Knowt
Macro 0.1 Notes
Economics is about the choices of people
Every economy faces three questions:
What goods and services to produce?
How to produce goods and services?
For whom to produce the goods and services?
A good: a tangible object that satisfies our wants
A service: intangible but satisfies desires
A resource: an input that is used to produce goods and services
A good, service, or resource is scarce if there is less of it freely available from nature than people want
Macroeconomics: the study of the performance of the economy as a whole
Positive statements: relate to facts and verifiable hypotheses, such as statements that are either true or false
Normative statements: statements related to opinions and value judgments, such statements cannot be proven true or false
Opportunity cost: the value of the best activity sacrificed in making a choice
SUNK cost. An example is paying insurance on your car
An allocation of goods and services is Pareto efficient if it is impossible to reallocate goods and services so that someone becomes better off while nobody becomes worse off
An allocation is inefficient if it is possible to improve someone's well-being without simultaneously hurting anyone
At the Pareto Efficient point, you cannot make any improvement
Key ideas that guide an economist's way of thinking:
People make rational choices by comparing benefits and costs
The benefit is what you gain from something
Cost is what you must give up to get something
Thus, a choice involves a tradeoff
Most choices are “how much” choices made at the margin
Choices respond to incentives because they change the benefits or costs
Production possibilities frontier (PPF) is an economic model that shows the maximum combination of two goods that are possible for a society to produce given available resources and technology
“Other things equal (ceteris paribus)” assumption: Quantities of all other goods and services are not changing; also, available resources and technology are not changing
All other relevant factors remain constant
PPF describes the maximum production capacity of an economy
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 or service should specialize in that good or service
The law of comparative advantage is one of the most important principles in economics
