Formulas to Know for Macro Economics:Keys to Economic Prosperity:8 Guideposts to Economic Thinking (Chapter 1):Chapter 1 Textbook Notes:Economics (Pages 1-3)A. Definition: the study of human behavior, focusing on decision- making. (How people make choices)B. Origins: Adam Smith (Father of Economic Science), a Scottish moral philosopher, expressed the first economic idea in his book ‘An Inquiry into the Nature and Causes of Wealth of Nations’ in 1776. (Idea of the invisible hand concept)1. Explains why people in different geographic locations are wealthier than those in others.2. Stresses that free exchange and competitive markets harness self-interest as a creative force.a) The wealth of a nation lies in the goods and services produced and consumed by people.b) Competitive markets lead to coordination, order, and efficiency without a central authority.c) The “invisible hand” or market prices directs individuals towards the productions of goods that are most advantageous to society.What is Economics About? (Pages 4-7)C. Scarcity and the choices we have to make because our demand for goods is greater than nature can supply.1. Our desire for goods is virtually unlimited.2. Both individuals and society face a constraint known as scarcity, which prevents them from being able to fulfill their desires.a) Definition: Fundamental concept of economics that indicates that there is less of a good freely available from nature than people would like.b) Salt Water will never be scarce, however all other “goods” can be scarce if the conditions are right, even time.c) Even if a good has been mass-produced, it can still be considered scarce if individuals still want more and it is not freely available in nature.(1) Example: Apples are scarce. Even though they are relatively abundant in the United States, people still would like to have more than nature can provide at a given time.3. Scarcity leads to the consequences of choices.a) Definition: The act of selecting among alternatives.b) By making a choice, we are trading off meeting one desire for another. To meet one need, we must let another go unmet.4. Scarcity, Choices, and Trade-offs provide the basic foundation for economic analysis.D. Resources are the ingredients, or inputs, that people use to produce goods and services. The ability to do so is limited because of nature’s limit on our resources.1. Definition: An input used to produce ecomonic goods.a) Example: Land, Labor, Skills, Natural Resources, Human-Made Tools and Equipment.2. Categories:a) Human Resources(1) Example: the productive knowledge, skill, and strength of human beings.b) Physical Resources or Capital(1) Definition: human-made resources used to produce other goods and services while enhancing our ability to produce in the future.(2) Example: tools, machines and buildings.c) Natural Resources(1) Example: Land, mineral deposits, oceans, and rivers.3. What is the difference between scarce goods and limited resources?a) Scarce goods are the product of limited resources due to the fact that human desires are not met.(1) Examples: Food, Clothing, House Hold Goods, Education, National Defense, Time, Entertainment, Clean Air, etc.b) Limited resources are things used to create products.(1) Examples: Land, Natural Resources, Machines, Physical Resources, Animal Resources, Technology, and Human Resources.4. How can a resource be turned into a good?a) The ingenuity of humans is often needed to turn the resources into useful products.b) Natural resources are important, but knowing how to use them productively is equally important.E. Scarcity and Poverty Are Not the Same1. According to Thomas Hobbes, an English philosopher, life in 1750 was “solitary, poor, nasty, brutish, and short.”a) People worked 50-70 hours a week just to obtain the basic necessities of life.b) Manual labor was the main source of income.c) Animals provided a means of transportation.2. The degree to which modern technology has allowed us to fulfill our desires at very low prices is taken for granted.3. Scarcity is an objective concept that describes a factual situation in which the limited nature of our resources keeps us from being able to fulfill our desires for goods and services.a) Definition: A fact based on observable phenomena that is not influenced by differences in personal opinion.4. Poverty is a subjective concept that refers to a personal opinion of whether someone meets an arbitrarily defined level of income.a) Definition: An opinion based on personal preferences and value judgments.b) Expansion: Different people have different ideas of what it means to be poor.(1) Example: In the U.S what is considered poverty would be considered very wealthy if living in Africa.c) People always want more and better goods.F. Scarcity Necessitates Rationing1. When a good or resource is scarce, criteria is used to determine who will receive the good and who will not.a) Rationing is a necessity when it comes to scarcity.(1) Definition: Allocating a limited supply of a good or resource among people who would like to more of it. When price performs the rationing function, the good or resource Is allocated to those willing to give up the most “other things” in order to get it (trade-off).b) Which method of rationing is used will have an influence on human behavior.(1) In politics, those with powerful resources will be able to influence the politicians into making sure that they are the ones who receive the resources.(2) In first come, first serve, the goods are allocated to those that are the fastest to getting in line or those that are willing to spend the longest time waiting in line.(3) In a market economy, price is usually used to allocate products. Whoever is willing to pay the asking price shall receive the good.c) You can tell if a good or resource is scarce by asking if it has a selling price. If you have to pay for it, it is scarce.G. The Method of Rationing Influences the Nature of Competition1. Competition is a natural outgrowth of scarcity and the desire of humans to improve their conditions.a) Competition exists in every economy and every society.b) Rationing effects completion(1) When the criteria is price, individuals will try to boost their income any way that they can.(a) Benefit: encourages consumers to hold jobs, possibly in the production of goods/services business.c) When the criteria is first come, first serve, individuals waste their time standing in line.d) When the criteria is
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