Ch. 1: Economics: Foundations and Models

Ch. 1

• What is economics? Why do we have to make choices?

People make choices as they try to attain goals. Choices are necessary because we live in a world of scarcity. 

Economics: the study of the choices people make to attain their goals given their scarce resources.

• Microeconomics vs. Macroeconomics

Microeconomics: the study of how households and firms make choices, how they interact in markets, and 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

• What do we mean by “market” in economics

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade

• Productive vs. Allocative Efficiency

Productive Efficiency: A situation in which a good or service is produced at the lowest possible cost

Allocative Efficiency: A state of the economy in which production is in accordance with consumer preferences

• Equity vs. Efficiency

Equity: the fair distribution of economic benefits

Economically efficient outcomes are not necessarily desirable because less efficient outcomes may be more fair

• Normative vs. Positive Statement

Normative Analysis: Analysis concerned with what ought to be

Positive Analysis: Analysis concerned with what is