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Summary - macroeconomics
1 Economics: Foundations and Models
ScarcityA situation in which unlimited wants exceed the limited resources available to fulfill those wants
EconomicsStudy of choices people make to attain their goals, given their scarce resources
1.1 Three Key Economic Ideas
MarketGroup of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade
- Most of economics involves analyzing what happens in markets
- The study of how people make choices and interact within a market will return to three important ideas:
- People are rational
- People respond to economic incentives
- Optimal decisions are made at the margin
1.1.1 People are rational
- Economists generally assume that people are rational
- this means that they assume that consumers and firms use all available information as they act to achieve their goals
- The assumption of rational behavior is very useful in explaining most of the choices that people make
1.1.4 Optimal decisions are made at the margin
Marginalextra or additional
Marginal analysisAnalysis that involves comparing MB and MC
- Some decisions in life are all or nothing, but most decisions are something in between.
- Economists reason that the optimal decision isto continue an activity up to the point where the marginal benefit equals the marginal cost, MB=MC
1.2 The economic problem that every society must solve
Trade-offThe idea that because of scarcity, producing more of one good or service menas producing less of another
Opportunity costThe highest-valued alternative that must be given to engage in an activity
- Because we live in a world of scarcity, any society faces the economic problem that it has only a limited amount of economic resources and so can produce only a limited amount of goods and services
- Trade-offs force society to make choices when answering the following three fundamental questions:
- what goods and services will be produced?
- How will they be produced?
- Who will receive them?
1.2.1 What goods and services will be produced
- This question is determined by the choices that consumers, firms and the government make
- In each case, consumers, firms and the government face the problem of scarcity by trading off one good or service for another. and each choice made comes with an opportunity cost, measured by the value of the best alternative given.
1.2.2 How will the goods and services be produced?
- Firms choose how they will produce the goods and services.
- Example: more workers or more machines
1.2.3 Who will receive the goods and services produced?
- Individuals with the highest income have the ability to buy the most goods and services
- Often people are willing to give up some of their income - donate to the poorer poeple
1.2.4 Centrally planned economics versus market economics
Centrally planned economyThe government decides how economic resources will be allocated
Market economyThe decisions of households and firms interacting in markets allocate economic resources
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A situation in which the quantity demanded is greater than the quantity supplied
A situation in which the quantity supplied is greater than the quantity demanded
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The characteristics of a population with respect to age, race and gender
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