Macro and micro econ
Download as PPT, PDF5 likes1,942 views
This document defines key concepts in microeconomics and macroeconomics. It explains that microeconomics examines the economic behavior of individual units like households and firms, while macroeconomics looks at aggregates for a whole economy. It also outlines the differences between positive economics, which describes economic systems objectively, and normative economics, which makes judgments about economic outcomes. Additional concepts covered include ceteris paribus, economic models, graphs, and the four criteria used to evaluate economic policy: efficiency, equity, growth, and stability.
Macro and micro econ
- 1. microeconomics The branch of economics that examines the functioning of individual industries and the behavior of individual decision-making units—that is, business firms and households. MICROECONOMICS AND MACROECONOMICS macroeconomics The branch of economics that examines the economic behavior of aggregates—income, employment, output, and so on—on a national scale. Microeconomics looks at the individual unit—the household, the firm, the industry. It sees and examines the “trees.” Macroeconomics looks at the whole, the aggregate. It sees and analyzes the “forest.”
- 2. positive economics An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works. normative economics An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.
- 3. ceteris paribus, or all else equal A device used to analyze the relationship between two variables while the values of other variables are held unchanged. All Else Equal: Ceteris Paribus Using the device of ceteris paribus is one part of the process of abstraction. In formulating economic theory, the concept helps us simplify reality to focus on the relationships that interest us.
- 4. The most common method of expressing the quantitative relationship between two variables is graphing that relationship on a two-dimensional plane. Expressing Models in Words, Graphs, and Equations
- 5. Cautions and Pitfalls The Post Hoc Fallacy post hoc, ergo propter hoc Literally, “after this (in time), therefore because of this.” A common error made in thinking about causation: If Event A happens before Event B, it is not necessarily true that A caused B.
- 6. ECONOMIC POLICY Criteria for judging economic outcomes: 1. Efficiency 2. Equity 3. Growth 4. Stability
- 7. efficiency In economics, allocative efficiency. An efficient economy is one that produces what people want at the least possible cost. Efficiency equity Fairness. Equity
- 8. economic growth An increase in the total output of an economy. Growth stability A condition in which national output is growing steadily, with low inflation and full employment of resources. Stability
- 9. A graph is a two-dimensional representation of a set of numbers, or data. HOW TO READ AND UNDERSTAND GRAPHS
- 10. A time series graph shows how a single variable changes over time. TIME SERIES GRAPH FIGURE 1A.1 Total Disposable Personal Income in the United States: 1975–2005 (in billions of dollars)
- 11. The Cartesian coordinate system is the most common method of graphing two variables. This system is constructed by simply drawing two perpendicular lines: a horizontal line, or X-axis, and a vertical line, or Y- axis. The axes contain measurement scales that intersect at 0 (zero). This point is called the origin. GRAPHING TWO VARIABLES ON A CARTESIAN COORDINATE SYSTEM FIGURE 1A.2 A Cartesian Coordinate System
- 12. TABLE 1A.1 Total Disposable Personal Income in the United States, 1975–2005 (in billions of dollars) YEAR TOTAL DISPOSABLE PERSONAL INCOME YEAR TOTAL DISPOSABLE PERSONAL INCOME 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1,181.4 1,299.9 1,436.0 1,614.8 1,808.2 2,019.8 2,247.9 2,406.8 2,586.0 2,887.6 3,086.5 3,262.5 3,459.5 3,752.4 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 4,016.3 4,293.6 4,474.8 4,754.6 4,935.3 5,165.4 5,422.6 5,677.7 5,968.2 6,355.6 6,627.4 7,120.2 7,393.2 7,827.7 8,159.9 8,646.9 8,945.6 PLOTTING INCOME AND CONSUMPTION DATA FOR HOUSEHOLDS
- 13. TABLE 1A.2 Consumption Expenditures and Income, 2003 AVERAGE INCOME BEFORE TAXES AVERAGE CONSUMPTION EXPENDITURES Bottom fifth 2nd fifth 3rd fifth 4th fifth Top fifth $ 8,201 21,478 37,542 61,132 127,146 $ 18,492 26,729 36,213 50,468 81,731 This line slopes upward, indicating that there seems to be a positive relationship between income and spending. Points A and B, above the 45° line, show that consumption can be greater than income. FIGURE 1A.3 Household Consumption and Income
- 14. The slope of the line indicates whether the relationship between the variables is positive or negative.
- 15. 15 of 36 A downward-sloping line describes a negative relationship between X and Y. An upward-sloping line describes a positive relationship between X and Y. FIGURE 1A.4 A Curve with (a) Positive Slope and (b) Negative Slope
- 16. 16 of 36 FIGURE 1A.5 Changing Slopes Along Curves
- 17. 17 of 36 FIGURE 1A.6 National Income and Consumption
- 18. The Economic Problem: Scarcity and Choice
- 19. THE ECONOMIC PROBLEM: SCARCITY AND CHOICE FIGURE 2.1 The Three Basic Questions Three basic questions must be answered in order to understand an economic system: • What goods and services to produce & how much? • How is it produced? • Who gets what is produced?
- 20. capital Things that are themselves produced and that are then used in the production of other goods and services. THE ECONOMIC PROBLEM: SCARCITY AND CHOICE factors of production (or factors) The inputs into the process of production. Another word for resources.
- 21. production The process that transforms scarce resources into useful goods and services. THE ECONOMIC PROBLEM: SCARCITY AND CHOICE inputs or resources Anything provided by nature or previous generations that can be used directly or indirectly to satisfy human wants. outputs Usable products.
- 22. Nearly all the same basic decisions that characterize complex economies must also be made in a simple economy. SCARCITY, CHOICE, AND OPPORTUNITY COST SCARCITY AND CHOICE IN A ONE-PERSON ECONOMY
- 23. The concepts of constrained choice and scarcity are central to the discipline of economics. Opportunity Cost SCARCITY, CHOICE, AND OPPORTUNITY COST opportunity costs The best alternative that we give up, or forgo, when we make a choice or decision.
- 24. Specialization, Exchange, and Comparative Advantage SCARCITY, CHOICE, AND OPPORTUNITY COST theory of comparative advantage Ricardo’s theory that specialization and free trade will benefit all trading parties, even those that may be absolutely more efficient producers.
- 25. SCARCITY, CHOICE, AND OPPORTUNITY COST absolute advantage A producer has an absolute advantage over another in the production of a good or service if it can produce that product using fewer resources. comparative advantage A producer has a comparative advantage over another in the production of a good or service if it can produce that product at a lower opportunity cost.
Editor's Notes
- #3: Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.
- #4: Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.
- #5: Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.
- #6: Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.
- #7: Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.
- #8: Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.
- #9: Opportunity cost does not have to be measured in dollar terms. The value of an alternative activity is usually measured in both monetary and nonmonetary costs. Opportunity cost is referred to as implicit cost. Accountants count only explicit costs. Economic cost is higher than accounting costs because it includes implicit, or opportunity, cost.