MACROECONOMICS – CHAPTER ONE: FOUNDATIONS AND MODELSScarcity – unlimited wants exceed limited resources Economics – the study of the choices people make to attain their goals, given their scarce resources - Must assume that people are rational, people respond to incentives, and optimal decisions are made at the margin o People are rational: economists assume consumers and firms use all available information as they act to achieve their goals; individuals weigh the benefits and costs of each action and choose an action only if the benefits exceed the costs o People respond to incentives: refers to economic incentiveso Optimal decisions are made at the margin: optimal decision is to continue any activity up to the point where marginal benefit equals marginal cost (MB = MC)- Asks the following questions:o What goods and services will be produced? Determined by choices that consumers, firms, and the government make o How will the goods and services be produced?o Who will receive the goods and services produced? Depends largely on how income is distributed - Considered a social science - Cannot be controlled, but can be influenced Economic Models – simplified versions of reality used to analyze real-world economic situations - Based on making assumptions because models must be simplified in order to be useful - Models are used if they lead to a hypothesis confirmed by statistical analysis Economic Variable – something measurable that can have different values (i.e. the incomes of doctors)Market – a group of buyers and sellers of a good or service and the institution/arrangement by which they come together to trade Marginal Analysis – analysis that involves comparing marginal benefits and marginal costs Economic Problem – a limited amount of economic resources (i.e. workers, machines, and raw materials) is available Trade-Off – producing more of one good or service means producing less of another good or service due to scarcity Opportunity Cost – the highest valued alternative that must be given up to engage in an activity Centrally Planned Economy – the government decides how to allocate economic resources (i.e. the Soviet Union)Market Economy – decisions of households and firms interacting in markets allocate economic resources (i.e. all high-income democracies such as the United States, Canada, Japan, and western European countries)- Tend to be more efficient than centrally planned economies because they promote competition and facilitate voluntary exchange Mixed Economy – most economic decisions result from interaction of buyers and sellers in markets, but government alsoplays a role in the allocation of resources (hybrid of centrally planned and market economies)Productive Efficiency – a good or service is produced at the lowest possible cost- Possible due to competitionAllocative Efficiency – production is in accordance with consumer preferences; every good and service is produced up to the point where the last unit provides marginal benefit to society equal to the marginal cost of producing it Voluntary Exchange – both the buyer and seller of a product are made better off by a transaction Equity – fair distribution of economic benefits - Often a trade-off between efficiency and equity Positive Analysis – concerned with what is- Primary focus of economics because positive analysis measures the costs and benefits or different courses of action Normative Analysis – concerned with what ought to be Microeconomics – the study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices- Explains how consumers react to changes in product prices and how firms decide what prices to charge for the products they sell; also involves policy issues Macroeconomics – the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth - Explains why economies experience periods of recessions and increasing unemployment and why, over the long run, some economies have grown faster than others; also involves government-related policies Interpreting Graphs - A change in the price of a product results in movement along a stationary demand curve, but a change in any other variable results in a shift along the demand curve - Demand curves are actually curved, but they are represented with a straight line for simplicity Disposable Personal Income – all expenses with the exception of taxes (taxes are required)Positive Relationship – positive slope Total Revenue = Price x Quantity Demanded Percentage Change = [(Value in the Second Period – Value in the First Period) / Value in the First Period] x