Economics and Recession Economic Theories Essay

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Microeconomics: studies the decisions made by individual consumers, firms and markets. Ex) how many workers a firm hires or how many pizzas consumers buy in Kingman
Macroeconomics: studies broader issues of the whole nation such as inflation, unemployment and national output (GDP) * Government uses monetary and fiscal policy to * Smooth out fluctuations in our business cycle * To help us get out of recession

Economic theories and models * Shows complex relationships in a simple way * Do it through the use of graphs and equations * It’s the simplest and most effective way to show and demonstrate data and complex ideas * Use simplified models to analyze issues and make predictions about the real world * Use “ceteris paribus” assumption “all else constant” * Where other relevant factors/variables are held equal or constant assume they do not change * So we can focus on looking at just the few variables at hand or in question * Ex) how many iTunes you buy at different prices we hold constant your income

Equity vs. Efficiency
Efficiency
* How well resources are used and allocated * People get the products they want and products are produced at their lowest possible cost
Equity
* Is the fairness/equity of the allocation of resources, issues, and policies
These are a trade off * Where a policy or company may be very efficient but is unfair to someone

10 key ideas of economics 1) Choice and scarcity * Scarcity: exists because we have unlimited wants and limited resources to fulfill them. * Everybody faces scarcity of both time and money: people, firms, nations, and the world * This means there are tradeoffs in everything we do and we have to decide among alternatives * Economics is the study of the allocation of scarce resources to satisfy competing wants 2) Opportunity costs a. Costs dominates our live * Decistions are made by weighing the costs and benefits of different alternatives * When we make a choice; something is given up * When we decide to do one thing (buy one thing) over another, we give up other valued things we could have done (or bought) * O.c. is the value of the next best alternative; what you gave up to do/buy something else 3) Rational thinking is thinking at the margin * Thinking at the margin means thinking about the change or additional from the current level or status quo. * There is always already some level that we are currently at (zero or 100) when making decisions * Studying changes from the current situation or current level is called marginal analysis
Ex) more people eat dessert at a buffet 4) People follow incentives * We assume people and firms are rational and look out for themselves * People and firms will do things if there is an incentive to do them * Workers will take jobs with the higher pay * Firms will buy parts from china if cheaper * Government can use tax credits and deductions as incentives to get us to do particular things
Ex) give a mortgage deduction, and more people buy homes.
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