Introduction Flashcards
The field of economics is traditionally divided into two broad subfields which are:
Microeconomics and Macroeconomics
Microeconomics is
the study of how households and firms make decisions and how they interact in specific markets.
Macroeconomics is
the study of economy-wide phenomena.
How the economy as a whole works?
Principle 1:
A country’s standard of living depends on its ability to produce goods and services
The most important determinant of living standards is:
Productivity (the amount of goods and services produced per unit of labor)
How the economy as a whole works?
Principle 2:
Prices rise when the government prints too much money
Inflation is
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
How the economy as a whole works?
Principle 3:
Society faces a short-run tradeoff between inflation and unemployment
Short-run effects of monetary injections:
- Stimulates the overall level of spending and the demand for goods and services.
- Firms raise prices, hire more workers, produce more goods and services.
- Lower unemployment.
What are two things that an economist must use to study the economy?
- Assumptions
- Models (diagrams and equations)
Assumptions can
Simplify the complex world and make it easier to understand.
Models
- Omit many details
- Allow us to see what’s truly important
- Built with assumptions
- Simplify reality to improve our understanding of it
The circular-flow diagram is
A visual model of the economy, shows how dollars flow through markets among households and firms.
Two types of “actors” in the circular flow diagram are
Households and firms
