Chapter 1 Notes Economics
What is Economics, and Why Is It Important?
Economics is the study of how humans make decisions in the face of scarcity.
Scarcity means wants exceed the available resources.
The FRED data resource provides data used in the course.
Microeconomics and Macroeconomics
Microeconomics focuses on actions of individual agents: households, workers, and businesses.
Macroeconomics focuses on broad issues: growth, unemployment, inflation, and trade balance.
Theories and Models in Economics
A theory is a simplified representation of how two or more variables interact.
A good theory is simple yet captures key features; models test theories.
In this course, 'model' and 'theory' are used interchangeably.
The Circular Flow Diagram shows interactions in the goods/services market and the labor market:
Goods/services market: households receive goods/services and pay firms.
Labor market: households provide labor and receive wages/benefits.
Economic Systems Overview
Traditional economy: agricultural, oldest system; family-based occupations; produces what it consumes; limited progress.
Command economy: government owns resources and makes production/price/wage decisions; provides many necessities like healthcare and education.
Market economy: decisions are decentralized, private ownership, production based on demand; market arises from demand and supply; private enterprise.
Mixed economies: most real-world economies blend elements of traditional, command, and market systems; US is market-oriented; Europe/Latin America have more government involvement; China/Russia moving toward more market features but with government role.
Division of Labor and Specialization
Division of labor: breaking production into discrete tasks; e.g., assembly line.
Specialization: focus on tasks for which workers/firms are well-suited; increases output.
Economies of scale: as production grows, average cost per unit declines.
Monetary and Fiscal Policy
Monetary policy: central bank alters interest rates, credit availability, and borrowing.
Fiscal policy: government spending and taxes.
The Global Economy and GDP
Globalization: increasing cross-border trade and investment.
Exports: domestically produced goods/services sold abroad.
Imports: goods/services produced abroad and sold domestically.
GDP: measures the size of total production in an economy.
Real-World Economies and Regulation
Most economies are mixed; they combine elements of traditional, command, and market systems.
Regulations define the rules of the game; market-oriented economies have fewer regulations; heavily regulated economies may have underground markets.
Globalization Discussion
What are examples of products and services in the modern economy?
How has globalization contributed to economic activity?