Chapter 1- Macroeconomics

Macroeconomics Study Guide Chapter 1- Macro Economics✷ • Scarcity: the limited nature of society’s resources • Economics: the study of how individuals and societies allocate their limited resources to satisfy their nearly unlimited wants o Microeconomics: the study of individual units that make up the economy (such as households and businesses) o Macroeconomics: the study of overall aspects and workings of the economy (such as inflation, employment, growth, and interests) • Inflation: an overall increase in prices • The five foundations of economics are: o Incentives: incentives are important because they help explain how rational decisions are made. o Trade-offs: these exist when a decision-maker has to choose a course of action. o Opportunity cost: each time we make a choice, we experience an opportunity cost, or a lost chance to do something else. o Marginal thinking: a decision-maker must weigh the extra benefits against the extra costs. o Trade creates value because participants in markets are able to specialize in the production of goods and services that they have a comparative advantage in making. • Incentives: factors that motivate or incentivize you o Positive incentives: things that attract you (such as receiving payment) o Negative incentives: things that repel you (such paying a lot of money) o Direct incentives: do this, you get that (such as “cut my grass for $30, the offer serves its intended purpose) o Indirect incentives: an unintended side effect, not what it was meant to do ▪ Unintended consequence: an unpredicted/unwanted result of change (ex: people living off food stamps instead of using them to get back on their feet) • Trade-offs: doing one thing often means that you will not have the time, resources, or energy to do something else. o All choices involve trade-offs, meaning nothing is technically free • Opportunity cost: the highest-valued alternative that must be sacrificed to get something else. (Ex: if I want pears and apples but can only pick one, if I pick an apple then pears are the opportunity cost) o The key to making the best possible decision is to minimize your opportunity cost by selecting the option that gives you the largest benefit. o Lower opportunity cost: you miss out on less/something that means less o If it’s $30 for event A but you get paid $20 for B, the opportunity cost of A is $50 • Economic thinking involves a purposeful evaluation of the available opportunities to make the best decision possible • Marginal analysis: breaking down decisions into smaller parts/requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost. o Marginal cost: the negative consequences of an action o Marginal benefit: the potential positives of an action • Markets: bringing buyers and sellers together to exchange goods and services • Circular flow: how resources, final goods, and services flow throughout the economy o Households: consumers o Firms: businesses ▪ Households want the goods and services produced by the firms, and firms want the resources owned by the households in order to make goods and provide services. The circular flow shows how households get the things firms produce and how firms acquire the resources to produce those things. o Product market: households are buyers, firms are the sellers (more familiar type) o Resource market: household is the seller, firms are the buyer (such as the labor market) • Trade: the voluntary exchange of goods and services between 2+ parties • Comparative advantage: the situation in which an individual, business, or country can produce at a lower opportunity cost than a competitor can. o Harnesses specialization (specific skills and focuses) • An economy requires o People with wants and needs o Decisions on how to allocate resources o • Resources in limited supply Consequences of globalized trade for a developed country importing goods are lower labor costs and lower prices • Consumer surplus: the difference between what a consumer is willing to pay and what they do o if you get something for X but would have paid y (which is more) then you gain the value of y-x