Economics Test 1 Notes: Macroeconomics and Microeconomics Principles - Prof. William L. Be, Study notes of Economics

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Economics Test 1 Notes

Macroeconomics- relationships are complex, Large Lags- everything takes time in economics. When lags occur we raise issues on what really causes problems. Scarcity- exists cause nature does not provide us with the resources to produce enough godds and services to satisfy out material wants. Economic Problems-  Unlimited wants  Limited resources Implications of Scarcity  Can’t have everything we want  Getting more of one thing implies giving up something else Opportunity Cost- When we make a choice in the face of scarcity, we give up opportunity to do something else. Economics is a materialistic science that is concerned with the production and distribution of goods and services. Basic Economic Questions..  What goods and services should be produced?  How should they be produces?  For whom should these goods and services be produced?  Countries choose economic systems to address these questions Alternative Economic Systems  Traditional Economy o An economic system that answers the basic economic questions the way they have always been answered. o Downside- doesn’t handle change good o What to do after change???

 Centrally Planned Economy (Responsible) o We will make someone responsible for things o Always have to make plans and predict o Cant predict change  Market Based System o People who can afford resource, gets resource o Rely on Profit Motive to address 3 basic questions o Profits = total revenues + total costs o (whom) (what) (how) Factors of Production “ingredients” from which goods and services are produced. Economic Resources 4 Basic Groups Land- natural resources that we use to produce goods and services location “gifts of nature” Owners of land receive rent from the producers who use these resources Labor- the work time and work effort that people devote to produce goods and services Labor includes both the physical effort and skills Economists call skills ‘human capital’ Payments called wages Capital- tools, instruments, machines, building, and other items that have been produces in the past and that business now use to produce goods. Owners of capital good receive interest for the use of their productive resources Entrepreneurship- organize labor, land and capital to produce goods and sevices Vision to do something Payments called profits Macroecomics- the study og the aggreavate (total) effects on the national economy and the global economy that individuals, businessmen, and government meke”

Produce more. Address the economic problem of scarcity by attempting to increase total (aggregate) output and reduce unemployment. Alternative in dealing with economic problems: Microeconomics- study of choices that individuals and businesses make and the way these choice interact and are influenced by governments Markets- bringing buyers and sellers together Answers to economic problem- use resources in such a way to satisfy as many people. Produce more efficiently Microeconomics address the problem by placing emphasis on efficiency in the production and distribution of goods and services. Positive Economics-  Positive statements are about what is  We can test a positive statement by checking it against the facts o Ex: it is raining outside o Predictions o If-then relationships  Used to develop theories  Make predictions  Attempt to eliminate value judgements o Hard to do this because we are all people studying people Examples- an across the board income tax cut will help stimulate the econmy and reduce the unemployment rate. An across the board income tax cut will benefit wealthy tax payers more than it benefits poor tax payers Normative Economics-  About what ought to be  Statements depend on values and cannot be tested  Opinions  Characteristics- o Should-should not statements o Often are extensions of positive statements

o Applied to government policy o Based on personal value judgement Examples- the US should implement an across the board income tax cut… The US should not implement an across the board income tax cut… Disagreement Among Economists and Sources of These Disagreements Because normative statements are based on value judgements, which cant be verified, economists (and others) are more likely to disagree on normative than on positive statements Economic Theories (models) Represent simplified views of the world that help us understand the world, predict the effect of changes in outside forces on the world, and create policy to change the world. Function of Theories-  Understanding  Predicting  Policy making Building a Theory – The Scientific Method “refers to a body of techniques for investigating phenomena, acquiring new knowledge, or correction and integrating previous knowledge”

1. Observation
2. Measurement
3. Assumptions
4. Hypothesis
5. Testing Observation - looking at world events and questioning why they occur Measurement- collection information about observed phenomena Making Assumptions- using general statements about the world to simplify and reduce the scope of a model  Foundation of building a theory  Assumptions are everywhere Hypothesis- drawing a tentative conclusion based on assumptions and logic

Testing- Comparing the models conclusions to historical and future events Never stop testing Production Possibility Factor (PPF)  “boundary between combinations of goods and services that can be produced and combinations that can’t be produced given the available factors of production.”  At any point of the PPF, the economy is operating at maximum compacity.  Use models as illustrating  Pictures in graphs Assumptions of PPF  When economy is operating on the PPF o It resources are fully employed o It is operating at maximum efficiency o Its technology is being fully utilized final assumptions- in order to simplify our analysis, we assume the economy produces only two classes of goods. Consumer and capital