Macro CH 1

Economics

the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources.

3 key ideas about markets

People are rational, people respond to economic incentives, and optimal decisions are made at the margin.

what does “people are rational” mean?

economists assume that consumers and firms use all available information as they act to achieve their goals

T or F→ Economists assume that the only reason people take the actions they do is in response to economic incentives.

False

Economists reason that the optimal decision is to continue any activity up to the point where the _____.

marginal benefit equals the marginal cost— MB=MC

Trade-offs

Therefore, every society faces trade-offs: Producing more of one good or service means producing less of another good or service.

Opportunity Cost

the highest-valued alternative that must be given up to engage in that activity

In a market system, how does society decide what goods and services will be produced?

Consumers, firms, and the government determine what goods and services will be produced by the choices they make.

In a market system, how does society decide who will receive the goods and services produced?

based on income distribution

the government decided what goods to produce, how the goods would be produced, and who would receive the goods

Planned Economy

Mixed Economy

most economic decisions result from the interaction of buyers and sellers in markets, the government plays a significant role in the allocation of resources.

Productive efficiency

when a good or service is produced at the lowest possible cost.

Allocative efficiency

when production is in accordance with consumer preferences.

voluntary exchange

the buyer and the seller of a product are made better off by the transaction

Equity

the fair distribution of economic benefits

economic models

simplified versions of reality used to analyze real-world economic situations. based on assumptions

economic variable

something measurable that can have different values. ex) the number of people employed in manufacturing

Positive analysis

concerned with what is. used in economics

Normative analysis

concerned with what ought to be.

Microeconomics

the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Macroeconomics

the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Firm

an organization that produces a good or service.

Entrepreneur

someone who operates a business. In a market system, entrepreneurs decide what goods and services to produce and how to produce them.

Innovation

the practical application of an invention. (may also be used more broadly to refer to any significant improvement in a good or in the means of producing a good.)

Technology

the processes it uses to produce goods and services.

Goods

tangible merchandise, such as books, computers, or smartphones.

Services

activities performed for others, such as providing haircuts or investment advice.

Revenue

the total amount received for selling a good or service. multiply the price per unit by the number of units sold.

Profit

the difference between its revenue and its costs. economic profit includes opportunity costs. accounting profit does not

Household

all persons occupying a home. suppliers in factors of production like labor

Factors of production

used to produce goods and services. main factors are labor, capital, natural resources—including land—and entrepreneurial ability

Capital

refers to physical capital, which includes manufactured goods that are used to produce other goods and services.

Human capital

the accumulated training and skills that workers possess.