Principles of Macroeconomics

Economic Principles (Unit 3)

Principle 1: choices are necessary because resources are scarce

• Time, money, gas, natural resources, food, water

• All limited

Scarce: a resource is scarce when there is not enough of the resource available to satisfy all the various ways a society wants to use it

Trade-off: comparison of costs and benefits of doing something

Opportunity cost: what you must give up in order to get something, the net benefit of the next best alternative

• Mark Zuccerberg, dropped out of Harvard to start Facebook

Principle 2: the true cost of something is opportunity cost

Opportunity cost: involves two items, monetary costs plus subjective costs

EX) we decide to go to college

Next best alternative - work

• Benefits of work

• Money

• Leisure time

• Experience

• Subjective costs for attending college

• Monetary costs - tuition and fees

• Opportunity costs

What are the opportunity costs of

• Buying a car

• Monetary value of the car, gas, insurance, maintenance

• Could bike, walk, public transport, rent/lease a car

• Opportunity cost=monetary cost + subjective cost

• Subjective cost=money saved

• Investing in stocks

• Monetary value of the stock

• Could fail or succeed, could spend the money on something else

• Preparing food at home

• Monetary savings

• Could go get take out instead

• Taking public transportation

• Monetary value to get on

• May be late, cannot control when and where you get off, may have to walk

• Could drive instead

Globalization

A process by which the economies of the world become more integrated by the free flow across national boundaries of goods, investments, finance, and labor.

• Is it a good thing?

Market economy: an economic system in which the main form of economic organization is the firm, in which the private owners of capital goods hire labor to produce goods and services for sale of markets for projects. (Capitalist Countries)

Capitalism

An economic system with private property, self sufficient, family based

And markets

Market economy with family based production

And firms

Capitalist economic system, final decision, controller

Command Economy: centrally planned economic system, the government has been the institution controlling production and deciding how goods should be distributed, and to whom

• Cuba and North Korea

• Socialism countries

• China - quota of food and water, no more, planned out

Invisible Hand: a way in which an individual’s pursuit of self-interest can lead , without the individual intending it, to good results for society as a whole

Market Failure: the point at which the individual pursuit of self interest found in markets makes society worse off, that is, the market outcome is inefficient

Common Measures of Globalization

1. Imports, exports, total trade as a share of GDP

2. Reduction in trade costs between countries

3. Tariffs

Offshoring: outsourcing, sending work to other countries

What causes economic growth?

• Discovery of new/more resources

• An increase in factors of production

• Resources used to produce goods and services

• Technology

• Employees, labor (human capital)

• Transportation

• Physical capital

• Land

• Political environment

• Demand increase

• Better technology

• Produce more, more demand = economic increase

• International trade

Principle 3: There are gains from trade

Production if 10% of time is spent on one good

Greta has absolute advantage in production of both

Absolute advantage: uses fewer inputs to produce a good

Comparative advantage: greatest absolute advantage or least productivity disadvantage (comparatively better)

Greta has CA in wheat, Carlos has CA in apples

Specialization: a country should specialize in the product that they have comparative advantage