MacroEconomics Unit 1

NVCC                  Economics                       Kostes

Lesson 1 – Economic Principles, Concepts and Terms

Economics: The study of why people make one choice or another when buying, selling, spending, and saving.  Economics is a Social Science and is studied by an Economist.

Goods & Services

a)  Goods – things that can be seen and touched.  Examples – sneakers, IPODs, bicycles, etc.

b)  Services – useful work that cannot be touched.  Example: salespeople who sell you things, Bank tellers, are performing a service

Economic Resources – things that go into the making of goods and services.  Without natural resources there would be no goods of any kind.

1)  Land/Natural Resources – things provided by the world around us – Arable land, Forests, Water, Minerals (gold, coal, gas)

2)  Human Resources/Labor – the people who put everything together to make goods and services

3)  Capital Resources – the machines, tools and buildings used in the production of goods and services

4)  Entrepreneurship – a special kind of economic resource; the process of bringing together the three factors of production – natural, human, and capital resources.  The person who organizes a business, assumes the risks and gets the rewards is called an Entrepreneur

The Economic Perspective: Economists view things from a unique perspective, and that perspective has several features:

Scarcity – is the most important feature and drives all the rest.  Scarcity means that there is not enough of something to go around – such as food, water, and other types of natural resources.  Think of Scarcity as a combination of limited resources and unlimited wants.

1)  Economic Choices – because of scarcity, people, businesses, even governments must make economic choices.  The study of Economics offers a framework for explaining how and why we make such choices

2)  Purposeful Behavior – or rational self-interest.  This means people look for opportunities to increase their satisfaction through the purchase of goods and service.

Because they consider costs and benefits, their actions are rational and purposeful vs. random and chaotic

3)  Costs and Benefits – according to Economists, a person will want to do an activity only if the benefits are greater than the costs.  Example?

a)   Incentives – something that encourages or motivates someone to take an action.  Can you give me an example?

4)  Opportunity Cost – this is the word (term) used to describe economic choices. People can get more of one good or service but only by getting less of another good (reading activity)

5)  Trade-Offs – like opportunity cost.  Deciding on an action by weighing the costs and benefits

6)  Unintended Effects – trade-offs can cause unintended effects – that is some action you take has a different outcome than you expect

Rationing Device – because Scarcity exists, we need a rationing device – some way to decide who gets what portion of all the resources and goods available.  Can you tell me what this is in our Economy today?

Competition – another consequence of Scarcity - our world is extremely competitive.  People compete for jobs, companies compete for profits, and students compete for grades.

Microeconomics – the study of economic forces that affect individual parts of the economy – like workers, households and business firms

Macroeconomics – the study of economic forces on the economy and on society as a whole – unemployment, buying behavior of consumers for some product (cars), or even the process of globalization.

Economic Theory – Some questions have obvious answers.  However, many do not – especially when it comes to people’s behavior.  Remember, Economics is a Social Science.  It does not measure the distance to the stars, or chemical reactions that can be precisely calculated.  It measures the behavior of people.  How would you answer the following questions?

1)  What causes Inflation?

2)  What causes the Unemployment rate to rise and fall?

3)  How do Business Firms operate?

4)  What cause the prices of goods and services to rise and fall?

5)  Why do countries experience good economic times in some years and bad economic times in others?

To answer these questions, Economists need to build Theories.

Theory:

1)  Is NOT a Hypothesis – which is an educated guess

2)  A Theory must be able to predict an outcome, and that predicted result must happen often 

3)  A theory will use the scientific method to predict an outcome.   That is, it will use research, observation, and experimentation to explain why something happens or why it does not

4)  A theory is also NOT a Law – like the Law of Gravity.