Macroeconomics
Chapter2
3 Basic questions that what must be answered
1. What gets produced?
2. How is it produced?
3. Who gets what is produced?
-Every society has some system or process that transforms its scarce resources into useful
goods and services. In doing so, it must decide what gets produced, how it is produced, and
to whom it is distributed.
The primary resources that must be allocated are land, labor, and capital.
Resources
- are the inputs provide by nature or previous generations that can be used directly or
indirectly to satisfy human wants
- Human wants are unlimited but resource are not
Limited or scarce resources force individuals and societies to chose
3 categories of resources
1. Land- Shortland expression for all natural resources provided by nature
2. Labor- A mental and physical capacity of workers to produce goods and services
- Entrepreneurship < the creative ability of individuals to seek profits by
taking risks and combining resources to produce innovative products>
3. Captial - Things that are produced and then used in the production of other goods
and services.
factors of production (or factors) The inputs into the process of production. Another term
for resources
production The process that transforms scarce resources into useful goods and services.
outputs Goods and services of value to households.
Scarcity, Choice, and Opportunity Cost
-
Every society has a system or process that works to transform the resources
No society has enough resources to produce all the goods and services
necessary to satisfy sll human wants.
Scarcity and Choice in an Economy of Two or More

theory of comparative advantage Ricardo’s theory that specialization and free trade
will benefit all trading parties, even those that may be “absolutely” more efficient
producers.
1. absolute advantage A producer has an absolute advantage over another in the
production of a good or service if he or she can produce that product using fewer
resources (a lower absolute cost per unit).
2. comparative advantage A producer has a comparative advantage over another in
the production of a good or service if he or she can produce that product at a lower
opportunity cost.
Weighing Present and Expected Future Costs and Benefits
-We trade off present and future benefits in small ways all the time.
- Very often we find ourselves weighing benefits available today against benefits available
tomorrow
- The simplest example of trading present for future benefits is the act of saving
Goods for the present: Consumer goods

Goods produced for present consumption
Goods fot the future:Capital goods

Goods produced for future benefits
The Production Possibility Frontier
- A graph that shows all the combinations of goods and services that can be
produced if all of society’s resources are used efficiently.
The PPF demonstrates…
1.Full employment and production efficiency – resources are employed fully at” least cost”
2.Opportunity cost- when resources are employed fully and efficiently, it can produce more
of 1 good only by reducing production of another good
-
PPF slopes downward or has negative slope
The value of the slope PPF is called” Marginal rate of transformation”(MRT).
3.Law of increasing opportunity cost- The more additional unit of good being produced, the
more alterntive good must be sacrified if the economy’s resource are already being used
efficiently
Points show on PPF…
1.Point inside the PPF( Unemployment or Production inefficiency)
-
Shows combinations that resource are not fully employed or fully employed
but using them inefficiently
This point is “Attainable but inefficient”
2.Points on, along the PPF(Fully employment and production efficiency)
-
Shows combinations that resources are employed fully and efficiently
This point is “ Attainable and efficient”
3.Points outside the PPF(Unattainable)
-
Show “ unattainable” combination given the resource ans technology
available
It can be possible, it there is economic growth
The Efficient Mix of Output

To be efficient, an economy must produce what people want
economic growth An increase in the total output of an economy. Growth occurs when a
society acquires new resources or when it learns to produce more using existing resources.
Economic Systems and the Role of Government
1.command economy
- An economy in which a central government either directly or indirectly sets output
targets, incomes, and prices.
- Government answes the what,how,who questions
-Government involvement may improve the effiecncy and fairness of the allocation of a
nations resources
2.laissez-faire economy (The free market) -Literally from the French: “allow [them] to
do.” An economy in which individual people and firms pursue their own self-interest
without any central direction or regulation.


consumer sovereignty(=What) - The idea that consumers ultimately dictate
what will be produced (or not produced) by choosing what to purchase (and
what not to purchase).
Individual Production Decisions (free enterprise) - The freedom of
individuals to start and operate private businesses in search of profits.
Distribution of output
-The amount that any one household gets depends on its income and wealth.
Income is the amount that a household earns each year. It comes in a number of forms:
wages, salaries, interest, and the like.
Wealth is the amount that households have accumulated out of past income through saving
or inheritance.
Price theory ( the basic coordinating mechanism)
-Price is the amout that a product sells per unit, and it reflects what society is willing
to pay.
3. Mixed Systems, Markets, and Governments
-The differences between command economies and laissez-faire economies in their pure
forms are enormous.
-In fact, these pure forms do not exist in the world; all real systems are in some sense
“mixed.”
References
-Assumption University, Principles of Macroeconomics, 11𝑡ℎ
edition