Econ 201 Dr Hadler 01 31 2011 Lecture 1 Chapter 1 The Scope and Method of Economics Opportunity Cost the best alternative that we forgo or give up when we make a choice or a decision Marginalism the process of analyzing the additional or incremental costs or benefits arising from a choice or decision Sunk costs costs that cannot be avoided because they have already been incurred Efficient markets a market in which profit opportunities are eliminated almost instantaneously Microeconomics the branch of economists that examines the functioning of individual industries and the behavior of individual decision making units that is firms and households Macroeconomics the branch of economics that examines the economic behavior of aggregates income employment output and so on on a national scale Positive economics an approach to economics that seeks to understand behaviors 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 Descriptive economics the compilation of data that describe phenomena and facts Economic theory a statement or set of related statements about cause and effect action and reaction Theories and Models Model a formal statement of a theory usually a mathematical statement of a presumed relationship between two or more Variables a measure that can change from time to time or from variables observation to observation Ceteris Paribus all else equal a device used to analyze the relationship between two variables while the values or other variables are held unchanged o Process of abstraction simplifies reality to focus on relationships that interest us Post hoc ergo propter hoc a common error made in thinking about causation if Event A happens before Event B it is not necessarily true that A cause B literally means after this therefore because of this Fallacy of Composition the erroneous belief that what is true for a part is necessarily true for the whole Empirical economics the collection and use of data to test economic theories Economic Policy Efficiency Equity Growth Stability Efficiency an efficient economy is one that produces what people want a the least possible cost Equity fairness Economic Growth an increase in the total output of an economy Stability a condition in which national output is growing steadily with low inflation and full employment Lecture 2 Chapter 5 Introduction to Macroeconomics Macroeconomics deals with the economy as a whole Macroeconomics focuses on the determinants of total national income deals with aggregates such as aggregate consumption and investment and looks at the overall level of prices instead of Aggregate behavior the behavior of all households and firms individual prices together Sticky prices prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded Macroeconomic Concerns Output growth Unemployment Inflation and deflation Business cycle the cycle of short term ups and downs in the economy Aggregate output the total quantity of goods and services produced in an economy in a given period Recession a period during which aggregate output declines Conventionally a period in which aggregate output declines for two consecutive quarters Depression a prolonged and deep recession Expansion or boom the period in the business cycle from a trough to a peak during which output and employment grow Contraction recession or slump the period in the business cycle from a peak down to a trough during which output and employment fall Unemployment Unemployment rate the percentage of the labor force that is unemployed key indicator of an economy s health level Inflation and Deflation Inflation an increase in overall price level Hyperinflation a period of very rapid increases in the overall price Deflation a decrease in the overall price level The Circular Flow Diagram Circular flow a diagram showing the income received and payments made by each sector of the economy Transfer payments cash payments made by the government to people who do not supply goods services or labor in exchange for these payments They include Social Security benefits veterans benefits and welfare payments The Three Market Arenas Goods and Services Markets o Firms supply to goods and service market Households the government and firms demand from this market Finally the res of the world buys from and sells to the goods and services market Labor Market o Interaction in the labor market takes place when firms and the government purchase labor from households In this market households supply labor and firms and the government demand labor The total supply of labor in the economy depends on the sum of decisions made by households Individuals must decide whether or not to enter the labor force Money Market o In the money market households purchase stocks and bonds from firms Households supply funds to this market in the expectation of earning income in the form of dividends on stocks and interest bonds Households also demand borrow funds from this market to finance various purchases Treasury bonds bills and notes promissory notes issued by the federal government when it borrows money Corporate bonds promissory notes issued by firms when they Shares of stock financial instruments that give to the holder a share in the firm s ownership and therefore the right to share in the borrow money firm s profits Dividends the portion of a firm s profits that the firm pays out each period to its shareholders The Role of the Government in the Macroeconomy Fiscal Policy government policies concerning taxes and spending Monetary Policy the tools used by the Federal Reserve to control the quantity of money which in turn affects interest rates Fine tuning the phrase used to refer to the governments role in regulating inflation and unemployment Stagflation a situation of both high inflation and high unemployment February 7 2011 Measuring National Output and National Income Gross Domestic Product The total market value of all final goods and services produced within a given period by factors of production located within a country o Final goods and services o Exclusion of used goods and paper transactions o Exclusion of Output Produced Aboard by Domestically Owned Factors of Production National income and product accounts data
View Full Document
Unlocking...