LESSON 1 FIRST PRINCIPLES

• Macroeconomics


  Views the economy as a whole, examines the behavior of economic aggregates
• Microeconomics


  Examines the behavior of individual decision-making units – business firms and households
• Aggregate behavior


  Behavior of all households and firms together
• Components of circular flow

  • Households
  • Firms
  • Government
  • Market for goods and services
  • Market for factors of production
  • Financial markets
  • Rest of the world
• Household


  Social unit consisting of a person living alone/group of persons who sleep in the same housing unit
• Family


  Group of persons usually living together – related by blood, marriage or adoption
• Firm


  Entities that employ factors of production to produce goods and services for consuming units
• Government


  A group of people that governs a community or unit/ administers public policy
• Roles of government in the economy

  • Fiscal policy
  • Monetary policy
  • Growth or supply side policies
• Fiscal policy


  Government policies concerning collection and spending
• Monetary policy


  Consist of tools in the central bank to control quantity of money in the economy
• Growth policies


  Focuses on stimulating aggregate supply instead of aggregate demand
• Market


  Institutions in which agents interact and engage with each other
• Agent


  Buyer (consumers) and sellers (producers)
• Financial intermediaries


  Where trading of securities including equities, bonds, currencies, and derivatives occurs
• Rest of the world


  All of the other countries of the world
• 3 market arenas


  • Goods and services market
  • Labor market
  • Money market
• Inflation


  Sustained increase in the overall price level of goods and services in the market
• Hyperinflation


  Period of rapid and sustained increases in the overall price level
• Deflation


  Sustained decrease in overall price level
• Economic growth

  Increases in the real GDP of a country from one point in time to another
• GDP


  Total value of all goods and services produced within a given country
• Business cycle


  Short-term ups and downs in the economy
• Aggregate output (AO)


  Total quantity of goods and services
• Recession


  Period during which aggregate output declines in 2 consecutive quarters
• Depression


  Prolonged and successive deep recession
• Unemployment rate


  Percentage of the labor force that is unemployed
• Sustainable development


  Development that meets the needs of the present without compromising the ability of future generations to meet their own needs