Principles of Macroeconomics
Chapter 1- Economic Issues and Concepts
What is Economics?
- Economics is the study of the use of scarce resources to satisfy unlimited human wants.
- Scarcity indicates that resources are not unlimited and that if resources were not scarce, then choices
would not have to be made.
What are the factions of production/input?
- Land: All natural endowments such as arable land, forests, lakes, crude oil, and minerals.
- Labor: The mental/physical human resources, like entrepreneurial capacity and management skills.
- Capital: All manufactured (produced) aids to production, such as tools, machinery, and buildings.
What are goods and services?
- Goods are tangible, while Services are intangible.
- The act of making goods and services is called production and the act of using them is consumption.
What is Opportunity Cost?
- It is the value of the next best alternative that is forgone when one alternative is chosen.
- It can be shown using a budget line, which is a negatively sloped line that indicates the boundary
between attainable (efficient) and unattainable (inefficient) combinations.
- The opportunity cost for a country is shown using a production possibilities boundary (PPB), a curve
showing which alternative combinations of output can be attained if all available resources are used
efficiently.
What is the law of increasing opportunity costs?
- It states that as the production of one good increases, the opportunity cost of producing an additional
unit rises.
What are the 4 key economic questions?
1. What is produced and how? Resources must be allocated among alternative uses to determine which
goods are produced, and which are not. (MICRO)
2. What is consumed? By whom? What determines how a country’s total output is distributed among its
residents? Why do some get a lot and others only a little, should governments try to alter it? (MICRO)
3. Why are resources sometimes unused? If a society is not using all of its resources, then the society is
operating inside the PPB. Why would this happen? How should governments deal with it? (MACRO)
4. Is productive capacity growing? Growth in productive capacity is shown by an outward shift of the PPB,
making previously unattainable points now attainable. (MACRO)
What is Macroeconomics?
- The study of the determination of economic aggregates such as total output, employment, and growth.
What are the characteristics of a Market Economy?
- Self-Organizing, not organized by the central authority
- Efficient, which means that the resources available are organized to produce goods and services while
using the least amount of resources.
- Focused on Incentives, buy low and sell high. Maximizing consumers and making Marginal decisions to
help them determine if they are better off producing one more/less of a good.
