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Lesson summary: Introduction to Macroeconomics

AP.MACRO:
MOD‑1 (EU)
,
MOD‑1.A (LO)
,
MOD‑1.A.1 (EK)
This article summarizes the learning objectives and essential knowledge for the lesson on Scarcity. Here you will find key terms, key concepts, common misperceptions, and discussion questions to help you review what you have learned.
If you want to sum up what economics means, you could do so with the following statement:
Individuals and societies are forced to make choices because most resources are scarce.
Economics is the study of how individuals and societies choose to allocate scarce resources, why they choose to allocate them that way, and the consequences of those decisions.
Scarcity is sometimes considered the basic problem of economics. Resources are scarce because we live in a world in which humans’ wants are infinite but the land, labor, and capital required to satisfy those wants are limited. This conflict between society’s unlimited wants and our limited resources means choices must be made when deciding how to allocate scarce resources.
Any economic system must provide society with a means of making choices that answer three basic questions:
  • What will be produced with society’s limited resources?
  • How will we produce the things we need and want?
  • How will society’s output be distributed?

Key Terms

TermDefinition
economicsthe study of how individuals and societies choose to allocate scarce resources.
scarcitythe fact that there is a limited amount of resources to satisfy unlimited wants.
economic resourcesalso called the factors of production; these are the land (natural resources such as minerals and oil), labor (work contributed by humans), capital (tools, equipment, and facilities), and entrepreneurship (the capacity to organize, develop, and manage a business) that individuals and businesses use in the production of goods and services.
modelsgraphical and mathematical tools created by economists to better understand complicated processes in economics.
ceteris paribus a Latin phrase meaning "all else equal".
agentsome entity making a decision; this can be an individual, a household, a business, a city, or even the government of a country.
incentivesrewards or punishments associated with a possible action; agents make decisions based on incentives.
rational decision makingan agent is "rational" if they use all available information to choose an action that makes them as well off as possible; economic models assume that agents are rational.
positive analysisanalytical thinking about objective facts and cause-and-effect relationships that are testable, such as how much of a good will be sold when a price changes.
normative analysisunlike positive analysis, normative analysis is subjective thinking about what we should value or a course of action that should be taken, such as the importance of environmental factors and the approach to managing them.
microeconomicsthe study of the interactions of buyers and sellers in the markets for particular goods and services
macroeconomicsthe study of aggregates and the overall commercial output and health of nations; includes the analysis of factors such as unemployment, inflation, economic growth and interest rates.
economic aggregatesmeasures such as the unemployment rate, rate of inflation, and national output that summarize all markets in an economy, rather than individual markets; economic aggregates are frequently used as measures of the economic performance of an economy.

Models and graphs

Economics is a social science. This means that economists, in their study of human interactions, use models to simplify, analyze, and predict human behavior. Models include graphs and mathematical models.
The purpose of these graphs and mathematical models is to simplify the many interactions that occur in an economy. In their use of models, economists usually make the assumption, when analyzing the effect of a particular change on a market or on a nation’s economy, that all else is held constant. The term we use for “all else equal” is the Latin expressions, ceteris paribus.
Another assumption economists make is that economic agents are rational and have an incentive to make decisions that are always in their own self-interest. While in reality human beings often act irrationally, by assuming people, businesses, governments, and other agents are rational decision-makers, and by assuming ceteris paribus, economists attempt to establish laws and make predictions about how human interactions will affect society.
When thinking about economic problems, we can use either positive analysis or normative analysis. Positive analysis is objective, fact-based, and cause-and-effect thinking about problems. When economists disagree it is typically due to different normative analysis. When using normative analysis, the focus is on what should happen or how desirable one action is compared to a different action.
The study of economics is sometimes broken down into two disciplines: microeconomics and macroeconomics. Microeconomics examines the interactions of buyers and sellers in individual markets for goods and services, the competitive structure of markets, and the markets for resources. Macroeconomics examines the interactions and behavior of entire nations' economies, such as why recessions occur, what causes economic growth, and how countries can benefit from specialization and trade.

Common Misperceptions

  • Economics is not the study of stock markets, money, or how to run a business. Although many new students believe they will be learning about these concepts, economics is a social science that seeks to better understand and predict human interactions; unlike business and finance, which focus on how to manage a business organization and invest money in a way to earn the highest return for investors.
  • One essential assumption made in most economic analysis is that all humans are rational and will make choices based on what is always in their best interest. In the real world, obviously, people, businesses, and even entire societies can be highly irrational.
  • Just because a decision is "irrational" in the economic sense, that doesn't mean that it is inherently wrong, bad, or lesser than what an economist would call a "rational" decision. In fact, the field of Behavioral Economics seeks to understand better the many reasons humans choose to make economically "irrational" choices in their decision making.
  • One of the four economic resources that societies must decide how to allocate is capital. When people use the word capital in everyday conversation, many people are referring to money or “financial capital.” In economics, capital is defined as the already-produced goods (tools, machinery, equipment, and physical infrastructure) that are used in the production of other goods or services. A robot on a car factory floor is defined as capital in economics; money you borrow to start your own business is not.

