Macro Economics Ch. 1 "Ten Principles of Economics"

the limited nature of society's resources.

1.the study of how society manages its scarce resources 2. an economy is just a group of people dealing with one another as they go about their lives.

the property of society getting the most it can from its scarce resources. 2. Efficiency means that society is getting the maximum benefits from its scarce resources. 3.In other words, efficiency refers to the SIZE of the economic pie.

the property of distributing economic prosperity uniformly among the members of society 2.Equality means that those benefits are distributed uniformly among society's members. 3.equality refers to how the pie is divided into INDIVIDUAL SLICES.

# 1 : People Face Trade-offs [Equality v. Efficency] # 2: The Cost of Something Is What You Give Up to Get It [ Opportunity Cost] # 3: Rational People think at the Margin [Marginal Change] # 4: People Respond to Incentives [ Incentives]

1.Making decisions requires trading off 1 goal against another. 2.Another trade-off society faces is between efficiency and equality. Efficiency means that society is getting the maximum benefits from its scarce resources. Equality means that those benefits are distributed uniformly among society's members. In other words, efficiency refers to the size of the economic pie, and equality refers to how the pie is divided into individual slices. 3.Tradeoff: To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic "pie." Examples of Common Trade-offs: A.Going to a party the night before your midterm leaves less time for studying. B.Having more money to buy stuff requires working longer hours, which leaves less time for leisure. C.Protecting the environment requires resources that could otherwise be used to produce consumer goods.

whatever must be given up to obtain some item. 2.It is the relevant cost for decision making.

1.making decisions requires comparing the costs and benefits of alternative courses of action. 2.The opportunity cost of any item is whatever must be given up to obtain it. It is the relevant cost for decision making. Examples of Opportunity Cost: Examples: A.The opportunity cost of... ...going to college for a year is not just the tuition, books, and fees, but also the foregone wages. B. Opportunity cost of seeing a movie is not just the price of the ticket, but the value of the time you spend in the theater.

people who systematically and purposefully do the best they can to achieve their objectives,given the available opportunities.

a small incremental adjustment to a plan of action.

1.Rational people systematically and purposefully do the best they can to achieve their objectives. Make decisions by evaluating costs and benefits of marginal changes, incremental adjustments to an existing plan. Examples: A.When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education. B.When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue.

something that induces a person to act.

Incentive: something that induces a person to act, i.e. the prospect of a reward or punishment. Rational people respond to incentives. Examples of People Responding to Incentives A.When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs. B.When cigarette taxes increase, teen smoking falls.

A. Trade can make everyone better off. B. Markets are usually a good way to organize economic activity. C. Governments can sometimes improve market outcomes.

1. Trade between two countries can make each country better off. Example: Sony(Japan) v. Apple(US) 2.Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services. 3.Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods. 4.Countries also benefit from trade and specialization: Get a better price abroad for goods they produce Buy other goods more cheaply from abroad than could be produced at home

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services.

1. Market: a group of buyers and sellers (need not be in a single location) 2."Organize economic activity" means determining what goods to produce? how to produce them? how much of each to produce? who gets them? 3. A MARKET ECONOMY allocates resources through the decentralized decisions of many households and firms as they interact in markets. 4.Famous insight by Adam Smith in The Wealth of Nations (1776): Each of these households and firms acts as if "led by an invisible hand" to promote general economic well-being. 5.The invisible hand works through the price system: The interaction of buyers and sellers determines prices. -Each price reflects the good's value to buyers and the cost of producing the good. -Prices guide self-interested households and firms to make decisions that, in many cases, maximize society's economic well-being.

the ability of an individual to own and exercise control over scarce resources

the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. .

a situation in which a market left on its own fails to allocate resources efficiently.

the impact of one person's actions on the well-being of a bystander.

1.Important role for govt: enforce property rights (with police, courts) 2.People are less inclined to work, produce, invest, or purchase if large risk of their property being stolen. 3. Market failure: when the market fails to allocate society's resources efficiently Causes of market failure: 4.Externalities, when the production or consumption of a good affects bystanders (e.g. pollution) 5.Market power, a single buyer or seller has substantial influence on market price (e.g. monopoly) Public policy may promote efficiency. 6.Govt may alter market outcome to promote equity. If the market's distribution of economic well-being is not desirable, tax or welfare policies can change how the economic "pie" is divided.

1.A Country's Standard of Living Depends on Its Ability to Produce Goods & Services 2. Prices Rise When the Government Prints Too Much Money 3. Society Faces a Short-run Tradeoff Between Inflation and Unemployment

the quantity of goods and services produced from each unit of labor input.

1.The most important determinant of living standards: productivity, the amount of goods and services produced per unit of labor. 2.Productivity depends on the equipment, skills, and technology available to workers. 3.Other factors (e.g., labor unions, competition from abroad) have far less impact on living standards.

an increase in the overall level of prices in the economy.

1.Inflation: increases in the general level of prices. 2.In the long run, inflation is almost always caused by excessive growth in the quantity of money, which causes the value of money to fall. 3.The faster the govt creates money, the greater the inflation rate.

fluctuations in economic activity, such as employment and production

1.In the short-run (1-2 years), many economic policies push inflation and unemployment in opposite directions. 2.Other factors can make this tradeoff more or less favorable, but the tradeoff is always present.