Transcript Basic Economic Concepts

Macro and Micro Economic Concepts
Module 1
Jan 2015
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Economics is the study of scarcity and
choices
Individual choices are decisions made by
individuals about what to do and what not to
do
Suppose someone had $4 and wanted to buy
ice cream. Suppose their favorite brand was
$5 and another brand was $3. This individual
would need to make a choice to buy the
cheaper brand or not buy any at all.
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Economy is a system that coordinates choices
about production with choices about consumption,
and distributes goods and services to the people
who want them.
Market Economy – production and consumption are
the result of decentralized decisions made by many
firms and individuals. Who has this?
Command Economy – industry is publicly owned
and there is a central authority making production
and consumption decisions. Who has this?
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Incentives – rewards and punishments that
motivate particular choices. Command
economies do not have this.
Market economies are free to charge higher
prices when there is a shortage or something
to keep the profits high.
Property rights establish ownership and the
right to trade goods and services with each
other, creating incentives.
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Marginal Analysis – the study of decisions
made on the basis of margin
Marginal Decisions – trade-offs; the cost and
benefit of doing a little bit more or a little bit
less
Marginal Benefit – the gain from doing
something one more time
Marginal Cost – the cost of doing something
one more time
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Both income and time are in limited supply.
An example of this is Black Friday sales. An ad in
the paper may advertise an item on sale at the
store for $15, but on-line it is $20. An individual
pressed for time, may choose to buy on-line. An
individual who has limited money may choose to
go to the store.
A resource is scarce when there is not enough of it
available to satisfy the various ways a society
wants to use it.
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A resource is anything used to produce
something else.
LAND – timber, water, minerals, and other
resources that come from nature
LABOR – the effort of workers
CAPITAL – machinery, buildings, tools, and
everything else used to manufacture goods
and services
ENTREPRENEURSHIP – risk taking, innovation,
and organization of resources for production.
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Opportunity Cost is the value of what you
must give up when you make a particular
choice.
Money or time spent on one thing cannot be
spent on another. If you spend $10 on a CD,
you cannot spend that same $10 on a Subway
sandwich. Same goes for spending an
evening at the movies, you cannot spend that
same time reading a book.
What you choose to give up is the O.C.
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Micro focuses on the choices made by
individuals, households, or firms – the
smaller parts of the economy
Macro focuses on the bigger picture – the
overall ups and downs of the economy,
including the economic aggregates
Economic aggregates – measures of
unemployment rate, the inflation rate, and
gross domestic product (GDP)
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Positive Economics – the branch of economic
analysis that describes the way the economy
actually works – it has definite right or wrong
answers
Normative Economics – makes prescriptions
about the way the economy should work –
how the world should work
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What are the 4 categories of resources?
What type of resource is:
◦ Lawn mower
◦ Sewing a garment
◦ Ice
What is the opportunity cost of studying for your AP
Macro class?
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Which of the following represents resource
scarcity?
◦ I. there is a finite amount of oil.
◦ II. Cities experience an increase in water pollution.
◦ III. VCRs are no longer being made.
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A. I only
B. II only
C. III only
D. I and II only
E. I, II, and III
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Which statements are normative?
◦ I. The money the tax generated this year?
◦ II. How much money would be generated if the tax
increased 10%?
◦ III. Should the tax be increased?
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A.
B.
C.
D.
E.
I only
II only
III only
I and II only
II and III only