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Principles of Macroeconomics

by: Grayce Heidenreich

Principles of Macroeconomics EC 202

Marketplace > North Carolina State University > Economcs > EC 202 > Principles of Macroeconomics
Grayce Heidenreich
GPA 3.84

O. Movchan

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O. Movchan
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This 2 page Class Notes was uploaded by Grayce Heidenreich on Thursday October 15, 2015. The Class Notes belongs to EC 202 at North Carolina State University taught by O. Movchan in Fall. Since its upload, it has received 31 views. For similar materials see /class/223922/ec-202-north-carolina-state-university in Economcs at North Carolina State University.

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Date Created: 10/15/15
NCSU EC 202 PRINCIPLES OF MACROECONOMICS Department of Economics Summer 2008 1 Economics Foundations and Models 1 Reasons to study economics Understand what s going on Make right decisions Prepare for other careers To be an informed voter Become an economist Career information for economists can be found at the Bureau of Labor Statistics Web site httpstatsblsgovocoocos055htm For example the median annual earnings of economists were 77010 in 2006 2 Scarcity and economics as a science People must make choices as they try to attain their goals The choices people make reflect the tradeoffs made necessary by scarcity O Scarcity is the situation in which unlimited wants exceed the limited resources available to fulfill those wants 0 Economics is the study of the choices people make to attain their goals given their scarce resources 0 An economic model is a simplified version of reality used to analyze real world economic situations 3 Markets 0 A market is a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade The image many people have of a market is a supermarket neighborhood store or shopping mall But some markets do not have an easily identifiable image Many people make online purchases with their computers In these markets buyers and sellers do not see each other and may be located hundreds of miles from one another For some goods for example books and CDs is it not necessary for buyers to see or test merchandise before they buy it For other goods clothing food automobiles some personal contact is important In many of these cases sellers have a physical location to which buyers must travel to try out the product There are also markets in which sellers travel to their buyers Doortodoor salespeople are one well known example Economists make three important assumptions about the way people interact in markets 0 First people are rational This means that buyers and sellers use all available information to achieve their goals 0 Second people act in response to economic incentives 0 Third optimal decisions are made at the margin The terms marginal benefit and marginal cost refer to the additional benefits and costs of a decision Economists reason that the best or optimal decision is to continue any activity up to the point where the marginal benefit equals the marginal cost 4 The Economic Problem That Every Society Must Solve Any society faces the economic problem that it has only a limited amount of economic resources and so can produce only a limited amount of goods and services 0 Society faces tradeoffs A tradeoff is the idea that because of scarcity producing more of one good or service means producing less of another good or service 0 Tradeoffs force society to answer three fundamental questions 0 What goods and services will be produced 0 How will the goods and services be produced 0 Who will receive the goods and services 5 Societies organize their economies in two main ways 0 A centrally planned economy is an economy in which the government decides how economic resources will be allocated O A market economy is an economy in which the decisions of households and firms interacting in markets allocate economic resources Societies organize their economies in two main ways A centrally planned economy is an economy in which the government decides how economic resources will be allocated From 1917 to 1991 the Soviet Union was the most important centrally planned economy Today there are few such economies Examples are Cuba and North Korea A market economy is an economy in which the decisions of households and firms interacting in markets allocate economic resources The United States Canada Western Europe and Japan all have market economies Privately owned firms must produce and sell goods and services consumers want to stay in business An individual s income is determined by the payments he receives for what he has to sell The Modern Mixed Econom The high rates of unemployment and business bankruptcies of the Great Depression caused a dramatic increase in government intervention in the economy in the United States and other market economies Some government intervention is designed to raise the incomes of the elderly the sick and people with limited skills In recent years government intervention has expanded to meet social goals such as protection of the environment and the promotion of civil rights 0 Some economists argue that government intervention makes it more accurate to refer to the US and other nations as mixed economies rather than market economies O A mixed economy is an economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources 0 In recent years China has moved from being a centrally planned economy to being a more mixed economy Production of most goods is determined in markets 6 Economic Models 0 Models are simplified versions of reality used to analyze realworld situations To make a model usually economists use assumptions 0 Simplifying assumption makes the model simpler but does not distort conclusions 0 Critical assumption affects the models conclusion in the important way 7 Microeconomics and Macroeconomics O Microeconomics is the study of how households and businesses make choices how they interact in markets and how the government attempts to influence their choices 0 Macroeconomics is the study of the economy as a whole including topics such as inflation unemployment and economic growth


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