Principles of Macroeconomics: Key Vocabulary from Chapter 1

Chapter Objectives

• Define Economics

• Identify the kinds of questions Economics addresses

• Understand principles of how people make decisions

• Learn principles of how people interact

• Comprehend principles of how the economy as a whole works

Definition of Economics

• Economics encompasses:

  • Money management

  • Business, government, and jobs

  • Disparities in wealth

• Core of Economics: Study of choices and their consequences due to scarcity.

• Scarcity:

  • Situation where wants exceed resources available

  • Impacts both poor and rich alike (Examples: Child vs. millionaire)

Subfields of Economics

• Microeconomics:

  • Focus: Individual and business choices

  • Example Question: "Why are more people buying e-books?"

• Macroeconomics:

  • Focus: National/global economy performance

  • Example Question: "Why is the U.S. unemployment rate high?"

Ten Principles of Economics

How People Make Decisions

1. People Face Trade-Offs

   • Choices involve trade-offs, such as studying vs. leisure.

   • Societal trade-offs: National defense vs. consumer goods.

2. The Cost of Something Is What You Give Up to Get It

   • Costs include both monetary and opportunity costs.

   • Example: College costs involve tuition/foregone wages.

3. Rational People Think at the Margin

   • Decisions involve marginal changes (e.g., studying vs. chatting).

   • Marginal benefits exceed costs for decisions to be made.

4. People Respond to Incentives

   • Incentives affect behavior (e.g., higher taxes reduce smoking).

How People Interact

5. Trade Can Make Everyone Better Off

   • Specialization increases efficiency (global trade benefits).

6. Markets Are Usually a Good Way to Organize Economic Activity

   • Market economies replace central planning with individual decision-making.

   • Prices reflect supply and demand interactions guided by the 'invisible hand'.

7. Governments Can Sometimes Improve Market Outcomes

   • Government roles:

     • Enforcing rules and property rights

     • Promoting efficiency and equality (reducing market failures)

How the Economy as a Whole Works

8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services

   • Productivity is crucial for living standards (U.S. vs. Nigeria example).

9. Prices Rise When the Government Prints Too Much Money

   • Inflation caused by excessive money supply affects value and cost of living.

10. Society Faces a Short-Run Trade-Off between Inflation and Unemployment

    • Short-term policies can influence inflation and employment.

    • Business cycles represent fluctuations in economic activity.

Key Terms

• Scarcity: Limited resources vs. unlimited wants.

• Opportunity Cost: Value of the next best alternative.

• Marginal Change: Small incremental adjustments to a plan of action.

• Market Failure: Inefficiencies within the market system.

• Inflation: General increase in prices.

• Business Cycle: Variations in economic activity over time.