Macro 0.1 Notes

Economics

The study of the choices of people.

Three questions every economy faces

What goods and services to produce? How to produce goods and services? For whom to produce the goods and services?

Good

A tangible object that satisfies our wants.

Service

Intangible but satisfies desires.

Resource

An input that is used to produce goods and services.

Scarcity

A good, service, or resource is scarce if there is less of it freely available than people want.

Macroeconomics

The study of the performance of the economy as a whole.

Positive statements

Statements that relate to facts and verifiable hypotheses; can be true or false.

Normative statements

Statements related to opinions and value judgments; cannot be proven true or false.

Opportunity cost

The value of the best activity sacrificed in making a choice.

Sunk cost

A cost that has already been incurred and cannot be recovered; e.g., paying insurance on your car.

Pareto efficient allocation

An allocation of goods and services is Pareto efficient if it is impossible to reallocate goods or services to make someone better off without making someone else worse off.

Inefficient allocation

An allocation is inefficient if it is possible to improve someone's well-being without simultaneously hurting anyone.

Marginal choices

Most choices involve 'how much' decisions made at the margin.

Production possibilities frontier (PPF)

An economic model showing the maximum combination of two goods that a society can produce given available resources and technology.

Ceteris paribus assumption

The assumption that other relevant factors remain constant.

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Absolute advantage

The ability to produce a good using fewer inputs than another producer.

Law of comparative advantage

An individual firm with the lowest opportunity cost of producing a particular good should specialize in that good.

Key principle in economics

The law of comparative advantage is one of the most important principles in economics.

The ppf is useful because it illustrates how much of one food an economy must give ip to get another good regardless of whether resources are being used efficiently - true or false?

False

Six key ideas that guide an economists way of thinking

1. People make rational choices by comparing benefits and costs

2. The benefit is what you gain from something

3. Cost is what you must give up to get something

4. Thus, a choice involves a tradeoff

5. Most choices are “how much” choices made at the margin

6. Choices respond to incentives because they change the benefits or costs