Macroeconomics Ch. 1 & 2 Notes

Economics – social science concerned w/ the efficient use of scarce resources to achieve maximum satisfaction of economic wants
Rational self interest – individuals pursue actions that give them the greatest satisfaction (cost & benefit)
Marginal – extra/additional
Marginal analysis is used for every decision, each option includes marginal benefits and marginal costs
MB=MC (okay)MB>MC (good)MB<MC (bad)
Policies – courses of action based on economic principles & intended to solve a specific economic problem or further a goal (formulated by theories and data)
Positive economics – facts and cause/effect relationships (reality of the economy, theoretical economics)
Normative economics – value judgments of what the economy should be like or what should be recommended in order to reach a certain goal (policy economics, politicians use this)
Factors of production – LLCE=wrip
Labor – all physical & mental talents of individuals
Land – all natural resources
Capital – all manufactured aids used in producing consumer goods and services
Entrepreneurial ability – human resource, the person who takes the initiative and is a catalyst in the force behind production
W = wagesR = rentI = interestP = profit
Production possibilities
Full employment – use all available resources
Full production – max possible satisfaction of wants
Productive efficiency – least costly way
Allocative efficiency – particular mix of goods and services wanted by society, MB=MC
Opportunity costs – What did you give up when you made a decision? Other products are sacrificed to obtain one additional unit, each one is greater than the one before it
Law of increasing opportunity cost – the more of a product produced, the greater its OC
Fallacy of composition – a statement that is valid for an individual or part is not necessarily valid for the larger group or whole
Post hoc fallacy – because event A precedes B, A is not always the cause of B
Tradeoffs – when goals conflict, we sacrifice one to achieve another
Theoretical economics – the process of deriving theories and principles (arrange facts, interpret, generalize)
Principles – statements about economic behavior or the economy that enable prediction of the probable effects of certain actions
Generalizations – theories, principles, and laws
Economizing problem – society’s wants are unlimited and insatiable but resources are limited or scarce
Investment – the process of producing and purchasing capital goods
Consumer goods – products that satisfy our wants directly (ex: pizza directly satisfies hunger)
Capital goods – products that satisfy our wants indirectly by making possible more efficient production of consumer goods
Full employment – 5% rate or below of unemployment
Economic system – set of procedures a nation uses in producing and distributing goods and services
Traditional economies – habitual, customs, rituals, traditions
Adv: stable & predictable
Disadv: discourages progress
Ex: Amish/Southern Farmers
Pure command economies – gov owns land and capital, no entrepreneurs, uses central planning
Adv: resources can be redirected very quickly
Disadv: little economic freedom, no economic incentives, wants & needs of people not met, inefficient
No country in the world today fits this category
Pure market economies – consumers & businesses, voluntary exchange of goods & services driven by self interest and incentives (free market), motivated by profits (free enterprise)
Adv: freedom provides incentives and wide varieties of goods & services, efficient
Disadv: only productive resources are rewarded, market failures, unequal distribution
No countries in the world fit this
Mixed economic system – every country combines the characteristics of market and command to varying degrees, no clear distinction between each mixed system
Authoritarian – relies on central gov planning, allows little economic freedom
Democratic socialism – allows election, gov controls major industries, allows free market for other goods & services
Capitalism – leaves market decisions to buyers and sellers, gov provides legal framework for the interaction to occur