Chapter 1 - Ten Principles of Macroeconomics
Chapter 1 - Ten Principles of Macroeconomics Econ 110
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This 5 page Class Notes was uploaded by Erin Payne on Monday May 9, 2016. The Class Notes belongs to Econ 110 at Kansas State University taught by Dr. Al-Hamdi in Spring 2016. Since its upload, it has received 13 views. For similar materials see principles of Macroeconomics in Economcs at Kansas State University.
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Date Created: 05/09/16
Week 1 & Week 2 January 19th January 29th Spring 201 Introduction Chapter 1 Notes Ten Principles of Macroeconomics ● Household and economies have much in common. ● Households face many decisions ○ Allocate scarce resources. ■ Ability, effort, and desire. ○ Society faces many decisions. ■ Allocate resources and outputs. ● Resources are scarce ● Scarcity the limited nature of society’s resources. ○ Society has limited resources and therefore cannot produce all the goods and services people wish to have. ● Economies how society manages its scarce resources, how people make decisions. ● Economists study: ○ How people make decisions (ex. Work, buy, save, invest). ○ How people interact with one another. ○ Analyze forces and trends that affect economics as a whole. ■ Growth in average income. ■ Unemployment fractions. ■ Rate of which prices are rising. ● How People Make Decisions: ○ People face tradeoffs. ○ The cost of something is what you give up to get it. ○ Rational people think at the margin. ○ People respond to incentives. ● How People Interact: ○ Trade can make everyone better off. ○ Markets are usually a good way to organize economic activity. ○ Governments can sometimes improve market outcomes. ● How the Economy Works as a Whole: ○ A country’s standard of living depends on its ability to produce goods and services. ○ Prices rise when the government prints too much money. ○ Society faces a shortrun tradeoff between inflation and unemployment. ● Principle 1: People Face Tradeoffs ○ “There ain’t no such thing as a free lunch.” Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided b instructor. Week 1 & Week 2 January 19th January 29th Spring 2016 ■ To get something we want we must usually give up something else in return. ○ Making decisions. ■ Trade off one goal against another. ○ Common tradeoffs: ■ Student = time. ■ Parents = income. ■ Society = national defense vs. consumer goods, clean environment vs. high income, efficiency vs. equality. ● Efficiency society getting the maximum benefits from its scarce resources. ○ ∴Size of the economic pie. ● Equality distributing economic prosperity uniformly among the members of society. ○ ∴How the pie is divided. ● Principle 2: The Cost of Something is What You Give Up to Get It ○ People face tradeoffs. ■ Make decisions. ● Compare cost with benefits of alternatives. ○ Opportunity cost ■ Whatever must be given up to obtain some item. ● Principle 3: Rational People Think at the Margin ○ Rational people ■ Systematically and purposefully do the best they can to achieve their objectives. ○ Marginal changes ■ Small incremental adjustments to a plan of action. ○ Rational decision maker ■ Make decisions by comparing marginal benefits and marginal costs. ■ Take action only if marginal benefits > marginal cost. ● Principle 4: People Respond to Incentives ○ “People are motivated by personal benefits.” ○ Incentive ■ Something that induces a person to act. ■ Higher price ● Buyers consume less. ● Sellers produce more. ■ Public policy ● Changes costs or benefits. ● Change people’s behavior. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided y instructor. Week 1 & Week 2 January 19th January 29th Spring 201 ● Principle 5: Trade Can Make Everyone Better Off ○ Allows each person to specialize in the activities they do best. ○ Enjoy a greater variety of goods and services at a lower cost. ● Principle 6: Markets are Usually a Good Way to Organize Economic Activity ○ Communist countries, central planning ■ Government officials (central planning) ● Allocate economy’s scarce resources. ○ What goods and services were produced. ○ How much was produced. ○ Who produced and consumed these goods and services. ○ Market economy, allocation of resources ■ Through decentralized decisions of many firms and households. ■ As they interact in markets for goods and services. ■ Guided by prices and selfinterest. ○ Adam Smith’s “Invisible Hand” ■ Households and firms interacting in markets. ● Act as if they are guided by an “invisible hand”. ● Leads them to desirable market outcomes. ■ Corollary: Government intervention ● Prevents the invisible hand’s ability to coordinate the decisions of the households and firms that make up the economy. ● Principle 7: Governments Can Sometimes Improve Market Outcomes ○ We need government ■ Enforce rules and maintain institutions that are key to a market economy. ■ Enforce property rights. ■ Promote efficiency, avoid market failure. ■ Promote equality, avoid disparities in economic well being. ○ Property rights ■ Ability of an individual to own and exercise control over scarce resources. ○ Market failure ■ Situation in which the market left on its own fails to allocate resources efficiently. ■ Externalities. ■ Market power. ○ Externality ■ Impact of one person’s actions on the wellbeing of a bystander. ■ Pollution. ● Production = Pollution/Consequences (∴Market failure) Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided b instructor. Week 1 & Week 2 January 19th January 29th Spring 2016 ○ Market power ■ Ability of a single economic actor (or small group of actors) to have a substantial influence on market prices. ○ Disparities in economic well being ■ Market economy rewards people. ● According to their ability to produce things that other people are willing to pay for. ● “Lessening the gap.” ■ Government intervention, public policies ● Aim to achieve a more equal distribution of economic wellbeing. ● May diminish inequality. ● Process far from perfect. ● Principle 8: A Country’s Standard of Living Depends on its Ability to Produce Goods and Services ○ Large difference in living standards. ■ Among countries. ■ Over time. ○ Average annual income, 2011. ■ $48,000 (US); $9,000 (Mexico). ■ $5,000 (China); $1,200 (Nigeria). ○ Explanation: differences in productivity. ● Productivity ○ Quantity of goods and services produced from each unit of labor input. ○ Higher productivity. ■ Higher standard of living. ○ Growth rate of nation’s productivity. ■ Determines growth rate of its average income. ○ “Even with less resources, higher income because increased productivity.” ● Principle 9: Prices Rise When the Government Prints Too Much Money ○ Inflation ■ An increase in the overall level of prices in the economy. ○ Causes for large or persistent inflation. ■ Growth in quantity of money. ● Value of money falls. ● Principle 10: Society Faces on Shortrun Tradeoff Between Inflation and Unemployment ○ Shortrun effects of monetary injections: ■ Stimulates the overall level of spending. ● Higher demand for goods and services. Notes Key:Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by instructor. Week 1 & Week 2 January 19th January 29th Spring 2016 ■ Firms raise prices; hire more workers; produce more goods and services. ■ Lower unemployment. ○ Shortrun tradeoff between unemployment and inflation. ■ Keyroleanalysis of business cycle. ○ Business cycle ■ Fluctuations in economic activity. ● Employment. ● Production. Ten Principles of Economies How People Make Decisions 1. People Face Tradeoffs 2. The Cost of Something is What You Give Up to Get It 3. Rational People Think at the Margin 4. People Respond to Incentives How People Interact 5. Trade Can Make Everyone Better Off 6. Markets are Usually a Good Way to Organize Economic Activity 7. Governments Can Sometimes Improve Market Outcomes How the Economy as a Whole Works 8. A Country’s Standard of Living Depends on its Ability to Produce Goods and Services 9. Prices Rise When the Government Prints Too Much Money 10. Society Faces a ShortRun Tradeoff Between Inflation and Unemployment Notes Key: Bolded texts = most important facts stressed by professor. ∴ symbol = “Therefore” or “In other words”. “ ” = Specific definition or word choice provided by i structor.
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