Macro-Economics Textbook Notes

What does the word “economy” come from in Greek, and what does it mean?

It comes from “oikonomos” meaning “one who manages a household”

What is economics the study of?

The study of how society manages its scarce resources

What is scarcity?

The limited nature of society’s resources

What do economists study?

• How people make decisions

• How they interact with each other

• The forces and trends that affect the whole economy

What does it mean when people face trade-offs??

It means choosing one goal over another

Ex1. Time VS. Studying for a student

Ex2. Income VS Leisure for parents

What is the trade-off between efficiency and equality

Efficiency→ Getting the most out f scarce resources

Equality→ Distributing prosperity more evenly

END RESULT→ Increasing one may reduce the other

What is the cost of something according to economics?

It is what you give up to get it-the opportunity cost

What do rational people do?

They systematically and purposefully do the best they can to achieve their goals

What are marginal changes?

Small, incremental adjustments to a plan of action

When should a rational decsion maker take action?

Only when marginal benefits exceed marginal costs

What is an incentive?

Something that induces a person to act

How do higher prices affect buyers and sellers?

Buyers consume less, while sellers proudce more

What is an example of incentives from gasoline prices between 2005-2008??

Rising prices encouraged people to buy smaller cars, use mass transit, take online courses, and even celebrities like Sean “Diddy” Combs flew commercial instead of private

How does trade make people better off?

It allows specialization and provides a greater variety of goods and services at lower cost

How do market economies allocate resources?

Through the decision of households and firms interacting in markets, guided by prices and self-interest

What is Adam Smith’s “invisible hand”?

The idea that households and firms, acting in their own interest, are guided toward desirable market outcomes

When can governments improve market outcomes?

When they enforce rules, protect property rights, promote efficiency, or promote equality

What are 2 main causes of market failure?

Externalities and market power

What determines a country’s standard of living?

It’s ability to produce goods and services, or productivity

What happens when productivity increases?

Standard of living and average income rises

What causes inflation?

Growth in the quantity of money, which reduces the value of money

What is the short-run trade-off between inflation and unemployment?

When more money is injected, spending rises, firms produce more, hire more workers, and unemployment falls-but prices also rise (inflation)

What is the business cycle?

Fluctuations in economic activity, such as employment and production