Macroeconomics Ch. 1 & 2 Notes
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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
o Marginal analysis is used for every decision, each option includes
marginal benefits and marginal costs
o 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
o Labor – all physical & mental talents of individuals
o Land – all natural resources
o Capital – all manufactured aids used in producing consumer goods and
services
o Entrepreneurial ability – human resource, the person who takes the
initiative and is a catalyst in the force behind production
o W = wages
R = rent
I = interest P = profit
Production possibilities
o Full employment – use all available resources
o Full production – max possible satisfaction of wants
o Productive efficiency – least costly way
o 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
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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
o Adv: stable & predictable
o Disadv: discourages progress
o Ex: Amish/Southern Farmers
Pure command economies – gov owns land and capital, no entrepreneurs, uses
central planning
o Adv: resources can be redirected very quickly
o Disadv: little economic freedom, no economic incentives, wants & needs
of people not met, inefficient
o 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)
o Adv: freedom provides incentives and wide varieties of goods & services,
efficient
o Disadv: only productive resources are rewarded, market failures, unequal
distribution
o 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
o Authoritarian – relies on central gov planning, allows little economic
freedom
o Democratic socialism – allows election, gov controls major industries,
allows free market for other goods & services
o Capitalism – leaves market decisions to buyers and sellers, gov provides
legal framework for the interaction to occur