MacroeconomicsCHAPTER 1

First Principles

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What you will learn in this chapter:How individuals make choices:ScarcityOpportunity costTrade-offsMarginal analysis

How individual choices interact:TradeGains from trade Specialization Equilibrium Efficiency and equity

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How Individuals Make Choices:

Basic principles behind the individual choices: 1. Resources are scarce.

2. The real cost of something is what you must give up to get it Opportunity costIt is all about what you have to forgo to obtain your choice.

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How Individuals Make Choices:

3. “How much?” is a decision at the margin. Trade-offs Marginal decisions and marginal

analysis

4. People usually take advantage of opportunities to make themselves better off.

Incentives

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Interaction: How Economies WorkPrinciples behind the interaction of individual choices:1. There are gains from trade. Specialization Trade and gains from trade

2. Markets move toward equilibrium.

3. Resources should be used as efficiently as possible to achieve society’s goals. Efficiency Equity

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Interaction: How Economies Work

4. Markets usually lead to efficiency. Exceptions: Market failure

5. When markets don’t achieve efficiency, government intervention can improve society’s welfare.

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The End of Chapter 1

coming attraction:Chapter 2:

Economic Models: Trade-offs and Trade