Macroeconomics Unit 1 – Basic Economic Concepts

The science of scarcity and the study of choices

The condition in which our wants are greater than out limited resources

The study of small economic units such as individuals, firms, and industries

The study of the large economy as a whole or in its basic subdivisions

Positive Statement
Based of facts. Avoids value of judgement (what is)

Normative Statements
Includes value judgements (what ought to be)


Marginal Analysis
Involves making decisions based on the additional benefit vs. the additional cost

Scarcity (Key Assumption #1)
Society’s wants are unlimited, but all resources are limited

Trade Off (Key Assumption #2)
Due to scarcity, choices must be made. Every choice has a trade off

“Self-Interest” (Key Assumption #3)
Everyone’s goal is to make choices that maximize their satisfaction. Everyone acts in their own “self-interest”

Marginal Costs and Marginal Benefits (Key Assumption #4)
Everyone acts rationally by comparing the marginal costs and marginal benefits of every choice.

Models and Graphs (Key Assumption #5)
Real-life situations can be explained and analyzed through simplified models and graphs

all of the alternatives that we give up whenever we choose one course of action over others

Opportunity Cost
The most desirable alternative given up as a result of a decision

Production Possibilities Curve (PPC)
a model that shows alternative ways that an economy can use its scarce resources. Graphically demonstrates scarcity, trade-offs, opportunity costs, and efficiency

Constant Opportunity Cost
Resources are easily adaptable for producing either good. Results in a straight line PPC (Not common)

When you focus on a specific good

Adam Smith
The Division of Labor – increased productivity and output

Absolute Advantage
Implies that a product can be produced more efficiently (i.e. with fewer inputs)

Comparative Advantage
If the opportunity cost of producing the good or service is lower for that individual than for other people



Scarcity vs. Shortage
Scarcity occurs at all times for all goods. Shortage occurs when producers will not or cannot offer goods or services at current prices

Price vs. Cost
Price is the amount a buyer (consumer) pays. Cost is the amount a producer pays to create product

The money spent by Businesses to improve their production

Goods vs. Services
Goods are physical objects that satisfy needs and wants. Services are actions or activities that one person performs for another (teaching, cleaning, cooking)

Consumer Goods
Created for direct consumption

Capital Goods
Created for indirect consumption

All natural resources that are used to produce goods and services

Any effort a person devotes to a task for which that person is paid

Physical Capital
Any human-made resource that is used to create other goods and services

Human Capital
Any skills of knowledge gained by a worker through education and experience

ambitious leaders that combine the other factors of production to create goods and services

Explicit Costs
The traditional “out-of-pocket” costs of decision making

Implicit Costs
The opportunity costs such as a forgone time and forgone income

Ceteris Paribus
“All other things held constant”

Goods used in place of one another. If the price of one increases, the demand for the other will increases

Two goods that are bought and used together. If the price of one increases, the demand for the other will fall

Normal Goods
As income increases, demand increases. As income falls, demand falls

Inferior Goods
As income increases, demand falls. As income falls, demand increases

The different quantities of goods that consumers are willing and able to buy at different prices

Law of Demand
States that there is an inverse relationship between price and quantity demanded. As price falls, quantity demanded rises

The Substitution Effect
If the price goes up for a product, consumers buy less of that product and more of another substitute product

The Income Effect
If the price goes down for a product, the purchasing power increases for consumers – allowing them to purchase more

The Law of Diminishing Marginal Utility
As you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease.

The different quantities of a good that sellers are willing and able to sell (produce) at different prices

Law of Supply
States that there is a direct (or positive) relationship between price and quantity supplied. As price increases, the quantity producers make increases

Government payments that support a business or market. Can cause the supply of a good to increase

The quantity demanded is less than the quantity supplied. During this, producers lower prices

The quantity demanded is greater than the quantity supplied. During this, producers raise prices

Free Market System
Automatically pushes the price toward equilibrium