Discussion questions

  • Victorian historian Thomas Carlyle once called economics the "dismal science" because he believed it obsessively focused on the scarcity of resources. What does the field of economics provide society that other sciences such as chemistry, biology and physics cannot?
  • Using at least three key terms from this lesson, explain how scarcity affects you in your everyday life.
  • What are the three basic economic questions? How have different societies that you know about or have studied in other classes attempted to answer these questions?

Want to join the conversation?

  • blobby green style avatar for user hereshazel
    What are the three basic economic questions?
    (3 votes)
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  • blobby green style avatar for user Otha Sheets
    Why is the market economy so unpredictable?
    (7 votes)
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  • blobby green style avatar for user salihu idris
    what is land and capital augmentations?
    (6 votes)
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    • starky tree style avatar for user melanie
      I'm not sure what you mean without more context, but based on what I think you mean, these are things that improve the productivity of those resources, rather than the quantity or stock of those resources. For example, if I have an acre of land I can grow some carrots. But if I improve the soil on that land, my amount of land hasn't changed but the producitvity of the land has improved.
      (11 votes)
  • male robot hal style avatar for user Meowstur
    Discussion question 1: What the field of economics provides society that other sciences cannot is the ability to prove how society allocates scarce resources.

    Discussion question 2: Scarcity affects my everyday life by liking a particular pair of shoes and so as everyone else in my town, an agent will increase the price of the shoes based on the incentives. Even though the agent personally like another pair of shoes, he decides to make more of the shoes the town like because of his Rational Decision Making

    Discussion 3: Will raising taxes on the wealthy to pay for government programs will grow the economy? Will raising taxes on the wealthy slow economic growth? Does Command Markets increase economic growth?
    (5 votes)
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  • blobby green style avatar for user Victor Parmar
    I'm a little confused on why money borrowed to start a business not considered as capital. I could borrow money, to rent/buy a storefront for my business. The storefront is land and therefore capital according to the definition so why not include money into the mix?
    (3 votes)
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  • blobby green style avatar for user rahman.saif.ca
    What does the field of economics provide a society that other sciences such as chemistry, biology and physics cannot?
    (2 votes)
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    • ohnoes default style avatar for user Noah L.
      Economics is a social science that studies human behavior, especially how humans and human societies deal with the fact that there is an unlimited amount of wants we all possess but a limited about of resources. Other sciences like chemisty, biology, and physics work to understand the natural world: for example, how the human body works, or how much force the moon exerts on Earth. These sciences do not question human or market behavior, just behavior of the natural world.
      Another important difference is how the scientific method is utilized in Economics. Economist cannot make an observation about the economy and then create a theory about it; instead, they must make a theory and then test it and observe it in the economy. In other sciences, you can do a study and create a consistent theory from it, but this does not work so well in a field like Economics.
      (6 votes)
  • piceratops seed style avatar for user c_to_sea
    Discussion Questions:
    1. WHAT DOES ECONOMICS PROVIDE SOCIETY: The field of economics provides society (that other fields like chemistry, biology and physics cannot) a way of modeling/simplifying the way that people interact.

    2. SCARCITY IN MY EVERYDAY LIFE: Fashion is a great example, I watch as scarcity drives the price up particular limited edition clothes. The capital in the fashion industry is the knitting equipment or fabric or labor but then they have to decide where to allocate that capital (what should we design? - what does the market want?)

    3. THREE BASIC ECONOMICS QUESTIONS: The economics questions tackle the areas of Allocation - "What should we make?", Production - "How should it be made?" and Distribution - "For who should it be made?"
    (4 votes)
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  • blobby green style avatar for user Rosa Airam
    My answers to the discussion questions. Don't know if they are correct.

    1. Economics is not an absolute science it is a social sciences it looks at human behaviour and ethics. It can help with decision making in areas of how to progress in a way that is beneficial and good for a society, outside of absolute truths.

    2. I as most agents in our society desire certain things. Scarcity of certain resources that I desire makes in not always possible to obtain those things. This incentives me to make certain decisions such as offer up labour to be able to obtain those resources.

    3. What will be produced with society’s limited resources? How will we produce the things we need and want? How will society’s output be distributed?

    One of the ways societies have been attempting to answer these questions is by implementing certain economic systems the most famous examples of those are: capitalism and communism. Where you have a command economy on the one side and a market economy on the other side of the spectrum.
    (4 votes)
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  • blobby green style avatar for user oluwagbamif47
    what is the difference between wants and needs
    (2 votes)
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  • blobby green style avatar for user Harold Wilhelmsen
    Is economics a key component of a basic education.
    (3 votes)
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