Basic Macroeconomics Flashcards
Economics is divided into 2 subfields
- Macroeconomics
- Microeconomics
– study of the economy as a whole. Includes inflation
unemployment and economic growth
- Macroeconomics
– study of how households and firms make decisions and how
they interact in markets
- Microeconomics
study of scarce resources
Economics
Importance of Microeconomics
- Understanding the behavior of firms and households is
crucial in forming a robust and functional economic
policies - As economic managers we should learn to use economic
policies as incentives for good behavior
Terminologies
- Market
- Households
- Firms
– a place where households and firms interact where they buy
and sell goods
- Market
– buy goods and consume goods and services
– own and sell factors of production
– maximize utility
- Households
– produce and sell goods and services
– hire and use factors of production
– maximize profits
- Firms
The Economist is like a Scientist
- We mostly use theory and observation since conducting
experiments in economics is often impractical - As a substitute for laboratory experiments, we economists
pay close attention to the natural experiments offered by
history - We also make assumptions to simplify the world’s
complexities and to make it easier to understand - Economic models unlike other scientific models in the
field of biology are often in the form of graphs and
equations
- We mostly use ________ and __________ since conducting
experiments in economics is often impractical - As a substitute for laboratory experiments, we economists
pay close attention to the _____________ offered by
history
The Economist is like a Scientist
theory and observation
natural experiments
- We also make __________ to simplify the world’s
complexities and to make it easier to understand - Economic models unlike other scientific models in the
field of biology are often in the form of _______ and
__________
assumptions
graphs and equations
Circular flow of Model
- Markets for Goods and Services
- Households
- Markets for Factors of Production
- Firms
- Firms sell
- Households buy
Markets for Goods and Services
- Buy and consume goods and services
- Own and sell factors of production
Households
- Households sell
- Firms buy
Markets for Factors of Production
- Produce and sell goods and services
- Hire and use factors of production
Firms
The circular flow model
(RED) Markets for Goods and Services —-> Goods and services bought —-> Households —–> Labor, land, and capital —-> Markets for Factors of production —–> Factors of production —-> Firms —–> Goods and services sold —-> Markets for Goods and Services
(GREEN) Markets for Goods and Services <——– Spending <———Households <——Income <——Markets for Factors of Production <—— Wages, rent, and profit <—–Firms <——– Revenue <—— Markets for Goods and Services
(RED) = Flow of inputs and outputs
(GREEN) = Flow of dollars
4 factors of production
- Land
- Labor
- Capital
- Entrepreneurship
- any natural resource used to produce goods and
services
Land
- effort that people contribute to the production of
goods and services
Labor
- machinery, tools and buildings humans use to
produce goods and services
Capital
- the ability to combine the factors of
production to make profit
Entrepreneurship
In economics we don’t see money as _________ rather as ____________.
capital
measurement
It is a graft that shows the combinations of output that the
economy can possibly produce given the available factors
of production and the available technology
Production Possibilities Frontier (PPF) Curve
is the study of efficient allocation of
scarce resources,
Economics
shows the optimal
combination of goods that can be produced, given the
resources available.
Production Possibilities Frontier (PPF) Curve
It also shows the Trade off that occurs when resources
are maximized
Production Possibilities Frontier (PPF) Curve
4 Factors of production applied
- Land
- Labor
- Capital
- Entrepreneurship
- Plant/ Factory where the manufacture of cars and
computers would take place
- Land
- Workers engaged in the manufacture of goods
- Labor
- Machineries/ tools used in building cars and
computers
- Capital
- The businessmen engaged in the
business of production of these goods
- Entrepreneurship
Application of concept of trade off
- When resources are maxmized, to increase production of
one good, we’ll have to sacrifice production of the other - For example, in our graph, if we increase our production
of cars from 600 to 700, we will have to lessen our
production of computers from 2,200 to 2,000 - The 200, decrease in production of computers is called
the opportunity cost to increase the car production to 100
Trade- off explained
- Since resources are scarce, people have to sacrifice
something to get something in return - Opportunity cost is that whatever must be given up to
obtain something in return
is that whatever must be given up to
obtain something in return
Opportunity cost
What happens during technological advancements
- expands society’s set of opportunities
- more of both goods can be produced
- Take for example a technological advancement in the
computer industry
