual better off remain

-makes markets predictable w/ trends

efficiency

-an economy is efficient when it has fully exploited all opportunities to make EVERYONE better off

-b/c efficient markets are producing maximum gains from trade, incentives and the invisible hand self-regulate, moving the market toward efficiency

-not always ideal (efficiency usually comes at the cost of equity; i.e. disabled parking spots)

equity

-when everyone gets a fair share

-ppl have diff ideas of ‘fairness’

gov’t intervenetion

-markets are not efficient/self-regulated in cases of market failure —> gov’t steps in (i.e. taxes, policies)

-what policies are appropriate in which situations?

Principles of Economy-Wide Interactions

1. one person’s spending is another person’s income

2. overall spending sometimes doesn’t match productive capacity

3. gov’t policies can change spending

spending behavior

-a chain reaction within the system (income is dynamic)

overall spending

-too little spending to support production —> recessions

-too much spending which outstrips supply —> inflation

macroeconomic policy

-gov’ts can control circulation, taxes, and overall spending

-used to remedy recessions/inflation