Macroeconomics Chapter 1 Terms – Flashcards

Scarcity means human wants for goods and services exceed the available supply.

Supply is limited because resources are limited. Demand, however, is virtually unlimited. Whatever the supply, it seems human nature to want more.

100 people / 10 people per ham = a maximum of 10 hams per month if all residents produce ham. Since consumption is limited by production, the maximum number of hams residents could consume per month is 10.

She is very productive at her consulting job, but not very productive growing vegetables. Time spent consulting would produce far more income than what she could save growing her own vegetables using the same amount of time. So on purely economic grounds, it makes more sense for her to maximize her income by applying her labor to what she does best. In other words, she should specialize in consulting, and use the income she earns to buy the vegetables she needs.

The engineer is better at computer science than at painting. Thus, his time is better spent working for pay at his job and paying a painter to paint his house. Of course, this assumes he does not paint his house for fun!

1. Specialization allows people to do what they do best. 2. Workers who specialize are more likely to think of ways to improve the production process. 3. Specialization may allow for economies of scale that reduce production costs.

1. Most major problems in the world have an economic dimension. 2. It will allow you to make more informed political decisions. 3. It will make you a well-rounded thinker.

Suppose it takes the baker one hour to make an appetizer but ten minutes to make dessert; the chef, on the other hand, takes ten minutes to make an appetizer and an hour to make dessert. If each does both, it takes each an hour and ten minutes per meal (just for appetizers and dessert). But if the chef makes the appetizer and the baker makes the dessert, it only takes 20 minutes per meal; that means they can make three meals per hour.

Unless one can trade, one cannot specialize. If I need food, clothing, shelter, and medicine, I cannot specialize in producing just one of them unless I can trade for the things I do not produce; if I cannot trade, I would have to produce them all myself, even though I am not likely to be good at producing all of them.

A good or service is scarce if we do not have the resources to give everyone all they want of it. Air is not scarce in most circumstances (although clean air might be). Sand in the desert is not scarce. Some would argue that existing ideas are not scarce because in theory an idea can be endlessly shared.

Microeconomics studies the behavior of individual economic actors such as consumers and business firms. Macroeconomics studies the behavior of the overall economy. By analogy, microeconomics looks at the individual pieces of a jigsaw puzzle; macroeconomics looks at the whole puzzle (or large sections of the puzzle).

A few common examples are individual workers, consumers, land owners, and businesses

1. Growth in the standard of living 2. Low unemployment 3. Low inflation

A balanced federal budget or balanced trade are means to an end, not ends in themselves. The objective is to make people better off by raising the standard of living; a balanced federal budget may help us achieve that objective, but a balanced budget per se is not what people care about

If you are at a concert, you might want to stand up to get a better view. But if everyone stood up, nobody would have a better view. So what is true at the individual level may not be true at the aggregate level. Macroeconomic effects may be different from the sum of microeconomic effects.

Keynes said that economics, "is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions." His point was that economics is a way to look at the world, not a set of answers about it.

An economic model is a simplification of reality intended to capture some essential economic relationships. Economic models are judged not on their realism, but on their ability to predict and explain.

Economic models can be presented in words, in the form of an arithmetic example, as a graph, or in the form of equations.

The economy is extremely complex; it is impossible to understand without some degree of abstraction. Theories are deliberate simplifications. Done correctly, a good theory allows us to see important relationships by shielding us from the virtually infinite "noise" of reality

You should build and test a model to help you understand the problem.

Globalization refers to the growing economic, cultural, and political relationships among the peoples of the world. Globalization provides greater economic and cultural variety, and the benefits of increased trade (see next chapter). It also makes the nations of the world more interdependent, which has both good and bad implications.

Market economies have proven very good at raising standards of living. Yet markets also have some failings that can only be solved by central direction; an example of such a failing is pollution, which markets generally do not handle very well. Another reason for command elements in economies is that political elites are always reluctant to give up their authority.

The answer to this question will vary from individual to individual. For the average American, globalization has reduced the prices paid for many goods, but it has also made it harder to find an unskilled job.