Macro/Micro Unit 1 - Basic Economic Concepts

Define “economics”

Economics is the study of how individuals and societies choose to allocate scarce resources, why they allocate them the way they do, and the consequences of those decisions

Define “macroeconomics”

• Macroeconomics is the study of aggregates and the overall commercial output and health of a nation

• Typically focuses on policy

Define “microeconomics”

• Microeconomics is the study of individual actors (such as persons, firms, households) or buyers and sellers in individual markets

• Typically focuses on individual decisions/allocations of scarce resources

Define “scarcity”

Scarcity (in economics) is the fact that there is a limited amount of resources to satisfy the infinite demands of society.

List and briefly describe the four economic resources/factors of production.

1) Land = natural resources

2) Labor = people and their efforts

3) Capital = things produced to help produce other things (tools)

4) Entrepreneurship = the capacity to organize, manage, and develop a business- brings together the previous 3 factors

Define “models”

Models are graphical + mathematical tools created by economists to better understand complicated processes in economics.

Define “ceteris paribus”

Ceteris paribus is a Latin phrase meaning “all else equal.” In economic models, it is a simplifying assumption that everything else in an economy is constant aside from the cause/effect being analyzed.

Define “agent”

An agent is some entity making a decision (person, firm, government, etc.)

Define “incentives”

Incentives are rewards or punishments associated with a possible action- agents make decisions based on incentives.

What does it mean for an agent to be “rational”?

An agent is rational if they use all available information to choose an action that makes them as well off as possible

*Economic models assume that all agents are rational

What is the difference between positive and normative analysis?

Positive analysis:

• Thinking about objective facts and testable cause-and-effect relationships

Normative analysis:

• Subjective thinking about what we should value and the best decisions to make- all about opinions

Define “economic aggregates”

Economic aggregates are measures that summarize all markets in an economy rather than individual markets (e.g. unemployment rate, rate of inflation)

*These are often used as measures of an economy’s economic performance

Define “opportunity cost”

• the value of the next best alternative to any decision you make, or

• what must be sacrificed to obtain something

What is a Production Possibilities Curve/Frontier?

a graphical model that represents all the different combinations of two goods that can be produced- demonstrates the TRADEOFFS associated with allocating resources between two goods

Describe what increasing, decreasing, and constant opportunity costs would look like on a PPF

• Increasing = curves outward

• Decreasing = curves inward

• Constant = line

Explain the difference between the opportunity cost and MARGINAL COST of a good

• OC = the cost of the next best alternative to a choice

• MC = the cost of producing one more unit of something

Describe efficiency and inefficiency in relation to the PPF.

• Efficiency: the full employment of production resources (point lies ON the PPF)

• Inefficiency: the unemployment of production resources (point lies WITHIN the PPF)

Describe growth and contraction in relation to the PPF.

*Both due to changes in the INPUTS (resources)

• Growth: an INCREASE in an economy’s ability to produce goods and resources (PPF shifts OUT)

• Contraction: a DECREASE in an economy’s ability to produce economic resources (PPF shifts IN)

How do you calculate the opportunity cost of each good (marginal cost)?

(Y₁-Y₂) / (X₁-X₂)

Is going from inefficient to efficient production considered economic growth?

NO!

How can economic growth occur without a change in resources?

Productivity/technology: the ability to combine economic resources

Define comparative advantage and absolute advantage.

• Comparative advantage: a situation in which an agent can produce a good or service at a LOWER opportunity cost than another producer

• Absolute advantage: a situation in which an agent can produce more of a good or service than another producer WITH THE SAME QUANTITY OF RESOURCES

Define specialization

when an agent allocates most or all of its resources toward the production of a particular good or service

Define trade

the exchange of goods, services, or resources between two economic agents

How can you determine the optimal price for trade that is beneficial to both agents?

OC of seller < price < OC of buyer

What is the benefit of specialization and trade?

Both parties can get outcomes even beyond each of their individual PPFs (trading price is lower than their own OCs)

Explain the law of demand.

if we raise the price of a product, we lower the quantity demanded for the product (and if price lowers, QD increases)

Define demand

(ceteris paribus) the relationship between price and quantity demanded

How does the demand curve change with changes in demand and price

Change in demand: curve shifts

Change in price: point moves along the curve

What axis is price on in economics?

y-axis, despite being the independent variable

What are related products?

Products that affect the demand of another product- these are held equal (ceteris paribus) when considering demand

List and describe the two types of related products

1) Substitutes - products that can replace a good

2) Complements - products that are needed to consume a good

Usually, the demand for goods will increase as population incomes increase. Name and explain the exception to this rule.

Inferior goods: goods that people will not want to own if they had more money (e.g. cheapest car- you want to upgrade)

What are the factors of demand?

T - tastes and preferences

O - other goods (substitutes and complements)

N - number of buyers

I - income

E - expectations (of future prices)