Macroeconomics 1/08/2013 Notes (Chapter 1):
1. Economics is a Social Science.
2. Economics is a form of applied logic (reasoning).
3. Economists study how individuals make decisions about:
a. Working and hiring
b. Buying consumer goods and services
c. Producing goods and services for sale
d. Building factories, equipment, and tools
e. Building and buying houses
f. Setting prices and reacting to them
g. Coordinating activities in the economy
h. Importing goods
4. Economists study the reasoning that drive economic decisions and outcomes
5. One might think of economics as the study of unintended consequences.
6. Understanding causes and effects is critical to:
a. Understanding the ultimate consequences of economic events and
b. Effective and responsible policy making
c. Not all causes and effects are analyzed.
d. We need to isolate causes and effects from things that occur together
7. Economics is the scientific study of how scarce resources are allocated among unlimited
a. Scientific method (based on observation)
i. Look at human behavior
b. Empirical science (not experimental) theories are tested actual data.
i. Real world experiments. Modeling.
8. Human Nature and Reality:
a. People have unlimited wants.
i. Most people in the economy want more. Ex) I have a car. I want a new car.
b. People have limited resources to acquire the things they want.
c. As a result, they must make choices.
d. Choices involve pursuing some things while forgoing others.
i. Must be willing to give up something to gain another.
9. Scarcity, Goods, and Bads
a. Any item that costs something must be scarce.
i. Anything with a price on it is called an economic good- these include goods
ii. A free good is a good for which there is no scarcity.
1. Ex) Barbershop. Unlimited quantity
iii. An Economic bad is anything you want to get rid of.
1. Ex) Pollution
b. Is clean air free? i. There is a Chinese billionaire canning and selling fresh air to those who are living
in villages covered in smog and are lacking clean air.
ii. Most countries have banned the sale of drugs, human trafficking, organs,
iii. Illegal agents make money by selling illegal items on the black market.
iv. As long as there is want and some sort of availability there is a way to sell them,
resulting in the continuation of illegal actions.
v. Who sets the price for these items? What is the result of that?
10. Clarifying Concepts:
a. Scarcity means that not enough is available for free.
i. There are limited availability for a set price for the items wanted.
ii. During military times there was a rationing. A way of allocating goods because
there was not enough for everyone.
iii. There is something wrong in the distribution network.
b. A shortage occurs when not enough is available at the current price. A shortage is a
problem of price.
i. There is a limited availability total, yet an unlimited want.
ii. Coal and gas continue to sell at increasing prices even though they are harmful
to the environment because the sun has yet to be sellable. The sun is a free
c. Poverty occurs when the goods are scarce, and those who need them do not have the
income to obtain them. Poverty is a problem of income.
i. There are unlimited wants so there must be a way/price for these allocated
ii. There is willingness and ability.
1. People in poverty are willing to pay the price, but they do not have the
means are ability to pay.
11. Goods to Produce Goods:
a. Resources are the elements needed to produce goods. Resources are also called:
i. Factors of production
b. They are:
i. Land (includes natural resources)
ii. Labor (physical and intellectual services of people)
iii. Capital (plant, machinery, equipment, used in production)
1. Pizza Parlor
2. The amount of money you put into the business, whether it be your
own or a loan
c. They are all scarce resources
i. We want to turn these services into wanted goods that can be sold for a profit.
12. Scarcity and Choice
a. Scarcity necessitates making choices.
b. 3 basic questions: i. What to produce?
1. In a market economy the consumer chooses the products because the
producers will produce what consumers want to buy.
ii. How to produce?
1. What technology the producer will choose to use. Whether it be
technology, outsourcing, labor etc.
2. More capital less labor, more labor less capital. Choices.
iii. For whom to produce?
1. Those who are able to pay for the goods get the goods.
2. The person willing to pay the producers price are those who get the
3. Those who are willing to get it for a certain price gain the profit.
4. The market is not always enough. A third market is sometimes
c. Economics is the study of how people choose (individually and collectively) to use
their resources in attempts to satisfy their unlimited wants.
Macroeconomics 1/10/2013 Notes (Chapter 1 cn’t):
1. Economic Agents:
a. Households (consumers)
i. Own resources and are the final consumers of goods and services produced
b. Firms (producers)
i. Produce goods and services using resources
i. Produces government services (or goods) using resources
2. Individual and collective choices