Basic Economic Concepts

Macro and Micro Economic ConceptsModule 1Jan 2015

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.

It’s all about choices

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?

Economies

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.

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

Marginal Analysis

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.

Scarcity

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.

Resources

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.

Opportunity Cost

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)

Micro vs Macro

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

Positive vs Normative

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?

REVIEW

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.

A. I only B. II only C. III only D. I and II only E. I, II, and III

REVIEW

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?

A. I only B. II only C. III only D. I and II only E. II and III only

REVIEW